When a foreclosure auction is won by the lender, the price is not very indicative of the market value.
Usually, lenders will bid up to somewhere around the outstanding loan amount. And typically, the loan amount is known. If you have an idea for how much you want to pay, and it's much less than the loan amount, you won't bid, because there's no point.
Combine that with typically a very short period before announcement and auction, during which time the borrower may not be compelled to cooperate with due dilligence (or may refuse to cooperate despite having a duty to), and yeah, you're not likely to get bidders. If the property was easily sold near the loan amount, the borrower likely would have done it.
Edit: an article from April claims a loan amount of $83M [1]. Asumming that's roughly accurate, this auction says nobody is interested in paying around $83M for this building on short notice. You need "good funds" at the auction: cash, a cashier's check or ability to do an immediate wire.
What is indicative of market value is the fact that the auction yielded no better buyer.
These stories about huge markdowns of commercial real-estate are not surprising. This case is indicative of the predicted instability in local and regional banking sector. Pinnacle Bank Texas is a part of a regional bank that is badly exposed in commercial real-estate, where borrowers are defaulting left and right. There is something approaching $1 trillion in commercial real-estate mortgages coming due this year, and much of it can't be feasibly refinanced due to prevailing interest rates, vanishing tenants and other problems.
2024 is going to get interesting. My prediction is: it's an election year, and The Powers That Be don't want a big banking blow-out, so there's going to be bail outs, the national banks are going to be pressured to clean up some of the mess, etc. More consolidation, more public debt, more kicking the can.
I don't see how this prevents economics from taking over. If nobody bid over 12 million, thats a signal that nobody thought it was worth say 20 million. Otherwise they would have bid.
12.3 million is pretty down there though, that no one thinks the building is even worth the loan amount, and that the loan amount was at least 10% (I bet it was much higher though) indicates the building isn’t worth much.
This does provide an amusing mental image of some theoretical commercial real estate person who specializes in distressed properties, not specifically this auction, but showing up to some "auction on the courthouse steps" type thing with an actual Pelican case crammed full of USD 100 notes. I wonder what's the largest recent real estate transaction that's been done actually in cash. I imagine it would raise a few KYC red flags and reporting requirements, of course.
In practical terms of course we all know that "cash" payment really means "ability to execute a SWIFT transfer for the funds within one business day".
Wow, to put it into perspective, the numbers in the article work out to 25000 square feet per floor, and about $300k per floor.
About $300k buys you a modest 2000 square foot house in a flyover state.
One thing I've thought about, when people talk about turning skyscrapers into housing, is that you don't actually have to use all of the space. Instead, figure out how many actual dwellings can be built given the amount of windows and utilities, and leave the rest of it empty or treat it like basement space.
Disclosure: Dweller of modest house in a flyover state.
One of the problems with turning skyscrapers into housing is that the typical floor plate of an office tower is not equipped with plumbing (toilet and shower and sink drainage, fresh water suppy) in the concrete slab of each floor. Only in a few spots like "break room" and bathrooms. Same problem in buildings that are 100% steel frame floor slabs and a few inches of concrete on top of the steel.
There should be a vector based PDF linked there above for closer inspection.
It's very expensive to retrofit residential walls, HVAC, plumbing etc into a building that wasn't designed for it. Not saying it can't be done, some pre-1940 skyscrapers in the lower manhattan/financial district area have been fully converted to 500+ suite rental apartment buildings. But there has to be a relatively high demand in residential leasing demand and $ per sq ft rental rates to make it viable.
Treat it as storage space, community space, small retail space. There are so many opportunities to build better environments. I know Cyberpunk 2077 is a dystopian future, but V lives in a small apartment that is in ready walking distance to everything from guns to martial arts training to food all available within the building. That aspect of the dystopian future actually seems quite a bit better than what many people live with in US "modern society".
I always wonder what happens to your skyscraper 50 or 100 years from now.
