PLANYC 2030

When the housing market began collapsing across the developed world, commercial real estate remained a bastion for builders. But now the global recession is dragging it down, too. Central business districts that only a year ago were crowded with construction projects are emptying out as office tenants cut staff and operations. Building values are sinking, while delinquencies on securitized loans have tripled in the past six months.

The abrupt downturn in commercial real estate is punishing cities as varied as Detroit, Dallas, and Hartford, where downtown office vacancy rates top 20%. Unoccupied space is piling up quickly in San Antonio, Las Vegas, Charlotte, and San Jose. Outside the U.S., high-profile towers have been halted everywhere from Dubai to Santiago, Chile.

New York, though, may be the epicenter of the bust. The world’s biggest office market, with roughly 350 million square feet of floor space, New York added 2.9 million square feet of vacant property in 2009′s first quarter alone — more than the entire Empire State Building. In that same period, calculates commercial real estate brokerage CB Richard Ellis (NYSE:CBG – News), rents slid 14.6% to an average of $57.35 per square foot, the largest quarterly drop on record.

At 8.5%, New York’s office vacancy rate is still well under the U.S. average of 14.7%. But with virtually no demand for new space, that percentage is likely to hit double digits within months, putting New York’s recovery well behind that of cities such as London, where some analysts and investors think the worst may be over.

Tenants Wanted

Steven J. Pozycki could add to the glut in New York next year. Pozycki, founder of SJP Properties in Parsippany, N.J., is plugging away at a 40-story tower in Midtown Manhattan with 1.1 million square feet of space. The $1 billion project, a joint venture with Prudential Real Estate Investors, was started in early 2007, when property values were still soaring and vacancy rates were at all-time lows. It is scheduled to open next spring but has yet to find a single tenant.

The developer had intended to anchor his building, known as 11 Times Square, with financial companies and law firms. After these would-be renters began teetering, several other developers canceled projects at earlier stages. Boston Properties (NYSE:BXP – News) called off plans for a nearby tower in March. A few weeks later, developer Larry Silverstein said he may delay construction at the World Trade Center site for decades. But Pozycki says that by last fall construction on his site had gone “past the point of no return.”

The slide in the office sector mirrors trouble throughout the nonresidential real estate industry. On Apr. 16, General Growth Properties (GGP.), the nation’s second-largest mall operator, with 200 shopping centers, filed for bankruptcy. MGM Mirage (NYSE:MGM – News), which is erecting an $8.6 billion complex of stores, offices, hotels, and a casino on the Las Vegas Strip, came close to default this spring. In New Orleans, a $400 million Trump International Hotel & Tower is now on hold until the credit market rebounds.

With homebuilding moribund — the sector is at its weakest in 50 years — it’s no surprise the U.S. has been shedding more than 100,000 construction jobs a month since December. Meanwhile, new assignments for architecture firms have become all but nonexistent, forcing big names such as New York’s Daniel Libeskind to trade down to designing doorknobs and light fixtures.
Putting Work on Hold

Office construction is skidding outside the U.S., as well. Work was halted in March on a Cesar Pelli-designed skyscraper in Santiago, Chile. Building has reportedly stopped on Norman Foster’s Russia Tower in Moscow. And many Persian Gulf projects that were green-lighted when oil topped $100 a barrel have been shelved, including the kilometer-high Nakheel Tower in Dubai. “We’ve had several projects in Dubai that have basically been put on hold until further notice,” says Daniel Kaplan, a senior partner at architecture firm FXFowle.

The financial impact will spread. The commercial real estate debt market in the U.S., valued at $3.4 trillion, is three times larger than it was in the early 1990s, creating the potential for huge losses as defaults and bankruptcies rise. Already, delinquencies on commercial mortgage-backed securities have jumped from $3.48 billion in February 2008 to $11.99 billion a year later, and a report from Deutsche Bank (NYSE:DB – News) forecasts they will swell to at least $24 billion before 2010. “It’s like subprime,” says Richard Parkus, head of CMBS research at Deutsche Bank. “Knowing what’s in the delinquency pipeline, we can predict a dramatic rise in defaults.”

