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Zero Hedge's feelings about commercial real estate are no secret. Yesterday's sale of the John Hancock Tower to Normandy was an interesting market test, with media reports claiming it implied either nothing much or only good things about CRE and CMBS recoveries. A contrarian (and realistic) analysis on the transaction out of Morgan Stanley implies that based on this deal, not all is good in CRE land. (hat tip to reader David).

In a foreclosure auction today, the John Hancock Tower - a marquee building in Boston - traded at $660MM to Normandy Real Estate Partners. That same property was appraised for $1.3BN in 2006 and traded for $935MM in 2003. This is VERY negative for commercial real estate. At face, it looks like even top quality assets are down 50% from their peak, but that forgets the value of the financing that Normandy now gets to assume. There will still be a $640.5MM mortgage on the property at a rate of 5.6%.

What is the value of being able to get a 97% LTV loan at 5.6% these days? Let's say you can get a 60% LTV mortgage ($400MM) at 8%, and the other $240MM in mezz financing (which has no chance of getting done in this market) could hypothetically get done at 15%. That combination produces a weighted average financing cost of almost 11%. A 5.6% mortgage at 11% yield is about a 70 $px, which means the value of assuming the existing financing on the Hancock Tower is close to $190MM. The real clearing level for the top commercial property in Boston was only $470MM - down 65% from 2006 levels and down 50% from 2003 levels. If we assume 2008 NOI numbers are still accurate, this would be a 9.5% cap rate adjusted for the financing. Without adjusting for the value of financing, the purchase price of $660MM looks like a 6.7% cap rate and $383/sqft - rich, relative to 1540 Broadway (NY office vs Boston office) recently clearing at ~$400/sqft.

**The main takeaway: property values are down A LOT more than people think, especially when considering the implied value of financing. Caveat Emptor.**

On the brightside for holders of GG9, the #1 loan now has a better sponsor with a lighter debt load. Unfortunately, not every CMBS loan had a 50% LTV to 2006/2007 levels like John Hancock Tower...Severities will be much higher for the majority of 75+% LTV CMBS loans.

Source: What Hancock Tower Sale Means for Commercial Real Estate - Morgan Stanley