UBS HAS ENOUGH ROPE TO HANG ITSELF

Implications: UBS announces a new $780-million loan @ a 6.26% interest rate, to Sears Tower in the face of a 22% vacancy rate and a 20% decline in NOI to only $59 million. The article also mentions the well known fact that many of the leases made during the period when space was at a premium, are now coming up for renewal  at rates expected to be lower than their current rents. This will undoubtedly drive next years NOI even lower.

To me the Key implication of this article is that this is a perfect example of how a plentiful supply of cheap mortgage money is creating a return to the "dumb lender" days of the last real estate "bubble".

Analysis: With a declining NOI of only $59 million and obligations for real estate taxes, loan interest  and loan repayment well in excess of even the most optimistic estimate of next years NOI, the only explanation for UBS' action is that they are so anxious to get into the mortgage lending business that they are willing to make interest only loans for the next ten years and face the very real prospect of owning the nation's  tallest building at what might be a bargain price.

The pricing history of Sears Tower is also a good example of how high profile buildings of this type, even if they are clearly seen as distressed, are allowed to be seen as "trophy properties" worthy of special consideration, especially when there is so much money chasing so few big deals. It was built by Sears in 1974 for just under $400 million. It was sold for slightly over $1 billion plus lease guarantees by Sears in 1994.  In 2004 it was acquired for $825 million with a loan from B of A. Now it is being refinanced at a value of $780 million which seems very high.

The article further points out that the building's food court has recently closed due to poor sales even after a remodeling and change of ownership. The restaurants provided over $500,000 in rent. It also points out the likelihood of the NOI continuing to decline due to many leases being renewed at substantial reductions in current rents and the need to refinance $45 million in mezzanine debt in order to remodel the aging observation deck.   

If this is not a leading indicator of a real estate "bubble" what is?