Apartment Owners' Potential Bankruptcy Encapsulates State of Commercial Real Estate Market

In what can be considered the best example of the current state of the nation's commercial real estate industry, the largest residential real estate investment in United States history is facing bankruptcy. As a result, the current owners of the Stuyvesant Town/Peter Cooper Village are handing the property over to its primary financial backers after the recession and overall plunge in global real estate values decimated the complex's value to a third of where it was upon its 2006 purchase.

Bought for $5.4 billion by Tishman Speyer and BlackRock Realty, the largely middle-class development in New York city housed 11,227 apartments and provided homes to close to 25,000 individuals, a population larger than many small cities. The entire development actually consists of two separate apartment complexes.

Originally built to house soldiers returning from World War II, it is now estimated to be worth around $1.8 billion.

The owners chased down the massive deal at the absolute height of the real estate bubble, eager to undergo massive renovations to convert it to higher-end units and change the neighborhood's reputation as a run-of-the-mill urban New York City address into a live and play destination.

They also fought hard to assess tenants for additional funds through rent increases and projected they could turn portions of the area into luxury condos.

However, tenants were quick to protest what would amount to a $200 million door-to-door collection when all was said and done. A New York State judge sided with the residents when the issue made it to court, leveling the owners' redevelopment plans. The pending economic crash did not exactly help their cause, either.

Since November of last year, the group has been working to restructure close to $3 billion in outstanding loans.

The critical breaking point for the partnership, which is exactly what continues to erode the stability of our nation's commercial real estate industry, was their inability to make their most recent loan payment of $16 million. With credit no longer readily available, owners of commercial property are collectively facing billions in expiring mortgage loans with no way to refinance.

Commercial landlords are doing everything possible to lure and keep tenants in their buildings. Rents have dropped substantially and months of free rent are handed out with little negotiation as high-end office property owners are watching their rent rolls shrink. Larger commercial real estate companies and ownership groups are filing bankruptcy, laying off brokers and shopping mergers as the United State government scrambles to prevent what many on Wall Street are calling "the other shoe" from dropping on our already trembling economy.

With the announcement of the Stuyvesant/Cooper complex's trouble, the commercial real estate industry has sustained another serious blow across the chin. You can only hang on the ropes for so long.

The lenders on the property, a group that includes The Church of England and the California Public Employees' Retirement System (as if they could use another reason to worry about money), now have to figure out the best way to handle one of the nation's most massive housing developments. One option, of course, is foreclosure.

Many in the industry challenged the purchase as a major risk, given the difficulty of dislodging rent control standards in New York and the fact that high cost of the property left little room for error. Since income property is essentially the purchase of a revenue stream---rent---its value falls when tenants are not able to provide that revenue. Plus, when the tenants won the case against the rent increases, the coffin nails met even less resistance.

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