Boston's Hancock Tower sells at nearly half price

By Ilaina Jonas

NEW YORK (Reuters) - The John Hancock Tower, New England's tallest office building, sold in a foreclosure auction on Tuesday for $660 million, about half what the sellers paid three years ago, underscoring the crumbling state of the U.S. commercial real estate market.

The building, a distinctive presence on the Boston skyline, was bought by Normandy Real Estate Partners and Five Mile Capital Partners, investors that had previously snapped up distressed loans on the property.

The building, designed by renowned architect I.M. Pei and officially named Hancock Place, went into foreclosure in January after its owner, Broadway Partners, defaulted on the mezzanine loans it used to finance the $1.3 billion sale in late 2006.

"This is exactly what is happening with many other buildings across the country," Chris Stanley, an analyst at real estate research firm Reis Inc in New York. "Now that things have started to deteriorate, they will deteriorate at a much faster rate because of all the leverage in the system."

And the trend is expected to get much worse.

Delinquency rates for U.S. commercial properties, which stand between 1.2 percent and 1.8 percent, could rise between 3.5 percent and 5 percent by the end of the year, according to forecasters. The default rate is expected to top that next year.

During the U.S. commercial real estate boom from 2005 through 2007, cheap debt financing enabled investors to snap up property by using as much as 90 percent debt.

Investors paid skyrocketing prices based on very aggressive assumptions that rental rates and occupancy would soar and that they could sell or refinance the property at a much steeper price.