A Big Deal Gets Done

11/15/2007 12:00 am EST

Focus: REITS

Peter Slatin

Founder and Editor, The Slatin Report

Peter Slatin, editor of the Forbes/Slatin Real Estate Report, says the completion of the sale of REIT Archstone-Smith may signal the end of the credit crunch in that area.

In September, it was the considered opinion of many a seasoned opinionator in real estate finance that the $22-billion sale of multifamily REIT Archstone-Smith to Tishman Speyer Properties and Lehman Brothers, announced in May, would collapse under the weight of its suddenly vulnerable debt structure amid the credit-markets freeze up.

But on Friday, October 5th, the deal was consummated. Yet it wasn't quite the deal that was first revealed to the public in late spring, at the apex of the buyout boom amid an ocean of debt capital. In the end, participants in the buyout included not only the Irvine Company of Newport Beach, Calif., but also the federally chartered housing finance agencies Fannie Mae and Freddie Mac. Together, with a helping hand from Lehman, the two agencies spoke up for $9 billion in debt, while the Irvine Co. stepped in with Tishman Speyer and bought a 90% stake in Archstone assets in Irvine's Orange County front yard and in San Diego for a reported $1.4 billion.

The closing of this high-profile and high-stakes deal, a few weeks later than initially anticipated, is a soft-landing watershed for the commercial real estate world in general and the REIT world in particular. That it was completed in the face of widespread market turmoil and uncertainty appears to be a vote of confidence in the eventual return of liquidity to real estate capital markets and in the present and long-term value of high-quality apartment assets in top US regional markets, where Archstone has most of its properties.

At the same time, we should look at it as proof that much has changed. Perhaps most significantly, the willingness with which these acquirers sought out new partners to help shoulder the burdens of both debt and equity shows a reduced tolerance for high-priced risk. That, in itself, may be the best lesson and most welcome aspect of this transaction.

Even institutions awash in capital and with strong reputations for high-quality management can no longer simply sail out and plunk down whatever it takes to win a deal. Not that we would ever suggest such a strategy ruled the day for Tishman Speyer and Lehman, but it is worth noting that somehow, some way, prices rose steeply over the past three years and yields reflected the weight of lessened expectations.

Whether this will prove to be the push that frees up other transactions or turn out to be an anomaly remains to be seen. Because of its sheer heft and, indeed, that of each of its key players, it is entirely possible that it will provide some fluidity where none has been apparent. If nothing else, it shows that major financial institutions can move nimbly to turn difficult situations to their advantage rather than simply freezing, deer-in-headlights mode, to be slammed by whatever it is that's rushing around the bend.

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