And I don’t think, personally, that Stuy Town or Peter Cooper will go under. I think they’ll have that recapitalized, some new powerful ownership. Not just Tishman Speyer–there are investors in that, including BlackRock and the Crown family and others. I just don’t think they’re going to let that go away and their investment disappear.
Mr. Laginestra: You just have to keep in mind that when you talk about debt, there’s different levels of debt. So a lender, as Steve just referenced, doesn’t really want to participate in the ownership, because they’re lenders, they’re banks, and they’ve got other primary businesses. But there are tranches of mezz debt which are going to be treated differently, and some of those will disappear.
Mr. Siegel: You know, it’s interesting. When you think of the buildings that are out there, only one has gone back to a bank, and that was 475 Fifth. When you look at the buildings where big chunks of space are going to be coming available, they’re owned by landlords that aren’t going to default. Merrill Lynch, and let’s assuming they’re [leaving] World Financial — effectively, they’ve vacated a good portion of it now, but they have a lease until 2013 — Brookfield’s not going to go into foreclosure, and they’re not going to give that up. You’ve got 85 Broad. It may take who knows how long to re-lease that when Goldman Sachs leaves. It’s owned by MetLife. They’re not going to default. I mean, there’s that type of ownership for the most part.
And there is a cadre of to-be-unnamed, because we won’t name them, owners that are less institutional and less stable, but those are the ones that I was referring to earlier that I think, in some way, shape or form, will work through their issues with recapitalizations and reduce their own positions and the banks will work with them.
Do you think that’s true of the old New York Times building and 11 Times Square?
Mr. Gottlieb: Well, Steve and I are the agent for 11 Times Square.
Mr. Siegel: I know 11 Times Square has no issues.
None?
Mr. Siegel: None. Prudential is the institutional partner, plus there’s a lot of activity in the building.
Mr. Gottlieb: I can’t speak to the old New York Times building.
Siegel: Nor can I. There’s a lot of wealth behind it, but I have no idea what their intentions are.
Mr. Laginestra: Yeah, they have other interests, like Apthorp and other things, that they’re dealing with. So who knows?
Mr. Siegel: We don’t know anything about it. In fact, I think we’re agents there, too.
Are there any steps being taken in the real estate industry to prevent the sort of over-valuation of buildings that occurred during this most recent cycle?
Mr. Siegel: I don’t think over-valuation is a correct terminology. Valuation relates to the building’s cash flow and the residual value perceived by a prospective buyer. While we got to $1,000 a foot, in London they were selling at $2,000 a foot. And there’s no question in my mind that it has the potential of returning to those levels. But a lot of that was motivated by available debt at very low cost. Mezzanine debt and bridge loans. That will go away, and so for valuations to increase substantially again, it’s going to be a much more conventional structure: 30 or 40 percent equity. …If rents rise, they’ll create a rise in values. Right now, values are somewhere in the neighborhood of half to 60 percent of where they were at their peak.
So you’re arguing that buildings weren’t overvalued?
Mr. Siegel: It’s just this term I don’t like…
O.K., forget the term.
Mr. Gottlieb: Let me answer the question. The group of buyers that chased all of these office buildings, and Stuy Town and others, there was so much competition that consistently each of those buyers had these extremely aggressive expectations as to where pricing and values would go. Unfortunately, the market doesn’t just move in one direction. So, while they were overly optimistic, as we come out of the down part of the cycle, people are going to be too pessimistic. So it’s really self-regulated. You know, if there’s a buyer out there who wants to pay $1 billion for an office building that’s really only worth $800 million…
Mr. Siegel: Or, is it worth $1 billion because he’s happy with 3.5 or 4 cap because he’s got the kind of capital that can wait for the market to return to rise? Remember, when these valuations really started to rise, office buildings were $300 to $400 a foot. There was a lot of people who became very, very, very wealthy in between. It’s sort of like a chain letter. Somebody buys at $400, sells it for $500. Somebody buys at 5, sells it for 7; and then sooner or later it gets to $1,000; then there’s nobody out there for $1,100 or $1,200. And the cash flow itself doesn’t cover the debt. There were lenders out there giving debt zero interest accrued for 10 years because they also believed the residuals would pay off all the debt, it would pay off the owner with some substantial profit. You went from $1,000 to $1,200–at a million-foot building, that’s a $200 million increase.
Mr. Laginestra: That’s where I was going to go. I was going to say it’s like man bites dog to write about a Stuyvesant Town. Those people were so successful in so many other instances during the period leading up to this, that’s it not fair to pick on one little–you know, the deal’s not little–but one deal.
Mr. Siegel: …And there were a lot of politics involved, and all types of issues which are not real-estate related. And somehow, I think, these are very smart people, as I said earlier, I think they’ll get through it.
Mr. Laginestra: And they hit the cover off the ball at 300 Park, at the Chrysler building, etc, etc etc..
Mr. Siegel: Rock Center….
Mr. Laginestra; Yeah, so it’s a little man bite’s dog.
What does that mean, man bites dog?
Mr. Gottlieb: It’s an old newspaper term.
Mr. Laginestra: The newspaper doesn’t want to write about dog bites man… because it’s too common. I’m showing my age, I guess.
Mr. Gottlieb: Remember the Post headline, ‘Headless Man Found in Topless Bar?’
That’s a classic.
Mr. Laginestra: That’s what I’m referring to. Nobody buys a paper and says hey, ‘Mrs. McCarthy bought a quart of milk.’
That’s an important thing to understand, though, when there are complaints about us not writing positive stories.
Mr. Gottlieb: You’re just reporting the news.
Mr. Siegel: You are man biting dog. You’re not looking for good news out there, you’re looking for something that’s got a little bite in it.
Mr. Laginestra: Newsworthy.
