IF you’ve played the real estate game since 2005, you should be quaking in your boots – with the test being when the deal was done and, perhaps more important, how it was done.
“Our steroids were leverage and the buyers were way over-financing,” admitted one investment broker who oversaw many such transactions.
“The buyers couldn’t afford to pay, but were back-ended with reserves. And if their bank was handing over 90 to 100 percent of the money for the deal, they weren’t sensitive to what they were paying.”
“But if you financed the deal [over the] short term,” the broker said, “it’s sayonara.”
Now, with zilch on the market, no big transactions and brokers not wanting to be quoted, it’s difficult to determine a ballpark price per square foot for top-flight Class A office buildings.
Off the record, brokers give answers in a wide range. There’s the $400 to $425 per foot that will be paid for the 880,000-foot office portion of 1540 Broadway which has nearly 200,000 feet vacant – a sale in the making first revealed by The Post’s Steve Cuozzo yesterday.
On the high end, there’s the $1,000 a foot for a theoretical tower fully leased with good stable cash flow and no current turnovers.
One broker, for instance, thinks Worldwide Plaza, the 1.7 million-foot Macklowe behemoth now in sales limbo, will garner a mere $300 a foot – around $510 million.
Its last sale to Macklowe in Feb. 2007 was for $1.739 billion. Ouch!
“Buildings will trade much more on cash flow – on current and contractual cash flow,” said another broker.
“For the last few years buyers were gambling that they would grow in value. And they did for six straight years. Now the buyers want a yield going in.”
While some deals will be fine due to long-term tenant leasebacks, other transactions are quickly heading underwater.
That’s because, like the Macklowe transactions, most properties were purchased based on future signed leases that would achieve unsustainable rents – say $100 a foot – and reality is now kicking in.
Remember, Rockefeller Center was lost after the market crash of 1987 sent office rents tumbling. Nearly 40 percent of the Center’s leases were up for renewal on Sept. 20, 1994 and would have leased at rents closer to $30 a foot than the original projections of $60 and $70 a foot, so the owners couldn’t pay the mortgage.
Looking at 2008 over 2007, office rents are up, and the third quarter ended at $84.48 a foot. However, that amount rose further and then took a nose dive to $79.81, all during the fourth quarter.
Such $5-drops in asking rents are unprece dented in one quar ter, said Joseph Harbert, COO of Cushman & Wakefield’s Metro Region, who explained concessions go up prior to prices coming down so much.
C&W brokers say owners are asking for any and all offers while “taking” rents are discounted from 5 percent to 20 percent.
Vacancy rates are up to 8 percent while sublet space comprises 25 percent of the market versus 18 percent last year.
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Philips International is betting the market for office condominiums near Grand Central Terminal is solid.
The company purchased 110 East 40th St. near Park Ave. for $35 million in August and is now renovating.
The asking prices for the “Grand Park” office condos will average in the mid-$900s a foot.
John Ciraulo of Massey Knakal Realty represented the sellers while Michael Pilevsky represented his family’s company.
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Sam Zell is snooping through Starwood Hotel & Resorts’ books and the hotelier has agreed to provide his company, Equity Group Investments, with two days’ notice if a third-party offer is received.
The filing, first reported by Commercial Real Estate Direct, could mean the Vulture investor wants to up his current stake of 14.8 million shares amounting to 8 percent of Starwood. [email protected]
