Property Slump Hits NY Commercial Market

Source : The Business Times, November 6, 2008

Market headed for worst year since 2004 as deals plunge 61% through Oct

(NEW YORK) New York City commercial real estate transactions plunged 61 per cent this year through October as the global credit crisis roiled lending and sidelined buyers.

About US$17 billion of transactions have closed so far and the market is headed for its worst year since 2004, according to data from Real Capital Analytics Inc of New York. Sellers have made 237 deals of US$5 million or more, a four-year low in a market that posted a record US$51 billion in sales last year.

'The banks are not lending, and most of them are saying we're done for the year,' said Scott Latham, executive vice-president for New York investment sales at Cushman & Wakefield Inc, the largest closely held commercial brokerage. 'In all likelihood, you will see next to no transactions between now and the end of the year.'

The property recession that began in housing during 2006 is spreading to the commercial market.

About 85 per cent of domestic banks tightened lending standards on commercial and industrial loans to large and mid-sized firms in the past three months, the highest since the Federal Reserve's Senior Loan Officer Survey began in 1991, the Fed said on Monday. Financial firms have recorded writedowns and losses of more than US$680 billion.

The office market will likely get worse next year and may not improve for at least another year, said Andrew Simon, executive managing director for the New York City office of NAI Global, a worldwide network of 325 independent commercial property brokerages.

The bankruptcy of Lehman Brothers Holdings Inc, the takeover of Merrill Lynch & Co and the city comptroller's forecast that New York may lose as many as 165,000 jobs are also weighing on the market. 'I don't think the first half of 2009 is going to be very rosy,' said Mr Simon. 'I believe you're talking about a year from now before you see more movement toward normalcy.'

Buyers and sellers are looking for a bottom, he said. 'People are going to be waiting on the sidelines until a floor is established,' said Mr Simon. 'People aren't going to sell unless they have to sell. Unless that floor is established you will not see significant sales.'

With no let-up in sight for the property industry, investors have dumped real estate investment trusts focusing on offices.

The 14-member Bloomberg Office Reit Index lost 43 per cent in the 12 months through October, led by Maguire Properties Inc and SL Green Realty Corp, which together control almost 50 million square feet of office space in the Los Angeles and New York metropolitan areas.

SL Green, the biggest owner of Manhattan office buildings, has dropped 65 per cent in the 12 months through October. Maguire, the largest owner of downtown Los Angeles office towers, has plunged 87 per cent and is the worst performer in the index.

Vornado Realty Trust said on Tuesday that the credit crisis and the slowing economy may lower profits in future quarters, while reducing the volume of real estate sales and property values.

'Our existing real estate portfolio may be affected by tenant bankruptcies, store closures, lower occupancy and effective rents', which may cut net income, Vornado said. Circuit City Stores Inc, the electronics retailer that announced 155 store closings this week, leases 12 locations from Vornado and pays US$8.1 million in annual rent, Vornado said in a regulatory filing.

Global commercial sales fell 57 per cent this year through August, Real Capital said in an Oct 9 report. In the third-quarter, they fell 64 per cent from the same period a year ago, according to preliminary data from the company.

In the US, sales have declined 72 per cent this year through October, the biggest drop since the firm's recordkeeping began in 2001, Real Capital said. Starting in 2004, property investors, fuelled by cheap and abundant debt, began an unprecedented run to US$514 billion of US deals last year, said Dan Fasulo, Real Capital's director of market analysis.

'I think it will be a while before we get to that figure again,' he said. 'We're going to do less than half of that in 2008.'

September was 'disastrous' for the financial and commercial property markets, Real Capital said. Office sales totalled US$13.4 billion in the third quarter in the US, the lowest since the first quarter of 2004. Sales for all this year are not likely to exceed the volume of the first quarter of last year.

'Until we have some kind of watershed transaction that gives people a sense of what the market is, you're not going to see a lot of transactions,' Lynne Sagalyn, director of the Paul Milstein Center for Real Estate at Columbia University, said in an interview.

Sales involving New York real estate investor Harry Macklowe, perhaps commercial real estate's most prominent casualty of the credit crisis, accounted for more than two- fifths of New York's year-to-date dollar figure through October.

Mr Macklowe paid US$6 billion last year for seven Midtown skyscrapers, primarily using short term debt. His lender, Deutsche Bank AG, took control of the towers in February and sold five of them for US$2.83 billion. Mr Macklowe also sold the General Motors Building and three other buildings for US$3.97 billion to Mortimer Zuckerman's Boston Properties Inc.

Second-quarter commercial and multi-family mortgage originations tumbled 63 per cent in the second quarter from the same period a year earlier, according to the Mortgage Bankers Association (MBA) in Washington.

Office property loans fell 65 per cent, retail property loans fell 63 per cent and industrial property loans slid 57 per cent, the MBA said. Loans slated for the commercial mortgage- backed securities market declined 98 per cent in the second quarter from a year earlier, the group said.

Financing of deals by so-called portfolio lenders, companies such as commercial banks and life insurers that originate loans and keep them on their books, was also down. Loans by banks fell 29 percent and 27 percent for insurers, the MBA said.

The few deals being made usually require sellers to either provide financing or allow buyers to take over their existing loans, said Howard Michaels, chairman of the New York-based Carlton Group LLC, a real estate investment banking firm, which arranged the recapitalisation of the GM Building for Mr Macklowe in 2004, and Chicago's Sears Tower last year.

At 1372 Broadway, a 20-storey pre-World War I office building in New York's Garment District, buyer Lloyd Goldman received financing for 86 per cent of the tower's cost from the seller, Wachovia Corp, the lender being acquired by Wells Fargo & Co.

Wachovia and partner SL Green sold the building for US$274 million, US$61 million less than what they paid a year before, according to city records. The price dropped US$20 million from the signing of the contract in July and last month's closing, said people familiar with the transaction.

A standoff between sellers and buyers over price appears to be stalling the market, said Mr Michaels, who arranged financing for the 1372 Broadway sale.

'Most people are waiting to see how 2009 shakes out. Until then, nobody's putting any buildings on the market unless they have to,' he said. 'I don't think that anybody would voluntarily sell into this market right now.'

Two properties remain on the market five months after they went up for sale. They are: Worldwide Plaza on Eighth Avenue, a 1.7 million square-foot tower, and 1540 Broadway in Times Square, the former Bertelsmann Building.

The seller of both buildings: Harry Macklowe's lender, Deutsche Bank. -- Bloomberg