More worrisome downtown buildings news

[MikeM]

This attitude, that by some 'magic' that has not been tried in the last 20 years you can get more 'economic activity' in detroit, is why they will likely be torn down.

Give it up. If you want to keep those buildings, go buy them.

This criticism comes from the same person who had this brilliant idea?

...tear down the newer buildings where the tenants currently are.

[softailrider]

Penobscot building is an absolute gem, I'm in that building and the Ford building next door several times a year and have NEVER seen trash laying around anywhere. Both buildings do seem to be down in tenants last year or two. They're very well maintained from what I can see.

[mwilbert]

In the case of commercial real estate as opposed to residential, worst case scenario is the properties get sold at auction, with tenants in place, leases transferrable, and the building sells for less than the value of any liens against it.

So if the Penobscot Building has a 15 million dollar loan against it, as an example, it sells for 8 million to a new owner, they don't have such a large stake in it, and revenues will balance out with debt.

No, the worst case scenario is that the revenues don't even cover the operating expenses and the building closes, as has been seen in buildings throughout downtown.

[GRALR]

The next tidal wave of destruction is about to hit the U.S. Commercial real estate, unemployment benefits running out, residential alt A and arms loans resetting. The numbers are about 3 times larger than the last wave.

Meanwhile after driving around the city, we are slightly confused as to why all the money is being spent on tearing down the Lafayette when the same money could tear down and remove hundreds of remnant burnt out homes and businesses buildings.

Hum .......................

[mwilbert]

A lot of people wonder about that.

[mrrichard]

I agree, Commercial will be really hit hard next; shopping malls and luxury high leveraged hotels and offices especially. Maybe the government will bail them out and tax payers and bank customers will pay over the long run.
'D_uke' is right about property management being a huge part of how well a property performs.

[Lorax]

No, the worst case scenario is that the revenues don't even cover the operating expenses and the building closes, as has been seen in buildings throughout downtown.

If that were the case, it would have happened already at the current level of leverage vs. income.

The Penobscot, First National, Cadillac are all still viable structures. A new owner will have lower overhead with regard to initial investment, and will immediately see higher margins at current leasing rates.

As long as any new owners buying in foreclosure are well funded enough to endure decreased ratios over the next few years, it buys breathing room to work out viable soulutions to the occupancy problem.

[stasu1213]

The next tidal wave of destruction is about to hit the U.S. Commercial real estate, unemployment benefits running out, residential alt A and arms loans resetting. The numbers are about 3 times larger than the last wave.

Meanwhile after driving around the city, we are slightly confused as to why all the money is being spent on tearing down the Lafayette when the same money could tear down and remove hundreds of remnant burnt out homes and businesses buildings.

Hum .......................

The lafayette towers can't be razed. There are on the historical listing

[LouHat]

This criticism comes from the same person who had this brilliant idea?

He was trying to make a point, which apparently escaped your grasp, that the market is saturated. It's not "build them and they will come", it's rather "build them and they will carry boxes a few blocks".

[LeannaM]

The lafayette towers can't be razed. There are on the historical listing

Detroit may be different. I know in St. Louis, a historic building [[listed on the national historic reigster) can be raised if the Preservation Board approves the demolition permit. But that's not usually likely. Of course, it depends on the building and the neighborhood. If the neighborhood is intact, it's hard to get a building demolished because it would damage the historical integrity of the street. If the neighborhood is pretty desolate, the demolition permit may be easier to obtain.

But I'm not sure if it's different in Detroit.

[rjlj]

"There are on the historical listing" ???

Take a lesson in grammar.

[stasu1213]

"There are on the historical listing" ???

Take a lesson in grammar.

As long as you know what I was saying. It has been a long day; who gives a damn about grammer. Thanks anyway for the head's up

[EastSider]

The Penobscot, First National, Cadillac are all still viable structures. A new owner will have lower overhead with regard to initial investment, and will immediately see higher margins at current leasing rates.

