By Peter Shakalis
Many developers and landlords that mortgaged their properties in the 2005 through early-2008 period anticipating rents at levels 30% to 40% higher than what is achievable today, are having long talks with their bankers.
The recent sale of Worldwide Plaza, a 1.7 million square foot building on Eighth Avenue and 50th street is in some ways indicative of challenges in the industry. Purchased in 2007 for $1.8 billion by Harry Macklowe, the property was sold this year for $590 million. While the sale price reflects a substantial vacancy factor, large declines in values are the norm. Since many properties are now worth less than their mortgages, bankers in many instances will opt to keep the present ownership in place with the hope of achieving the best possible returns over the long term on their assets. The average recovery rate in New York for holders of defaulted mortgages is presently 70%. Some holders, however, are just selling their paper now for whatever it will bring. The consensus in the industry is that this part of the market will have its share of challenges to traverse in the coming year.
On the commercial leasing side however the news is better. While the office space market is not completely out of the woods, the relative stabilization of pricing and the return of office tenants to the market is good news. Long term lease renewals and new space acquisition deals are getting signed. Many believe that pricing in the market is now at or near to the bottom, hence a good time lock in a long term lease at very attractive rates. Rents in the Plaza district for instance, an area generally located between Fifth and Park Avenues in the 50’s, are half of what they were just 18 months ago prompting many tenants to reconsider that location since many were priced out of the market.
While space availability and rental rates may differ from one Manhattan market to the next (Grand Central, Park Avenue South, Penn Plaza, Wall Street et al), the tend over the year has seen the spread between asking and taking rents lessen. So, too, has the incremental decline in rental rates slowed down in recent quarters. While premier properties such as 450 and 390 Park Avenue may be in a rarified class of there own, both have recently signed deals in excess of $100 per square foot – a number that was unheard of after the economic collapse began to take hold in 2008. While 2010 will bring new challenges to the industry, hopefully they’ll be a bit less interesting.
Peter Shakalis is a Director at
FirstService Williams Real Estate
pshakalis@fswre.com
They say, “May you live in interesting times.” Certainly this past year in the real estate industry has been nothing if not interesting. The situation this year in the investments sales side of the industry, that is building sales and purchases, has yet to play itself out in. With properties valued 30% to 50% less than they were as recently as 2Q08, and banks reluctant to refinance mortgages coming due, it is going to be an interesting 2010.
