Monday, September 7, 2009

Scott Lawlor and the John Hancock Building

Daniel Gross predicts an impending crisis in commercial real estate in his profile of the John Hancock Tower, "The Skyscraper That Ate a Billion Dollars" (here).

A number of writers this summer have, like Gross, said the commercial real estate market is due for the next great correction when, in the next several years, $1 trillion in debt requires refinancing -- and banks won't be willing (or able) to lend on sufficiently favorable terms. Gross is even more pessimistic than most of the analysts.

The tag for Gross's piece is the Hancock Tower and Scott Lawlor, whose fund purchased Hancock along with a portfolio of commercial properties in 2006; Gross says that the debt on Hancock was approximately $1.36 billion at that time. Whereas Alan Leventhal had bought the Hancock Tower for $910 million in 2003 but paid $300 million down, Lawlor's purchase was highly (almost entirely?) leveraged.

The second mortgage came due in January of 2009, and Lawlor was unable to refinance. In the preceding year, Normandy Real Estate Partners and Five Mile Capital had bought up portions of the second mortgage, and they foreclosed on Lawlor in March and wrote down -- by $350-400 million -- the value of the debt secured by the building.

Gross says its market value is now $700 million -- down from $1.4 billion in 2007. He thinks the Hancock is a harbinger of many similar writedowns to come.

Thomas Friedman wrote a long piece in yesterday's NYT Magazine about the difference between freshwater economists (largely anti-Keynesians) and saltwater economists. He argues that the two schools converged in failing to see the real estate bubble. He pointedly criticizes certain freshwater guys who have argued that many of the current unemployed have rationally decided to take some time off. He also says behavioral economists, including Robert Shiller (who identified the bubble), stand apart in having done some valuable recent work.

There's a big problem with Friedman's piece: he starts with the underlying premise that economic growth must equate with more spending and more consumption. He does not explore alternative models as to what "growth" could, or should, mean.

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