If I buy a house I own assets for the price of the house plus the price of the land on which it sits. If the house burns down I still own the land underneath.
But if I buy an apartment on a skyscraper and it is deemed uninhabitable all I end up with is the price of the land minus the price of demolishing a skyscrapper divided by the number of people living there. That doesn't sound like a good investment long-term.
Selling at a massive discounted value coupled with very short notice on what is being sold... doesn't this just lend itself to collusion between those that know when properties will be put up for 'auction' to ensure that the right friends get a heads up beforehand?.
This is of course a rhetorical question as I've met quite a few people whose fortune can all be traced back to having good friends in the right places. This is all sort of open secret so its not illegal but it is a form of corruption of the system.
Foreclosure auctions are different to the open market. Not just the 'setting the price' but also the mechanics of 'knowing what you're buying' etc.
In other words opportunities like even entering the building (in some cases) or doing a proper property inspection will likely not happen.
For this reason it's a pretty high-risk situation, and that risk will be factored into the bids. Equally the bidders will be "professionals" - people who understand the process, risks and so on. In some cases the full purchase amount is due on the fall of the hammer, in others after a very short period (like 24 hours.)
For all these reasons, you don't really need a long notice period. The buyer pool is already on the bank's mailing list, and need no more than a few hours to figure out their "best price".
Make no mistake, buying foreclosed property is risky. Which is why the price is (severely) depressed. Yes you can make money. More likely there are additional significant costs. (Like outstanding property taxes.) Some of that is disclosed, most is not.
While I've no doubt networking remains the root of a lot of business, and the benefits of networking are serious, there's likely no corruption here. This sort of sale us not "open market".
There may well be corruption in some of these processes, but these foreclosure options are generally a public courts process and occur only after vast sums of money have been lost by owner and lender.
Due to construction costs, interest rates, and skyrocketing vacancy (a triple peak), the math does not work by a long shot to restore these buildings, even with new office tenants. Lease terms too short to recapture improvement costs. The deal just would have a rely on massive increases in rents and occupancy that likely never returns.
Converting to a new use is far more expensive and similarly doesn’t work. High rises are very complex systems.
These lender-run foreclosure auctions would LOVE to see another buyer come along to take the asset off their hands. The lender-buyback is just a risk backstop, they still have to figure out what to do with the asset after the buyback, meanwhile the building is deteriorating and costing (in any cases) millions to operate annually.
My group knows how to do these conversion very well, we don’t see a path forward, even being willing to dive in on some major risk assumptions, the converted value end game is too weak to justify the risk.
If you're interested in buildings at auction, you can follow court filings, default notices, and auction notices.
If a lender is suing its borrower, that's a sign that the borrower may not be following the terms of the loan and the property may be heading to foreclosure.
If a lender files a notice of default on a property, that's a pretty good sign that payments aren't being made timely, and the property may be heading to foreclosure.
If a lender files a notice of foreclosure auction, that's an even better sign that there will be a foreclosure auction, but they can usually be called off, up until the start of bidding; sometimes only if the borrower pays the outstanding balance, sometimes if the borrower makes the late payments, sometimes at the lender's discretion.
But why would the lender want to sell at such a discount? Arent they losing out on the remaining value of the loan. They had to pay someone else 137 mil and they arent getting that back. That just sounds like internal fraud.
If you work in risk management in Listed Property Trusts and read HN, I'd love to know when you started talking seriously inside your company about the write down you had to make to book value on these assets.
Personally, I think that conversation was had over 2 years ago. But it may have a long tail of consequence as property holdings unwind.
I can tell you that in northern CA, large relatively recently class A office buildings are well available at ~$75/foot outside of the main downtown cores (where they might be ~$200s/foot).
Think 75,000 - 200,000 sqft office with a couple acres of parking outside.
Thus far the only buyers are people betting they can undercut the other local office market. So the bottom may be further yet.
I don’t work in those departments, so I don’t know about those conversations explicitly, but I think it’s notable that many big tech companies spent the post-pandemic times unwinding real estate expansion and leases.
