Leverage just one factor in high availability buildings, analysis shows

Nov.November 02, 2009 04:54 PM

It has been taken as an article of faith in the current downturn that tenants are shying away from highly leveraged buildings in an effort to protect themselves against possible building service cutbacks or other interruptions tied to onerous debt-service payments.

High leverage along with financially strapped ownership, legal uncertainty or extremely high vacancy, lead to tenants shunning leasing in certain buildings, brokers have said.

As recently as last week, Real Estate Board of New York panel member Isaac Zion, a managing director at SL Green Realty, said relatively low leverage on the company’s buildings was an advantage.

“Most of our buildings have very low leverage, so it is a positive. We see sort of — for the tenants that are actually moving — there is a flight to quality,” Zion said.

But data requested by The Real Deal from two research firms reveals that the situation is complex, and that high leverage in some buildings leads to high availabilities, while in others it does not.

To study the impact of loan-to-value ratios on leasing, The Real Deal looked at the top 10 highly leveraged sales and refinancings during each of the boom years of 2005, 2006 and 2007 as provided by finance research firm Real Capital Analytics. Those rates of leverage were then compared with the availability rates, as provided by Costar Group, to determine the relationship between the two numbers.

Leverage turned out to be a factor, but not a deciding factor.

“High leverage can be a cause of trouble but it is not a causal relationship between trouble and high leverage. It is not a linear relationship. It can be one of many causes,” Ben Thypin, senior market analyst at Real Capital Analytics, said.

Some highly leveraged buildings such as 620 Sixth Avenue, between 18th and 19th streets, have availability rates in the 40 percent range, or more than twice the Manhattan average of 14 percent, as reported by commercial real estate firm CB Richard Ellis.

An SL Green building, 711 Third Avenue, located between 44th and 45th streets, has an availability rate of 21 percent, and a loan-to-value ratio of 67 percent, the data show.

Other high-leverage buildings, such as Vornado Realty Trust’s 350 Park Avenue, between 51st and 52nd streets, with nearly an 80 percent loan-to-value ratio, have an availability rate of zero, Costar reported.

“It is all about the intention of the leverage. Is it used just to pull out cash to enrich the owners?” Thypin said. If so, the availability rate tends to be higher, he said.

But if “someone [is] using high leverage loans to put in capital expenditures, they may have an easier time realizing or raising rents in this environment,” he said.

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