The expected upsurge is due, in part, to timing. A huge share of commercial mortgages was taken out in the mid-2000s, when building prices were rising to record highs and the loan-to-value ratio was around 90%. Many must be refinanced this year. These days the maximum loan-to-value ratio has fallen to 65%, while property values are plunging. On Mar. 31, for example, the John Hancock Tower in Boston was auctioned off for $660 million — half the amount a private equity firm shelled out for the property three years ago.
London, Harbinger of Hope

Of course, real estate is a cyclical business. Many of today’s troubled office markets were hurt badly in the U.S. recessions in 1990 and 2001. But within a few years, as a halt in construction constrained supply, and businesses began to require more space, vacancy rates shrank, rents climbed, and developers started breaking ground on new towers and Philadelphia apartments.

Some real estate brokers are looking to London for signs of a turnaround. Prices there may be stabilizing after falling nearly 30% in 2008. As a result, equity buyers are emerging to snap up deals, encouraged by the weaker British pound. Hessam Nadji, director of research at real estate brokers Marcus & Millichap, thinks the U.S. may be less than 18 months from leveling off, too. “If there’s moderate economic stabilization,” he says, “we could see that translate into new demand for commercial office space in mid- or late 2010.”

Should that happen, Pozycki’s SJP might be positioned well. None of its properties has a loan coming due in the next year or two. Most of the Midtown office buildings that 11 Times Square is competing with date to the mid-20th century. And no other towers are expected to open nearby before 2014. He also has plenty of space.

Broadcom Corp., the maker of chips for wireless headsets and TVs, made an unsolicited $764 million offer for Emulex Corp. after an earlier approach was rejected by the provider of semiconductors for data centers.

Broadcom said today that it’s offering $9.25 a share in cash, 40 percent more than Emulex’s closing price yesterday. The purchase, which would add to earnings by 2010, will be funded with cash on hand, Broadcom said.

Emulex is an attractive target because its technology for transporting information from data centers to storage systems is fast, reliable and hard to replicate, said Harsh Kumar, an analyst at Morgan Keegan Inc. Emulex shares rose above the offer as investors bet Broadcom may have to raise its bid. Stocks of other data center component makers also advanced on speculation such a deal will fuel consolidation. This is big news for data and colocation centers throughout the country, such as:

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“Broadcom has tried for years to get into this space,” said Kumar, who rates Emulex “outperform” and doesn’t own the shares. “Everyone wins.”

Emulex added $3.09, or 47 percent, to $9.70 at 4:01 p.m. in New York Stock Exchange composite trading. Broadcom, based in Irvine, California, fell $1.27, or 5.8 percent, to $20.52 on the Nasdaq Stock Market.

Emulex’s board is considering the offer, the company said today in a statement. It is being advised by Goldman Sachs Group Inc. and law firm Gibson, Dunn and Crutcher LLP.

Poison Pill
The deal may make QLogic Corp., an Emulex rival, attractive to bidders as well, Kumar said. Cisco Systems Inc. and Juniper Networks Inc. may want to buy the Aliso Viejo, California-based company to enhance their own products for data centers, he said.

QLogic gained as much as 19 percent on the Nasdaq, while Mellanox Technologies Ltd., a maker of chip-based products that help servers and storage systems communicate, added as much as 14 percent.

Broadcom sued Emulex to bar the company from taking any action to defeat its bid. Broadcom said Emulex rejected an offer to hold talks in January and adopted a “poison pill” provision to thwart bids. Poison pills release a large number of shares in the event of an offer, increasing the price a buyer must pay.

“A lot of times, that’s a tactic to get a higher offer price, so it may be related to that rather than to prevent the takeover entirely,” Steve Smigie, an analyst at Raymond James & Associates, said in an interview on Bloomberg TV. Also, “Emulex can argue they are coming off a severe trough.”

Emulex shares lost almost half their value in the past year before today as the recession ate into sales, leading to three straight quarters of declines.

‘Always Other Options’
“There’s every opportunity for this to be a friendly transaction,” Broadcom Chief Executive Officer Scott McGregor said in an interview. “There are always other options. Our priority is to close with Emulex.”

Katherine Lane, an Emulex spokeswoman, said the company doesn’t comment beyond its statement. Sonal Dave, a spokeswoman for QLogic, said the company didn’t immediately have a comment.

