There is fear in the eyes of investors, lenders, leasing brokers, owners, and virtually everyone involved in commercial real estate.

Some industry leaders worry that the heady days of megadeals are behind us. Others see great opportunities for buyers in 2008 because the credit crisis and a turbulent Wall Street could depress prices. Almost everyone agrees that the volume of sales will be way down from record levels in 2006 and 2007.

As the chairman of the Lightstone Group, David Lichtenstein, said, “Absent of a complete resurrection of the economy by the Fed, New York City real estate will have its slowest year in 15 years.”

“The news continues to worsen. Whether it is more subprime write-offs or further negative economic data, the clouds are becoming darker,” the executive vice president of Anglo Irish Bank, Paul Brophy, said. “A few weeks ago there was a view among the more optimistic out there that perhaps this storm would pass and a recession would be avoided, but the chances of this are becoming even more remote. Not only are we seeing continued subprime write-downs, but now we are starting to see write-downs in consumer credit as well. Clearly this does not bode well for the economy as a whole, or for real estate markets and investment sales.”

Some industry leaders see opportunity in the state of the investment sales market for this year and the likelihood of a quick recovery. The managing partner and co-founder of Stonehenge Partners, Ofer Yardeni, said: “I love this market. The fear and uncertainty makes this market a wonderful opportunity for a buyer to pick up great assets at a huge discount to replacement and market value. 2008 will be remembered as the bargain year.”

The senior managing director at Eastdil Secured, Douglas Harmon, said, “The silver lining in today’s modern capital market meltdown is that technology now provides for rapid information travel, therefore compressing cycles and accelerating recovery times.”

“I’m not worried for anybody who is well-capitalized. I believe the run-up in values over the last few years has been over 100%, and the rundown so far has been more than 15%. That leaves plenty of profits to be harvested for those inclined to prune their gardens even in these frosty winter times,” Mr. Harmon said.

“The mood has been set for a very interesting 2008, as the financing marketplace does not remotely resemble where the industry stood 12 months ago,” the senior director and principal at Eastern Consolidated, Alan Miller, said. “The stock market is tumbling, and what may be the beginning of huge layoffs from big financial firms has left a stamp on the current market condition. It tells us that more challenging times are here for all of those involved in the real estate industry in New York.”

“Those who have decades of experience may be better prepared to weather the storm, but any prolonged period of inactivity in the investment sales arena can be a bit disconcerting,” Mr. Miller added.

A principal and co-founder of Broad Street Development, Daniel Blanco, said, “I can sum up the marketplace as ripe for investment opportunities, and those investors who understand the fundamentals will do well.”

“Yes, values are down and volumes will be down, but I think the downward move in rents predicted by some investors is unlikely,” a principal at the capital markets group at Newmark Knight Frank, David Noonan, said. “Rents will be flat or drop slightly.”

“We are finding there is ample equity out there, and some debt is available for deals under $100 million,” he added.

The chairman of Massey Knakal Realty Services, Robert Knakal, said: “Today, we are much more concerned with the number of investment sales as to the dollar volume. The enormous totals of dollar volume achieved in 2006 and 2007 were reflective of price appreciation and many megadeals. Almost everyone anticipates that the current ‘de-leveraging effect’ caused by the debt markets will affect the larger transactions much more significantly than other segments.”

“The market for properties under $50 million has been relatively unaffected, and below $100 million is still very strong with no evidence of falling prices, with the exception of speculative properties in truly fringe areas. We believe that gross dollar volume will fall by 25% to 40% in 2008, but the key variable — the number of sales — will be off only slightly, as there is still a tremendous amount of demand chasing a constantly insufficient supply of available properties,” Mr. Knakal said.

“The fundamentals across all market segments remain strong, although employment is a key economic indicator to watch,” he added. “Presently, there are tremendous reserves of equity, which have been amassed during the past several years, representing dry powder for so many of our clients. This was not the case in the early 1990s, when we experienced both income and capital recessions. The weak national economy will put pressure on the Fed to lower rates, which will result in one of two very positive dynamics: Either mortgage rates will also drop, or spreads will continue to widen, which creates tremendous motivation for lenders to push money out the door. Either way, the market is a winner.”

