Commercial Real Estate Blog

Cushman & Wakefield released its mid-year report on the Manhattan market. Vacancy now sits at 7.1%, up about 180 basis points from this time last year. Rents continued to edge up slightly, but concessions and tenant improvement allowances also crept up, effectively keeping rents flat to slightly down over last quarter.

Investment sales fell to $13.8B for the first half of 2008 versus the $34B that occurred in the first half of last year. Nearly half of all the investment sales occurred to foreign buyers.

Why is this important? Two reasons, with the first being that the Manhattan market in many regards is a “leading indicator” for overall commercial real estate trends. The second is that statistics generally are a “lagging index” when it comes to what is happening on the ground. For instance, in San Francisco the Business Journal wrote an article the other day about 500K SF of space coming onto the market.

We didn’t report on this because the extent of availability is likely much greater than 500K. There is “shadow space” which is sitting vacant and unused by firms while they reorg and figure out what they need and don’t need. In a downturn it takes several months at least to figure this out for most large firms. That said, we anticipate that not only will companies such as PayByTouch and RedEnvelope vacate space, but that financial firms and law firms will also start making cutbacks in headcount. Once that happens, the amount of space to actually hit the market will grow significantly higher than the 500K SF that was reported in the Business Journal. So you might read that it’s 500K SF, but in fact in a period of contraction, the actual figure is higher.

Also, keep in mind what is happening in venture capital. That could be another wild card when it comes to forecasting how the office market fairs.

Over the weekend, the fate of the GM Building at 767 Fifth Avenue became known. Boston Properties and Goldman Sachs led an investment group that acquired the trophy asset along with other buildings from Macklowe Properties for $4B, $2.5B of which was assumption of debt. It’s rumored that middle eastern investors and sovereign investment funds are part of the investment group.

This deal highlights a tough 15 month period for the Macklowes which saw them make a spectacularly large acquisition of 7 buildings from Blackstone, only to default on the loans associated with the acquisition and finally the disposition of a dozen buildings totalling nearly 10 million square feet to escape financial ruin.

The elder Macklowe, 70, took on a $1.2B bridge loan from Fortress Investment Group which was recourse (meaning that the Lender, Fortress, could come after the personal assets of Macklowe). Part of the group’s personal assets (assets outside the investment vehicle created for the acquisition) was the GM Building which is likely now the most expensive office building ever sold.

It seems that the younger Macklowe is taking over the family empire from his father, who twice, has risked much at the wrong time and cost the family dearly, losing significantly both in the early 90’s and now. Of course, it must be said that the elder Macklowe has made many right moves as well, including the acquisition of the GM Building in 2003 for $1.4B, which has subsequently doubled in value.

After many months of speculation and the fact that Macklowe went into default on the short term loans he took to acquire a seven building portfolio from Blackstone (some details here), Macklowe seems to have lined up some buyers for his landmark GM building (which is also home of the Apple “Glass Cube” Store), along with other properties he controls.

In February it was rumoured he retained CB Richard Ellis to market and solicit bids for his building, which at that time was said to be worth north of $3 Billion. It appears, according to the WSJ, that a consortium of Middle-Eastern buyers along with Goldman Sachs, and Boston Properties have lined up to acquire the trophy asset in a $3.6B deal which includes some other buildings and developable land. The value of the GM building is pegged at around $2.8B, several hundred million less than what it was hoped the building would fetch.

This sale, if it goes through, would help make its lender whole, but due to tax implications and the need to pay off the existing mortgage, might mean that Harry Macklowe might still come up a bit short and might have to dip into other “personal savings” or assets to fully remedy the loans that were taken out to acquire the buildings from Equity Office/Blackstone.

Just two days ago Mort Zuckerman, Chairman of Boston Properties, was quizzed on an earnings call what his take was about the Macklowe situation. His answer was:

“Let me give you a nice vague answer to that question. You know our history and we have always taken a look at premier properties, which may fit very well into Boston Properties’ portfolio, as [Mike] mentioned. [Lots] of quality, location, et cetera.

We also have a history of not commenting on transactions or potential transactions that are highly speculative until such time as we feel that there is something to say that’s really — that has substance to it. So, I don’t think we can speculate on what the pricing of the Macklowe Properties will be or anything else. I mean, they’re — it’s a complicated transaction for whoever makes it and we’ll see what happens.”

What this deal shows is that while the effect of lax lending standards and the subprime mess continue to sort themselves out on the residential side, we’re just beginning to see the effects of the same on the commercial side. Some are able to structure deals allowing them to get out from under assets, but we’ll undoubtedly be seeing more and more situations in which the lenders are essentially in control of the sale.

After taking control of a $7B portfolio of properties from Equity Office last year, Harry Macklowe’s financing situation is rumored to have led to a deal to relinquish control of his properties to his lender, Deutsche Bank.

His financing package, when he acquired the buildings, only required him to put $50M worth of equity into the deal. In addition however, Macklowe was required to provide a personal guarantee of $1b for the deal.

As a result, CBRE has been retained by Macklowe to sell his trophy asset, the GM building in New York, possibly to help satisfy his obligations. The GM Building which Macklowe picked up in 2003 for $1.4B is estimated to be worth north of $3B.

The commercial paper market has taken a bite out of some investors but fortunately it seems that it is a manageable exit for Macklowe and the market.