The mortgage meltdown and resulting credit crunch that have rocked the housing market nationwide are reaching their tentacles into commercial real estate.
In metro Denver, several office transactions have fallen through because of the tightened credit markets. The World Trade Center downtown is back on the market after a contract with Broadway Capital Partners fell through; and International Capital Partners pulled out of a deal to buy Plaza Quebec in Englewood, according to people in the commercial real-estate industry.
Other sales that have fallen through because of financing difficulties include Cherry Creek Corporate Center, Denver Corporate Center and a building in the Mountain View office park in Broomfield, those people said.
“Any business in America right now that’s borrowing money is impacted by the credit crunch, whether it’s Cerberus Capital that’s trying to buy Chrysler or KKR trying to buy First Data,” said Mike Winn, an investment broker with Cushman & Wakefield.
Private-equity firm Kohlberg Kravis Roberts & Co. offered $26 billion for credit- and debit-card processor First Data Corp. in April in a leveraged buyout. Rising mortgage defaults and fears of a glut of leveraged-buyout debt rocked credit markets over the summer, making it a struggle to raise the money to finance the deal. KKR’s investment bankers had to cut the size of their planned loan sale from $14 billion to $5 billion and lower the price by 4 percent.
KKR’s investment banks were able to sell about $7 billion of the First Data deal’s debt, according to press reports.
“Any business that requires debt is impacted because the cost of debt has changed,” Winn said. “Right now, risk is being repriced. It’s just part of the cycles that financial markets go through.”
Winn was involved in some of the deals that have been affected but declined to comment on those transactions.
John Becker, vice president at Fuller Real Estate, said he’s aware of two southeast suburban Class B office buildings that were about to go into foreclosure before they sold. He knows of another that sold for less than the seller paid for it.
“To me, that’s an ominous sign that values are starting to slip a little bit on some of these office buildings,” he said. “That bodes poorly for the market as a whole that we may be seeing some deterioration.”
It’s not just building sales that are falling apart. Large construction projects also are having trouble with financing. Developer Randy Nichols stopped construction on Spire after the German lender yanked its $160 million loan because of uncertainty in the international market. Nichols is working on securing new financing for the project.
Still, the fundamentals of Denver’s commercial real-estate market are strong. Borrowing terms may be different, but there’s still plenty of money available, said Craig Poulter, executive vice president of CoBiz Financial’s real-estate capital-markets group.
“While there’s a lot of puckering and liquidity is being taken out, there still is a lot of capital to go around,” Poulter said. “The fundamentals of the commercial real-estate market are no less sound today than they were before the credit crunch hit.”
Highly leveraged borrowers are feeling the most impact from the credit crunch. Those who were borrowing 80 percent two months ago now can borrow only 70 percent, said Eric Tup ler, managing director of CB Richard Ellis’ capital-markets group.
“In a nutshell, we’re seeing a reduction in the availability of debt and an increased cost in the debt that is available,” Tup ler said.
Still, the uncertainty over credit has prompted CB Richard Ellis investment broker Mary Sullivan to advise clients with high-priced buildings to wait until the first quarter of 2008 to list them.
“This is an emotional reaction to the subprime meltdown, which isn’t even a meltdown – it’s a ripple,” Sullivan said. “When this settles down and the fear is taken out of the market, and you can begin to price debt again with certainty, then you’re going to get better pricing.
“For (brokers), we eat what we kill,” she said. “If we’re saying take a couple of animals off the market, we’re going to eat a little less. But you have your client’s best interest in mind.”
Margaret Jackson: 303-954-1473 or mjackson@denverpost.com
