Upon what are we basing these wildly irresponsible estimations? That, we’re afraid, entails a discussion of what the pros refer to as “price discovery,” a process that involves broadly comparing the prices of recently sold buildings (of which there are, frankly, very few, given the economy and the ongoing dearth of credit).
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.
(That vacancies are considered unhealthy is an exact reversal of the way the market used to work in 2007. “It’s very hard to finance vacant space today, because banks don’t want to give you credit,” said Jeff Gural, Newmark Knight Frank chairman and owner of at least 6 million square feet of real estate. “In the go-go days, someone would say, ‘We’ll rent the vacant space for $85, $100 a square foot.’ Today, even if you could get $85 a square foot, banks will not give you credit for vacant space.”)
Vacancy-ridden or not, the math remains.
“You’re like the grim reaper,” chided Howard Michaels, chairman of the Carlton Group, before acknowledging, “All the buildings that were bought were bought on the expectation of increasing rents and that hasn’t happened. You combine that with higher cost of capital on financing, and buildings are worth less.”
“The big picture is that most properties that transferred in the last five years are worth less than the debt,” wrote Cushman & Wakefield sales guru Yoron Cohen in an email. “The markets provided huge leverage to buyers which were based on extremely optimistic future growth of rents. It was out of control. Buildings like 885 Third (the Lipstick Building) were sold for $1,000 per square foot, and it is worth about a third of that number.”
Woody Heller, head of Studley’s capital transactions group, came to a similar conclusion.
“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).
Mr. Gural? His estimations were more modest. “I think most people would tell you 25 percent. I don’t think anyone would disagree with that number. There are probably other people who would use higher numbers, depending on vacancy.”
Perhaps Sam Chandan, president and chief economist of Real Estate Econometrics, put it best: “The overarching point is that we’re in the midst of the process of price discovery.”