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.