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Will Tishman Speyer buckle?

Carrying a heavy load: Jerry (left) and Rob Speyer of Tishman Speyer, whose holdings include Rockefeller Center.

With credit markets frozen and property values slumping, real estate firms that soared the highest during the boom now appear poised to fall the farthest.

Certainly, few have looked down from as lofty a perch in recent years as Tishman Speyer, the venerable blue-chip firm that has long held a stake in such New York City landmarks as Rockefeller Center and the Chrysler Building.

Firmly established as the city's best in class, Tishman Speyer expanded its empire even wider during the boom, most notably by beating out scores of bidders in 2006 to acquire the iconic 80-acre Stuyvesant Town and Peter Cooper Village complex for $5.4 billion, the priciest deal ever for a single real estate property in the U.S.

It was just one of several coups. In 2007, Tishman partnered with Lehman Brothers to acquire the massive $22 billion nationwide portfolio of buildings owned by Archstone Smith — one of the largest real estate deals ever.

Tishman completed its hat trick in March of this year, when the Metropolitan Transportation Authority awarded the firm the right to buy Manhattan's largest swath of undeveloped land: the West Side rail yards, which run from 30th to 33rd streets between 11th and 12th avenues. For a time, it seemed Tishman Speyer could do no wrong.

But now, it appears that even this company is paying a price for success.

The company backed out of the rail project earlier this year following rezoning disagreements with the MTA, catching many observers — and the MTA itself — by surprise.

Both Standard & Poor's and Moody's Investors Service, meanwhile, recently downgraded their ratings on several bonds tied to Stuyvesant Town and Peter Cooper Village. They warned that Tishman Speyer was having trouble converting the rent-stabilized apartments into market-rate units, and noted that the property's value "has declined 10 percent since issuance."

What's more, the rating services added, Tishman and its partners had already burned through two-thirds of a $650 million cash reserve fund aimed at paying for renovation costs and interest payments not yet covered by rental income.

"The current reserve balances are significantly below Standard & Poor's expectations," one report stated. If spending continues at its current pace, they will be "completely depleted" by the third quarter of 2009, before the property generates enough cash flow to meet debt-service obligations.

As for the Archstone deal, both Lehman and Tishman Speyer have written down at least 25 percent of their investment, sources told The Real Deal. Those losses, according to the New York Times, "helped to bring down" Lehman, which filed for bankruptcy in September.

It's a dizzying turn of fortune for a company long used to victory. But industry observers say Tishman Speyer has a number of advantages that should help it weather the storm better than many lesser-established or less-respected competitors facing similar setbacks.


Art of the deals

The firm put up less than $112 million of its own capital on the Stuyvesant Town deal, and about $250 million on Archstone (1 percent of the total investment, for which it will receive 13 percent of the profits), according to a source familiar with the deals. Tishman may well have to put up more capital to supplement reserves and pay off debt, but the firm probably won't have trouble raising it.

Tishman declined to comment on the record for this article, but sources close to the firm say it launched an aggressive campaign to sell assets and raise capital as far back as the beginning of 2007, when Blackstone acquired Equity Office Properties — a deal that may have best captured the height of the market before it dropped off, as it was one of the biggest leveraged buyouts in history. So far, Tishman is said to have sold some $11 billion worth of property, most of it at the peak of the market.

Its remaining portfolio is formidable and spread around the world, with holdings valued at more than $40 billion. Its largest asset, however, may be its longstanding, in some cases multi-generational, relationships with financial institutions and wealthy backers.

"The traditional New York families, and the ones that have had long-term relationships with financial institutions and partners, will be able to handle these troubled times better than others," says Steven Spinola, president of the Real Estate Board of New York.

Tishman "has been in the business a long time. They are in the top three [in New York City] in terms of ownership of office buildings, and have become one of the biggest residential owners," he adds.

In fact, some maintain Tishman may actually be poised to capitalize on the current situation. (After all, the New York Times once described Tishman CEO Jerry Speyer as "like the Forrest Gump of New York developers, landing in the right place at the right time and remaining unscathed as he ambles his way to the top of an industry littered with carcasses.")

