The Real Deal New York

REITs used in slow market to estimate value

April 16, 2009 05:31PM
By Adam Pincus

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alternate textLeft to right: Paul Massey, Woody Heller, James Kuhn

Manhattan investment sales brokers struggling to determine values for trophy office properties in a market lacking in comparable sales are looking at the stock prices of a local real estate investment trust for guidance.
 
While brokers said the technique of using a stock price does not provide an exact value, it gives some indication as to what properties are worth. Other brokers discounted the idea, and some had not heard of it at all.
 
SL Green is the best choice among the REITs because the majority of its portfolio is Manhattan office buildings, said Woody Heller, executive managing director at Studley. But using stock values to determine property values is at best a poor solution brokers resort to because of the thin amount of trading. Normally brokers look to comparable sales to determine capitalization rates, price per square foot and other metrics, but this year has yielded just one significant, arms-length office sale, at 1540 Broadway in Times Square.
 
“So in the absence of that data, because the market has been so inactive, people are looking for other ways that they can feel comfortable with the value,” he said. 
 
Even the $355 million sale of the condominium portion of 1540 Broadway was not a representative transaction because it was not a complete building sale. The purchase did not include the retail portion that would increase the total value of the building to about $600 per square foot from the actual sale price of $392 per square foot, he said.
 
Using rough calculations based on a market capitalization of $940
million and $7.4 billion in debt, the price of SL Green’s Manhattan
Class A holdings would be about $350 per foot, estimated James Kuhn,
president of Newmark Knight Frank, who said he is using the concept
loosely.

Note: Clarification appended.

Its greatest value is to determine the relative costs to invest in real estate through buying stock versus purchasing property.
Several brokers were not familiar with the idea, or were opposed to it. 

When told of the idea, Paul Massey, CEO of Massy Knakal Realty Services, said it was innovative but flawed.

“It is an interesting strategy. But I think it is dangerous in that SL Green stock is widely held by people who may not necessarily understand the nuances of the New York market,” he said.
 
Some brokers such as Gil Robinov, executive managing director at NAI Global New York City, said such data was so unreliable he would not even use it as a reference point. 

The SL Green stock value is pushed down because the firm cannot buy and sell buildings, and it was unfair to use the price to determine the value of properties. 
 
“It is interesting conversation, that is all,” he said.

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