The Real Deal New York

Editor’s note: Real estate’s fuzzy math

By Stuart Elliott | February 01, 2014 07:00AM
Stuart Elliott

Stuart Elliott

Loss factor is one of the more maddening concepts in New York City real estate. It’s the measurement that office landlords use to figure out how much tenants pay for the shared space in an office building.

The only problem is that a building’s loss factor — and therefore its size — is arbitrary and driven by market forces, so it doesn’t reflect that actual size of a building.

To repeat that: the actual size of an office building in New York City does not correspond to its actual size.

As reporter Hiten Samtani explores in “Lies in size”, a building’s rentable square footage typically jumps when it is remeasured after an acquisition, a big renovation, or when an owner is mulling a sale of the property. When the Durst Organization bought a stake in 1 World Trade Center, for example, the size of the building suddenly jumped from 2.6 million to 3 million square feet. The Blackstone Group’s 1140 Avenue of the Americas grew by 40 percent recently, after a capital improvement project.

And as the economy improves, loss factor generally increases, so the size of many New York City office buildings will grow without anyone so much as lifting a hammer or hoisting a construction crane.

Many in commercial real estate are, of course, already aware of this phenomenon and have gotten used to it, with tenants accepting this as the cost of doing business. But just because people get used to things, doesn’t mean they are right.

Building owners are measuring space according to rules set by REBNY, which justified the guidelines to TRD by saying they reflect more than 100 years of office development. But appealing to history rather than to rules is like saying the Spanish Inquisition was acceptable because it had already been going on for a couple of centuries.

Numbers are supposed to be the one objective barometer in the real estate world, which is always full of smoke and mirrors. When the numbers themselves have been co-opted by market forces, then what do you have to go on?

Meanwhile, relying on numbers is the precise mission of our ninth annual Data Book, which is included with this issue.

The Data Book brings together all the key market stats in one place — from price averages and deal volume across sectors, to the big transactions and most active players.

Numbers and data serve as a North Star for real estate players to make decisions about what to buy and what to invest in when navigating the murky waters of real estate. And there are important changes on the horizon for how real estate data is collected and disseminated, including through the rise of so-called “Big Data,” which looks at macro trends, and through seed money that new real estate startups are raising. In addition, shake-ups at established market leaders like StreetEasy in New York could change the kind of information the industry has access to.

TRD, too, is planning a major push on the data front in 2014, with a new section on our website that will contain greatly expanded data offerings, as I explain in my introduction to the Data Book.

In the meantime, also be sure to check out our main cover story, “Risk is back,” about the looser lending in New York City real estate today.

In a throwback to the boom, banks are starting to lend on projected income (rather than what a building is actually generating now), requiring less equity in deals, providing loans to less experienced developers and asking for fewer or no personal guarantees on deals.

While things are clearly not as frothy as they were in, say, 2007, it could be problematic if it goes unchecked, market observers say. Also a concern is the price per square foot new condos on the market are asking today, which we examine in “Ranking new condos by per-square-foot prices.” We found that more than half the projects surveyed were asking $3,000 a square foot or more, a level that would have been unthinkable in the past.

Finally, we take a look at Jared Kushner in a profile. The young real estate and media mogul has silenced doubters since taking the helm of his family’s real estate empire, snapping up $3.5 billion of buildings. And Mayor Bill de Blasio, too, is winning more industry support as he makes more key real estate appointments (see “Mayor’s key appointments ease industry concerns”).

Enjoy the issue and enjoy the Data Book.