After a record-breaking run, New York City’s commercial market has witnessed a dramatic slide in the wake of the credit crunch.
Big-dollar building sales have sunk to their lowest levels in six quarters as money has gotten tougher to borrow. The pace of leasing deals has also slowed since the crisis hit this summer, as weakened financial firms are shying away from taking space.
And so this month, as brokers and developers make the rounds at holiday gatherings, there will be tension behind the merriment. To help gauge the depth of the slump, this month The Real Deal examines the state of commercial real estate activity in the city from a number of perspectives.
We look at the prospect for office building foreclosures (Technical defaults rise, but foreclosures don’t hit) as well as the battle between titans Sheldon Solow and Harry Macklowe and how it may indicate the latest trend toward opportunistic maneuvers to gain control of buildings from owners who run into trouble (Solow and Macklowe square off).
Stories also examine the kinds of leasing deals that are being most affected by the slowdown (Big block leasing activity taps the brakes), the big impact the decline in mega-sales will have on the city’s nearly $60 billion budget (City revenue from big building sales expected to go dry), and how smaller brokerages may weather the storm better than bigger firms (Big versus small firms in the new market: When it pays to be the little guy).
Some say there is a silver lining to the current crisis. The CEO of the Paramount Group, Albert Behler, pointed out that a slowdown in speculative development would be healthy for the market because it would prevent an oversupply of office space.
The most acute sign of the changed market is the more stringent lending standards banks have put in place, making it increasingly difficult for highly leveraged borrowers to get their hands on financing for the large deals that in the recent past made New York’s real estate market so intoxicating.
The number of Manhattan building deals worth more than $250 million dropped to three in the current quarter, down from nine such deals in the third quarter and 14 deals each in the first and second quarters of 2007, according to data compiled by The Real Deal. (The yearly period covered ran from Nov. 10, 2006, to Nov. 10, 2007 because of the way the magazine tracks deals; see charts.)
The volume of leasing deals in the current quarter, 3 million square feet, was half as much as the 6 million square feet leased during the same period a year ago.
Yet, even as commercial sales volume has tumbled and the debt markets falter, some big-ticket transactions have bucked the trend.
Late last month, World Trade Center developer Larry Silverstein teamed up with the California-based CalSTRS pension fund to purchase 1177 Sixth Avenue for over $1 billion from the Paramount Group. Also last month: The Paramount Group purchased a 700,000-square-foot office tower at 31 West 52nd Street from Deutsche Bank for more than $500 million. And the Shorenstein Co. was said to be negotiating to buy the Citigroup tower at 388 Greenwich Street for $1.6 billion, which would be the fourth-biggest building sale in U.S. history.
But, those transactions seem to be exceptions and the macro picture for overall commercial activity is not as rosy.
Behler of the Paramount Group said the number of entities willing and able to buy an asset of $500 million to $1 billion is shrinking.
“You can count them on one hand most probably,” he said.
Broker Nat Rockett, senior vice president at Jones Lang LaSalle, said in the spring a building with as much as 40 percent or more of its leases expiring in the coming year would have been highly sought after and sold for a lofty price as the market kept improving. That has now changed.
“Those leases are at a significant discount to market. Significant being 25 percent or more below today’s market,” he said.
While a bevy of big deals in the beginning of the year broke records — and there still should be an all-time high of $50 billion or so in total Manhattan building sales this year — transactions began slowing dramatically as the subprime mortgage debacle surfaced.
Even some of the big deals that were brokered last month had different financial characteristics than before. Rockett pointed out that the rent support offered as part of the transaction at 1177 Sixth Avenue, was “sort of tangible evidence of a change in the marketplace where you can no longer finance a period between when you purchase the building and when the property begins to support the debt.”
Behler declined to comment on the 1177 deal because it had not closed as of press time. He said his firm, which has had some mega-deals and doesn’t appear to be slowing down, is still signing leases that are substantially higher than they were six months ago. Those in the commercial real estate business said that while the cost of financing and capital have gone up, New York is still an attractive place to invest. They say financing is coming from new sources, such as the Middle East.
“Potential buyers are looking for alternative sources of capital, whether it be a [mezzanine] player or whether it’s an equity player,” said Craig Evans, senior managing director at commercial brokerage Colliers ABR.
He cited the $1.2 billion sale of 280 Park Avenue, which was first announced in April and just closed last month.
“You saw where he got his equity,” Evans said, referring to the CEO of Broadway Partners, Scott Lawlor. “He got it from the Middle East. That is very typical right now.”
Rockett said that he’s not surprised transactions are taking longer now than they did four months ago or that there has been a reduction on the sales side. He said people will naturally hedge their bets when there is uncertainty and that a decrease in sales volume is not necessarily a bad thing.
But, he said, “If transaction volume on the leasing side is not good by the second half of next year, that is going to be cause for concern because it will start to affect how people underwrite transactions and that will affect the value in a different way.”