Gump, however, was not on the board of the Museum of Modern Art and a frequent advisor to Mayor Michael Bloomberg, like Speyer.

"One could argue this is their kind of market," says Darcy Stacom, vice chairman and partner in the investment properties institutional group at CB Richard Ellis. "They got a hold of Rockefeller Center at a tough time. They got a hold of the Lipstick Building during a tough time. They bought the New York Times building coming out of a tough time. And all of those have been phenomenal successes for them."


A new phase

Still, the wave of negative news buffeting Tishman certainly heralds a new phase in the credit crisis. It's no longer just the marginal, the young, the gamblers and the cowboys who are taking hits: The contagion is hitting the industry's top players, and hitting some of them hard.

Indeed, there are numerous other examples to point to. Last month, the Wall Street Journal reported that Moody's took aim at a firm owned by Stephen Ross, chairman of the Related Companies and REBNY. The Journal reported that the liquidity resources of the firm, Centerline Holding Company, "may not be adequate for meeting its near-term needs."

SL Green, the city's largest office landlord, is in the spotlight for its affiliation with a company called Gramercy Capital Corp., a firm "sponsored" by SL Green that markets loan products. Shares of Gramercy have fallen from $28 to under one dollar. A recent Wall Street Journal report suggested it may have trouble maintaining its credit lines with lenders, threatening its very viability.

But it is Tishman that has been generating the most headlines. And the firm's storyline is among the most compelling.

Over the years, Tishman president Jerry Speyer has built his company into one of the city's most respected. He has cultivated ties with top city and national politicians. He has flown in business delegations with U.S. presidents, and has also served as chairman of the New York Federal Reserve.

To many observers, the troubles facing his well-respected firm demonstrate just how far the crisis has gone.


Past downturns

The Tishman family business was already well established when Jerry Speyer married Lynne Tishman shortly after graduating from Columbia Business School in 1964 and joined her family's company.

Founded by Julius Tishman, Lynne's great-grandfather, in 1898, Tishman Realty and Construction was a national company. But by the mid-1970s, it was facing financial difficulties. In 1977, Speyer and his father-in-law liquidated the company and reorganized it as Tishman Speyer Properties.

The family eventually bought back the finance and development unit of the old company and brought it back to life as Tishman Realty and Construction.

Speyer's early projects included a 1 million-square-foot tower at 520 Madison Avenue, which became the company's headquarters in 1982. In 1985, he finished 375 Hudson Street, known as the Saatchi Building. Speyer also transformed a 600,000-square-foot, long-shuttered department store between 18th and 19th streets on Sixth Avenue into a booming retail center anchored by Bed Bath & Beyond.

But it was in a downturn very much like the current one that Jerry Speyer made his bones as a brilliant market timer. In the mid-1980s, many developers sat on the sidelines waiting for the turmoil to subside. But Speyer, the son of German and Swiss Jews forced to flee Hitler's Europe, headed to Frankfurt, Germany, looking for opportunity. Backed by Citibank, he built the 70-story Messeturm, then the tallest tower on the continent.

He moved on to Berlin and constructed a 2 million-square-foot mixed-use complex that became the European headquarters for Sony.

By 1995, the firm's portfolio, composed of more than 15 million square feet stretching across the United States and Europe, was valued at an estimated $5 billion, and it was the largest owner of office space in New York City.

The Independent of London noted that "if Donald Trump is larger than life, then Jerry Speyer must be very big indeed."

Tishman's focus on local landmarks and international diversification has continued. Since 1987, the firm has invested some $2.7 billion in equity in Europe, in 133 properties totaling more than 13 million square feet. That equity is now valued at more than $9 billion, according to one source with access to its numbers. It includes the CityPoint building in London, the Lumière office tower in Paris and many others.

In the future, the company intends to place roughly 50 percent of assets overseas, says one source familiar with company strategy.

