Who's Lending To Whom In Manhattan—And Why

Manhattan property investors are in a funk. Their friends at the investment banks have empty pockets or fresh pink slips. Financing for large deals is scarce. And industry heavyweights are for once publicly bearish.

Peter DeCheser, managing director of capital markets for Jones Lang LaSalle, said using the word “somber” to describe the mood “might be euphemistic.”

“We’re in for a slowdown in volume that would almost be comparable to the early ’90s,” Mr. DeCheser said. “It will become much worse. In the next 30 to 60 days, the proverbial second shoe will drop.”

Normally, getting a real estate type to say something negative about the Manhattan investment-sales market is like eliciting an intelligent comment from Kelly Ripa: damn near impossible. Professionals know that psychology matters, so they talk up the market, and they chastise the press for talking it down. Recently, some have given up the ruse that the market for large-deal financing merely has a runny nose. Turns out the market has mono.

Robert O’Brien, the chief financial officer for Forest City Ratner, was downhearted in an April 2 conference call, going so far as to evoke the specter of disease.

“The meltdown in the subprime mortgage market and the downturn in the housing market have been a contagion, negatively impacting all the capital markets,” Mr. O’Brien said. “I feel like I’ve got to be the positive coach among our finance team because the tables have changed so much.”

And Mort Zuckerman, chairman of Boston Properties, appears to spend nearly every public appearance warning his rapt audience that the sky is about to fall. (On June 9, Mr. Zuckerman told a Real Estate Board of New York luncheon that “this is the most difficult time we’ve had in 70 years.”)

So there you have it. Mr. DeCheser sees the clock turning back to the ’90s, or even (egad!) the ’70s, as he later said. Mr. O’Brien, in effect, finds himself donning a pleated miniskirt and yelling, “Give me an F! Give me a C! Give me an R!”

These are desperate times in commercial real estate investment.


THE REASON FOR this collective mood swing is what we’ll call PMS—post-mortgage securitization. This time 16 months ago, the capital market was in full swing, fired by the market in securitized debt. All a borrower had to do was call up his buddy at larger lenders like Wachovia or Bank of America, Lehman Brothers or Credit Suisse, Bear Stearns, UBS, or Natixis, and ask for a loan.

By this time last year, $116.2 billion of mortgages had been securitized, according to Jere Lucey, managing director of the Real Estate Investment Banking Group for Jones Lang LaSalle. Oh, how times have changed. So far this year, only $10.9 billion worth of mortgages have been securitized. Transactions this year in Manhattan are down 43 percent, according to Mr. DeCheser. Projects in the development pipeline are scarcer.

“Now, the floating-rate market for securitization is nonexistent, so borrowers need to go to offshore banks, such as German and Irish banks, or life companies, and various U.S. regional banks,” said Steven Kohn, president of real estate investment bank Sonnenblick-Goldman.

“The financing picture has totally changed,” said Howard Michaels, chairman of the Carlton Group, a real estate investment firm that arranges financing for acquisitions and recapitalizations. “We basically have gone through a period where there was unlimited capital and people were deluged with liquidity, to a market where lenders are now highly selective of whom they will lend to. Frankly, borrowers are a little lost in terms of whom to call for money. All of their favorites who used to be at Wachovia, First Boston, etc., are either not lending or no longer at the institution.”

Gone are the days of borderline-crazy leveraging, à la Harry Macklowe, who last year, lest we forget and repeat our mistakes, put down a mere $50 million and leveraged his personal fortune and the GM Building to buy seven midtown towers worth $7 billion. Poor guy jumped in at the market’s apex. And he rode it all the way down.

As 2008 broke, Mr. Macklowe defaulted on the $7 billion in short-term loans, and had to hand over control of the seven-tower Equity Office package to Deutsche Bank, which has since sold four of the towers. Still not out of the abyss, Mr. Macklowe also had to put his beloved GM Building on the block, since he still owed $1.2 billion to Fortress Investment Group, an asset-based investment management firm. Mr. Macklowe became the poster boy for overleveraged acquisitions.

Now, in the wake of his disastrous fall, any deals over $50 million or $100 million are extremely difficult to finance. The $50 million-$100 million range includes, by Manhattan standards, medium-size assets—maybe an old loft building in Chelsea or a Class B office building in the diamond district.

“Today the majority of $30 million-plus loans need a syndicate to get don
e because banks don’t want to go it alone,” said Josh Zegen, co-founder of Madison Realty Capital, referring to the increasingly common practice of combining loans from four or five different lenders.

Those lenders include companies like Prudential, New York Life, MetLife and AIG, as well as pension funds, hedge funds with more conservative investment strategies, and some regional and smaller banks like M&T, Capital One, Signature Bank, Bank of Smithtown and Hudson City Savings.

Who's Lending To Whom In Manhattan—And Why