07 July 2010

U.S. Commercial Property Sales Trail Average as Supply Limited

Bloomberg Business Week

U.S. commercial real estate sales in the first half totaled about a quarter of the average of the previous six years as owners kept properties off the market, impeding investors with record funds for purchases.

Buyers and sellers completed $34.2 billion of deals through June, or 26 percent of the average first-half dollar volume since 2004, according to preliminary figures from Real Capital Analytics. The total was about 12 percent of the 2007 peak, when $277.7 billion of properties changed hands in the same period, data from the New York-based real estate research firm show.

Sales climbed 58 percent from last year’s first half, when purchases dried up after the U.S. credit crisis and recession sent values tumbling. A dearth of available properties has sparked demand for the few deals being offered, according to Alan Kava, co-head of Goldman Sachs Group Inc.’s Real Estate Principal Investment Area in New York.

“People are frustrated that not a lot has been trading,” Kava said. “When something does come to market, that lack of supply is causing almost a feeding frenzy. People have real estate funds that are not on an infinite time line -- they need to put capital to work.”

Private equity real estate funds have a record $104 billion of equity available for U.S. deals, research firm Preqin Ltd. reported last month. Blackstone Real Estate Advisors has the most to invest, with Goldman Sachs second, according to Preqin.

Goldman Sachs, Blackstone

More than half of the $8.4 billion available for Goldman Sachs’s property funds is reserved for overseas investments, Kava said. Blackstone has about $12 billion for real estate purchases, said Peter Rose, a spokesman for the New York-based private-equity firm.

In top markets such as New York and Washington, owners who owe more than their properties are worth are finding new sources of equity and lenders are willing to restructure their loans, said Sam Chandan, Real Capital’s chief economist.

In less attractive markets, banks have been extending loans, waiting for higher prices so they don’t record losses, according to Chandan. That has kept troubled assets off the market, he said.

There also is little incentive for owners who bought as the market climbed to sell now. Values in April were down 41 percent from their October 2007 peak, according to the Moody’s/REAL Commercial Property Price Index.

“The problem is more on the supply side than the demand side,” said Dan Fasulo, a Real Capital managing director. “Our investors are regularly complaining there’s not enough quality listings available for purchase.”

Four Markets

Demand for properties is strongest in New York, Boston, Washington and San Francisco, “where domestic and foreign investors alike have sought to acquire high-quality assets,” said Chandan.

Those four markets accounted for 20 percent of first-half sales, compared with about 15 percent last year, according to Real Capital. For office buildings, the largest category, the cities made up almost 35 percent of the volume, up from almost 32 percent in 2009.

Manhattan totaled $2.92 billion of completed sales in the first half, up 70 percent from a year earlier. About $1.42 billion were office deals, up 62 percent.

SL Green Deals

SL Green Realty Corp., New York’s largest office landlord, was both a buyer and seller. The company agreed in May to sell a 45 percent stake in Manhattan’s McGraw-Hill Building at 1221 Avenue of the Americas to Canada Pension Plan Investment Board for $576 million, a deal that values the building at about $500 a square foot, according to Real Capital.

It also purchased 600 Lexington Ave. for $636 a square foot, and agreed to buy 125 Park Ave., a tower across 42nd Street from Grand Central Terminal. That deal was valued at about $507 a square foot, based on data in a company statement.

Those prices reflect a rebound off market lows reached last year, when similar midtown Manhattan properties sold for about $350 a square foot, said Chandan. In 2006 and 2007, readily available loans that were packaged and sold as commercial mortgage-backed securities helped drive prices for top Midtown skyscrapers beyond $1,000 a square foot.

“We basically went around the world talking to capital sources, in Asia, Europe, Middle East, Canada, and domestically, and hearing the same thing,” said Andrew Mathias, SL Green’s president and chief investment officer. “People’s confidence in Manhattan was not at all shaken, because of the extraordinary supply/demand metric that exists here, where you have very, very limited new supply, and the interest rate environment.”

Monsanto Purchase

The company paid $523 million for its two acquisitions, combining both closed and contracted deals. Its sales of partial property interest totaled $663 million.

The biggest completed deal of the year so far was Monsanto Co.’s purchase of Chesterfield Village Research Center, a research and development complex in Chesterfield, Missouri, from Pfizer Inc., according to Real Capital. Monsanto paid $435 million, said Kelli Powers, a spokeswoman for the St. Louis- based company.

Distressed building sales probably will remain scarce, Chandan said. There are $184.6 billion of troubled properties facing foreclosure or bankruptcy, out of a total $239 billion since the credit crisis started in 2008, according to a June 1 Real Capital report.

“There’s tons of liquidity out there,” said Barden Gale, chief executive officer of JER Partners, a McLean, Virginia- based company with about $500 million available for investment. “The trouble is it’s having a problem finding a place to reside.”

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