In response to the current crisis, the company has scaled back projects around the world, but that conservatism does not appear to apply to Asia. The company is slated to break ground on a massive $1 billion, mixed-use planned community in India that will include 32 million square feet of retail, commercial and residential developments. And as reported by The Real Deal last month, Tishman is pursuing a $2.6 billion project on 400 acres in Hyderabad, India, with more than 20 million square feet of developed space.

Locally, Speyer has leveraged the firm name by investing in landmarks.

In 1994, Speyer, along with the Crown family of Chicago, acquired a 5 percent stake in Rockefeller Center, partnering with Goldman Sachs after the Japanese firm Mitsubishi Estate had purchased an 80 percent stake from the Rockefeller family, then walked away from the property and allowed it to tumble into bankruptcy. The deal called for Goldman Sachs (which won half of the complex), Speyer, the Crown family and other investors to take stakes of $306 million and assume some $845 million in debt and other obligations.

In 2000, Speyer and the Crown family bought out their partners for $1.85 billion and assumed control of the 12-building, 6 million-square-foot Rockefeller Center.

This was just two years after the firm had acquired a stake in the iconic Chrysler Building.


An heir joins the business

That strategy — of investing in iconic, high-value landmarks — has informed the approach of Jerry Speyer's son and heir apparent, Rob Speyer.

The younger Speyer joined the business in 1995 after working as a reporter for two newspapers, the New York Daily News and the New York Observer. He started doing retail leasing at Rockefeller Center, and joined the acquisition and development team in 1998. He oversaw, among other projects, the redevelopment and leasing of 300 Park Avenue, the Colgate building and the purchase of the land, the development and the preleasing of the 375,000-square-foot office tower his company built at 222 East 41st Street, between Second and Third avenues.

The younger Speyer took over responsibility for all New York City business in 2001, and brokers and firm associates credit him with reeling in a number of big fish, including the acquisition of the Lipstick Building, the New York Times building, the MetLife building and Stuyvesant Town-Peter Cooper Village.

Associates describe the pair today as co-CEOs, and by most accounts, the partnership is a real one.

"It appears to me that Jerry is allowing Rob to flourish without being too micro-managing," said one associate who declined to be identified. "That is the structural problem with a lot of entrepreneurial types; they tend to be loath to yield power, because the exercise of power defines them."

The source noted that with Larry Silverstein, for instance, it is evident that his son Roger is an "employee."

"Roger is detached," he says. "The whole body language, the gestalt, is different with the Speyers. He appears to have artfully managed a transfer of power on a very orderly basis."

The source noted that on many deals, Rob is "the chief negotiator," adding, "Jerry is not coming in at the eleventh hour, wearing the white hat, swashbuckling and saving the day."

Jonathan Mechanic, chairman of Fried Frank's real estate department, says, "They have a very close working relationship; there's a great deal of mutual respect between them. And I think they bounce ideas off one another, and they work together as a team.

"Obviously, Jerry had much more extensive experience than Rob coming into the business," he adds. "But over the last 10 years, Rob has gained more and more experience and has been instrumental in doing more and more transactions, and [has had more] responsibility for personnel and management decisions. Now, it's very much of a two-way street between them."

CBRE's Stacom has worked with the younger Speyer on six deals, and describes him as "quick," "fun," "positive" and the "go-to guy who, in my experience, is really running the acquisitions and dispositions."

The largest of those acquisitions to date — and the one that the younger Speyer may well be judged on — was the deal to buy Stuyvesant Town-Peter Cooper Village, which the New York Times described as "a very public introduction for Rob Speyer."

Indeed, the newspaper noted, Rob Speyer was "responsible for leading his team into the real estate record books. The previous holder was his father … who led the group that bought Rockefeller Center for $1.85 billion in 2000."


Landing the prize

Located between 14th and 23rd streets overlooking the East River on a prime 80-acre plot of land, the 110-building, 11,232-apartment property was so coveted it attracted bidders ranging from the Prince of Qatar to the Rothschilds, as well as virtually every single New York City real estate entity of significance.

In the end, Rob Speyer and his team narrowly beat out Apollo in the bidding, agreeing to shell out a record-breaking $5.4 billion plus closing costs.