For example, Google has paused a number of projects related to new buildings (eg SJ mega project), and has started to clear out leased buildings that were outside their core neighborhood.
I wonder when overpriced buildings and leases will start to be a competitive risk. I recall that Handspring (makers of Palm PDAs) tied up a ton of cash in expensive leases right before the iPhone became a competitive threat. Losing access to that cash weakened them by preventing them from being nimble. I can see similar situations happening with companies expansion in 2020s to overvalued RE commitments.
I’ve looked at buying a number of buildings like this one over the past six months, and we own a couple office (mid) high-rises that we’ve converted to hotel.
I can tell you there’s a massive delta between the “book value” these investors are claiming and the real market value for the foreseeable future, 3-5 yr horizon.
As the market endures a historic shift in demand away from big block towers due to remote work and skyrocketing cost of building opex services, The traditional 7 to 10 year lease for office space no longer pencils on all but the most expensive office space. And not by a longshot.
However, there is real appeal to the value of a professionally managed a+ location high rise with views and a curated tenancy.
We really need a new format of high-rise design that diversifies the ownership and risk on a per-floor basis. high-rise office cownership should look a lot more like a condo association, in the physical building needs to be modified so that some common systems are broken up into per-floor systems (mainly just HVAC; convert a single huge chiller/cooling tower combo to per-floor heat pumps. Suboptimal under peak load but far more flexible, risk tolerant and far lower cost capex)
Smaller bites of ownership dramatically broadens the ownership opportunity and potential market reach of a given 30,000sf block/floor of tower. Similar to the stock market democratizing corporate investment. Big players can still play right along side the small businesses and private investors. It even derisks ownership of a high rise because a 1m sf office tower now has two target customers, a massive reit or a diversified flock of private investors who don’t need to know each other.
“Dont we already have that in X Y Z?” Yes but no, and that’s a large part of why these buildings are selling for cents on the dollar. The customer/payer is too far removed from the risks and benefits of ownership of this asset class, and the fundamental design of the building systems carries too much maintenance risk.
In other words, as a real estate professional, I would like to see diversified, smaller “dumb money” in this office asset class, which can be far more patient an opportunistic (or unwise, tomato tomahto) than a major REIT
Well, not one floor, but you could have bought 40 floors at 300k each.
Having said that, the other comments here make a fair point that you would have likely ended up paying an initial 300k and then an unknown sum in repairs and unpaid taxes for a floor with an unknown number of tenants with valid leases.
[+] [-] toast0|1 year ago|reply
Usually, lenders will bid up to somewhere around the outstanding loan amount. And typically, the loan amount is known. If you have an idea for how much you want to pay, and it's much less than the loan amount, you won't bid, because there's no point.
Combine that with typically a very short period before announcement and auction, during which time the borrower may not be compelled to cooperate with due dilligence (or may refuse to cooperate despite having a duty to), and yeah, you're not likely to get bidders. If the property was easily sold near the loan amount, the borrower likely would have done it.
Edit: an article from April claims a loan amount of $83M [1]. Asumming that's roughly accurate, this auction says nobody is interested in paying around $83M for this building on short notice. You need "good funds" at the auction: cash, a cashier's check or ability to do an immediate wire.
[1] https://therealdeal.com/texas/fort-worth/2024/04/05/opal-hol...
[+] [-] topspin|1 year ago|reply
These stories about huge markdowns of commercial real-estate are not surprising. This case is indicative of the predicted instability in local and regional banking sector. Pinnacle Bank Texas is a part of a regional bank that is badly exposed in commercial real-estate, where borrowers are defaulting left and right. There is something approaching $1 trillion in commercial real-estate mortgages coming due this year, and much of it can't be feasibly refinanced due to prevailing interest rates, vanishing tenants and other problems.