Sounds like the reasoning Northern Group used when they bought the places...and the owners before them.

[Lorax]

Sounds like the reasoning Northern Group used when they bought the places...and the owners before them.

Fantastic! You got my point.

Water seeks it's own level, as do real estate prices.

Here in Miami a 750,000.00 condo three years ago is today's 150,000.00 condo.

And they still aren't selling well.

When the value of buildings like the Penobscot reach their bottom, don't be surprised if they end up in the 2-3 million dollar range as an appraisal.

Class A office space in Detroit hovers around the low 20.00 psf range, which is still inflated, since class A spaces shares the same city streets with class c buildings- when you don't have a cohesive mass transit system, convenient cheap parking, services such as restaurants, shopping, pharmacies, etc., you can't charge Class A prices for class c neighborhoods.

I would rent ground floor space in the Fisher Building, as I had just recently looked into, but not until it's down around 8-10 bucks psf.

Net leases are another canard. Only New York can get away with that and expect to keep a tenant long term.

[3WC]

By conservative estimates, there are $2.7 TRILLION of commercial loans rolling over in the next 18 to 24 months. $800 million of that are CMOs.

The largest residential deal that has ever been done in the U.S., Peter Stuyvesant Village in NYC, which closed a 2 or three years ago for $5.5 billion, will be hopelessly in default in 30 to 6o days. Current appraisals reflect a reduction in value of 50% or more. On top of that, the owners have been hit with a $200,000,000 appellate judgement in favor of their tenants as a result of illegal rent increases.

I know a large commercial bank which has been trying to unload its -never-in-default commercial loans for 2 years, at a discount. The $125 million bloock I was shown by a potential investor group couldn't work out a big enough discount. [[I said at least 30%.)

Bank of America notifiend virtually all its MI commercial borrower over a year ago that it would not renew, roll over or otherwise continue to own over $3 billion of its commercial mortgages. [[BOA has since started negotiating with some borrowere to restructure certain loans, usually with terms that take all the NOI before debt service.)

I remember in the early '80s, when I was building in FL, there were almost 60,000 unsold condos in Dade County alone, a large percentage of them being under construction, and unfinished. FL is typically a boom and bust state anyway. Nobody ever learns, or if they do, it's the hard way.

[MikeM]

He was trying to make a point, which apparently escaped your grasp, that the market is saturated. It's not "build them and they will come", it's rather "build them and they will carry boxes a few blocks".

That point was made clear in the following line:

If you're goal is to keep the buildings, and you are unable to expand the base of tenants, then reduce the base of office space inventory.

It was his solution that seemed so simple.

[3WC]

I just noticed that a large commercial lender, Capmark [[formerly GMAC's commercial lending arm) just filed for bankruptcy. That follows the bankruptcy of General Growth Properties and a couple of other large lenders.

Small local and regional banks are really going to get hit hard as they have a far higher percentage of commercial real estate loans that the larger banks. Of the 106 bank failures so far this year, the largest ones went under because of residential loan portfolios, but the vast majority that have tanked resulted from commercial real estate loans.

It is an absolute disaster out there. Wanna buy a strip center or an office building cheap? You can pretty much take your pick. [[But, why would one want to do that?)

[Lorax]

3WC you are so right about Florida- have lived here now for 14 years, and saw this coming to a certain extent, but was myself caught off guard at what a body-blow it would be to the real estate market and the economy as a result.

Right now, five miles from my condo are 60 story condo buildings completely vacant, and mostly unfinished.

Florida has always been a boom/bust state as you say, and never learns it's lessons.

This debacle will take more time to correct than the last one, which was 15 years or so- we're looking at 20+ years to shake out the vast number of vacant or underused buildings.

Or, the values will tank to the point they were in the early 80's, which we have some indication of movement in that direction. I personally know of waterfront condos near me that were 250-350k a few years ago now selling in foreclosure in the 50-60k range.

