Commercial Real Estate Headed the Way of Residential?

The sale of Harry Macklowe’s GM Tower portfolio will set a new benchmark for the valuation of Commercial Office Real Estate for New York, and probably for the US, as a whole. 

The GM Tower, a 50 Floor building, overlooking Central Park, was estimated at a value of around $3.2 Billion, but the expected sales price is in the region of $2.8 Billion. This equates to a discount of around 12%. 

The total value of CRE in the US is approximately $5 Trillion, so if this new valuation is a benchmark, $600 Billion of value could be wiped off of asset values. 

This figure sounds horrendous, but is it probable? 

Here are some uncomfortable facts: 

1. NY office vacancy rates are up to 6%
2. JPMorgan is to slash its office requirements by 1 M Sq Ft
3. Other troubled financials could add another 2 M Sq Ft.
4. Cap Rates in NY have risen by about 0.5% to 5.5%  ( Around 9% in 2004)
5. Retail Commercial is actually falling in value faster than Office Commercial. 

Bearing in mind the indications listed above, $600 Billion may be a conservative figure. 

How these new valuations will affect the Banks and Commercial REITs, only time will tell, but one surprising candidate will be GE (GE), which has a $57 Billion property portfolio. An asset write down of $6 Billion, may be required, but can the CEO do it after the embarrassment of the last quarter results?

Comments

[tom1234]

yes --residential real estate is related to the rest of the type of properties ---and usually one does follow the other --great buying time when one can get a 10% or better cap ---it's buying time again

[Emerald]

Commercial cap rates will rise with inflation over the next few years and values will drop. However, international interest in world class cities will always be strong. NYC will see a softening as financial firms give back space. Look for European pension funds to buy more properties. As an aside, many have known that GE is a real estate and finance company and so goes its fate. Immelt has a lot of work to do to become an infrastructure play.

[ATHELSTAN]

I've dumped my real estate holdings in NYC because I think the commercial real estate market there is heading for a crash. So, welcome to another exciting chapter of the Great Depression of 2008.

[Eric Fox]

Does anyone know what the capitalization rate was on the sale?

[johnthebear]

Don't expect help from Europe, they have overvalued commercial property all over, with cap rates less than 4%, even lower than mortgage rates if you can imagine that! Lots of ding bats running around spending your money. The bigger they are the dumber they are, I always say. Check C or CFC lately? GE is just another one. Makes it tough on honest appraisers when fools rush in. No way to use these properties as honest comparable sales even at the $2.8 billion price.

[chrism1962]

Thank you for your comments,

cap rates in NY are around 5.5% currently, I expect the GM Tower cap rate is around 5.75% - 6.00% ( This is my informed guess ).

A 10% cap rate is great, but difficult to achieve, they tend to be accompanied by short time left on the leases, which means that you may be stuck with a vacant building.

I agree with John regarding the European Pension funds, they are really struggling (I'm based in the UK). If we use the 9% cap rate as a yard stick, and estimate the current cap rate as 6% (for ease), then Commercial Real Estate may be 50% over valued. Potentially this could mean $1.66 Billion of Asset write downs!

I don't believe that they will fall this far, but if recession really kicks in, don't discount the possibility either. Financials are still a one way short bet at this current time, regardless of what the FED and Treasury say.

Chris Marshall

PS: Regarding GE, Did you know that one credit card co in India has a default rate of 16%, so don't bank on emerging markets coming to the rescue of the international banks, they appear to be as self obsessed and stupid, as the rest of us.