Manhattan Invincible! Credit Woes Barely Nick Buildings Market

Think of the Manhattan investment-sales market right now as a particularly swanky casino toward the end of a long night. Several high-rollers want to keep playing, but they don’t have as much cash on hand as they did at dusk. So, the house comps them money because these high-rollers often win. And as long as they win, the house wins because these particular comps have to be repaid.

That’s basically the current market for Manhattan buildings and building portfolios: the actual real estate—the nuts and bolts and concrete—remains fabulously sound, but buying and holding onto it is harder because of pricier financing.

As of Sept. 20, $40.113 billion in buildings and property portfolios had traded hands in 2007, more than in any other full year before, according to research firm Real Capital Analytics, which monitors closed deals of at least $5 million.

No real estate tycoon will be losing his trophies any time soon. The house won’t allow it.

“No one is having a fire sale on New York City office buildings,” said Howard Michaels, president of the Carlton Group, an investment bank that’s handled re-financing for such building buys as Hiam Revah’s of the Lipstick Building earlier this year and Harry Macklowe’s of the GM Building in 2003. “There’s still as much capital as you need for deals that make sense; it’s just that the cost of that capital is greater than it was before.”

Mr. Michaels was sitting open-collared in his firm’s headquarters four floors above the Burberry/Brooks Brother jungle of Park Avenue at rush hour. “I think everybody was a little bit spoiled given that there was what seemed like virtually unlimited capital coming out of Wall Street—insurance companies, hedge funds, etc.—and that’s not the case now.”

Even with the number of deals slowing and the more expensive lending, it seems unlikely, say, that Mr. Macklowe would have to sell some of his other buildings—including the eight he acquired from Blackstone in February—to pay the GM Building’s mortgage. The big building buys of the last year—280 Park, 666 Fifth, 230 Park—all appear safely in the hands of their buyers.

Take the buy of the Lipstick at 885 Third Avenue by a partnership led by Mr. Revah.

Mr. Michaels’ firm arranged the sale of the ground underneath the building to leading city landlord SL Green for $317 million; SL Green then gave Metropolitan Real Estate, Mr. Revah’s firm, a 70-year ground lease. Mr. Michaels then went to the Royal Bank of Canada and borrowed another $210 million at a little over 6 percent interest. Voila! A half billion-plus in financing.

Such creativity wouldn’t have been necessary in the spring. In those halcyon days of titanic deals among city household names, capital flowed like honey downhill to buyers.

Then, a crisis in the market for the cheapest home loans touched off an international credit market imbroglio that eventually impacted some of the most expensive properties in the world. The subprime mortgage crisis continues to reverberate, and the waves of shock have stumbled ashore on Manhattan, most acutely—and understandably—in the housing market but also in the commercial market.

Deal-making has slowed. This month isn’t on pace to beat August’s investment sales numbers. And August didn’t beat July. And no month ever has come close to the over $11.381 billion in sales that closed this February.

But a couple of things:

One, the local economy remains strong, buoyed by the usual litany—a healthy Wall Street (at least three record bonus seasons in a row); a safe city; a strong housing market (Manhattan should have 10,000 apartment sales this year); and low unemployment.

Two, Manhattan real estate prices remain high. Apartment rents, office rents, home prices—they’re all at or near record highs, and with the strong local economy, they should only get higher. Rents in some of the choicest office buildings—towers like Sheldon Solow’s 9 West 57th Street, Douglas Durst’s under-construction 1 Bryant Park—command rents of nearly $200 a square foot annually.

Not only are Manhattan real estate prices ever higher, they’re also fairly low—by international standards. A would-be building buyer from Tokyo or Geneva or London would think Manhattan real estate actually undervalued, compared to his or her hometown’s. Thus, real estate here is both a steal and a deal for investors.

So, with these realities of a strong local economy and robust prices holding, will the credit twitters ever claim a major sale from a major New York high-roller? Probably not.

Still… one wonders because one reads the papers every morning and watches CNBC every night…

“Right now, there’s less activity than before because sellers don’t want to accept the new reality,” Mr. Michaels said, “and everyone’s hoping that it’ll change; and that everything will go back to the way it was before. If it goes back to the way it was before, everyone will be happy.”

And if it doesn’t?

“Guys will have to start selling. People will eventually need money.” Manhattan Invincible! Credit Woes Barely Nick Buildings Market