Property Sales Outshine the Gloom and Doom

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Despite the doom and gloom predictions spurred by the credit crunch and the evaporation of cheap debt, the real estate record books have been shattered through the first three quarters of 2007.

Few expected that an office building in Manhattan would trade at a price of $1,560 a square foot, which Somerset Partners is paying for 450 Park Ave. It is well known that people from around the world want to reside in Manhattan, yet few would expect a joint venture of Mann Realty and Africa Israel Investments to pay $430 million for a rental building, the Apthorp, on the Upper West Side. The stock market reached a record high this week and in the third quarter, and Cushman & Wakefield reported that, year-to-date, 14 office leases have been completed with rents of more than $150 a square foot, and one lease reached close to $200 a square foot.

Cushman & Wakefield also reported that at the end of the third quarter, commercial property sales closed and under contract totaled more than $42 billion for the year, surpassing the $34.7 billion closed in all of 2006. An additional $5 billion to $6 billion of investment properties at amounts of less than $10 million in the boroughs have been sold during the first nine months of 2007, according to the co-founder of Massey Knakal Realty Services, Paul Massey, bringing the total sales volume to close to $50 billion.

The big question on the minds of real estate leaders is: “Can the velocity of sales continue in the fourth quarter and in 2008?”

“When 2007 is behind us and we look back in the rear-view mirror, I think it will be a year of two markets: the first half of the year, which was a continuation of the white hot real estate market characterized by rising prices, fierce competition, high leverage, and abundant debt and equity capital at historically low cost; and the second half, which was marked by a severe tightening of credit, widening spreads, lower leverage, and more stringent underwriting,” the chairman of the national real estate practice at Greenberg Traurig, Robert Ivanhoe, said. “The pipeline for investment sales coming to market is way off, and this is not surprising. Unless an owner has a compelling reason to sell, why would it sell into an uncertain and perhaps falling market and capture significantly less in price than just three or four months ago?” He added: “Just a few months ago, a seller could anticipate fierce competition for any sizable asset in New York at unprecedented capitalization rates. The perfect storm is over and we are now returning to a more realistic market. However, until the bond market can properly recalibrate risk premiums, it will be difficult to establish the kind of stable equilibrium that will induce bond investors to return to the market and capital to flow more freely, albeit at higher spreads and lower loan to value ratios. Fortunately, through the capital markets turbulence, real estate fundamentals have remained stable.” Looking ahead, Mr. Ivanhoe said he expects a slower pace of sales until confidence in the bond markets is restored, lowering the price of debt. “Although it may be a long time until we see the cost of capital reach the record lows of 2006 and the first half of 2007, a return of more stability should restart the sales market, though not at the frenzied level of the last few years,” he added.

The chief executive officer of the metropolitan region at Cushman & Wakefield, Joseph Harbert, said interest in New York City property remains high despite recent credit woes.

Some real estate experts think the credit woes have been overstated.

“I’m not a betting man, but if I was, I would bet that we will continue to see strong sales numbers throughout the rest of the year,” a senior partner at Massey Knakal Realty Services, Tim King, said. “There has been a great deal of talk recently about ‘downturns’ and ‘corrections’ in the real estate marketplace. In much the same way that ‘irrational exuberance’ was attributed to the activity of the stock and real estate markets, I think it’s time to revive a phrase last heard in 1970: ‘Nattering nabobs of negativism.'”

He added: “No one can ignore the damage caused to our industry by the meltdown of the sub prime market, but we also can’t overlook the fact that there is a reason that it’s called the ‘subprime marketplace.'”

The chairman of Thor Equities, Joseph Sitt, said that while he believes the volume of activity will slow, “New York City has a lot that should make it a stand-out performer in the country. First, the world is seeing a faster evolution of globalization by the day and New York is one of the five most important global gateway cities of the world. We should see the strong fundamentals continue as the city is still catching up from being undervalued for a number of years. The further weakening dollar will result in increased tourism driving foreigners to our hotels, shops, and restaurants. Lastly, the flight to quality domestic and foreign purchasers can find no better home for their capital than New York City.”

