Buyers, brokers split on Manhattan office leasing future

Oct.October 15, 2009 03:28 PM

While several of the city’s top brokers said the leasing market is approaching a floor for the current down cycle, potential office building buyers are preparing for years of further rent declines, real estate experts said at a forum this morning.

“This is a unique city. It is at the bottom or close to [it],” Bruce Mosler, president and CEO of Cushman & Wakefield, said of office leasing in Manhattan. He was on a panel organized by business publisher Bisnow at Cooper Union.

But just half an hour earlier at the same event, Michael Fascitelli, president and CEO of landlord Vornado Realty Trust, said potential buyers of office buildings were not predicting rents to increase for several years.

He said that expected annual rent increases during the boom years, which were as high as 15 percent, are now at zero. And they could remain at zero for years. He added that to buy a building, a purchaser has to forecast a rent increase at some future time.

“You have to be willing to bet that rents will go up at some point. Whether it is three years [or more], nobody knows,” he said.

The divergent expectations underscore the different interests between a broker, who wants to encourage leasing activity with evidence that the market is stabilizing, and buyers who fear purchasing too early and getting burned by further rent declines.

Mosler spoke on a five-person panel that also included Andrew Jonas of Goldman Sachs; Winston Fisher of Fisher Brothers; Jonathan Mechanic of Fried, Frank, Harris, Shriver & Jacobson; and Mitchell Rudin of CB Richard Ellis.
The panel was moderated by Iryna Lomaga Carey, of law firm Cole, Schotz, Meisel, Forman & Leonard.

Fascitelli spoke before the panel, in somewhat blunt terms, about the market and Vornado. He said the models used to predict rents in the future were often flawed.

“I mean we do these exhaustive computer models and you are predicting things and they are absolutely never right. It is a bunch of crock… like they have any clue what the IRR [internal rate of return] is going to be,” he said.

He also noted that his firm has been burned in the mezzanine lending business, noting that all mezzanine loan profits may be wiped out if their values are written down further.

“Over the course of time we were in the business, we generated an 18.4 percent return,” he said. “And then we got to have our first losses in the business, and the losses that we took, took that return down to 10 percent. If we were to take any more losses — and I have a few that are suspect children in that portfolio still today — it would basically get us to wipe out our profits entirely.”

Related Articles

Vornado's Steve Roth and 220 Central Park South (Credit: Getty Images, iStock)

Free and clear: Vornado pays off debt at 220 CPS

Vornado chairman and CEO Steven Roth, and 608 Fifth Avenue (Credit: Getty Images)

“Negative surprises”: Vornado execs talk retail struggles on Q2 earnings call

Steven Roth, CEO of Vornado and 640 Fifth Avenue (Credit: Getty Images and Vornado Realty Trust)

Bank of China issues $500M to Vornado in refi of 640 Fifth Avenue

220 Central Park South (Credit: Google Maps)

Condo at 220 Central Park South sells for $51M

The Coca-Cola building at 711 Fifth Avenue and Michael Shvo (Credit: Google Maps)

Michael Shvo, partners secure $545M loan for Coca-Cola building

Brett White, CEO of Cushman & Wakefield (Credit: iStock; Cushman & Wakefield)

Cushman & Wakefield lays off employees, but won’t say how many

From left: L&L Holding Company's 425 Park Avenue with CEO David Levinson, Citadel Securities founder Ken Griffin, and Vornado Realty Trust’s 350 Park Avenue with CEO Steve Roth (Credit: (Photo by Michael Kovac/Getty Images; L&L Holding Company; Vornado)

Citadel Securities expands nearby lease while waiting on 425 Park

Fears of coronavirus have led some of the world’s most prominent commercial real estate companies to pull out of the MIPIM conference in Cannes, France. (Credit: Getty Images, iStock)

Coronavirus exodus: CRE bigwigs ditch MIPIM