Thursday, April 2, 2009

John Hancock Tower

John Hancock Tower has received ample coverage elsewhere, but it deserves a little clarification. At the risk of sounding like an optimist (please don't accuse me of that), it really doesn't imply much at all for commercial real estate in general.

Some believe it implies severe price corrections are coming for CMBS, but it doesn't really tell that story. The sole bidder had been buying up the mezz position for months - not only did they have a higher basis, but who would bid against them? They obviously are going to protect their position, so no serious bidder is going to compete, thus guaranteeing a low price.
Others point to it and say it proves CMBS are a good investment because the senior mortgage isn't close to taking a hit on this one. That is not fair either. The average LTV is just below 70% in CMBS, significantly higher than the 50 handle LTV on this loan. Further, LTV has historically been somewhat correlated to credit (lower credit requires a lower LTV by the underwriter), but that wasn't the case in recent years where lower credits could come into CMBS and receive high senior LTVs (some of the lowest LTVs went to high credit institutional investors).

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