Manhattan Office Values Crater

Bloomberg has a short article that notes commercial real estate deals in Manhattan have come to a halt. They quote CB Richard Ellis statistics that show three buildings changed hands in the first six months of the year versus an average of 32.

The article cites a lack of financing as one of the obstacles in the market and that is surely the case. One could add that uncertainty about future demand for office space as well as rents probably factor in to buyers’ reluctance as well.

Perhaps the most interesting item in the article was the assertion that cap rates are up to around seven versus cap rates as low as three during the frenzy. Supposedly this cap rate is what would apply for prime, stable Manhattan properties though I’m not sure how valid it is given the lack of transactions.

Assuming that the cap rate is in that range it implies a greater than 50% decrease in valuations. The implications of a decline in value for the banks of that order of magnitude is self-evident. It should be noted that cap rates probably hit the silly low range to a greater degree in Manhattan than they did elsewhere but there is still plenty of pain in other areas.

We know from the S&L crisis of the late ’80s and early ’90s just how difficult commercial real estate busts are to crawl out of. The knee jerk reaction then was to pretend that the banks with government assistance could weather the storm and earn their way out of their predicament. The thinking was that time and appreciation would cure the equity gap. It didn’t work as CRE was an anchor that just didn’t hold the banks back but actually dragged them down.

Right now, we’re going down the same road. This time instead of calling it regulatory forbearance we have the Fed’s TALF program. This time we’ll use government financing to keep the zombie properties alive and once again hope that time heals the wounds.

Will it work? Maybe history won’t repeat itself but the odds are against that happening.

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