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:
- NY office vacancy rates are up to 6%
- JPMorgan is to slash its office requirements by 1 M Sq Ft
- Other troubled financials could add another 2 M Sq Ft.
- Cap Rates in NY have risen by about 0.5% to 5.5% ( Around 9% in 2004)
- 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?
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This article has 6 comments:
- tom1234
- 175 Comments
May 27 08:53 AM- Emerald
- 125 Comments
May 27 10:14 AM- ATHELSTAN
- 20 Comments
May 27 12:52 PM- Eric Fox
- 175 Comments
My Website
May 27 01:42 PM- johnthebear
- 252 Comments
May 27 05:27 PM- chrism1962
- 52 Comments
May 28 06:54 AMcap 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.
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