Although it remains unclear how the $700 billion bailout proposal being debated in Washington will impact New York City commercial real estate, experts believe it could be the first step to unfreezing a market that is expected to see many building failures over the next several years.
Paul Fried, a principal at real estate investment banking firm AFC Realty Capital, said financiers are waiting for the bailout to kick start a frozen lending process for larger commercial properties.
“The short answer is, we don’t know the details of the plan,” he said. “To the extent it provides an essential stabilizing force it is going to be a good thing for New York and for its real estate values” as well as for its capital markets, city employment and tax revenue, he said.
He viewed the bailout as a helpful first step to restart the commercial lending market for sales of $50 million and up, a segment of the market which is struggling.
Real estate services firm Cushman and Wakefield data showed just $17.3 billion in sales of Manhattan office properties valued at $10 million or more were closed or under contract by the end of August, a 58 percent decline from $40.3 billion at the same time last year.
But the federal aid is only the first of two steps necessary for the lending market to flow again, the other being clarity about the direction of the economy, Fried said.
The Treasury Department sent the $700 billion plan to Congress last week, proposing that the federal government buy troubled commercial or residential mortgage-related assets that have lost value. While it is expected that the majority of the failing mortgages will be in the residential market, there will still be a fair number in the commercial market, insiders said.
Robert Knakal, chairman of commercial brokerage Massey Knakal Realty Services, said that whatever system is devised to take over and dispose of the toxic assets it will take years to unravel the complex securities to determine who the owners are and at what percentage of ownership. But the bailout would provide a positive and immediate effect on the credit market.
“I wouldn’t say it would unfreeze it, but it will certainly create a thaw,” he said.
But Jon Southard, director of forecasting at Torto Wheaton Research, a subsidiary of CB Richard Ellis, said in an analysis considering possible outcomes of the bailout proposal, published yesterday, that the intervention may not firm up commercial real estate pricing.
“The ‘bailout’ going as planned may result in short-term pain for the commercial real estate market as well,” he wrote. “While we believe that prices of most CMBS (commercial market backed securities) are destined to go up from their current levels, a successful Treasury intervention would not necessarily result in commercial real estate equity prices rising.”
One possible outcome of the bailout would be helpful to real estate investment trusts (REITs) such as Boston Properties, Reckson Associates Realty and SL Green Realty Trust, which have cash available because they were sitting on the sidelines while private equity firms were buying real estate in highly-leveraged deals during the boom times of the commercial market.
A commercial real estate broker, who asked not to be identified, said he expected “several dozen” New York City commercial buildings to fail in the next several years but he said he did not know how many of them had securitized mortgages that would include them in the federal bailout.
Knakal would not hazard a guess as to how many commercial properties would go into default in New York City, but he expects what is now a small number to grow. The only default he was aware of worth more than $50 million was Harry Macklowe’s losses stemming from the $7 billion purchase of the Equity Office Properties portfolio.
“Commercial defaults [in New York City] are at a miniscule rate at the present [time], but I anticipate that will change,” he said.
Paul Adornato, a senior REIT analyst for research firm BMO Capital Markets, said the trusts are waiting to see how the bailout progresses.
“In speaking to REIT executives over the last week, they are definitely keeping their powder dry (a metaphor for saving resources until they are needed) and looking for opportunities when the liquidation begins,” he said, both in Manhattan and nationwide.