Commercial Real Estate Headed the Way of Residential?

Includes: GE, ICF, IYR, VNQ
by: Chris Marshall

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 (NYSE: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?