March 31, 2009

A Scalping, Not a Haircut

Posted by JSpur at March 31, 2009 6:30 PM

In an auction that took less than two minutes, the best office building in New England, Boston's John Hancock Tower, traded today for $640 million, or roughly half of what Broadway Partners paid for it in 2006. The building traded before that, in 2003, for $935 million.

But even those numbers don't tell the whole story. The CMBS desk of one highly regarded Wall Street firm calculates that if you reduce the stated purchase price to reflect the value of the assumed debt (97% loan-to-value, 5.6% rate), the value of the building by itself is closer to $470 million, which would be 67% below peak pricing and half of its 2003 value.

No one in the commercial real estate business that I know of thinks that values have fallen that much. But when not much is trading, it's hard to say for sure. To the extent that this trade is at all reflective of the market in general, things could get really, really ugly before it's all said and done.

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That's why you should always focus on price, not value. Value is derived and unobservable. Price is direct and observable. When you look at value instead of price, you tend to get burned.

Posted by: Kaleberg | April 4, 2009 12:04 AM
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