New York's Trophy Buildings Down 25-60% In Two Years

Tyler Durden's picture

Whether or not the government has something up its sleeve to rescue commercial real estate is still unknown, despite various floating rumors. What is not debatable is that the ultra luxury CRE segment in New York, those crowning skyscrapers whose ownership as recently as 2 years ago resulted in a cache of real estate glory and jealous stares from competitors, has experienced an unprecedented decline in value in a short 24 months.

The New York Observer provides a useful glimpse into this most exlusive tier of commercial real estate, by analyzing comparing the plight of New York's 10 most expensive buildings now and back in the distant 2007. The undisputed winner then and now is the GM building:

That rocket of marble and black glass, considered then and now the most coveted skyscraper in Manhattan, if not the country, was, said one, “worth $4 billion–plus.”

At the time, the shimmering mirage of wealth was owned by one Harry Macklowe, a developer who was being lauded as a genius for once again rising to the acme of New York’s real estate firmament.

Reality could use some manners. Less than a year later, Mr. Macklowe, in hock to Fortress Investment Group, sold his most beloved asset to Mort Zuckerman and Ed Linde’s Boston Properties.

For his part, Mr. Zuckerman seemed to think he’d made the score of the century. “I got great sleep last night,” he told The Observer on June 10, 2008, the day after his firm and junior partners officially closed a deal for the tower valued at $2.8 billion, the most ever paid for an office building in recorded history.

Had Mr. Zuckerman known how values would decline, he might have gotten tangled in his bedsheets.

The GM Building, based upon its reported income, is today worth between $1.9 billion and $2.6 billion, according to Dan Fasulo, managing director of Real Capital Analytics. Such is the economic reality for Manhattan’s top office trophies.

Is the GM building indicative of the disease affecting NY's top properties? The answer is a resounding yes:

Since the peak years of 2007, the trophies’ values have fallen by somewhere between 25 and 60 percent. Emphasis on modifying words like “somewhere between,” “probably” and “about.”

Just who are the other 9 that round out the top 10 most coveted commercial real estate:

The 2007 most expensive list included, along with the GM Building: 9 West 57th Street; Rockefeller Center; 200 Park Avenue; the Seagram Building; 4 Times Square; One Bryant Park; 245 Park Avenue; 277 Park Avenue; and the one non-midtown entry, 7 World Trade Center. Based on interviews with real estate professionals, their values have declined anywhere between 25 and 60 percent. So, Rockefeller Center, guesstimated to be worth $8 billion in 2007, might be worth between $6 billion and $3.2 billion.  277 Park, then valued at about $2 billion, would sell for between $800 million and $1.5 billion. And The Seagram Building, in 2007 valued at around $1.6 billion, might today sell for between $640 million and $1.2 billion.

How does the Observer come up with its "price discovery" conclusions:

As one analytically minded investment broker noted, the major New York building transactions in recent months have fallen into one of two categories. Category one: sales of buildings like Worldwide Plaza, with huge vacancies, which traded in the high $300s a square foot, according to a source familiar with the transaction. These days, huge vacancies equal dodgy cash flow. And dodgy cash flow equals lower valuations, toward the 60-percent-off end of the pricing spectrum. The other category of building sales involves those with stable rent rolls, like SL Green’s sale of a 49.5 percent stake in 485 Lexington Avenue earlier this month, at a price of $547 a square foot. [which Zero Hedge discussed previously, and whose indicated cap rate in the mid-6% was analyzed by other market participants and concluded to be realistically around 8%]

And how are other, more "opaque" buildings faring?

“If we’re talking about better-quality buildings, we’re seeing price ranges in $350 to $600 a square foot,” he said. “And the super-premium buildings, such as 9 West [57th], the GM Building, 450 Park, etc., that handful or two of buildings, none of them have traded. So what they’re worth is pure conjecture. Based upon the rental premiums they achieve, they’re probably worth $800 a foot, but given their scarcity value, who’s to say what someone wouldn’t pay for them?”

Peter Hauspurg, Eastern Consolidated’s chairman and CEO, put it thusly: The recent trends indicate between 40 and 60 percent off peak value, peak being August to September 2007 (incidentally, roughly a year before Lehman Brothers’ collapse).