Problem is, the associations don't know how to handle this, and now the higher maintenance fees don't make sense, eventhough the costs of maintenance only goes up, and taxes only reduce incrementally over time in such a market. No one wants to pay 1000 bucks a month maintenance on a 60k condo.

Really a bloodbath.

[DetroitDad]

What did u really mean by "residential"? Tell us so you would not be misunderstood

Part of, or all of, said buildings would be converted into apartments or condos [[I think it was apartments).

[ndavies]

Lafayette towers is already 100% residential. Always has been. They are rentals. Northern group may have wanted to make them Condos. That would now be impossible given the current market conditions. Condo mortgages are virtually impossible to get nationwide. The odds of getting a condo mortgage are even worse in Detroit.

[EastSider]

Maybe he's talking about my comment here somewhere for splitting the smaller Penobscot towers from the main building and making them residential?

[OurNeighbors]

The fate of these buildings isn't looking good... Does anyone know if there has been any change in plans for demolishing the Lafayette Building since March?

[3WC]

artds: I've posted a couple of times but didn't recall seeing your # 11 re: Honigman Miller.

I doubt Honigman will move and if it does my guess is it will stay downtown as somebody else above predicted.

I actually don't know much more about what's going on other than what I see on here and on the online editions of the papers when I read them. However, I know a couple of Honigman partners and know that for years the firm has had a provision in its lease giving the firm the right to reject any potential tenant in order to preserve the character of the building. Years ago when the Penobscot had a huge vacancy rate it leased a lot of space to Wayne County Friend of the Court. Most tenants claimed the steady stream of distraught mothers and crying children visiting those offices destroyed the character of the building. Many moved or tried to void their leases. Honigman, which had the oversight condition in its lease before that occurred, wanted to prevent that kind of thing from happening.

Butzel Long moved from the First National to 150 West Jefferson years ago and it cost the firm a fortune in lost billing time. They wished they hadn't moved; I know that because the firm handled a couple of matters for me at the time, and I was close to several lawyers there.

Honigman is the most expensive and probably most profitable firm in Michigan. It's real estate practice group is the best overall of any major firm in the area in my opinion.

It's not beyond the realm of possibility that the firm and some of its clients may end up owning the building. [[Some partners and clients owned the Stott years ago, and dumped it imediately upon learning the Ford was going to build Ren Cen - Honigman repped Ford in that deal and had more advanced notice than anyone but Henry himself.) I know they would be very reluctant to leave. Most firms which left
First National wanted a more prestigious building. Honigman could care less about prestige because it's focused on the bottem line and its clients don't care where they're located and would probably be upset if the firm went upscale because they'd know their rates would go up to cover the cost.

That building and its sister property, the Penobscot, have been in financial trouble for years and have a had several owners over the past 12 + years or so. My view has been for many years that there is no scenario by which they can generate consistent NOI, regardless of what the purchase price is. Covering operating expenses regardless of debt service has usually been the problem and I'm sure still is.

[DetroitDad]

First, Robert Skriloff mentioned in a article that Northern was interested in the strong performance of various Downtown residential properties. It was rumored on here and at various news sources, not to mention on the streets, that as a response to the 95% lease rates at Lafayette Towers and the high lease rates at their Alden Park Towers property, Northern was looking at converting troubled CBD properties into apartments as an option, or building a new mixed use property Downtown. Shortly after, we had the announcement of Cadillac Centre. Once Cadillac Centre fell though, Northern proposed building a parking garage on a portion of the Monroe Block, for a conversion from office space to residential space in Cadillac Tower.

I am not overly familiar with many of Detroit's office towers when it comes to how easy it would be to convert them, nor do I know why nothing more ever came of all this.

[LeannaM]

The fate of these buildings isn't looking good... Does anyone know if there has been any change in plans for demolishing the Lafayette Building since March?

This Lafayette Building?
http://detroityes.com/mb/showthread.php?t=2143