Boston’s John Hancock building was sold at auction today to the partners controlling the senior portion of the mezzanine debt on the building. The sales price was $660 million — half the price that was paid for the building three years ago.

You can’t draw straight lines from this transaction to derive a value for other CRE deals but it does provide some guidance. I had a post up a couple of days ago noting that Deutsche Bank was forecasting a decline of 35% to 45% for CRE. It looks like that’s certainly in the ballpark.

What remains to be seen is the extent and intensity of any attempt by the federal government to stem or cushion the fall. CRE is one of the asset categories included in the PPIP. We aren’t going to know much at all for at least a couple of months as it will take that long to get the program up and running. The wild card, of course, is whether the banks will accept the bids. Most of the banks have not taken aggressive write-downs on their real estate portfolios so it’s an open question if they will accept haircuts of this sort of magnitude.

One issue that puzzles me is how the PPIP’s are going to deal with the underlying collateral on the pools of loans that they buy. Initially they’re buying paper but at some point a good chunck is going to default and they’re going to get the real estate asset. It will be a jumble of residential and commercial real estate as well as developed and undeveloped land. A fair portion may well be partially completed structures. Miami condos stopped in mid-course for example.

The actual management of the real assets is a far different business than buying and managing paper. The Pimcos of the world are great at investing in and managing portfolios of debt instruments but don’t necessarily have the skills necessary to preserve and enhance the value of real estate assets. In many respects, the job becomes much more complex when the asset is taken back by the lender.

I’ve not seen any discussion about this aspect. If anyone out there has, please let me know where I might find it.

It’s quite possible that commercial real estate may dominate the news this year as much as residential housing did last year.

more: here