Lehman Bankruptcy Puts Pressure On Apartment Investors

Cali, NY and DC investors likely to feel the pinch, pressure to sell and some value deterioration as Archstone assets start getting unloaded. They have a pretty large presence in the South Florida market as well; Lehman backed $226.5 million for construction of Donald Trump’s condo tower in Hollywood, $47 million for the new Canyon Ranch Miami Beach resort, and was part of the private consortium that infused $565 million into the Fontainebleau in Miami Beach. What happens from here is anyone's guess. From WSJ.

After Lehman, Banks Jettison
Commercial-Property Debt
By LINGLING WEI and MICHAEL CORKERY

The bankruptcy of Lehman Brothers Holdings Inc. is adding pressure on banks and other financial institutions to sell off their holdings of commercial real-estate debt, as they try to stay out ahead of the Wall Street firm's expected liquidation of its $30 billion portfolio.

The likely rush to sell is driving down the already battered market, forcing financial firms to take additional losses mated $150 billion worth of commercial real-estate debt on their books as the once relatively resilient pocket of the property sector now comes under heavy fire.

"As a result of Lehman's bankruptcy, other financial institutions will feel more pressure to sell assets at deeper discounts sought by investors," said Spencer Garfield, a managing director of Hudson Realty Capital, a New York-based real-estate fund manager.

Goldman Sachs Group Inc. on Tuesday said it had reduced its portfolio of commercial mortgages and securities by about $2 billion to $14.7 billion as of the end of its third quarter, which ended Aug. 29, taking a $325 million loss.

"It sure doesn't feel like the real-estate markets are improving anytime soon, and we will reduce that class going forward even if we think they are good assets," said Goldman Sachs Chief Financial Officer David Viniar. "Those assets are marked where they can be sold."

Lehman's collapse was the most dramatic sign so far that the financial crisis sparked by residential real estate is spilling over into office buildings, strip malls, hotels and other commercial real estate. The firm was one of the most aggressive lenders on Wall Street, making whole loans, bridge loans and packaging debt into commercial mortgage-backed securities, or CMBS.

About $4.3 billion of Lehman's $30 billion portfolio consists of securities. The prospect of that getting liquidated sparked the latest selloff in the CMBS market, as evidenced by widening spreads between the benchmark U.S. Treasury notes and the CMBX, a credit-market index that tracks the value of the bonds.

Apartment-building investors also are likely to feel significant pressure to sell as Lehman unloads its debt and equity pieces of the $22 billion purchase of Archstone, the large multifamily company with buildings concentrated in Washington, D.C., California and New York City. For months, Archstone had tried to sell assets to reduce debt, but met mixed success. It resisted for months lowering its prices, even as buyers balked. It has sold some complexes but not as many as it hoped, according to a person familiar with Archstone.

Prices are now likely to soften. In markets with apartment buildings that compete with Archstone, "there is no question that if you need to sell assets, you will try to get ahead" of the Lehman selloff, said Jeffrey Spector, a real-estate analyst at UBS. "Every day that goes by there will be more pressure on pricing."

For most of this year, commercial real-estate debt has held up better than housing-related debt. Commercial property values haven't deteriorated as much as homes, thanks to the still-healthy cash flows of most properties, lack of overbuilding and low default rates.

Delinquencies have been mounting in loans tied to construction and land development, a major commercial real-estate category. At the nation's largest construction lender, Bank of America Corp., about half of its $13 billion home-builder portfolio are loans that "we are watching and paying special attention to, because there could be structural deficiency or a market deficiency," said Gene Godbold, president of Bank of America's commercial real-estate banking, in an interview.

Mr. Godbold emphasized that the bank has adequate capital to offset possible losses from its home-builder portfolio.

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