Mechanic worked with Rob Speyer on the acquisition of 200 Park Avenue. He says Rob Speyer's grueling all-night sessions with people from MetLife on that deal helped win his firm "credibility" that helped with the deal.

"Rob's rapport with MetLife people made it easier to do a deal on Peter Cooper and Stuyvesant Town and have the credibility to close overnight," he says.

Still, Stuyvesant Town came with some baggage. Built by MetLife with the help of public subsidies in the years following World War II, the properties were meant for "families of moderate means." Many of the apartments remained subject to rent-control regulations, meaning the new owners would not be able to unlock the profits until the residents moved out.

Cash flows at the time of the deal would have warranted a price of about $3.5 billion, according to some reports at the time. Yet in order to win the bid, Tishman had to break with tradition and base its price on its estimate of what the property could yield in future years, rather than its current numbers.

To improve the building's cash flow, Tishman designed an ambitious improvement program to spruce up the buildings and the grounds, and embarked on an aggressive campaign to root out illegal subletters living in rent-controlled apartments.

Today, the estimates used to price the deal seem optimistic. With the credit crunch and plummeting property values, the value of the complex has already fallen some 10 percent, according to the credit rating agencies. Tishman's defenders downplayed the concerns and said that the firm has no intention of selling.

"This is going to be a great long-term investment, and the most important thing is to have the staying power to endure soft markets," said one source close to the firm. "If you buy great real estate and have staying power, that is how you succeed."

Still, there could be other problems. To cover the shortfall between rental income and debt service, Tishman and its partners have been relying on a cash reserve fund of some $650 million, which also pays for capital improvements. But with income from the rentals growing at a slower-than-expected rate, those funds have already been drawn down to about $200 million, on pace for a full depletion by the third quarter of 2009.

To get that income up, Tishman will have to find a way to clear out a larger number of tenants living in rent-controlled apartments. Yet there's no indication things will get easier anytime soon.

City Council Member Daniel Garodnick, who lives in a market-rate apartment in Peter Cooper Village, is just one of the political figures leading an aggressive campaign for tenant rights. He claims Tishman has been "extremely aggressive in their pursuit of rent-stabilized tenants who live in the community.

"Tishman Speyer has sent flurries of legal notices to longtime legitimate tenants, frequently with inaccurate information," he says. "Their goal is to turn these apartments to the market rate, and they have gone after many more tenants than they needed to."

Garodnick says he and the Stuyvesant Town Peter Cooper Village Tenants Association have asked Tishman to pay the legal fees of tenants the firm has wrongly pursued, and he has set up a hotline and monthly legal clinic to help tenants fight back. He claims Tishman has sent out legal notices to 13 to 15 percent of the rent-stabilized leases that have come up for renewal, but that only half have resulted in tenants giving up their apartments.

"My office has worked very hard to make sure that tenants know their rights and that they have the tools available to them to fight back, and we have slowed Tishman Speyer down considerably," he says. "We have protected a fair number of tenants who have every right to be in their apartments."

The situation will likely force Tishman and its partners to inject new cash into its reserve funds.

Like Harry Macklowe, who put up just $50 million of his own money to finance the roughly $7 billion he borrowed for his purchase of Blackstone's New York City EOP properties, the company borrowed heavily. Unlike Macklowe, however, it diluted the risk by partnering with a number of other investors, and put up far more cash.

Tishman's actual cash investment was $112.5 million of $1.9 billion put up. Other investors included BlackRock, the Crown Family of Chicago and CalSTRS and CalPERS, the country's two largest public pension funds. Their debt, one source close to Tishman noted, is locked in until the end of 2016 at a fixed rate, with a "very strong debt structure negotiated at the peak of the credit markets."

"For every dollar of capital invested at closing," he notes, they "might have to put in, say, 15 cents of additional capital — and that is when they run their downside scenario."

There's $1.9 billion of equity in the property, so the "downside scenario" shows that Tishman and its partners might have to put up between $250 and $300 million to supplement the reserve fund, the source said.

