Lehman Bust Hits NYC Commercial Property

One of the main drivers of New York City's commercial property boom was Lehman Brothers. Now that Lehman's gone bust, the NYC commercial property market seems to have ground to a halt.

It was probably going to happen sooner or later anyway: Commercial property prices, just like residential property prices, are governed ultimately by lenders' risk appetite. But in the world of commercial property, Lehman Brothers and a few shops like it were willing to advance 90% of overinflated prices even when rental income didn't come close to covering the mortgage payments.

They could do so with impunity (or so they thought) because no sooner were such loans advanced than they were bundled up into CMBS and sold off. But invariably the lead bank ended up taking a significant slug of the deal -- the primary reason why Lehman went bust.

Today, one can't really say that commercial-property underwriting has improved, so much as that it's disappeared altogether. (Whether that constitutes an improvement is a question to be left to theologians.) And as a result, done deals are falling through: HSBC (HBC), for instance, owns an undistinguished office block on Bryant Park, and decided to sell up and move to 7 World Trade Center. Now it's changed its mind, because it simply couldn't scare up realistic bids for 452 Fifth Avenue.

The irony is that HSBC should have known full well that it wasn't a great idea to own property in this market. After all, the CEO of HSBC USA, Martin Glynn, and his lieutenant, Brendan McDonough, both rent their New York apartments -- at a cost to HSBC of $586,600 per year. Maybe they should have decided to rent their office space at the same time, rather than waiting until now.

Comments

[investor88:]

Good evidence that US commercial real estate is also weak and in downturn mode.

2008 Oct 01 10:30 AM

[whidbey:]

It is worse. The NYC market has more than speculators, it has their creditors who are hugely involved with the lenders playing the bigger fool game. After all, it is, or was, some of the most valued real estate on the planet (like Tokyo in the 1980s). But today when the pressure (demand) for space declines there is nothing to catch the speculators/investors ?who can often be uncovered on cash flows with only a few vacancies in a building. So starts the repricing. My landlord has spoken to me about a longer lease in return for a concession on parking costs. I am thinking about it, but I smell a change coming down the road. New York is about to come down on its rents.

2008 Oct 01 12:30 PM

[Smarty_Pants:]

Counter-offer Zooey!! He must be desperate to make an offer in the first place.

Purchase apartment for (annual rent x 5). Maybe x6 if you're feeling generous.

Borrow the money at 6%, lease out at current rents and return 16% to 20% .

It will provide you with a good return on the money you borrowed.

2008 Oct 01 02:55 PM