Buyers, brokers split on Manhattan office leasing future

While several of the city’s top brokers said the leasing market is approaching a floor for the current down cycle, potential office building buyers are preparing for years of further rent declines, real estate experts said at a forum this morning.

“This is a unique city. It is at the bottom or close to [it],” Bruce Mosler, president and CEO of Cushman & Wakefield, said of office leasing in Manhattan. He was on a panel organized by business publisher Bisnow at Cooper Union.

But just half an hour earlier at the same event, Michael Fascitelli, president and CEO of landlord Vornado Realty Trust, said potential buyers of office buildings were not predicting rents to increase for several years.

He said that expected annual rent increases during the boom years, which were as high as 15 percent, are now at zero. And they could remain at zero for years. He added that to buy a building, a purchaser has to forecast a rent increase at some future time.

“You have to be willing to bet that rents will go up at some point. Whether it is three years [or more], nobody knows,” he said.

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The divergent expectations underscore the different interests between a broker, who wants to encourage leasing activity with evidence that the market is stabilizing, and buyers who fear purchasing too early and getting burned by further rent declines.

Mosler spoke on a five-person panel that also included Andrew Jonas of Goldman Sachs; Winston Fisher of Fisher Brothers; Jonathan Mechanic of Fried, Frank, Harris, Shriver & Jacobson; and Mitchell Rudin of CB Richard Ellis.
The panel was moderated by Iryna Lomaga Carey, of law firm Cole, Schotz, Meisel, Forman & Leonard.

Fascitelli spoke before the panel, in somewhat blunt terms, about the market and Vornado. He said the models used to predict rents in the future were often flawed.

“I mean we do these exhaustive computer models and you are predicting things and they are absolutely never right. It is a bunch of crock… like they have any clue what the IRR [internal rate of return] is going to be,” he said.

He also noted that his firm has been burned in the mezzanine lending business, noting that all mezzanine loan profits may be wiped out if their values are written down further.

“Over the course of time we were in the business, we generated an 18.4 percent return,” he said. “And then we got to have our first losses in the business, and the losses that we took, took that return down to 10 percent. If we were to take any more losses — and I have a few that are suspect children in that portfolio still today — it would basically get us to wipe out our profits entirely.”

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