Watergate Towers Final Chapter...

Almost 1 year ago I posted the sad saga of Emeryville California's Watergate Towers, the marquee East Bay office complex that became a victim of the financial crisis, and fell into foreclosure in February of 2010. I closed that post by writing "Final chapter on this one isn't written yet --"

Well it looks like we can now close the book, because Watergate Towers has brand new ownership (and it isn't the bank). As widely reported in the Bay Area media, three of the four buildings in the Watergate office complex have been purchased by a joint venture between LBA Realty and Starwood Capital Group.

No surprise that the estimated purchase price of $130 Million represents a steep (+ / - 40%) discount from the original purchase price paid by a Hines backed investment group back in 2006. (Hopefully they can fix the elevators now)...
Some previous posts on the Watergate Towers saga:
July - 2009
November - 2009
February - 2010
September - 2010

Our Brush with Watergate's "Deferred Maintenance"

Lots of talk in the Bay Area recently about the fate of the Watergate Office Towers in Emeryville. Three of the four buildings in the complex went into default, and are in the process of being sold. Asking price(s) range from $130 Million to $150 Million (depending on whom you ask) - but everyone agrees on one thing; the buildings need a lot of maintenance.

Which brings me to my post today -- we were making a delivery last night to one of the buildings in question, when we experienced what a lack of maintenance can do... namely the freight elevator we were using broke down, stranding our product mid-floor over night. The story has a happy ending, product was safe and sound, and freed from its captivity this morning.

The End of Irrational Exuberence in Commercial Real Estate

A couple of weeks ago the East Bay was jolted awake with the news that Emeryville's Watergate Towers office complex was one of several marquee San Francisco Bay Area properties going into default. Now comes news from Southern California that Maguire Properties is going to stop making payments on more than $1 Billion in loans on seven buildings in Orange County.

As evidenced by the chart below, we should prepare for a continued downpour of defaults and forced sales.

(Click above for a link to the source document)

While all of this sounds horrible - look through the scary headlines and realize that these events are evidence of an irrational market slowly and painfully moving back towards rationality. In other words, these events are a GOOD sign of a functioning market.

It is now clear that commercial real estate purchased between 2005 and 2008 was wildly overpriced. Almost anyone who bought during this time, is now faced with plummeting valuations with no floor in sight. By refusing to extend loans on properties that are underwater, and by dealing with the consequences, the lenders are forcing rationality back into the marketplace.

Forcing these overvalued properties into foreclosure, and back onto the market where they can be sold at the current (albeit much lower but more realistic) market rate, is a huge step towards climbing out of this hole.

Yet Another Tough Commercial Real Estate Moment in the S.F. Bay Area

In yet another sign of the challenging San Francisco Bay Area Commercial Real Estate Market, three buildings in the illustrious Watergate Towers building complex in Emeryville appears to be going into foreclosure.



According to a story in the Contra Costa Times, 1900 Powell Street, 2000 Powell Street, and 2100 Powell Street are in default. For those of us in and around the East Bay and San Francisco, Watergate is a marquee address with beautiful views of San Francisco and the Bay.

One more time, the relevance of this subject to Sam Clar, CSG, and other providers in the commercial interiors industry is the opportunity for a new owner to re-set rents to the current "lower" market rate, which will encourage prospective tenants to move, which in turn creates new project opportunites for industry providers. Painful but necessary transitions taking place.