Lehman’s Detroit Escape Means 90% Loss on Properties

Lehman Brothers Holdings Inc. has said it plans to be patient in selling real estate holdings four years after filing the largest U.S. bankruptcy in history. In Detroit, it’s willing to accept less than 10 cents on the dollar to get out while it can.

Lehman is selling a 251,000-square-foot (23,000-square- meter) office property in suburban Farmington Hills. In June, the bank offered it at auction for $10 a square foot, which would have recovered less than 10 percent of the $27.5 million mortgage it extended in 2007. It’s also selling 1 Woodward Ave., a tower overlooking the city’s riverfront and border with Canada that’s 44 percent vacant.

Detroit’s metro office market is missing out on Michigan’s revival three years after the government rescued General Motors Co. (GM) and Chrysler Group LLC amid the worst financial crisis since the 1930s. Borrowers 30 days late or more on Detroit-area office loans packaged into commercial mortgage-backed securities rose to 24 percent from 15 percent in August 2011, according to data compiled by Bloomberg, compared with 9.9 percent nationally.

“This is probably not a market where you’re going to see much growth and for that reason, it might make sense to just move on,” said Shaw Lupton, a senior real estate economist at data provider CoStar Group Inc. (CSGP)

Archstone Sale

Lehman said in July it’s attempting to recover as much as $12.9 billion for creditors by selling real estate holdings that range from condos in Hawaii to Archstone Inc., the eighth- largest apartment manager in the U.S. Lehman has said it plans to hold some assets as long as 2015, waiting for opportune times to dispose of properties as the commercial and residential markets recover. It moved to take Archstone public last month.

Kimberly Macleod, a Lehman spokeswoman, declined to comment on the firm’s Detroit holdings.

Lehman had $260 million in outstanding senior loans secured by Detroit-area property at the time of its September 2008 demise, in addition to $13.2 million in mezzanine or junior loans, according to court documents.

The bank had extended some of the loans as part of a joint venture with affiliates of developer Kojaian Management Co. The partnership, which had dated to 1995, was dissolved a year after the bankruptcy and Lehman took title to 15 properties in lieu of foreclosure.

Michael Kojaian, executive vice president of Kojaian Management, declined to comment.

Farmington Hills

Lehman had provided $27.5 million of debt against the three-story Farmington Hills property by 2007, an increase over the original mortgage it made in 2001 for $19.5 million, according to records filed with the assessor’s office.

The Farmington Hills site, about 30 miles (48 kilometers) northwest of Detroit, has an occupancy rate of 30 percent that will fall below 6 percent when mortgage company Quicken Loans Inc. leaves, according to Larry Emmons, a senior managing director at broker Newmark Grubb Knight Frank in Southfield, Michigan.

“It’s a good time to sell,” Emmons said. “The peak tenancy has kind of run its course and it’s going to take some major repositioning, some marketing and a general increase in market velocity for Class-B buildings before this one fills up again,” said Emmons, who isn’t involved in the deal.

Detroit’s decline isn’t uniform. Quicken’s founder Dan Gilbert has moved employees to the city’s Campus Martius Park area, the center of its tech industry. That’s less than three blocks from One Woodward Ave., the downtown Detroit office building with 333,000 square feet, according to CoStar.

‘General Upgrading’

“There’s been a general upgrading of space,” Emmons said. “A lot of the A and B buildings have been at 10-year lows so people will consolidate and upgrade their digs.”

There were 3,037 Class-B buildings totaling more than 100 million square feet in the Detroit area at the end of the second quarter, according to CoStar. The vacancy rate for Class-B buildings in the region was 21.2 percent.

Asking rent for office space in the Detroit region was $17.81 per square foot in the second quarter, the lowest on record, according to data from CoStar going back to 2000. The national average was $22.70 in the period. Vacancies were 18.4 percent in Detroit, compared with 12.7 percent nationally.

Michigan’s economic health ranked second in improvement among U.S. states in the first quarter, according to data compiled by Bloomberg. Unemployment that was the worst in the U.S. at 14.2 percent in August 2009, shortly after GM and Chrysler emerged from a U.S.-backed rescue, has since declined to 9 percent, compared with the 8.3 percent national average.

Auto Sales

U.S. auto sales in August smashed through estimates and are on pace to exceed 14 million vehicles for the best year since 2007. Chrysler’s sales last month increased 14 percent, the Auburn Hills, Michigan-based company said yesterday in a statement.

While that’s spurred hiring in the state, the jobless rate in the metropolitan region that includes Detroit was 13.4 percent in July, according to the Bureau of Labor Statistics.

Detroit is reeling from a decades-long decline that since 2000 has shrunk its population by 25 percent. In April, it narrowly averted state takeover because of its budget deficit and $12 billion in long-term debt. The city is now under watch of an advisory board as part of an agreement with the state to prevent it from seeking bankruptcy.

“Because of the weak economy it’s relatively tough to find a tenant,” said Lupton, who’s based in Boston. “There’s just not a lot of new office demand being generated here.”

Institutional investors seeking reliable cash flow and appreciation wouldn’t consider Detroit, where office buildings carry high “leasing risk,” he said.

‘New Cycle’

That’s not deterring some investors. Detroit office properties sold for an average of $89 per square foot in the second quarter, more than double the value they sold for in the second half of last year, according to data from research firm Real Capital Analytics Inc. The cap rate, or investment yield, which declines as the price of assets rise, was 7.2 percent -- the lowest since the fourth quarter of 2008.

“We’re entering a whole new cycle in Detroit after we’ve been bumping along the bottom for three years,” Emmons said. “The automobile business isn’t going away. This is still the world headquarters.”

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net

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