Records were shattered in 2007 in the commercial real estate arena, with more than $50 billion of commercial sales recorded in Manhattan alone. The office vacancy rate was at an all-time low; Taconic Investment Partners and New York State Retirement System sold its Class A office building at 450 Park Ave. for a record $1,560 a square foot, and residential condominiums in developments including the Plaza Hotel and 15 Central Park West reached $4,500 a square foot.

That was 2007.

“I think we can look forward to a very different and choppy year for 2008, especially compared to what we expected at the beginning of 2007 when things were very strong and the warning signals from the housing sector and subprime mortgages seemed to be only a minor threat to commercial real estate,” the chairman of the national real estate practice at the law firm Greenberg Traurig, Robert Ivanhoe, said.

“We will be back to the basics of our business in 2008,” a principal at Broad Street Development, Raymond Chalme, said. “Value will have to be created, as the commercial used to say, the old-fashioned way, by earning it. Business and leasing will continue over the next year, albeit at a much slower and cautious pace.”

“The days of, ‘Well, it’s New York real estate, it will be worth more in six months’ are long-gone dreams.”

Joseph Ficalora, the chairman of the board, president, and CEO of New York Community Bancorp, a $31 billion regional bank, says America is in a recession and that the real estate market is worse than the troubles that hit in the early 1990s.

With the capital markets in turmoil, other industry leaders have mixed views on the state of the real estate market.

Norman Sturner, the co-founder and managing member of Murray Hill Partners, who with David Werner purchased the office building at 1414 Avenue of the Americas late last year, said: “My crystal ball for 2008 gross sales volume is cloudy.” While last year’s sales volume was extraordinary, “prices per square foot will remain constant with milder percentage increases,” he said. “The achievement of the price of $1,000 per square foot for an office building was not the average sales price in 2007, but rather the exception for exceptional properties.

“But ask yourself: In 2008, will the prices increase for (a) labor costs, (b) health care costs, (c) university costs, (d) raw materials costs? If the answer to the above is yes, then be assured that the price for New York City office buildings will also increase.

“I do not believe there will be a significant percentage increase in the overall vacancy rate in office buildings,” he said. “There is no ‘uncommitted’ new construction coming on line in 2008 and that will mitigate any increase in vacancies over the next year. Office rents will continue to increase, but without the 30% to 50% increases. However, we can still count on mid-teen percentage increases in 2008 lease exceptions and re-occupancy rates.”

The chief operating officer at Stellar Management, Robert Rosania, said everything that happens in the real estate market this year, “not unlike the economy itself, will be highly dependent upon a return to normalcy of the ‘money markets’ and the commensurate sentiment shift which will lag that stabilization.”

He added: “Once LIBOR stabilizes, as it has shown signs of doing in the last three or four weeks, and the interbank rate doesn’t exhibit a substantial risk premium, as well as the swap rates return to a less volatile pricing matrix as a result of the sentiment LIBOR has stabilized, all borrowing and lending will stabilize as well as be less expensive due to the lending rates falling in line with Fed Funds. Unless and until that happens, all these questions answered are in pure speculation, since the economy operates upon the necessity of a stabilized borrowing and lending environment.”

The chairman of the board of Signature Bank, Scott Shay, said that in the commercial area, “there is no question that capitalization rate spreads are going to rise substantially, as spreads have widened for all credit sensitive markets. Here to there will be a rationalization of some financing excesses to which the market closed its eyes in an abundance of enthusiasm and fees. It is going to take quite a while for the capital markets to embrace the kind of aggressive financing that was common place only months ago.” Mr. Ivanhoe added: “Given that the volume of CMBS originations on Wall Street are expected to be down from levels of 2006 and the first half of 2007 by at least 50% (some institutions have predicted that reductions could reach as much as 75%), and that lending will be not only more difficult to obtain, lending parameters and standards will also change, and those changes will have implications on sales volumes and, to some extent, pricing, lenders will be more selective in placing their limited amounts of capital, both in terms of sponsorship, risk profile, and project criteria. Loan to value/ cost ratios will decline, debt service coverage ratios will increase, and equity requirements will increase substantially, as will recourse components of loans. The result will, almost necessarily, cause some decline in pricing of stabilized assets, as the financing structure applicable to the same cash flow and risk profile will yield lower loan amounts and higher equity requirements today than a year ago, so even if the investor is prepared to accept the same equity return as a year ago, in order to achieve that, the amount it would pay for the same return on equity under the debt terms available in the current market will result in a lower price.

“Add to that a greater risk in the office leasing market from a year ago, with lower or no growth in rental rates and more conservative lease up assumptions, the downward pressure on pricing, particularly in office assets, should become a noticeable trend,” Mr. Ivanhoe said. “In this situation, I also think it is likely that many owners who do not need to sell will (and should) ride out this market swing in the capital markets, as one can expect that in some period of time, the capital markets will return to some form of equilibrium, though not back to the euphoria enjoyed prior to mid-2007.

“These market factors will result in an increase in cap rates, particularly in office assets, which cannot properly build in market increases as had been previously underwritten. The office market in leasing had been strengthening steadily the last few years due to low vacancies and continuing strong demand; these trends should reverse to at least a market equilibrium, if not a slight downward trend in effective rental rates,” he said.