Mr. Sitt said he believes the dynamics of buyers in New York will change. Rather than the highly leveraged entrepreneur buyers that were once prominent in the New York City market, we will see new buyers who include more public real estate investment trusts and foreign buyers.

The managing partner at Massey Knakal Realty Services, Shimon Shkury, said transactions for trophy assets “will slow down for the first quarter of 2008 mostly because of the slowdown in Wall Street financing and inability for buyers to secure loans. Yet the ongoing perception of Manhattan as the current and future epicenter of global commerce should sustain demand for such properties.”

Mr. Shkury said the reaction of conventional lenders to the “credit crunch” is to be conservative and responsible when approaching investment properties, and in that there is a hidden opportunity. “Since there has been no change in the fundamental upside that exists in office buildings and rent-regulated buildings which operate well below market, there is a huge opportunity for equity and mezzanine lenders to take more secured positions after conventional lenders,” he said.

A few prominent financial institutions have retained sales brokers to sell corporate-owned real estate. Earlier this year, Citibank sold 23 branch locations in the five boroughs. The bank is now marketing for sale an additional 47 units. The bank plans to lease back these locations as well as two buildings it owns at 388 and 390 Greenwich St. These two towers in TriBeCa are expected to go for close to $1.6 billion. This summer, the bank sold an 11-story Smith Barney Building at 333 W. 34th St. to SL Green Realty for $184 million, or about $600 a square foot.

This spring, Deutsche Bank sold its 47-story, 1.6 million-square-foot headquarters at 60 Wall St. for $1.2 billion, or $750 a square foot, the highest price ever paid for an office building in Lower Manhattan. The bank signed a lease for 15 years with the new owners, the Paramount Group. Before the end of the year, industry leaders expect the winning bidder to be named for the bank’s Class A office building, the 660,000-square-foot tower at 31 W. 52nd St. Industry leaders expect the property to sell for close to $1 billion, or $1,515 a square foot.

A few blocks away is 1177 Avenue of the Americas, the 47-story, 1 million-square-foot tower that occupies the west side of Sixth Avenue between 45th and 46th streets. The property is owned by the Paramount Group, who acquired the building in 2002 for $406 million. Based upon the tenancy and its location, industry leaders feel that the property could trade for more than $1.3 billion.

In November 1999, the Guardian Life Insurance Company of America sold its headquarters at 201 Park Ave. The company is now marketing for sale its 10-story, 350,000-square-foot office and retail tower at 730 Broadway, aka 418 Lafayette St. About 50% of the building is leased to New York University and 20% to the Amalgamated Life Insurance Co.

One of the hottest markets for prime office space has been Greenwich, Conn. This week, General Reinsurance Corp. retained an investment sales broker to sell the 210,000-square-foot Class A office building at 600 Steamboat Road. The building, located on a 4-acre waterfront site in Greenwich Harbor, within walking distance of the Metro-North train station, is leased to RBS Greenwich Capital.

This month, Altria Group, the world’s largest tobacco company, announced that it was relocating its offices to Richmond, Va., and would be selling its Class A office building at 120 Park Ave. The 26-story, 554,000-square-foot office building, built in the early 1980s, is directly across the street from Grand Central Terminal. The property, which would be delivered vacant, could fetch close to $900 million.

“The trophy properties that are currently being marketed all have things in common — namely, high cost of bricks to build low cap rates, and long-term waiting periods for increase in net operating income,” the co-founder of Murray Hill Properties, Norman Sturner, said. “Therein lies the problem for the domestic buyer. On the other hand, foreign buyers have lower return horizons, more available cash to invest, and for the moment a stronger euro, pound, and Canadian dollar versus our U.S. dollar. I will not be surprised if these new trophy properties are bought by offshore buyers.”

“We are meeting with many new investors from Europe as well as the Middle East and Asia who have significant amount of capital and targeting investments in New York, with the strength of the euro and the pound against the dollar, making our city a compelling investment opportunity,” the executive director at Cushman & Wakefield, Jon Caplan, said.

One has to concur with Mr. Sturner when he says: “We have not seen ‘fire sale’ signs on good properties. New York City remains the least expensive, most stable property market capital in the world. Fear not; this too shall pass.”

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.


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