Banc of America Securities is providing financial advice to Broadcom, while Skadden, Arps, Slate, Meagher & Flom LLP is the legal adviser.

Broadcom aims to expand its range of products to lure customers as the recession forces other clients to cancel or delay orders. Emulex’s products would make Broadcom’s offerings more complete, cutting the number of suppliers clients buy from.

Slumping Sales
Broadcom posted its second straight loss today after sales fell and it spent more trying to break into the mobile-phone market. The loss for the quarter ended March 31 was $91.9 million, or 19 cents a share, after profit of $74.3 million, or 14 cents, a year ago. Sales slid 17 percent to $853.4 million.

Analysts predicted a loss of 24 cents on sales of $848.3 million, according to a Bloomberg survey. The company said sales will continue to decline this quarter, falling to as much as $975 million from $1.2 billion a year earlier.

Demand for chips is tumbling as electronics makers cut orders to draw down stockpiles of unused parts. Chipmakers say that while companies have now stopped reducing inventory and order declines have slowed, the economy remains sluggish.

Emulex’s profit fell 40 percent to $10.5 million in the quarter ended Dec. 28, with the company citing the recession and a “deteriorated sales environment.” Revenue slid 17 percent to $108.7 million.

EBay Inc. said it plans to separate its Skype Internet-phone business through an initial public offering, bowing to investor demands to unload a popular service that didn’t fit well with its core business.

The IPO plans signal eBay couldn’t find buyers for the business at a price that it liked. A group of private-equity firms recently teamed up to back Skype’s co-founders, Niklas Zennstrom and Janus Friis, in an attempt to buy back the business, according to people familiar with the matter.

EBay, seeking to focus on its core businesses, will take the Internet-phone service public sometime over the next 14 months. Stacey Delo reports.

But the founders’ offer fell on deaf ears, as it was well below the price at which eBay was willing to sell the business, these people said.

EBay declined to say how much it expects to raise by separating Skype, which had revenue of $551 million last year. EBay said it hopes to complete the IPO in the first half of 2010 and has hired Goldman Sachs Group to handle the offering. An eBay spokesman said the company plans to remain a shareholder after the IPO, but eventually will separate from Skype entirely.

The online-auction giant purchased Skype in 2005 for about $2.6 billion in cash and stock, on the premise that eBay buyers and sellers would use Skype’s internet phone service to communicate. But two years later eBay took a $1.4 billion charge for Skype, reflecting the unit’s shrinking value.

After John Donahoe became eBay’s chief executive last year, he said Skype seemed to be a poor fit with the rest of the company. Shedding the business next year “will give Skype the focus and resources required to continue its growth and effectively compete,” he said Tuesday.

The IPO market has been largely dormant since August, with just a handful of deals completed. Some bankers have said that they don’t expect a meaningful pickup until the end of 2009 or early 2010, so scheduling a deal that far out could mean a better environment for a Skype IPO.

Christopher King, a telecom analyst with Stifel Nicolaus & Co., said investors who have been burned by other IPOs, like that of wireless broadband start-up Clearwire Corp. in 2007, might be hesitant to buy into Skype’s offering.

“A standalone [Internet] telecom story would be a difficult sell for telecom investors in this environment,” he said. “People are a bit skeptical of uncertain business models.” He said Skype’s name recognition is an asset, but said the company would likely end up with a valuation far less than the $2.6 billion eBay paid.

Skype uses a technology called voice over Internet protocol, which treats calls as data like email messages and routes them over the Internet, rather than a traditional phone network.

Skype’s software, which can be downloaded free, allows users to call other Skype users on computers or certain cellphones for free. Skype users can also call land lines for a fee, typically 2.1 cents a minute, and conduct video calls. EBay says Skype has more than 400 million users.

Skype has an ongoing intellectual property dispute with its founders, who license a peer-to-peer technology to the company. An eBay spokesman said the company would resolve the dispute before an IPO.

Under Mr. Donahoe, eBay has moved away from the acquisition strategy of former chief executive Meg Whitman, and re-focused on its roots in e-commerce. On Monday, it also sold its stake in Internet company StumbleUpon back to its owners.

“Separating Skype will allow eBay to focus entirely on our two core growth engines — e-commerce and online payments — and deliver long-term value to our stockholders,” said Mr. Donahoe.