The president and CEO of Acadia Realty Trust, Kenneth Bernstein, said sales volume “will be lower than previous years as buyers, sellers, and lenders all try to come to terms with the new realty of a more constrained capital market. Volume may begin to increase in the second half of 2008.

“Cap rates will increase as it becomes clearer that the cost of both debt and preferred equity have increased. This, combined with an increase in perceived risk for illiquid assets, will cause cap rates to begin to revert to sustainable rates. The amount of this increase will be determined by the extent of the recovery of the credit markets and the state of the economy and its perceived impact on longterm fundamentals.

“I expect office vacancy will increase as the financial sector continues its layoffs. Rents will flatten or decline,” he said.

The chairman of global brokerage at CB Richard Ellis, Stephen Siegel, said: “I believe sales will slow this year as compared to last, as financing has changed dramatically. No more is 90% to 95% leverage available. More conventional deals will be the order of the day with more cash and debt at levels that are serviceable by cash flow.

“Buildings, however, that do sell that were $1,000 dollar a foot buildings in 2007 will continue to be so. Rents, while they will not rise as dramatically in 2008, the way they have the last two years, will not decline in prime properties. Vacancy rates will not increase unless there are lay-offs beyond my expectations and what I hear. There is still solid demand and no extensive new supply.”

A principal at Beck Street Capital, Kevin Comer, said sales volumes “will fall through the first two quarters, then pick up again in the latter half of the year, but not from recent buyers flipping their buildings for 50% more than they paid for them last year.” He said the pick up in volume would result from “distressed asset sales as time runs out for borrowers hoping to hold on long enough for spreads to narrow sufficiently to the point that they can refinance the short-term debt they used to finance their recent purchases. Even with an uptick toward the latter half of the year, sales volume won’t match that of 2007.” He added: “It is hard to imagine that all Class A office buildings in Manhattan will sell for more than $1,000 per square foot. With conduit lenders shut down and balance sheet lenders holding all the cards, the universe of potential buyers has narrowed considerably to those with sufficient equity to finance 40% of a purchase with their own money. Further, it will only take one meaningful bankruptcy filing for the definition of ‘equity’ to mean hard cash, not a personal guarantee whose value suddenly isn’t worth as much if values fall 10%. That dwindling of the buyer pool will result in a fall in prices, especially for a trophy product bought on the assumption that office rents always go up.”

New York City, and especially Manhattan, was resilient when it came to sales of residential condominiums last year. Record prices were achieved in 2007, yet industry leaders have mixed views of the continuation of the upward trends in prices. Mr. Comer said there would be demand for high-quality condominium projects in Manhattan. “Location and quality will be the key factors that determine the success of a project,” he said. “Projects will either need to be very moderately priced, with moderate finishes, selling for $1,000 per foot, or very high quality projects with distinctive features, great design, and a great location selling for $2,000 per foot. The middle market will be a difficult place for a while.”

For the near term, Mr. Shay said, “the condominium market is likely to be under a lot of pressure with the exception of the best built, best positioned, and most-value-for-the-dollar projects.”

Mr. Ivanhoe said the condo market “has remained strong and stable so far, a true credit to the desirability of New York as a major international city and destination, as well as a home for foreign capital given the continued weakness of the dollar. The continued strength of the condo market is somewhat surprising given national trends but seems to be the result of the desirability of New York, currency valuation factors and limited supply of new product. Wall Street bonuses, which have traditionally driven the condo market, will undoubtedly be lower this year, and the impact of that factor on the condo market is hard to assess at this stage.”

He added: “The residential market remains strong, buttressed by a general weakening in the for-sale market. Though buyers of residential properties can still project growth in cash flow, the change in the capital marketplace will temper pricing in the sale of residential multifamily assets in the current lending environment.”

Residential rental properties in 2007 continued to be a favored asset by investors. Real estate investment funds and foreign and local investors continued to pay record prices for this asset, Mr. Comer said.

“Residential properties with a preponderance of rent regulated tenants will continue to trade at very low cap rates,” he said. “Depending on the location and quality of the asset, these cap rates will continue to be between 2% and 4%. Residential properties that are largely free market will see a softening in values. The spread between regulated rents and market rents in New York City has continued to widen over the last decade, to an unprecedented level. The impact of rent regulation in New York City is to artificially inflate free market rents, and to constrain regulated rents. As the spread has widened, and the demographic of the tenant mix has aged, the inherent value in regulated units has increased. If anything, the value of rent regulated units should continue to increase over time.”

Jason Muss, a principal at Muss Development, the developer of Oceana Condominium and Club in Brighton Beach and SkyView Parc in Flushing, said, “Because new condominium supply is expected to contract significantly over the next 12 months, due mainly to the fact that the best and most easily developed sites have been exhausted in most prime neighborhoods, those who have quality products for a reasonable price and have a specific target market in their neighborhoods will do well.”

One thing is certain, 2008 will be a very interesting year for commercial real estate in our region. Nevertheless, I concur with Mr. Ivanhoe when he says: “The silver lining in the market is that there is still a lot of equity capital out there looking to find a home in the real estate sector. However, they seek returns, which, though perhaps lowered from a year ago, are harder to achieve given the lending environment and underwriting standards. The influx of foreign capital will certainly help sustain investor demand and perhaps allow some bridging of capital structures until the capital markets return to more of a sustainable equilibrium.”

Mr. Stoler, a contributing editor to The New York Sun, is a television and radio broadcaster, and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.