2024 is going to get interesting. My prediction is: it's an election year, and The Powers That Be don't want a big banking blow-out, so there's going to be bail outs, the national banks are going to be pressured to clean up some of the mess, etc. More consolidation, more public debt, more kicking the can.
[+] [-] mucle6|1 year ago|reply
[+] [-] wodenokoto|1 year ago|reply
OT, but I couldn't help noticing that when you put "cash" next to "immediate wire", you must mean actual paper and coin cash.
I don't think you can buy anything in the US for $12.3 in suitcases of cash.
[+] [-] seanmcdirmid|1 year ago|reply
[+] [-] walrus01|1 year ago|reply
In practical terms of course we all know that "cash" payment really means "ability to execute a SWIFT transfer for the funds within one business day".
[+] [-] aaron695|1 year ago|reply
[deleted]
[+] [-] analog31|1 year ago|reply
About $300k buys you a modest 2000 square foot house in a flyover state.
One thing I've thought about, when people talk about turning skyscrapers into housing, is that you don't actually have to use all of the space. Instead, figure out how many actual dwellings can be built given the amount of windows and utilities, and leave the rest of it empty or treat it like basement space.
Disclosure: Dweller of modest house in a flyover state.
[+] [-] walrus01|1 year ago|reply
For instance here's a full floor of the building in question: https://burnettplazaftworth.com/office-space/suite-3000/
There should be a vector based PDF linked there above for closer inspection.
It's very expensive to retrofit residential walls, HVAC, plumbing etc into a building that wasn't designed for it. Not saying it can't be done, some pre-1940 skyscrapers in the lower manhattan/financial district area have been fully converted to 500+ suite rental apartment buildings. But there has to be a relatively high demand in residential leasing demand and $ per sq ft rental rates to make it viable.
[+] [-] tstrimple|1 year ago|reply
[+] [-] probably_wrong|1 year ago|reply
If I buy a house I own assets for the price of the house plus the price of the land on which it sits. If the house burns down I still own the land underneath.
But if I buy an apartment on a skyscraper and it is deemed uninhabitable all I end up with is the price of the land minus the price of demolishing a skyscrapper divided by the number of people living there. That doesn't sound like a good investment long-term.
[+] [-] wudangmonk|1 year ago|reply
This is of course a rhetorical question as I've met quite a few people whose fortune can all be traced back to having good friends in the right places. This is all sort of open secret so its not illegal but it is a form of corruption of the system.
[+] [-] bruce511|1 year ago|reply
In other words opportunities like even entering the building (in some cases) or doing a proper property inspection will likely not happen.
For this reason it's a pretty high-risk situation, and that risk will be factored into the bids. Equally the bidders will be "professionals" - people who understand the process, risks and so on. In some cases the full purchase amount is due on the fall of the hammer, in others after a very short period (like 24 hours.)
For all these reasons, you don't really need a long notice period. The buyer pool is already on the bank's mailing list, and need no more than a few hours to figure out their "best price".
Make no mistake, buying foreclosed property is risky. Which is why the price is (severely) depressed. Yes you can make money. More likely there are additional significant costs. (Like outstanding property taxes.) Some of that is disclosed, most is not.
While I've no doubt networking remains the root of a lot of business, and the benefits of networking are serious, there's likely no corruption here. This sort of sale us not "open market".
[+] [-] ethagknight|1 year ago|reply
Due to construction costs, interest rates, and skyrocketing vacancy (a triple peak), the math does not work by a long shot to restore these buildings, even with new office tenants. Lease terms too short to recapture improvement costs. The deal just would have a rely on massive increases in rents and occupancy that likely never returns.
Converting to a new use is far more expensive and similarly doesn’t work. High rises are very complex systems.
These lender-run foreclosure auctions would LOVE to see another buyer come along to take the asset off their hands. The lender-buyback is just a risk backstop, they still have to figure out what to do with the asset after the buyback, meanwhile the building is deteriorating and costing (in any cases) millions to operate annually.
