As conditions in Manhattan’s commercial market grow grimmer, one question continues to dog investors: Where’s the debt and how can I break me off a piece?
The Manhattan office market dropped 22.9 percent between the second quarters of 2008 and 2009, according to the Moody’s/REAL Commercial Property Price September Indices, compared to 30.1 percent regionally and 21.2 percent nationally. (The indices track the price changes for commercial real estate in the top 10 U.S. markets by comparing prices of different assets over time.) Meanwhile, vacancy rates have plunged, and analysts expect anywhere from $1.8 to $700 billion of distressed commercial debt to come due by 2013.
Some of that, of course, falls in top-flight Manhattan. Several Class A, midtown office towers—the majority of which stem from auctions of Macklowe Properties’ distressed portfolio—have mortgages that mature in 2009 and 2010 (six in 2010 alone, in fact), according to September data from research firm Real Capital Analytics and regulatory filings.
Nonetheless, a lot of vultures waiting to pick up distressed Manhattan assets at fire-sale prices are going to be very disappointed, said Dan Fasulo, a managing director at Real Capital and an ardent Manhattan market watcher.
“I think, at some point, if the building is not performing, if it lost a major tenant or rents went down and they can’t pay debt service, [a lender] might foreclose, but these lenders are not going to give away assets for cents on the dollar,” he said. “They are going to tuck it away in their portfolio. … I don’t think lenders are gong to be in a rush to liquidate the good sites.”
One of the few commercial assets that Macklowe Properties was not forced to unload in August 2008, after defaulting on loan payments to creditors surrounding an epic $7 billion Manhattan commercial deal in 2007, was 400 Madison Avenue.
On Feb. 1, 2010, Macklowe has a $65.5 million mortgage payment due, leading Real Capital to classify the property as potentially troubled. But with 98 percent of 400 Madison leased to tenants like Pokeman USA, Xroads Solutions Group and Goldin Associates, the likelihood of Macklowe defaulting on the loan is low, Mr. Fasulo said. The debt service coverage ratio (DSCR) on the property is 2.24, according to Real Capital, meaning cash flow from the building is more than twice the debt-servicing costs. Macklowe, led by chairman William Macklowe, declined to comment for this article.