Beacon Writedowns Show Depth of Slump

Markdowns by two Beacon Capital Partners funds may provide the best indication to date of how far Class-A office values have fallen.

The $2 billion Beacon Capital Strategic Partners 4 fund, which acquired most of its properties in 2006, took a 36.9% writedown last year, according to investors. Properties held by the $4 billion Beacon Capital Strategic Partners 5, which primarily made its purchases in 2007, suffered a 51.2% reduction in value last year.

To be sure, those declines are unrealized. Beacon isn't under pressure to sell its properties, so it still has hope that values will rebound before its investments are harvested.

Nevertheless, with the paucity of property sales leaving valuations unclear, the writedowns taken by the prominent fund operator provide a reasonable yardstick of how far property prices have fallen since the bull market was peaking in 2006 and 2007.

Of course, a number of factors play into measures of valuation changes, including exactly when properties were purchased and how much leverage was used. But the 37-51% markdown range for the Beacon funds is somewhat greater than previous indicators.

Beacon, which declined to comment, focuses on a handful of major markets. The largest properties owned by the two funds are the 1.9 million-sf building at 1211 Sixth Avenue in Midtown Manhattan, the 1.5 million-sf Columbia Center complex in Seattle, the 1.1 million-sf building at 32 Old Slip in Lower Manhattan, the 1.1 million-sf Washington Mutual Tower in Seattle, a 50% stake in the 1.1 million-sf One Financial Center in Boston, the 1.1 million-sf Aon Center in Los Angeles, the 886,000-sf Polk & Taylor Buildings in the Washington suburb of Arlington, Va., and the 680,000-sf Market Square East & West in Washington.

Beacon was an aggressive seller at the peak of the market, but has only had one significant trade since the end of 2007 - the sale of a 50% stake in the 1 million-sf building at One Beacon Street in Boston to Allianz in January. The deal valued the property at $508 million. Beacon's fourth fund acquired the entire property in 2006 from a Feil Organization joint venture for $423 million.

Beacon, which shoots for a 15-17% return, often buys properties that at first glance appear to be core or core-plus plays, but have "hidden value" that can be unlocked by repositioning space, reducing operating costs or raising rents. Beacon has traditionally borrowed about 65% of the purchase price for its U.S. properties, but used substantially less leverage for some of its current holdings.

The results of another major fund operator, Blackstone Group, provide some additional indications of office valuations. But the Blackstone evidence is less clear because the investments are divided between office and hotel properties. The firm's sixth fund, the $10.9 billion Blackstone Real Estate Partners 6, posted a 41.3% decline in value last year, according to investors. The vehicle has invested just 38% of its equity, primarily via two transactions in 2007 - the acquisitions of Equity Office Properties and Hilton Hotels. In each case, the Blackstone fund co-invested with the predecessor Blackstone fund, whose performance data couldn't be learned.

After selling off more than half of the Equity Office portfolio, the portfolio of Blackstone Real Estate Partners 6 is almost evenly split between offices and hotels. However, the performance of the two groups likely varies. Market players estimated that Blackstone marked down its Hilton properties by about 50% last year and its Equity Office holdings by about 30%. Blackstone declined to comment.

The company, which acquired Equity Office for $39.9 billion, flipped about $27 billion of properties in 2007 to various players. In fact, it has sold nine of the 10 largest properties. Blackstone continues to own several office properties in Boston, as well as the 1.1 million-sf Lakeway Center in Metairie, La., the 735,000-sf Lincoln Center in Portland, Ore., the 395,000-sf building at 1221 Brickell Avenue in Miami and the 250,000-sf Community Corporate Center in Columbus, Ohio.

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