In the land of billion-dollar building sales and mega-bucks lease signings, it’s difficult to make the case that bigger isn’t always better when it comes to New York commercial brokerages. But with the troubled credit market continuing to exert its influence on the city’s biggest real estate deals, quite a number of Davids out there are clearly relishing the fact that they’re not Goliaths.
Although the heady world of Manhattan commercial real estate hasn’t taken a severe beating the way other markets across the country have, it’s clearly smarting, particularly at the high end. Banks are increasingly reluctant to shell out for highly leveraged building purchases, and financial firms are shying away from taking big leases in the city’s gleaming — and priciest — office towers.
Data from CB Richard Ellis showed that leasing activity in Manhattan in September was down almost 70 percent from 2006. And Manhattan’s $1.028 billion of commercial sales in September marked the lowest monthly total in 2007, according to research firm Real Capital Analytics’ latest figures.
“New York is an exceptional market,” said Tom McManus, chairman and chief executive of Cushman & Wakefield Sonnenblick Goldman. “It’s been doing better than most other markets, but it’s been difficult to get some of the biggest deals financed.”
And so for the moment, anyway, it’s paying to be a David on the city’s commercial brokerage scene.
“2007 will be the best year ever for us,” said Eric Anton, an executive director at Eastern Consolidated. “We’re lucky, because we handle sales between $25 and $200 million, and the market for those is still cooking. The loans you need for the properties we handle are much more bite-sized than they are for the very big deals. People are being forced to put more equity into deals, but they’re still trucking.”
Executives at the city’s other leading small- and medium-sized commercial firms echoed the assertion made by Anton. Representatives for CB Richard Ellis, the city’s biggest brokerage firm, declined to comment for this story. Records for the publicly traded company show about 30 percent of CBRE’s revenue comes from property sales, and another third from leasing.
“There was a slowdown in August and September, but volume picked up in October and November,” said Bob Knakal, chairman of Massey Knakal, which specializes in property and portfolio sales under $20 million. “We’re not expecting a profit dip at all for 2007.”
And the same trend seems to be holding for brokerages that specialize in medium-sized leases.
“I haven’t seen any slowdown in my business, and I don’t expect to take a financial hit at all this year,” said Abraham Hidary, president of Hidrock Realty. “We do deals for 2,000 to 30,000 square feet of space, though, and the general feeling in the market is that it’s larger tenants who are having problems finding space.”
The question now becomes: Will smaller firms continue to thrive in the midst of credit troubles that are likely to get worse?
Late last month, for example, analysts at Goldman Sachs said the final economic cost of the crunch would be in the neighborhood of $2 trillion, and a group of economists polled by the Wall Street Journal forecast that the credit crisis was less than halfway over.
So if the credit crunch lingers, could the sluggish pace at the top of the Manhattan market start to stymie smaller deals?
Most experts seem to believe that, at worst, the market is simply going to look more like it did a few years ago.
“I see 2008 rolling back to fundamental underwriting like in 2003, 2004, 2005,” said McManus. “High-quality deals are still happening, and they’re going to continue to happen.”
For now, bigwigs at small and medium-sized commercial brokerages are sounding confident about the year ahead, although some are also talking about taking steps to mitigate the effects of a lingering slump.
“We’re worried about ’08, but we’re always worried before the start of a new year, and all we do is work harder,” said Anton. “We’re brokering different kinds of debt, and we hired someone with expertise in bankruptcy. We’re not expanding geographically, though.”
Some commercial brokers think it’s still too early to gauge the full effects of the crunch.
“It’s only been two or three months,” noted Hidary. “I haven’t heard about the credit crunch affecting any deals of the size we do, but it’s possible we’re going to see that happen in a few months.”
As with the market as a whole, volume is king.
“What we don’t want to see is a big dip in volume,” said Knakal. “As long as that doesn’t happen, we think it’s more or less going to be business as usual.”
There seems to be a general feeling among commercial brokers that the record-breaking profits of the past couple of years couldn’t be sustained forever.
“We’ve all been spoiled for a while now,” said Anton. “But this isn’t going to be like the late ’80s, when brokerages went out of business. I think we’ll be OK.”
And, of course, some brokers at smaller firms aren’t upset about seeing the giant brokerages falter just a wee bit.
“I can’t say I’m sorry to hear that a firm like CBRE hasn’t gotten another billion-dollar deal where all they had to do was pick up the phone when some big company called them up,” said one executive at a mid-sized firm who asked not to be identified.