Boston Properties Sells $700M In Notes--Another Bull in the Boston Office Market

The announcement by Boston Properties (NYSE:BXP) of its sale of $700 million in notes, and the specific announcement by Doug Linde that the company expects "opportunities" is evidence not only of the recovery in the Boston office market but is the clearest statement yet that there is ample money awaiting so-called distressed owners. It throws cold water over the concept of property ownership as stewardship of an industry. Real estate is an asset, nothing more.

The catchphrase of catastrophe in the commercial office market over the past 9 months has been the approaching meltdown of the office market and then the meltdown of the world when existing mortgages come due. And all of the commercial property owners will suffer on one of Dante's rings. I'm sorry. I'm not moved. I'm feeling musical.

"Don't weep for building owners, Argentina, the truth is they never left you."


The theory behind this nonsense is that the lack of liquidity within the traditional sources of mortgage debt will close the window on refinancing, forcing great gnashing of teeth and a second wave of worldwide financial upheaval.

Actually what will happen is what Boston Properties is preparing for. If an owner has too much debt on its property, due to underlying rental rates, then, as in any refinancing situation, the owner is going to have to a) come up with equity to fill the gap and/or b) convince potential lenders that it has the capacity and standing to deserve a new loan.

There are many owners who are indeed overleveraged and who do not have sufficient capital to fill the refinancing gap. There are other owners whose profile will not appeal to traditional lenders. Boston Properties and many others plan to be there to either buy the properties prior to the wakes or be ready to bid at the funeral. As Doug Linde, the president of Boston Properties, clearly states, "It's not a question of money. It's a question of opportunity."

The real problem is overleveraged property owners attempting to live in the past world of a now subdued and cautious traditional mortgage lending market.

The loss of an owner's equity in a property and therefore the "loss of the property" is a normal occurrence. In fact, the loss of any asset because you can't make the payments is a concept that has served as the backbone of lending since the Roman Empire.

The preposterous attempt by major commercial owners to seek Federal TARP money was not only pathetic, but illogical. (Don't count that effort dead yet--for some reason Barney Frank is supporting it). Office buildings are not an industry. They are the land component, if you will, of land, labor, and capital that defines a capitalist economy. Underlying rent from tenants and expected future rents establish property value. To seek TARP money or to worry about existing owners implies that taxpayers should support anyone who lost assets in the recession.

Just think of that concept. If you lost $500,000 in the stock market (an asset loss), you would be able to petition the Fed for TARP money so your assets can "recover." Wow, I might try that.

There is ample money from REITS, private pooled investment funds, and even, as evidenced by the recent sale of Independence Wharf in Boston to Credit Suisse (VX:CSGN), from the real estate subsidiaries of the recovering investment banking houses.

Ownership will change. Some owners will lose. The lenders who did not properly assess risk will lose. New owners will come. New lenders will play. The buildings will not disappear. The economy will not crumble. The office market will continue to play its role as an underlying asset, not an industry, and will reflect the health of the underlying economy. The person you pay your rent to will be someone you haven't met yet. That's all.