"That will take them on a worst-case scenario until the property is cash-flow positive for its debt service," says the source. "This is going to be a great long-term investment, and the most important thing is to have the staying power to endure soft markets."

Real estate observers say those numbers are "manageable." The question, one added, is, "What happens if the credit crunch does not relax and the reserve is not deemed adequate? If they have to have a second infusion, that could get ugly."

Darcy Stacom points to the improvements made in the property's 80 acres of land, including a massive landscaping program with flower beds and trees, community spaces indoors and out and renovations of open apartments.

She notes that similar improvements at Rockefeller Center and the Chrysler Building vastly improved their value.

"They understand real estate," Stacom says. "This is their forte; they can manage the bottom line better than anybody."

She points to the Philip Johnson-designed, pyramid-like Trylon towers Tishman added to the Chrysler Building and the retail improvements the firm created at Rockefeller Center.

"Rockefeller Center was a hodgepodge of lousy little retails. They got everybody out over time, put in the giant NBC store and the Anthropologie store, and transformed the concourse," she notes. "They have been very creative."

Tishman may well be helped in both the Stuyvesant Town deal and its ability to endure losses from the Archstone deal by other actions it has taken to prepare for the current crisis.

Though Tishman has been close to pulling the trigger on several projects in recent months, it has not actually followed through with any new deals in the U.S. or Europe since the spring of 2007. That, says one source close to the company, is by design.

"Since June 2007, they've been basically keeping their capital at the ready, and have taken a very conservative posture because of their concern about the global economy, and those concerns preceded the current meltdown," the source says. "They've been concerned, and therefore cautious, for nearly a year and a half now."

After Blackstone emerged with the EOP properties and announced it planned to liquidate them, Tishman became "concerned the market was peaking and realized they were very long, particularly in New York and London," adds the source.

Blackstone's decision to liquidate a large part of that portfolio meant that billions of dollars would hit the market at the same time, and "though they [Tishman] did not foresee a global financial crisis, they did foresee that the EOP sales would soak up liquidity in the market and make it much harder to sell property.

"They wanted to get in front of that tsunami and decided to sell a significant part of the portfolio," says the source.

In the end, Tishman unloaded $10 billion worth of assets between January 2007 and the summer of 2007 alone. About $3 billion of those assets were in New York City. They included 666 Fifth Avenue, which sold for a record $1.8 billion to the Kushners; the Lipstick Building, which sold for $607 million; and the New York Times Building, which sold for $525 million (almost triple the $185 million Tishman paid for it).

The firm sold another $1 billion in assets in the first half of 2008.

Though Tishman did win the bidding to build the West Side Rail Yards, the firm's withdrawal from the project may well be a reflection of that new strategy. Others point to the firm's recent decision to back out of a $300 to $400 million deal to buy a leasehold on the former Mobil tower at 150 East 42nd Street from Japanese real estate company Hiro.

"Rob is not afraid of changing course," says Michael R. Laginestra, vice chairman of CBRE. "He went in, priced it aggressively, they won the bid — but as the market started to show signs of deterioration, Rob decided the market was not going in a direction that would benefit the project, and he walked away … for a big company, they are very nimble."

Still, there are other ways that the current challenges could affect Tishman down the road.

One observer noted that the only way the Stuyvesant Town bond downgrades could benefit Tishman is if the company is planning on stepping up and buying them at a steep discount — that would actually be a viable way to capitalize the debt and reduce the debt service.

But Tishman is "not immune to the downgrade," the observer notes.

"It damages their brand; the judgment of Tishman Speyer is being compromised in some respects," he says. The cost of funds for any future equity raising could also go up due to the perception of increased risk, he adds.

Tishman is said to be monitoring the situation closely and conferring with investors. "The most important thing is to let investors know exactly what's going on in their different deals and make sure they know exactly what Tishman knows about the collective investments," says one source with knowledge of their strategy.

"What characterized this financial crisis is the complete loss of confidence of investors in the market, and the most important thing for Tishman to do is to make sure the investors maintain their confidence in them, in terms of transparency, and make sure they are closer to Tishman than ever."