Commercial Real Estate May Be Next Victim of Recession (VIDEO)
NewsHour with Jim Lehrer reports: Just two years ago an office space in midtown Manhattan could fetch close to $1.7 billion. Today, the same property trades for about $600 million. A sign the commercial property market will be the next shoe to drop in the U.S. economy?
Watch the video here.
ROBERT WHITE, Real Capital Analytics: There are so many vacancies of retail spaces, former restaurants, other shops...
PAUL SOLMAN, NewsHour economics correspondent: Real estate analyst Bob White, playing Virgil to our Dante on a guided tour of what some fear might become the hellish state of Manhattan commercial real estate - the hotels and stores, apartments and office buildings - that raise the possibility of a next mortgage meltdown.
First stop: Worldwide Plaza, 1.6 million square feet of prime midtown office space, developed by one Harry Macklowe.
ROBERT WHITE: In early 2007, it sold as part of a package of buildings, and this building was priced around $1.7 billion.
PAUL SOLMAN: And what was the deal?
ROBERT WHITE: His organization bought this property and six others for a package deal for around $7 billion.
PAUL SOLMAN: And how much did he put in?
ROBERT WHITE: Well, that's what's amazing. Only $50 million, reportedly, was the equity component of that deal. The rest was a combination of a first mortgage and a second mortgage.
PAUL SOLMAN: So $50 million on $7 billion, that's less than 1 percent down.
ROBERT WHITE: But at the time, the market was full of such optimism that rents would keep increasing and office buildings would stay fully leased. The economy was still growing, banks had a lot of money to lend, and there were many investors that also wanted to be in commercial real estate.
PAUL SOLMAN: But not any more: Great Recession, sky-high unemployment, a glut of office space, so rents fell, building values, too. Meanwhile, the short-term one-year mortgage for Worldwide Plaza came due. Owner can't refinance; the lenders take over. Resale price?
ROBERT WHITE: It just traded about a month ago for just under $600 million.
PAUL SOLMAN: Wait, it sold two years ago for $1.7 billion and now for $600 million?
ROBERT WHITE: Yes, in very rough numbers. That's a significant discount, and that is...
PAUL SOLMAN: Significant discount? That's two-thirds of the price!
ROBERT WHITE: Exactly. The overall market is down approximately 35 percent from the peak. This traded at a more significant discount because it is 50 percent vacant. And in today's market, vacant space is worth very little.
View the full article on NewsHour with Jim Lehrer: Commercial Real Estate May Be Next Victim of Recession (VIDEO)
Posted by: Matthew Stone