The credit crisis that has shaken the Manhattan real estate market is affecting the tenor of property negotiations in secondary office markets in the city’s outer boroughs, but hasn’t yet affected pricing, brokers said.
Josh Segal, owner of the Segal Realty Group, which operates in all boroughs, said he closed last month on the sale of a 50,000-square-foot warehouse in Maspeth, Queens. But after the deal closed, the purchaser’s mortgage rate increased.
“The banks said, ‘It’s going to cost you a lot more,'” Segal said. “His rate of borrowing was going from 6 percent for a 10-year securitized loan to 7 percent, from one week to the next, which is very pricey. And the lending institution was having trouble moving quickly.”
But Segal said his client found a way around the tightening lending environment.
“He went to the secondary markets and placed a private loan for short-term money — but at a much higher interest rate — for six months,” Segal said. But in the transaction, he said, “the credit crunch played a significant role.”
While buyers are becoming creative in their financing, sellers are still holding firm on pricing for commercial real estate in the boroughs, real estate insiders said. But Segal said he believed the market had peaked for sellers.
“If you were a seller, and you were hoping for the top of the market, you missed the top of the market,” he said. “There’s no doubt about that.”
But it may take some time for that knowledge to sink in with sellers, brokers said.
“Usually, the sellers’ reaction is going to lag the buyers’ reaction,” said Peter Moreo, a senior director who has been in commercial real estate for the past three decades at Greiner-Maltz, a commercial real estate services firm in the New York metropolitan area with offices in Long Island City and Plainview, N.Y. “Buyers are reacting much more quickly, which is only natural. I think the sellers will say, ‘We’ll just sit and wait until the prices rebound.’ They don’t react that quickly to something that happened this summer in the credit markets.”
The credit crunch could possibly spur Manhattan companies to lay off employees or go belly up — thereby freeing up office space in that borough and potentially driving down rents. But real estate brokers said they doubted that would lead some firms that had been considering the outer boroughs to reconsider Manhattan.
Joe Simone, president of Simone Development, which is developing the Hutchinson Metro Center at 1200 Waters Place in the eastern Bronx, said he doesn’t believe that any credit crisis would prevent those firms looking for good commercial real estate leasing deals from considering the boroughs.
“You’re never going to see Manhattan rents become affordable because of the value and the cost and the price of real estate in Manhattan,” said Simone, who has moved on to the second phase of his speculative office development. The first phase of about 260,000 feet has been fully leased, and about half of the second phase of equal size has been leased, he said. It is one of few large-scale office developments in the Bronx.
Though Simone said he has developed the office buildings on speculation, he said he has not had any worries about the recent credit crisis, especially because the Bronx is centrally located with good public transportation and ample parking.
“If you’re not an overleveraged developer, [the credit crisis] doesn’t have that much of an effect at all,” he said. “It’s those people that are totally overleveraging, looking to put in extremely little equity, that it might affect.”
Despite the fact that the Hutchinson Metro Center has been built speculatively, developers said that few, if any, other office projects in the boroughs have been speculative, which will ultimately protect secondary office markets outside of Midtown Manhattan.
“Most of what’s going to be built here would not be as sensitive to the credit crisis, because if you’re building office buildings, you’re building it largely on the credit of the leases,” said John Reinertsen, a senior vice president at CB Richard Ellis’ Long Island City office. “No one builds on spec, so you have leases in hand with credit tenants, and on that basis you go to the bank and you build.”
Joshua Muss, the head of Muss Development, which has built numerous residential and commercial developments throughout the boroughs, agreed that even if banks have gotten tighter with their money, there is still credit to be had.
“My sense is that anything that will be financed will either require a really good story or more equity to keep the banks from considering the loans speculative,” he said. “If I’m a bank, I would say of all the venues in the country, New York City is the best bet there is, because it’s staying strong to all my knowledge. Everybody wants to be in New York, and that includes the boroughs.”