Low cost of debt sends retail, office prices sky-rocketing: experts

TRD New York /
Nov.November 13, 2012 06:00 PM

Increasingly low interest rates are driving commercial property prices through the roof, leaving investors vulnerable when rates inevitably climb back up, real estate pros said today at the Bloomberg Commercial Real Estate Summit.

The $380 million sale of a prime retail condominium inside the St. Regis New York hotel is just one high-profile example of sky high prices, they said. Swiss luxury-goods company Richemont North America bought the 24,800-square-foot condo from a partnership led by Crown Acquisitions, Goldman Properties and the Feil Organization for $15,100 per square foot, it was previously reported.

Crown’s Haim Chera, who served as a panelist at the event, said the deal was actually “a good play” for Richemont, since it plans to occupy the condo itself. That fact offset the seemingly high price, he said, and represented a 60 to 70 percent discount on the price if the company leased the space.

But for investors that do not plan to personally use a space, the interest rate situation is troublesome, panelists said. It’s difficult not to want to take advantage of rates, pros said, but it’s important to maintain “a margin of safety” in these kinds of transactions. It’s difficult to imagine that these interest rates will persist for long, Tishman Speyer’s Rob Speyer said.

“Prices are being determined by the cost of debt, which is very low,” commented Richard LeFrak of the LeFrak Organization.

Eastern Consolidated’s Peter Haupsburg added: “Values will plunge pretty dramatically if we get an interest rate rise.”

Real estate pros also took the opportunity to address the problem of upcoming lease maturities at the conference, which took place at The Alexandria Center On East 29th Street. Observers have closely watched the flood of debt that has matured in 2012, but they have taken little notice of the huge number of leases expected to roll over in the next few months, said one brokerage head.

“You really have to worry about it in office and retail,” said Dylan Taylor, CEO of Colliers International in the U.S. “[Landlords are not] going to be able to renew those leases at the rates they got before.”

Other panelists at the event included Bob Knakal of Massey Knakal Realty Services, Bill Macklowe of William Macklowe Company, Bill Rudin of Rudin Management and Witkoff Properties CEO Steven Witkoff.

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