Owners Hit the Road, Leave Investors Behind

The latest owner to follow the trend of walking away from commercial real estate properties that have become untenable as investments is Vornado Realty Trust (VNO). VNO, a $13 billion real estate investment trust, has announced plans to walk away from two loans totaling $235 million.
Commercial real estate experts predict that an increasing number of office building and shopping center owners will let go of properties that are worth less than their mortgages, as more loans mature and refinancing remains difficult and costly. Some commercial property owners find that it makes more economic sense for them to stop making payments and servicing the debt.

Vornado, whose properties had a net book value of $148 million but a $218 million mortgage,will join other well-known and well-funded operations that also have opted to walk away, including Black Rock, Inc. (BLK) and Tishman Speyer Properties. NewYork-based Tishman gave control of its Stuyvesant Town/Peter Cooper Village housing complex in Manhattan to creditors after its value fell by nearly $2.5 billion. Southern Calif.-based owner Maguire Properties, Inc. (MPG) handed over the keys to seven office building towers to its creditors last year.

The stigma attached to commercial real estate developers who walk away from their properties has faded. In the past, investors would boycott those companies. But if the loans have been bundled into commercial mortgage-backed securities, as most are, then investors in the bonds, especially those who own parts backed by subordinate debt, are likely to be adversely--and very quickly--affected. Investors have little recourse but to wait to see if protections built into the bonds offer a cushion from losses.