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Why Should Downtown Care About 550 South Hope?

By Fred Cordova
Published: Tuesday, August 18, 2009, at 05:54PM
550 S. Hope Eric Richardson [Flickr]

550 South Hope

Fred Cordova is a Senior Vice President with Colliers International. He writes about capital markets and real estate on his blog, The New Nexus.

Last week, Maguire Properties announced that it was giving seven buildings back to its lenders, among them a Downtown tower at 550 S. Hope. Should we see this move as an isolated event, or does it have significant implications for Downtown?

Why anyone invested in Downtown care that a public REIT just coughed up an asset that was purchased at the top of the market with way too much debt?

Maguire's move is important because it reflects the real beginning of a readjustment in values -- aka "capitulation" in commercial real estate parlance.

We are seeing this happen with residential as well, as the Concerto formally throws in the towel on August 29th with its big loft sale. Several other properties are in deep discussions with their lenders or have already filed for bankruptcy or handed over the keys to the lender.

Seeing capitulation happen in commercial real estate is important because office is always the last to be impacted. That means that we are finally entering the last stages of capitulation across all property sectors.

New capitalization in commercial, like residential, means a lower cost basis for the new owner, which means more competitive lease rates, which means more tenants, higher occupancies, more people in the financial district, more buyers for residential units and the beginning of the end of the residential slide.

This process will go on for at least two years, so there is no need to rush out and buy a unit in the Concerto on August 29th. At the same time, what I am saying is that if you do go out and buy, you will not get hurt by values declining further. If you are not buying at the bottom of the market, you are close enough to it that it should not matter and this recession will be a "U" or an "L" at best.

Bottom line: if you like it, then go for it, but do not expect a quick turnaround.

If you are an investor, have a long term (at least 5 years) horizon. If you plan to live there, relax and enjoy it. Downtown is 'hot' now and three years from now when the units are all filled, it will be smoking.

For more on capitulation, check out Timing Matters (PDF), a graphic illustration of the cyclical nature of markets.

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