As in the case of 485 Lex all it takes is for some Israel VoIP company to come in on no diligence and bid anything up to whatever the seller is luck to get for it.

Yet the scarier issue is the quite spot-on observation that equity values across the board have been near wiped out compliments of an over-eager CMBS market in the 2005-2007 time frame. But such is the nature of leverage. And the biggest problem as has been hammered over and over is the CMBS rolls beginning sometime in the next 3-4 years. Absent the printing presses completely deflating dollar denominated debt, one can expect 767 Fifth Avenue (where sublets are anecdotally available at the price of $60/sq. foot) to continue struggling to regain its place at the center of the commercial world.

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everaware's picture

Tishman Speyer is technically in default with its creditors on its vast CRE portfolio in Washington DC, it was reported this week.

Anonymous's picture

Can anyone please comment on why commercial REITs are up by large amounts (NCT Low:0.15 Now:1.63, RSO Low: 1.43 Now:4.55, etc.)with prices continuing to fall and future prospects seemingly so glum, especially for retail?

Arco's picture

The argument I've heard is that they have the ability (due to access to the equity market) to purchase assets on the cheap which would drive higher long term cash flows.

Zippyin Annapolis's picture

They missed the AIG building that was recently sold to Korean investors for cents on the dollar--AIG has to look like they are "making progress" it appears.

curbyourrisk's picture

What rumors?  Do tell.....please!

Arco's picture

One should also mention the residential commercial real estate market in NYC--apartment buildings. Rents have come down about 20-30% for studios, 1 br, 2 br, etc. Assuming a higher cap ratio...

Anonymous's picture

Saw a Park Avenue, two blocks south of Grand Central, sub lease for $25 a foot.

Zippyin Annapolis's picture
by Anonymous
on Wed, 08/26/2009 - 14:46
#48949

 

Can anyone please comment on why commercial REITs are up by large amounts......

 

_________________________

A thought--

The REIT investors are buying the bigger fool theory to wit--a lower dividend made up of  taxable stock divivdends (ugh!) and a debt for even more equity swap is "good" because the REIT can then use the money "and their superior biz acumen" to buy CRE "cheap" assets that will be even more plentiful.

 

-- Check out the recent Kimco deal-- they swaped debt exanding diluting shareholders by about 28% and the stock goes UP 28%. Not only that they only got rid of 1/5 of their debt!

 

I don't get it either-

PragmaticIdealist's picture

Could be reduced risk of bankruptcy due to lower leverage ratio = higher equity price

Gilgamesh's picture

More cash = longer until failed refis = investor ADD sets in = more equity offerings means they can buy more distressed property at pennies = higher stock prices = more offerings coming = ... where was the part about dividend payouts in this REIT equation? = new highs, baby! = choose stock dividend instead of cash dividend = REIT stocks can't lose!

ZerOhead's picture

There are however GREAT redevelopment opportunities in Detroit of all places...

Welcome to the future ZHers!

http://detroityes.com/downtown/38michtheat_pan.htm

walküre's picture

I love it!

Detroit could be transfered into the largest museum of recent American history.

This is how things used to be. Experience America's classy 50's and 60's in the original form. Disney would be jealous, guaranteed.

One attraction could be Motown and a ride on the assembly line.

They have these open air parks with antique themes all over Europe and they're successful.

Sorry, don't see any other potential for a Detroit future.

ZerOhead's picture

Neither do we unfortunately unless you want to fence everything inside of 8 mile off and sell it to Canada... it would be like a tropical destination for them to repopulate.

Still is very sad that Henry Fords first cars were built at this location and this is what's become of the world's first and greatest industrial city.

Truly mind altering porn for the RE crowd at this site!

 

KeyserSöze's picture

Oceanfront land on the East coast of Florida (CRE-with any vertical development compacity) was going for 12M/acre. Of course with no objection from the new "IVY league"  CFA grads sent down here to get give it their stamp of approval.  Apparently Devry isn't the only one handing out degree's in economics anymore.

