What Went Wrong In Stuyvesant Town?

I've noted that commercial real estate is feeling some serious pain these days, and so is New York City. But I'm still rather shocked that the enormous investment to revitalize Manhattan's Peter Cooper Village and Stuyvesant Town complex has been such an epic failure. How badly did the usually savvy Tishman Speyer Properties and BlackRock miscalculate that their cash reserve could be completely depleted by year's end?

Here's some background, from a Wall Street Journal article on this topic this morning:

The sprawling Manhattan apartment complex known as Peter Cooper Village and Stuyvesant Town -- acquired for $5.4 billion in 2006 by a venture of Tishman Speyer Properties and a unit of BlackRock Inc. -- is running out of cash. As of the end of September, it had $33.7 million left of the $400 million in interest reserves set up to service its debt, according to the people familiar with the matter. At its current burn rate of about $16 million per month, the reserve could be depleted before the end of the year, the people said. Others have said the venture could avoid default until February.

Here's the Journal's diagnosis of the problem:

Investors who bought into the deal were confident that real-estate manager Tishman Speyer would be able to greatly boost profits by raising rents in Manhattan's sizzling apartment market. But today, the 56-building, 11,000-apartment property is suffering from a slowing New York economy, a lawsuit that has hindered the owner's ability to convert rent-controlled units to market rentals, and the debt load.

Problems resulting for a lawsuit are just unbelievable. Legal obstacles should have been cleared prior to the acquisition. Then there must have been severe market miscalculations.

I get that this investment was made in late 2006, when people still believed investing in real estate was a good idea. As I've noted, the rental market has been suffering since then. But is the Manhattan rental market really that bad? I would have thought that financial masterminds at Blackrock would have devised a severe stress scenario that would have still resulted in the investment providing weak returns, instead of self-destructing in less than three years.

But I guess I'd be wrong. Maybe the Manhattan real estate market is worse than even the most astute market watchers could have imagined. That brings me back to 2007, when my friends in New York City finance swore the city was insulated from the broader real estate market's collapse. I thought it even its real estate market's decline was inevitable, though it would lag what we saw in other regions. According to a Bloomberg article from a week ago, Manhattan rentals fell 59% in the third quarter, year-over-year.

Also fascinating is the list of the investors who stand to lose big but aren't offering up any more cash to extend the life of the deal. Here's a chart from WSJ showing some major ones:

What a debacle! I wonder if disastrous deals like this, as well as substantial losses other mortgage-related investments, will mark a permanent change in how investors view real estate.