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Have I got an office tower for you

Loan defaults in the worst commercial real estate market in decades have created tens of billions worth of distressed properties across the U.S. and cut-rate auctions of skyscrapers.
Skyscrapers for Sale
417 Fifth Ave., an office building that Moinian and Goldman Sachs' Whitehall group bought two years ago, is one address in "serious jeopardy" of foreclosure, says Dan Fasulo, a managing director at Real Capital Analytics. Mark Lennihan / AP
/ Source: The Associated Press

The 40-story skyscraper sits on a prime corner in the country's wealthiest commercial market, steps from the Museum of Modern Art and a few blocks from Rockefeller Center and Central Park.

It recently sold for $100,000.

The 1330 Avenue of the Americas building — which sold for close to $500 million three years ago — was auctioned last month for the minimum to a Canadian pension fund unit after owner Harry Macklowe defaulted on a $130 million loan.

A month before that, the John Hancock Tower — Boston's tallest skyscraper — sold at auction for just over $20 million. The 33-story Equitable Building in downtown Atlanta is set to go up for auction next month; its owners owe more than $50 million to the bank and have only half of the building leased.

Loan defaults in the worst commercial real estate market in decades have created tens of billions worth of distressed properties across the nation, sometimes forcing cut-rate auctions of landmark skyscrapers. Developers are falling behind on mortgages as tenants leave and can find no financing to cover payments, analysts say.

So they are selling skyscrapers at a drastic discount, with the condition that the new buyer take on the enormous amounts of debt connected to the properties.

"Just imagine in a residential market, if there weren't 80 percent loans available for everyone. If everyone had to buy their houses in cash, the values of houses would plummet everywhere," said Dan Fasulo, a managing director at Real Capital Analytics. "That's happening on a massive scale on the commercial side."

The Hancock Tower and the Sixth Avenue building are the first of a wave of foreclosures and auctions expected in the next year that will slash sale values of formerly prime real estate, analysts say.

"This is a train wreck that's coming in the large office towers," said Matthew Haines, chairman of the real estate Web site.

Real Capital Analytics, which tracks commercial real estate transactions, counted over $86 billion worth of distressed properties in the country as of April, over $6 billion in Manhattan.

In New York City, addresses in "serious jeopardy," Fasulo says, include a 23-story Moinian Group skyscraper across from the New York Public Library that sold for $160 million two years ago, and an office building a few blocks away on Fifth Avenue that Moinian and Goldman Sachs' Whitehall group bought two years ago.

Several construction sites that have shut down are also facing foreclosure threats without new financing, like a hotel-condo project with a Robert De Niro-backed Nobu restaurant under construction in lower Manhattan.

Many of the towers that are likely to go up for sale were bought at inflated prices during the boom three to five years ago and could lose over half their value at sale, analysts said.

Macklowe bought the Sixth Avenue building in 2006 for $498 million, taking out $130 million in short-term financing known as mezzanine loans that bridged the gap between the equity side and the debt side.

The loan was sold to Cadim, Canada's largest pension fund, and transferred to the subsidiary Otera Capital. Otera took over the loan and the tower's $240 million mortgage. The building, in the middle of the country's most lucrative commercial district, is two-thirds leased; its most prominent tenant is the Financial Times newspaper, sporting a pink `FT' logo on its rooftop.

"We had some confidence that the building is a good building, and with patience we would be OK," said Marie Giguera, an Otera vice president.

Macklowe Properties didn't return calls for comment.

The Hancock Tower lost half its market value after its auction in March from former owner Broadway Partners, a partnership of Normandy Real Estate Partners and Five Mile Capital Partners.

The 60-story tower was bought in 2006 by Broadway Partners, which invested billions into office towers around the country in the past few years. The company often relied on financing from now-bankrupt Lehman Bros.

Normandy and Five Mile — which had stakes in some of Broadway Partners' debt — took on $640 million in debt, valuing the building at $660 million.

The building sold at a far steeper discount than the average drop in commercial prices in the Boston area, said David Geltner, research director at the Massachusetts Institute of Technology Center for Real Estate.

The center said last week that commercial property sales in the first quarter fell by 6 percent from the end of last year, and were down 21 percent down from the same period a year ago. And on Wednesday, the National Association of Realtors said its index of commercial brokerage activity fell almost 13 percent from a year ago.

Sales volume is "historically low. It has never been this low," Geltner said.

The only major property sales that are likely in the next several months, analysts say, are distressed properties with delinquent loans.

"No healthy owner in their right mind would try to sell a property in this environment," said Fasulo. He said devalued sales of skyscrapers represent "a trickle right now. It will turn into a flood over the next 12 months."