A proposed $7 billion downtown Seattle project has become the latest major urban development to be scotched or delayed because of the credit crisis and a faltering economy.
Seattle's Clise family is pulling a 13-acre property for sale for at least $600 million off the market, at least temporarily. The property was intended to be the catalyst for a project that would have totaled the square footage of as many as five Empire State Buildings, putting it on the scale of London's Canary Wharf or the former World Trade Center in New York.
The Seattle project joins other projects in New York, Phoenix, Atlanta and Las Vegas that have been shelved, scaled back or beset by financial problems in recent months. Many city officials hoped they would provide jobs and economic activity that could help make up for a housing-market downturn that still hasn't reached bottom.
In Seattle, Alfred M. Clise, the fourth-generation chief executive of Clise Properties Inc., said the family and the remaining potential buyer agreed it would be better to re-examine the possible sale after the credit markets settle. "It was a very positive environment. All the moons were aligned and things were happening all over the world," he said. "And then we lost that environment."
Clise declined to say with whom he was negotiating. A person familiar with the matter said it was Dubai's Emaar Properties Inc., one of the largest real-estate developers in the Middle East. Emaar executives couldn't be reached for comment, and a spokeswoman declined to comment.
Office construction plunged 28 percent in March across the United States, compared with February, despite the start of the $304 million office portion of a mixed-use project in Boston called Russia Wharf, according to an April report published by McGraw-Hill Construction, a trade publication.
Included in the list of scaled back or delayed projects is a $14 billion grand plan to improve the area around Penn Station in Manhattan and build a new Madison Square Garden. Merrill Lynch & Co. (NYSE: MER) backed out of plans to build an office tower at the site of the current Hotel Pennsylvania. Nearby, Cablevision Systems Corp., the owner of the Garden, decided against moving to a new site in the Farley Post Office across the street.
Meanwhile, Related Cos., the closely held development company founded by real-estate billionaire Stephen Ross, pushed back the debut of the second phase of its $1 billion CityNorth project in Phoenix by a year to late 2010. In Las Vegas, Deutsche Bank AG (NYSE: DB) is moving to foreclose on the $3.9 billion Cosmopolitan Resort Casino, although work is continuing on that project.
To be sure, many major projects continue unabated, particularly those for which the financing is less dependent on the U.S. debt markets.
Lee Polisano, president of Kohn Pedersen Fox, an architectural firm involved in some of the biggest projects across the globe, said there's been little slowdown, if any, on developments in Asia and the Middle East.
"A lot of them are financed already," he said. "Certainly, in the Middle East, in places like Abu Dhabi and Qatar, there's no shortage of capital and there is a big government program and a private sector program to do buildings."
Canadian developer WAM Development Group announced this week a $3 billion project near the Calgary airport. But WAM is relying entirely on equity financing from its partner, Alberta Investment Management Corp., a Canadian pension fund, and the Calgary area is still booming thanks to its heavy reliance on oil and gas companies.
"The drivers of our economy are a little different than generally what other people are exposed to," says Tim Hogan, a WAM senior vice president.
Developers often begin planning mega projects towards the tail end of solid real estate markets. Cheap debt and ample equity help push values to record prices, spurring developers to push grandiose mixed-use projects -- with office skyscrapers, high-rise luxury condominiums, trendy restaurants and chain retailers -- in city after city.
The current downturn is particularly damaging to grandiose plans because so many of them rely heavily on debt financing. That's something difficult to come by these days as major financial institutions struggle with huge losses from the commercial real estate debt they've been unable to move off of their books.
Even deep-pocketed investors usually plan to borrow heavily to jack up their returns. "When debt is not readily available, even well capitalized off-shore groups, are going to take a step back," says Michel Seifer, managing director for Jones Lang LaSalle, a real-estate brokerage, management and services firm.
It was the prospect of well-funded foreign investors, who perhaps weren't as reliant on Wall Street for funding, that made Clise and his advisers believe, until recently, that the Seattle transaction might still get done. "We were hopeful that there were players who didn't need to be involved in financing. And there are groups out there like that," says Clise. "But we learned that in the real estate world, people look to the credit markets. For a deal of this size, requiring a long period of time and many billions of dollars to build it out, you're going to be dealing in debt."
Perhaps no project had the potential to change the landscape of a city more than the Clise property. Set in a city of 500,000, it would have had an outsized impact compared with the crowded skylines of New York and London.
The Clise family had assembled the 13 contiguous acres in an area called the Denny Triangle after a fire destroyed much of the Seattle downtown in 1889. After decades of rebuffing any interested buyers, Clise stunned the city's real-estate market in June by announcing that the family company would sell the land en masse to a developer that had the vision to transform the city center over the next 20 years.
Jones Lang LaSalle, the broker hired by the family to market the project internationally, conducted more than 60 tours from potential bidders and received 15 final submissions to purchase, some of which showed interest in having the Clise family participate in the development. Emaar was selected and both sides began to discuss terms for a possible sale, said the person familiar with the matter.
However, by that time, the subprime-mortgage crisis had crippled Wall Street, forcing large financing institutions to write down billions of dollars in bad debts. Debt markets shut down, not just for large real-estate deals, but for all manner of transactions. Wall Street's merger frenzy skidded to a halt and many potential acquisitions were canceled or limped to the finish line.
Nonetheless, Clise Properties and its brokers continued to negotiate, hoping that a deal could get done. They kept going partly because Seattle's commercial real-estate market remains one of the country's strongest and home prices have held up relatively well, thanks to continued job growth.
But, in the past few weeks, it became apparent to both sides that the situation in the debt markets would not turn around quickly. In this environment, the larger the transaction, the more difficult it is to raise money, says Seifer, managing director for Jones Lang LaSalle. "And then you add on to that the inherent risk in development, it makes these large-scale projects that much more difficult."
Clise says he believes the downtown project will happen -- "just not now." He adds that the family remains committed to keeping the property intact. "We're not going to destroy the value of the assemblage as a whole by breaking it up. That would be a mistake."
Kris Hudson contributed to this article.