Smaller building buys fare better as trophy deals lag

For buyers and sellers of buildings, the world may not have come to an end — but it’s certainly shifted, according to brokers The Real Deal interviewed as part of a Q & A about the New York investment sales market. Underwriting standards have become more conservative, and highly leveraged buyers are out; taking their place at the table are buyers with larger equity positions, and in many cases, longer time frames.

Many note that the smoke has not yet cleared around pricing issues as well. Nat Rockett, senior vice president of Jones Lang LaSalle, expects a “detailed read” on the market to come from upcoming deals at 120 Park Avenue, 31 West 52nd Street, 1177 Sixth Avenue and 475 Fifth Avenue.

In terms of investment categories, hotels are still hot, as are residential rental buildings. Several commercial brokers noted that smaller buildings — what Adelaide Polsinelli of Besen & Associates called “not sexy or trophy material” — appear to be holding up much better than sales involving large buildings.

And what of distressed sellers, unrealistic buyer expectations and the hottest area in Queens? For the wisdom on those topics, let’s turn to our panel. Here’s what the experts had to say:

Craig Evans senior managing director, Colliers ABR

Post-credit crunch, what is the most interesting or surprising trend in the New York building sales market?

There are no surprises anymore; the market has been dealing with this for 60 to 90 days now. There is a low level of transactions.

What is the most negative trend in the market right now?

The lack of transaction volume has made pricing kind of sticky. Everyone hopes that things will clear. SL Green and George Comfort & Sons have put office buildings on the market within the last month. Also, Goldman [Sachs] is coming to market with a pool of loans, and everyone is looking very carefully to see how it’s pricing. Trading for [that business] is way off right now because people don’t know how to price their product.

What types of buildings — office, hotels, rental buildings, etc. — are faring best and worst in terms of sales activity and prices?

The best is rental buildings, and the worst is a toss-up.

What locations are faring best and worst?

The Manhattan office market in Midtown is still extremely attractive to capital on a global basis because of the weak dollar. We have constant calls from foreign investors. The weakest is residential condo development in tertiary locations in the boroughs.

According to one report, there has been $40 billion in building sales in Manhattan this year. How will the year finish?

We broke records for dollar volume this year already. The sales on a going-forward basis are going to be lower for a while because it takes time for the market to adjust.

What do you expect to see in the building sales market overall going forward?

Some price adjustment, and potentially lower volume, in the near term. There are a couple of large Broadway Partners acquisitions. Boston Properties has a number in contract; a large transaction pending at 280 Park Avenue under contract is something that will have a significant volume impact on this year’s transactions, at least $1 to $2 billion. They were not a highly leveraged buyer.

Nat Rockett senior vice president, Jones Lang LaSalle

Is the impact of the credit crunch on the building sales market a blip?

It is not a blip. Debt will look substantially different going forward than it has in the recent past.

What has happened with pricing and sales volume since the credit crunch?

Transaction volume dropped off dramatically in August and September as the market came to a virtual standstill. There were no major deals announced in September, as an example. It is not yet clear what has happened to the prices per square foot, as there have not been enough transactions since the beginning of August to create a true sample set.

Any notable deals you’ve seen recently that show the state of the market?

This month should see some interesting data coming into the market from the offerings of 120 Park Avenue, 31 West 52 Street, 1177 Sixth Avenue and 475 Fifth Avenue. These buildings represent a good distribution of deal types and will provide a very detailed read on the state of the market.

What is the most negative trend in the investment sales market right now?

From a broker’s point of view, the most negative trend is sellers holding product out of the market. Lower transaction volume is not good for brokers or buyers.

What types of buildings are faring best and worst?

The properties that appear to be least impacted by the changes in the debt market are high-quality, stable assets that price below $500 million. The properties that seem to be impacted the most are those with a value that is so large that the purchase would be very difficult to nearly impossible to finance due to the limited capacity of the CMBS (commercial mortgage-backed securities) lenders. CMBS are the only single-source lender for transactions above $500 million in debt.

How have buyers’ and sellers’ mentalities changed recently?

High rent growth was a big part of the fuel that drove this market for the past 18 to 24 months. Buyers are now, by necessity, more conservative in their underwriting, most significantly in their rent growth assumptions. Many sellers are reluctant to enter the market given the uncertainty about the impact of the changes in the real estate market, the economy, and the lingering debt crunch.

According to one report, there has been $40 billion in total building sales this year. How will the year finish?

I expect that 90 percent of the dollars to be invested in 2007 have already been invested.

David Schechtman director of the turnaround and distressed investments group, Eastern Consolidated

What are you seeing in the New York building sales market right now?

I am seeing a larger number of foreclosures. Our average deal at Eastern is $23 million. I am seeing an increase in the amount of technical defaults in commercial loans and loans that are being traded for buildings. I am not seeing what we saw in the ’80s — where banks were owning buildings — but I am seeing distress in the market.

Do you think there will be continued weakness?

I still believe the market is robust; I was hired to sell a 32,300-square-foot development site on the West Side of Manhattan, and I already have preemptive offers. It’s a $70 million deal happening on the same day that loans are being traded. Banks are shuffling paper and we are still setting price-per-square-foot records, and there is still not a lot of product for sale in Manhattan.

Marcia Rose Yawitz senior director, Eastern Consolidated

Post-credit crunch, what does the building sales market look like? Any surprises?

Initially when the debt markets — the Wall Street secondary market — closed, and there were no funds, we found that some pending deals couldn’t get the 85 percent leverage. Some deals did go south, but other buyers came in. I had one huge portfolio that I broke up, and then the buyers were more active. Banks are still lending, giving 65 to 70 percent; it was just Wall Street that shut down.