Unfortunately, others do not agree that lenders will be motivated to push money out the door. Several senior lenders said the only way they would provide financing for a deal larger than $50 million is if a syndicate was created before the transaction closed. In many instances, lenders are asking borrowers to contact a number of lenders to join together to provide financing for a transaction.

One prominent owner of Class B office buildings told me that he is purchasing an office building for about $60 million. To secure a lender for the project, he was required to have an equity investment of 50%, or $30 million, to close on the purchase.

Mr. Brophy, of Anglo Irish Bank, said, “Debt availability for real estate has if anything tightened even further over recent weeks, although the velocity of deals has also slowed considerably in the first few weeks of 2008.

“In terms of 2008 activity, we have to expect just a fraction of the volume that we have seen in recent years,” he added.

“It was once a beauty contest between multiple lenders for each asset type, and the winner was the borrower,” Mr. Miller, of Eastern Consolidated, said. “With the tides turned and table setting reversed, it is the lender in today’s marketplace who has the upper hand. Simply put, more equity is required, as the underwriting had definitely become stricter. On-hand cash flow is what lenders will shell out the bucks for, not some three- to five-year projections that seem to be higher all the time, and those target rents may not be achievable in a changing market.”

A number of properties are now being marketed for sale by investment brokers. At least two trophy properties are on the market in the Plaza district. Everyone would like to own the 50-story, 1.9 million-square-foot General Motors Building at 767 Fifth Ave., now owned by Macklowe Properties. If the property is sold for $1,560 a square foot — the number commanded by 450 Park Ave. last year, the highest price ever recorded for a building in the city — the GM Building would fetch at least $3 billion.

According to real estate sources, the 600,000-square-foot Class A office building at 650 Madison Ave., directly across the street from the GM Building, probably would have fetched close to $900 million in 2007. Industry leaders now expect the property to sell for approximately $750 million, or $1,250 a square foot.

Properties are earning record prices on Ninth Avenue near the Hudson Yards and Penn Station. Before the end of the first quarter, SL Green Realty is expected to close on the sale of its office building at 440 Ninth Ave., near West 35th Street, which is in contact for $160 million, or $472 a square foot. The purchaser is a joint venture of the Paramount Group and Sherwood Equities. The sale is expected to generate an estimated gain of about $110 million for SL Green.

Directly across the street from 440 Ninth Ave., Group Health, Inc. is marketing a 300,000-square-foot eight-story office building for sale. According to real estate sources, a new owner could increase the square footage of the building for commercial or residential use.

Investors are bullish on commercial properties in Lower Manhattan. Earlier this month, Joshua Zamir and Daniel Ghadamian of Capstone Equities closed on the purchase of the 216,000-square-foot office building at 156 William St., paying $60 million, or $278 a square foot to the seller, which purchased the property in July 2005 for $41 million.

In December, Lighthouse Real Estate Ventures sold a 22-story, 377,000-square-foot office building at 100 William St. to Mitsui Fudosan America for $180 million, or $477 a square foot. Real estate sources say RFR Realty has retained an investment banker to sell the 42-story, 570,000-square-foot office tower at 17 State St., which is expected to fetch close to $340 million, or about $600 a square foot.

Before the end of the first quarter, industry leaders expect a number of development sites and properties to be sold, including the office tower at 475 Fifth Ave., owned by the Moinian Group and Westbrook Partners; the portfolio of parking garages and development sites owned by Central Parking; and the development sites owned by the New-York Historical Society and Cooper Union.

2008 will be a very interesting and difficult time for the New York commercial market. One thing is certain: Whoever plans to purchase any of these properties will be required to invest significant equity to close on the purchase. This year, probably the biggest obstacle will be locating a syndicate of lenders to provide financing for acquisitions.

Perhaps Mr. Yardeni of Stonehenge Partners was on the mark when he said: “Whatever you buy today will be remembered as a great buy next year. Remember, it’s New York, baby.” Let’s hope Mr. Yardeni is correct.

Mr. Stoler is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at
mstoler@newyorkrealestatetv.com.