Below is a link to a story on an office tower than just sold in downtown Minneapolis.
The building sold for about 1/2 of its assessed value–what the previous owner was carrying it on the books at I have no idea, but you can be certain it was way above the sales price. This one appears to have been owned by a retirement fund who walked away from it and now the seller is Northwestern Mutual.
As we watch for earnings coming from the regional and community bankers we need to watch for how much of their commercial real estate loans are in central business districts–hopefully not too much.
Link to story on commercial building sale. Hopefully this opens as I have a subscription, but I think they give a free story or two.
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Out here on the west coast (crazy Ca) the commercial real estate market has not fully recovered from the Great Recession of 2008, many small and larger commercial properties still sit empty today!
With the new Information Age – remote work sites gathering steam in the business place, it appears a reconciliation of commercial property value is coming in the near horizon. 50% discount from market value is scary. But reality prevails.
Taking a look at the commercial spaces with the significant declines in property value in downtown Minneapolis, I’m struck by the number of bank named locations…US Bank Center (-18%), Wells Fargo Plaza (-23%), Ameriprise Financial Center (-21%), US Bancorp Center (-23%), etc.
With so many big names struggling locally, no wonder it was hard to find a lender for La Salle Plaza.
Very interesting Tim. Thanks so much for sharing.
One wonders how many other public pension funds have equity losses with CRE and how much of that will be made up by the taxpayers.
The link opened for me. The story is worth reading all the way through. IMHO, it does not bode well for office real estate. Even though he was buying at a 50%+ discount to assessed value, the new owner said the purchase was unfinanceable when presented to national lenders. He had to go to local lenders and then split finance it. This suggests regionals and insurers are skittish.
FWIW, I had a fight last night with a friend over whether “assessed or tax value” is a meaningful measure of property value. Our town once bought an abandoned and unneeded historic property, a fixer-upper, and a white elephant. The Mayor saw a lovely garden. I saw roof leaks, a tilted parapet and a bigger tax bill coming.
My friend took the position that the Town was honor bound to pay the assessed value for the property or “our tax rolls would be a lie.” My position was “Who pays list price?” It went downhill from there. IMHO, making a purchase based on somebody else’s number is like going into Kohl’s without a Friends & Family coupon. “Assessed value” is what the Tax Assessor and the taxpayer agree on every three years or so.
The market for big buildings is iliquid and they don’t change hands often, so comparables or so-called appraisals aren’t helpful. The claimed “market value” in MN was $87 million but the actual selling price was $46 million.
I tend think that the best measure of value in an uncertain market is the amount and quality of the income stream and even that is suspect. I had a client who was quite adept at padding his rent rolls with fly-by-night tenants before listing for sale.
Just my opinion.
Re “‘Assessed value’ is what the Tax Assessor and the taxpayer agree on every three years or so”:
Not in King County, WA.
Here, AV is what the Assessor tells you it is. The taxpayer has the right to contest, but based on anecdotal and personal info, very few challenges are granted.
The office REITs all got jammed higher this week on SLG’s recent sale of 50% of its interest in 245 Park Avenue in NYC (property is 20% vacant) at a $2B valuation.
But the sale was actually done at 10% less than SLG paid in 2017. This $2B asset already has $1.8B in debt. SLG was somehow able to dish off half of that debt and get a Japanese partner to pony up 50% of the renovation expenses. SLG essentially has almost no equity in the property any longer. It is the debt holders that could get killed on this one (although debt is locked at 4.35% until 2027).
But it does show that any semblance of good news causes the shorts to run for cover.