Commercial Real Estate Blog

The FDIC issued a press release the other day discussing the number of banks on its “problems list”. According to the release, the number of problem banks grew from 90 at the end of the first quarter to 117. The amount of assets represented by these “problem banks” grew from $26B to $78B, with a big chunk of that change attributable to IndyMac.

A lot of people have been wondering when the banks will get their books in order. It makes sense to follow this metric as one of the measures and we’ll try to keep up with the number of banks on the FDIC “problem list” going forward.

I know this is not related to real estate (yet) but I had to post a picture of what is potentially our next vice president, Sarah Palin. I wasn’t sure what to call the title of this post, but it came down to what you see and “Good Grief”.

Looks like Christmas may have come a bit early this year for Obama+Biden.

USBanker Magazine is featuring an article in its September issue discussing the impact of the current financial turmoil on office space vacancy rates. According to the article, New York’s Independent Budget Office is forecasting roughly 60,000 total job losses stemming from the credit crunch. The CEO of New York’s GVA office has estimated that as much as 3.7 million square feet of space can come back on the market in the next quarter alone as companies such as JP Morgan (Bear Stearns) dump or attempt to sublease space.

Of all the markets with the largest financial exposure (New York, Boston, Chicago, San Francisco), Orange County has been the hardest hit with 3-4 million square feet of space combing back online on top of the 8 million square feet of new construction. The vacancy rate there according to the article has risen a thousand basis points in one year alone.

Cupertino City Center Office Space

Hot Cupertino Office Space Sublease

• Cupertino City Center
• 11,365 Square Feet
• 11 Offices, 5 Conference Rooms, Server Room, & Kitchen
• Plug N’ Play - Furniture and Cubicles in Place
• Great Deal at $2.25 NNN
• Available for sublease to Q4, 2011.

Snell & Co. has acquired a +/- 90,000 square feet office building from Symantec, The three-story building is located at the corner of Torre Avenue and Rodrigues Ave in Cupertino. The building was delivered vacant.

We heard about this sale a few months ago when Snell & Co. tied the site up and was on the hunt for the financing and/or joint-venture partner it needed to conclude the deal. The word is that the sales price was right around $330 per square foot or $30M.

The building is a Class B+ asset, and can be fairly easily demised down into chunks of roughly 15K SF. Market rents for this quality space are in the $2.75 NNN range, with an allowance of $10-15 psf.  The new owners plan on upgrading the common areas, lobby, exterior, and elevator cabs. This building should clean up nicely, but the ceiling heights are a little low (8′-8′5″) to be considered quality Class A space and appeal to everyone. Cupertino is a historically strong market and currently benefits from single digit vacancy rates due to Apple’s voracious appetite for space.

Update: Another broker has emailed us and indicated that asking rents are $3.10 NNN at this project, and that they will demise the spaces down to about 5,000 SF. $3.10 is a fairly strong number for this asset, we’ll see if they can achieve that.

Fighting between Cupertino Square Mall and Gramery Capital has culminated with a notice of default and sale being issued by the lender with a tentative auction date set for September 10th. The lender, Gramercy Warehouse Funding I LLC and United Commercial Bank, claim that Cupertino Square LLC is in default of its loan for the center.

The shopping center, formally known as Vallco Mall was acquired out of foreclosure in 2003 for roughly $78 million by a trio of investors including Alan Wong, Emily Chen, and John Nguyen. Wong and Nguyen are also behind the failed Vietnam Town development, which is another development funded by United Commercial Bank.

The group seeked to add value by revamping Cupertino Square, as well as rezoning a portion of the property to condominium use. The conversion to land entitled for condominium use was unsuccessful. The ownership brought in an AMC Theatre (the design of which is, in my opinion, is horrendous and is to the benefit of AMC only) and largely has tied up the remainder of the mall’s redevelopment potential. The cost of the theatre construction was expected to be paid for by the re-zone of property to condominium use, which never materialized. As a result, the ownership sold off the property to Orbit Resources LLC, who immediately sold off a portion of the property on Vallco Parkway to Fred Chan’s Evershine Group for roughly $50M for retail and condominium development.

Now, the new owner, Cupertino Square LLC (via Orbit Resources LLC), is wrangling with its money partner and lender Gramercy Capital and United Commercial Bank. The lenders claim Cupertino Square LLC is in the default of its loan; which has a remaining balance of over some $120M. The original loan made in August of 2006 by United Commercial was for $195M. It’s unclear whether this asset will actually make it to the auction block at the courthouse, but the lender seems to be doing all the things it needs to make that happen.

The mall’s fate is unclear, but what is clear is that the owners of the mall since the foreclosure in 2003 have butchered the mall’s chance for redevelopment. What should have been done was to work with the city, the community, and the center’s anchors who own their own land (Sears and JC Penney) to seek a complete demo and rebuild and to bring in a mall operator that knows what it is doing. Instead, the undercapitalized and unexperienced group chose to execute piecemeal leases with tenants, severely limiting the flexibility to work with the mall.

The owners also failed to recognize the strength of the Cupertino office space market, a prospective use which they could have chased in lieu of condominiums. Instead, Apple Computer swallowed 50-acres of land north of the site across highway 280 for future campus development. The amount of office space allocatable to this area of the city is almost entirely dedicated to that development, leaving it unlikely that much more, if any, office space can be brought to this development.

Regardless of whether this mall actually gets foreclosed on and sold, it will be interesting to see what happens.

We wrote a piece the other day about Lehman looking to shed $14B of its $40B in real estate assets. The financial times is now reporting that Lehman is now looking to dump $40B stake. It is expected to take a loss somewhere in the range of $1.5-3B. Buyers who are circling the assets (which consist of both debt and real estate) include Blackstone and BlackRock.

It might be a tough pill to swallow, but it’s probably a necessary evil to save Lehman Brothers. The sooner all the banks can stabilize themselves, even if it comes at a drastic cost, the sooner the credit and financial markets will see signs of normalcy. Up until then, jittery investors will shun both equities and debt.