So what is the land price now? LESS THAN 1M/ACRE!!!  Oh and that is IF you can sell it!  Failed auction after failed auction (get used to those words)

Land indeed is a four letter word as well.  The whole sector is an DOA.

 

 

JohnKing's picture

South Florida CRE also DOA.

Prestigious office complex in downtown Fort Lauderdale faces foreclosure, the latest commercial property in South Florida dealing with financial problems.

 

and..

In Palm Beach and Broward counties, 52 office, industrial and retail complexes worth nearly $800 million are considered troubled assets

 

Link

Anonymous's picture

valued at 800 million usd when and by whom?

Zippyin Annapolis's picture

High end waterfront in Zippyland

has held up nicely- fewer new yachts though.

Everyone is waiting for "cash for cabin cruisers".

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and has held up nicely.

 

 

Anonymous's picture

I used to think deals like this were a layup. An easy flip or rent out with instant positive cash flow. I'm so glad the pesimist in me said it's going lower..... You gotta feel bad (with a smirk on face) for the sap who bought at 1mm

Bulk Deal Closes At 94% Discount In South Florida
Thursday, July 23, 2009 - 8:20:23 am EDT

A South Florida private equity group purchased 51 new, oceanfront condo-hotel units in the luxury One Bal Harbour complex at $63 per square foot, a discount of 94 percent off of the $1,100 per square foot average recorded sales price, according to a new report from Condo Vultures® LLC.
Elcom Condominium LLC with Jorge E. Arevalo and Thomas D. Sullivan in South Miami paid $2.6 million for 41,047 square feet of saleable space in the 124-unit Regent Hotel tower located on the west side of the 26-story, trophy complex in exclusive Bal Harbour.

Bankrupt residential development company WCI Communities, Inc., based in Bonita Springs, Fla., was the seller of the condo-hotel with 106,051 saleable square feet. WCI's chief restructuring officer Jonathan Pertchik signed the deed.

"Nearly 60 percent of the One Bal Harbour condo-hotel project closed at an average price of $1 million per unit before Elcom Condominium stole the remaining 40 percent of this high-end project for $51,000 per unit," said Peter Zalewski, a principal with the Bal Harbour, Fla.-based real estate consultancy Condo Vultures®. "Condo-hotels are not for everyone but at $63 per square foot one has to think there are buyers for this quality of product at that price."

This is the eighth bulk deal - and second in Bal Harbour - of new or significantly improved residential product to close since July 2008, according to the Condo Vultures® Bulk Deals Database. Four deals have closed in Greater Downtown Miami and an additional two transactions have closed in West Palm Beach.

In a separate transaction, Elcom Hotel & Spa LLC with Arevalo and Sullivan purchased the 67,031 square feet of hotel common areas and land for $12 million, or $179 per square foot, according to Miami-Dade County records.

The combined square footage of both transactions is 108,078 at an acquisition price of $14.6 million, or about $135 per square foot.

Industry watchers estimate the cost to construct a new tower in South Florida is about $250 per square foot plus land costs.

WCI purchased the five-acre waterfront property on which the One Bal Harbour stands for $50.4 million, $231 per square foot, in January 2004.

After demolishing the old rental tower that stood on the trophy site, WCI obtained a $174 million construction loan from the former Wachovia Bank to build a 185-unit condo and 124-unit condo-hotel complex overlooking the inlet connecting the Atlantic Ocean and the Intracoastal Waterway.

The last bulk deal to occur in Bal Harbour closed on Dec. 31, 2008, when a South Florida private equity fund paid $277 per square foot for 101 units in the neighboring Harbour House oceanfront condominium conversion completed by the Related Group.

A Florida entity called HH Condominium Investments LLC with Thomas F. Daly as president paid $27 million for an average of $268,000 per unit in the 16-story tower, according to a CondoVultures.com article.

