Falling rents force principal mortgage cuts in Manhattan

The sharp decline in asking rents in Manhattan over the past year is beginning to force lenders to reduce principal mortgage balances in some buildings, one of the city’s top brokers told an audience in Midtown this morning.

Citing as an example a 200,000-square-foot building in Midtown South, Robert Freedman, executive chairman at FirstService Williams, said the lender reduced a loan to allow a major tenant his firm was representing to sign a 40,000-square-foot lease.
In that market, CB Richard Ellis data shows average asking rents have fallen by 20 percent since their highs in August 2008. 

“What we are doing is legislating a cramdown,” he said, referring to the forced reduction of mortgage principal. It is “a haircut the lender is going to have to take to restore the rent to a rational basis.”

Freedman was part of a real estate panel organized by publisher Bisnow in Midtown this morning. The other panelists were Robert Alexander, CBRE chairman of the New York region, and Peter Riguardi, president of the New York office of Jones Lang LaSalle. The event was moderated by Marc Shapiro, partner with law firm Orrick, Herrington & Sutcliffe.

Despite the stress put on lenders by the marketplace, Freedman said there was some positive news as well.

Freedman cited a change made Sept. 15 by the U.S. Treasury that gives servicers greater flexibility to modify distressed loans that have been packaged in commercial mortgage backed securities.

“That on its face is a very positive development,” he said.

In addition, Riguardi said he expected rents to continue to decline, while Alexander was buoyed by an increase in leasing by financial and legal services firms in Midtown, compared to earlier in the year.

“We are encouraged by that activity,” he said.

Riguardi predicted that little-known, smaller companies, such as an entertainment company he did not identify that has expanded rapidly, would grow and take up some of the space abandoned by the city’s larger firms.