My group knows how to do these conversion very well, we don’t see a path forward, even being willing to dive in on some major risk assumptions, the converted value end game is too weak to justify the risk.
[+] [-] toast0|1 year ago|reply
If a lender is suing its borrower, that's a sign that the borrower may not be following the terms of the loan and the property may be heading to foreclosure.
If a lender files a notice of default on a property, that's a pretty good sign that payments aren't being made timely, and the property may be heading to foreclosure.
If a lender files a notice of foreclosure auction, that's an even better sign that there will be a foreclosure auction, but they can usually be called off, up until the start of bidding; sometimes only if the borrower pays the outstanding balance, sometimes if the borrower makes the late payments, sometimes at the lender's discretion.
[+] [-] from-nibly|1 year ago|reply
[+] [-] unknown|1 year ago|reply
[deleted]
[+] [-] ggm|1 year ago|reply
Personally, I think that conversation was had over 2 years ago. But it may have a long tail of consequence as property holdings unwind.
Any Takers?
[+] [-] aorloff|1 year ago|reply
Think 75,000 - 200,000 sqft office with a couple acres of parking outside.
Thus far the only buyers are people betting they can undercut the other local office market. So the bottom may be further yet.
[+] [-] vineyardmike|1 year ago|reply
For example, Google has paused a number of projects related to new buildings (eg SJ mega project), and has started to clear out leased buildings that were outside their core neighborhood.
I wonder when overpriced buildings and leases will start to be a competitive risk. I recall that Handspring (makers of Palm PDAs) tied up a ton of cash in expensive leases right before the iPhone became a competitive threat. Losing access to that cash weakened them by preventing them from being nimble. I can see similar situations happening with companies expansion in 2020s to overvalued RE commitments.
[+] [-] ethagknight|1 year ago|reply
I can tell you there’s a massive delta between the “book value” these investors are claiming and the real market value for the foreseeable future, 3-5 yr horizon.
[+] [-] ethagknight|1 year ago|reply
However, there is real appeal to the value of a professionally managed a+ location high rise with views and a curated tenancy.
We really need a new format of high-rise design that diversifies the ownership and risk on a per-floor basis. high-rise office cownership should look a lot more like a condo association, in the physical building needs to be modified so that some common systems are broken up into per-floor systems (mainly just HVAC; convert a single huge chiller/cooling tower combo to per-floor heat pumps. Suboptimal under peak load but far more flexible, risk tolerant and far lower cost capex)
Smaller bites of ownership dramatically broadens the ownership opportunity and potential market reach of a given 30,000sf block/floor of tower. Similar to the stock market democratizing corporate investment. Big players can still play right along side the small businesses and private investors. It even derisks ownership of a high rise because a 1m sf office tower now has two target customers, a massive reit or a diversified flock of private investors who don’t need to know each other.
“Dont we already have that in X Y Z?” Yes but no, and that’s a large part of why these buildings are selling for cents on the dollar. The customer/payer is too far removed from the risks and benefits of ownership of this asset class, and the fundamental design of the building systems carries too much maintenance risk.
In other words, as a real estate professional, I would like to see diversified, smaller “dumb money” in this office asset class, which can be far more patient an opportunistic (or unwise, tomato tomahto) than a major REIT
[+] [-] Strawberry76|1 year ago|reply
[+] [-] iancmceachern|1 year ago|reply
[+] [-] Animats|1 year ago|reply
[+] [-] bagels|1 year ago|reply
https://property.jll.com/listings/burnett-plaza-801-cherry-s...
[+] [-] Beijinger|1 year ago|reply
[+] [-] probably_wrong|1 year ago|reply
Having said that, the other comments here make a fair point that you would have likely ended up paying an initial 300k and then an unknown sum in repairs and unpaid taxes for a floor with an unknown number of tenants with valid leases.
[+] [-] unknown|1 year ago|reply
[deleted]
[+] [-] egberts1|1 year ago|reply
[deleted]
[+] [-] hindsightbias|1 year ago|reply
[deleted]