Anonymous's picture

I used to think deals like this were a layup. An easy flip or rent out with instant positive cash flow. I'm so glad the pesimist in me said it's going lower..... You gotta feel bad (with a smirk on face) for the sap who bought at 1mm

Bulk Deal Closes At 94% Discount In South Florida
Thursday, July 23, 2009 - 8:20:23 am EDT

A South Florida private equity group purchased 51 new, oceanfront condo-hotel units in the luxury One Bal Harbour complex at $63 per square foot, a discount of 94 percent off of the $1,100 per square foot average recorded sales price, according to a new report from Condo Vultures® LLC.
Elcom Condominium LLC with Jorge E. Arevalo and Thomas D. Sullivan in South Miami paid $2.6 million for 41,047 square feet of saleable space in the 124-unit Regent Hotel tower located on the west side of the 26-story, trophy complex in exclusive Bal Harbour.

Bankrupt residential development company WCI Communities, Inc., based in Bonita Springs, Fla., was the seller of the condo-hotel with 106,051 saleable square feet. WCI's chief restructuring officer Jonathan Pertchik signed the deed.

"Nearly 60 percent of the One Bal Harbour condo-hotel project closed at an average price of $1 million per unit before Elcom Condominium stole the remaining 40 percent of this high-end project for $51,000 per unit," said Peter Zalewski, a principal with the Bal Harbour, Fla.-based real estate consultancy Condo Vultures®. "Condo-hotels are not for everyone but at $63 per square foot one has to think there are buyers for this quality of product at that price."

This is the eighth bulk deal - and second in Bal Harbour - of new or significantly improved residential product to close since July 2008, according to the Condo Vultures® Bulk Deals Database. Four deals have closed in Greater Downtown Miami and an additional two transactions have closed in West Palm Beach.

In a separate transaction, Elcom Hotel & Spa LLC with Arevalo and Sullivan purchased the 67,031 square feet of hotel common areas and land for $12 million, or $179 per square foot, according to Miami-Dade County records.

The combined square footage of both transactions is 108,078 at an acquisition price of $14.6 million, or about $135 per square foot.

Industry watchers estimate the cost to construct a new tower in South Florida is about $250 per square foot plus land costs.

WCI purchased the five-acre waterfront property on which the One Bal Harbour stands for $50.4 million, $231 per square foot, in January 2004.

After demolishing the old rental tower that stood on the trophy site, WCI obtained a $174 million construction loan from the former Wachovia Bank to build a 185-unit condo and 124-unit condo-hotel complex overlooking the inlet connecting the Atlantic Ocean and the Intracoastal Waterway.

The last bulk deal to occur in Bal Harbour closed on Dec. 31, 2008, when a South Florida private equity fund paid $277 per square foot for 101 units in the neighboring Harbour House oceanfront condominium conversion completed by the Related Group.

A Florida entity called HH Condominium Investments LLC with Thomas F. Daly as president paid $27 million for an average of $268,000 per unit in the 16-story tower, according to a CondoVultures.com article.

zarrmax's picture

sorry I posted twice

thesystemisbroke's picture
thesystemisbroke (not verified) Aug 26, 2009 10:21 PM

this is the start of the reset

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Anonymous's picture

I think it's because they do not have to mark their assets to market.

Anonymous's picture

I think it's because they do not have to mark their assets to market.

jake's picture
jake (not verified) Aug 26, 2009 9:42 PM

So Indirect Bidders (FCB's) are responsible for buying up 56% of this batch.

How long can this go on and what the hell happens when it finally stops?

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Anonymous's picture

Can anyone comment on the best way to play the CRE collapse? I've looked into SRS, but have concerns about deterioration of ultrashort ETFs....

Anonymous's picture

Combining a couple of posts, it is interesting that the Chinese prefer to roll out of their Agency debt into Treasury paper---mostly bills---rather than purchase South Florida condos at 2 cents on the dollar.

Anonymous's picture

Commercial real estate is worse than you can imagine and there are no "green shoots" to speak of. Unfortunately, I know from experience.

With few exceptions, you can tell if there is any equity value based on the vintage of the purchase. Anything closed after 1Q 2007 is wiped! Financing went first, then rental rates/occupancy and cap rates will be the next major problem for RE investors.

Anonymous's picture

Most mezz lenders are out of the money as well. NYC is a RE wasteland.

Bruce Krasting's picture

The heck with trophy buildings. How about Stuyvesant Town. That 10B deal is about to blow up.