The Tipping Point

Malcolm Gladwell, in “The Tipping Point: How Little Things Can Make a Big Difference”, essentially discusses the ripple effect. Certain memetics create epidemics until they achieve critical mass. We may have seen the beginning of a tipping point yesterday.

The front page of the January 25, 2010 issue of The Wall Street Journal had a story about a group led by Tishman Speyer Properties, in a joint venture with BlackRock, Inc., two behemoths in the real estate industry that had “returned” apartments known as Peter Cooper Village and Stuyvesant Town to its creditors. The 11,000+ unit apartments, located in Manhattan, were acquired in 2006 for $5.4 billion (that’s right billion with a “B”). Sources estimate the present value around $1.8 billion.

What happened to “extend and pretend” or a “rolling loan gathers no loss”? Very smart people at the Tishman/BlackRock joint venture decided it was better to provide the lender with essentially a deed-in-lieu of foreclosure rather than file a plan of reorganization and try to keep the property. Bye-bye equity, adios management fees. The lender, who after significant negotiations had plenty of opportunity to renegotiate the debt, decided it was best to accept the property. Who will manage the apartments, what type of CAPEX is required to ensure that the tenants live in habitable units, how much will the lender ultimately sell the apartments for…..

I’ve been looking for a tipping point of when the economy will start to improve. What I believe I just read, was a tipping point that the tsunami is going to begin. Trillions of dollars of commercial debt will be maturing over the next few years. There is more than $3 trillion in cash sitting on the sidelines waiting for investment activity, not wanting to invest and catch a falling knife, but not having any product to invest in either. The wait is almost over, product will be forthcoming very soon.

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