The biggest, most offensive real estate deal in history has gone belly-up! Tishman Speyer properties — along with BlackRock — has forfeited Stuyvesant Town/Peter Cooper Village to investors. They bought the historic 80-acre postwar housing development for $5.4 billion back in 2006, exactly 380 years after Peter Minuit bought the island of Manhattan from the Lenape for about $24 in wampum (actually, it was about $1,000). They are completely unrelated, aside from the fact that they may go down in history together as the worst real estate deals to ever happen, ever.
Tishman Speyer’s failure stems not only from making a massive purchase immediately before the market tanked, though that didn’t help; their other mistake was buying a housing project and expecting to be able to treat it exactly like any other luxury housing development. Not only is a housing project not as appealing as a condominium (we will get to that later) — but people already live there. Lots of them. Tishman Speyer saw this as a mere bump in the road; their plan for raising enough revenue to pay back their massive loans — the purchase was 80% leveraged — was to turn rent-controlled apartments into market-rate apartments. Curious what a market-rate one bedroom costs in a former MetLife housing project just above the Lower East Side of Manhattan? $2850 a month. With more than 11,000 apartments in the two complexes, ranging from one to five bedrooms, Tishman was poised to make a lot of money. But, on top of a recession-generated lag in the rental market, the rent-controlled tenants filed suit against Tishman, arguing their actions were illegal, and actually won. Tishman Speyer’s business model was ruined, and they are now forced to default on $4.4 billion in loans. For anyone familiar with San Francisco current events, this is a cluster-site, New York-scale version of what happened with the Lembi group. This confluence really makes one wonder how many real estate investors got the capital for their highly-leveraged purchasing sprees by telling their investors they would boot rent-controlled tenants.
Megan McArdle wrote about the historically large default in this month’s Atlantic. She also points out that renting out a housing project as luxury downtown real estate has some inherent problems:
“The buildings simply weren’t build as deluxe rentals — the mosaic tile in the public areas has been replaced by marble, but in the cramped vestibules and narrow hallways, the effect isn’t luxurious; the buildings just look like they’re dressed up for Halloween. With mostly tiny kitchens, and no room in the lobbies for a doorman, these apartments were never going to command the kind of rents that would justify the partnership’s bid. Even though many of the apartments have been decontrolled, net income has barely risen.”
McArdle makes an excellent point about the cheap feel of the buildings. I have been to a handful of apartments in the complex, and had the same impression. But she stops just short of saying what really needs to be said: this is a housing project — even if it isn’t public housing — with the same design as those just a few blocks downtown, and just a few minutes away in Brooklyn. I don’t think there’s a place in the world where these hulking Corbusian monoliths have any sort of cachet. From les banlieues of Paris, to the panelaky estates of former Czechoslovakia, and even in Canada (shameless promo: Michael Summerton has an excellent piece about Toronto’s slab tower problem in our upcoming issue), this form of housing, which was quite popular in the housing shortages post World War II, is seen as problematic, not to mention cheap and dull. And I doubt anyone pays three grand a month to live in any of the above mentioned places. But in New York, investors were willing to gamble that people would — and should — pay that much to live in what is, in essence, a housing project.
Ultimately, they didn’t. I’d argue it’s in part because this type of housing is suburban at heart, which might seem ironic. Obviously, the density of housing projects like Stuy-Town are anything but suburban, as are our associations with them. But, the separation between residential, commercial and retail uses is quintessentially so. As a result, unless you live on the 14th Street or 1st Avenue side of the development, you could really be anywhere. And people don’t pay exorbitant rents to live in Manhattan because it offers an escape from the hustle and bustle of city life.
Tishman Speyer’s mistake was to take a form of housing that is inherently cheap (this is the stuff we give away for free!), and to try and repackage it as the precise opposite. They were forced to illegally remove rent-controls from a form of housing that is rarely rented out at market-rate — because it is typically not part of the normal housing market — and that’s what ultimately sunk their ship. It would be poetic justice if so many people weren’t losing their pensions as a result.