What is the most negative trend in the market right now?

The expectation of a seller to think his property is worth far more than it is, unless it is in a super location with excellent retail.

What is the most positive trend right now?

I have been doing this since 1973, and I have never seen a market like this for the level of resale on development sites that developers are getting. There is a development site in the East 20s that is selling for over $2,000 per foot. We originally priced it at $1,400 a year ago; their plan has been approved, and now it’s selling at $2,000. It’s a unique 60-story building overlooking Madison Park. People want views. The top floor is what generates the pricing. The lower floors without views are the last to sell; top floors go first.

What types of buildings are faring best in terms of prices and sales activity?

Rental buildings. The majors want to buy 500 to 600 units or 1,100 units. They want to buy large blocks; that’s very valuable and economical to own within a certain area, and people want large things they can get investors into. The major investor wants as large as they can get — it’s economy of scale.

Are there groups of buyers that are going to increase their activity now, like buyers with a lot of cash?

We have some of those, but there are no bargains and nobody’s that desperate to sell. If a buyer has $90 million in cash and the price is $110 million, they are not going to get the deal.

Adelaide Polsinelli senior executive broker, Besen & Associates

Any notable deals you’ve seen recently that show the state of the New York building sales market?

In the past month I have sold several residential apartment buildings in Manhattan and the boroughs. What is interesting about this is that the deals are based entirely on cap rates and value-added potential. They are not sexy or trophy material. They are simply great investments. I am seeing a return to basic real estate investing.

What neighborhoods are faring best and worst right now?

The areas that are doing best are the Lower East Side and all parts of the Village. Waterfront locations are also high on the list. Prime Midtown is always solid. When the market shows weakness it usually begins in the outer boroughs.

What do you expect to see in the building sales market overall going forward?

The majority of New York City residents live in rental housing — the percentage of homeowners is only 34 percent. The population of the city is projected to grow substantially. This sounds like the perfect storm for investing in residential, income-producing [rental] real estate.

Richard Baxter executive VP, Cushman & Wakefield

How have buyers’ mentalities changed recently in the building sales market?

Since the credit crisis there are some buyers who have certainly had the perception that there are bargains to be had. However, that’s not the case. Although many of the higher-leveraged buyers are currently sidelined, their places have been filled by institutional and high-net-worth buyers.

Is the credit crunch going to have a long-term impact?

I think we really see it as a short-term adjustment. Although I think there will be more stringent underwriting on certain new developments, we are already seeing signs of lenders coming back into the market.

What are you seeing in terms of lending standards for buying buildings right now?

Loan-to-value ratios of 65 to 70 percent, where prior to the credit crisis it was 80 to 90 percent. Once again cash is king — and these higher equity requirements are across the board.

According to one report, there has been $40 billion in sales this year. How will the year finish?

Close to $50 billion. What about 2008? I sure hope so. We expect a continued flight of capital to Manhattan from around the world. We also have a great currency exchange, so there are a lot of foreign buyers in the marketplace.

David Sessa senior associate, GCP Capital Group

Since the whole credit crunch issue emerged, what is the most interesting or surprising trend in the New York City building sales market?

That cap rates have not changed.

What is the most negative trend in the investment sales market right now? What’s the most positive trend?

A higher cash portion to the total acquisition price is the most negative. People have to come up with more money. The most positive trend is that, from a local perspective, values have held up very well on individual condo purchases as well as large office building purchases.

What has happened with prices since the credit crunch?

I haven’t seen a change in prices. I don’t foresee any further [credit crunch] impact than what has already taken place.

What locations in the city are faring best?

Things are happening in Flushing that haven’t got anything to do with the real estate market. It is hot as hell there.

Will Silverman managing director in the capital transactions group, Studley

Do pricing trends in the New York City building sales market surprise you? What’s most interesting?

There is a saying in Manhattan real estate that you can never pay too much, only too soon. And pricing here has still held at historically high levels. Even if prices were to retreat to levels of 12 to 18 months ago, or even 24 months ago, these are levels that are exceptional compared to any historic metric. Every spot in the city is priced at a level that is considered a historic high.

What types of buildings are faring best?

Hotel inventory is still historically low, so there is still a lot of demand for hotel sites.

Will the credit crunch have a long-term impact on the building sales market?

I’m not sure if we’ll have the answer until all the securitized mortgage debt has been moved off the books by the investment banks. However, it would seem that the days of 95 percent financing for inexperienced developers are at the very least paused, if not behind us.

Are there groups of buyers that are going to increase their activity now?

Foreign buyers, while their returns aren’t improved by the cheap dollar, might seek to trade up in asset class based on the cheap dollar.

Paul Massey founding partner, Massey Knakal

Since the whole credit crunch issue emerged, what’s the most interesting or surprising trend in the New York City building sales market?

The credit crunch that emerged earlier in the summer has not affected bread-and-butter multi-family retail and small office building sales, which is very interesting to us.

What types of buildings are faring best in terms of sales activity and prices? What’s worst?

The property types that are fairing best are multi-family, office and retail. There continues to be trepidation about luxury condo development, but that started occurring a year ago.

Any notable deals you’ve seen recently that show the state of the market?

The company just completed the sale of some very high-end multi-family buildings called the Alcoma Portfolio (six Manhattan buildings with 207 residential units that traded for $80 million), which was an indication of a robust market in terms of demand and pricing. I also have seen some record sale prices in Soho buildings trading at higher prices than the pre-credit crunch rates. Flushing is still very hot.

2006 was a year of building sales records. Do you expect to see records in any parts of the market going forward?

We’re projecting a 5 percent increase in overall building sales prices in the New York City market in 2007.