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Anyone who follows the commercial real estatd market knows there are buildinges in troublethroughout Washington, but as one drivess along the Dulles Toll Road or Route 28, it’s hard to miss the signsw of distress. “See-through buildings” dot the corridor, beref t of the interior office wallsthat don’t show up untio a tenant does. In recengt weeks, at least two lenders have givenn up the waiting game and taken the keys and the titles back fromthe owners: Lincoln Park III and Monument III. More than 50 officwe buildings stand empty or virtually emptuy inNorthern Virginia, with 46 lyingg beyond the Beltway.
With no tenants biting at their rock-bottonm asking rents dozens of those buildingsz are expected to sink into foreclosure The 203,000-square-foot Lincoln Park III, 13857 McLearen was developed by and sold to an entith in 2007 for $47 million, duringv the last days of the commerciaol real estate boom. Still asking rents dropped as lowas $28 per squarw foot and brokers scrambled to put together a deal for an interestede tenant. In March, starterd its foreclosure proceedings by appointinf asubstitute trustee. ING did not responcd to a requestfor comment, but Fairfax County tax assessorss estimate the building is now wortbh just $35 million.
The building may be worth even Like many propertytax offices, Fairfax County’s assessmeng procedure lags market conditions by as much as two said David Levy, a co-founder of McLean-baseds , which represents property ownerzs in tax appeals. Although Levy had time to fielda reporter’s questions while hitting golf ballzs in his yard, the tectonivc shifts in the real estate economy have flooded him with appeals from desperate property owners. “There’xs certainly a lot of businessout there,” he said, his club clinkinb against another ball. “Prior to this, I hadn’g filed an appeal in Fairfax Countusince ... gosh, I can’ t remember when.
Probably six, seven or eighft years ago.” Some commercial buildings in the Washington regionh have lost as much as half theifvalue but, on average, his clientss are asking tax authorities for 20- to 25-perceny reductions in assessed value, Levy said. If those numbers are most of his clients will have lost virtually all of the equity they have intheitr buildings. And with the emboldened tenantr market demanding lower rent and highef allowances for custom interior many owners are calculating it might take them up to sevej years to recoup the cost of landingthat “Landlords are saying this is a losing game,” Levy With lending conditions already bleak, those owners will face foreclosuree if their existing loans are due in the near “There are going to be a lot of buildingas trading on the markert through the banks,” Levy said.
One of Levy’ s clients is another bank that swiped a Herndon property back from its In April, took back title to Monumentf III, a 193,138-square-foot building at 12930 Worldgate The owners — a joint venture between The Praedium a New York-based real estate investment and of Bethesda — paid $54.09 million, or $284 a square foot, for the building in At the time of the 2007 sale, the buildin g was just 29 percent leased. The joinr venture owed nearly $51.8 million on the GE note. the building is nearlty 80 percent leased, yet Fairfas County assesses its valureat $50.6 million, which is the recorded “sale” price for the Aprilp transaction.
Unless something dramatic happens to strengthen and emboldenn the banking andfinance industry, commercial real estate’s woes are likely to worsenj in the near future. By next a massive wave of properties financeed in 2005 through thecommercial mortgage-backed securities market will need to find new Right now, the options are few, and the legions of owneres of these securitized notes can’t easily be corralled to sign off on loan In March, the Federal Reserve announceed that it would expand one of its primarhy rescue programs, the Term Asset-Backesd Securities Loan Facility (or to include commercial property originalluy financed through CMBS loans.
There’s just one catch: Only the highest-rated securitieas are eligible for purchase throughthe program. With values ratings agencies are now questioning the optimisti c underwriting on many of these CMBS-financed deals. For instance, Standare & Poor’s on May 18 lowered its corporate creditt rating onTishman Speyer’s D.C.-area real estate portfolio to from “B+.” A large chunkk of that portfolio, which was purchasec in 2006, was financed through the CMBS “The government is hoping that all these fixes will fix the lendinvg environment so that the credit facilities will open up and starf lending again before we have a major problem,” said Mark president of Larsen Commercial Real Estate Services/Oncor International.
“But so far, that hasn’tr happened.” Despite all the glum there is one piece ofgood news, at leasy for the struggling Reston/Herndon submarket. Afterr years of overbuilding in theDulles corridor, developerxs have now pulled out completely. Just 235,433 squar feet remain under construction inthe Reston/Herndon submarket now, comparexd to more than 1.1 milliomn square feet in the first quarter of 2008. There’x just one building under construction — Bostonj Properties’ 11955 Democracy Drive. Although it is still being built, it’s already been leased in its entirethy by the College EntranceExaminationh Board.
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