An iconic high-rise faces the auctioneer

Hancock foreclosure may be one of many

The delinquency rate on loans for office buildings, stores, and other commercial properties has increased rapidly in recent months. The Hancock Tower's foreclosure began in January. (John Tlumacki/ Globe Staff/ File 2003)

It is a scenario that seemed unthinkable as little as a year ago: Today, the John Hancock Tower will be auctioned off, the fallout of high-flying borrowing practices that are expected to trigger a wave of defaults at trophy office properties across the country.

The Hancock, New England's tallest building, is being sold in New York City under a foreclosure process that began in January. Its owner, Broadway Partners, defaulted on some of the loans it had used to purchase the Back Bay skyscraper for $1.3 billion in late 2006.

In the past two years, the 60-story building's value has dropped by nearly 50 percent, to between $650 million and $750 million, according to analysis by the real estate firm Reis Inc., which used rents, occupancy rates, and other data to calculate the value.

While the Hancock foreclosure is a sign of deep distress in the commercial real estate market, it also highlights the opportunities that are now available to savvy investors. For example, the Hancock is expected to be acquired at today's auction by two lenders that have quietly orchestrated an effort to buy its debt and seize control of the building.

The lenders, Normandy Real Estate Partners and Five Mile Capital Partners, purchased a $75 million slice of debt on the building in June and gradually added more, according to an executive who was briefed on the details of the companies' transaction.

The debt purchases put the firms in position to buy the 1.76 million-square-foot Hancock after they initiated foreclosure, following Broadway's default early this year.

Executives with Normandy and Five Mile declined to comment yesterday.

The Hancock auction, real estate specialists said, is at the leading edge of the rising loan defaults and foreclosures that are expected to ripple through the commercial property market. Between now and 2012, building owners are expected to face more than $1.5 trillion in debt payments, and to default on as much as 5 percent - the highest level since the early 1990s, according to Reis. While that default rate is small compared with the rates for credit cards and other categories of lending, it nonetheless represents a tremendous amount of distressed debt in commercial real estate. The default rate for the category usually hovers around 1 percent.

Between 2005 and 2007, buyers and lenders abandoned caution, buying ever-more-expensive buildings with as much as 85 or 90 percent debt. That left little margin for error - meaning buyers had to command ever-increasing rents to pay down debt.

But in 2008, rents in Boston and other cities leveled off and then started to drop, putting the Hancock's owner and other recent buyers in a financial squeeze. They couldn't escape by refinancing, because turmoil in the broader economy had caused banks to rein in lending.

The delinquency rate on loans for office buildings, retail stores, and other commercial properties has increased rapidly in recent months, reaching 1.14 percent for those financed through securitized lending, which involves packaging loans and selling them to investors.

"We've never been as worried about delinquencies and defaults as we are right now, because we've never seen such a high level of borrowing," said Victor Calanog, research director at Reis.

The tumult is creating opportunities for some investors, though. Jonathan Davis, chief executive of the Davis Cos. in Boston, said he has purchased $150 million in debt on seven office buildings and expects that defaults will leave him with ownership of some of those properties.

"The market is in the early stages of a period of extreme distress," he said, "owing to the complete abandonment of discretion by certain lenders. Out of that kind of distress always arises opportunity for those with the capital and fortitude to dive in."

Casey Ross can be reached at cross@globe.com.