Streetlevel: Organic Café Coming to Bustling Bergen

As per the NY Times

October 3, 2007
SQUARE FEET
Flipping Slows, but Landlords Continue to Raise Rents

By TERRY PRISTIN
For more than two years, until this summer’s credit squeeze, office buildings around the country were bought and sold at a dizzying pace. All that flipping — culminating in the Blackstone Group’s purchase of more than 500 buildings owned by Equity Office Properties and the subsequent resale of about half of that portfolio — has pushed up office rents.

In Chicago, for example, rents usually do not budge much. Since February, however, when Blackstone bought Equity Office for $39 billion, asking rents for prime office buildings downtown have spiked, causing sticker shock for tenants whose leases are expiring in the next year or two. In August, Blackstone sold six downtown Chicago buildings from the Equity Office portfolio to Tishman Speyer, the New York real estate company, for about $1.72 billion.

When Equity Office owned the 40-story tower at 30 South Wacker Drive, the asking annual net rent (without electricity and other operating costs) was $17 a square foot, said Joseph Learner, an executive vice president at Studley, a brokerage that represents tenants. “When Blackstone came in, they jumped the price to $25 net,” he said. “Now, Tishman Speyer wants $28.” (Tishman Speyer executives declined to comment.)

The recent rent increases — a phenomenon that some real estate specialists have labeled the Blackstone effect — are not limited to Chicago. Nor was the trend limited to the Blackstone-Equity Office merger and its aftermath, in which Blackstone sold 253 buildings in the Equity Office portfolio for a total of $27 billion, according to CoStar Group, a research company in Bethesda, Md. Some of these buildings were flipped again by the new buyers.

In the first six months of this year, more than half the office buildings that sold for $5 million or more nationwide had been held for less than two years, according to Real Capital Analytics, a New York research company.

As prices escalated, the capitalization rate — the initial rate of return on the buildings — declined, sometimes to levels of only 5 percent or less.

Lenders were often willing to finance 95 percent or more of the purchase in the expectation that far more rent could be wrung out of the space, once existing leases expired. Commercial loans are pooled and sliced into bonds carrying different levels of risk. But these bonds have recently become a tougher sell.

Since most deals were heavily leveraged, many owners are now left with debt service that is not covered by the building’s cash flow. And owners who counted on being able to flip their buildings for a higher price can no longer do so. In recent weeks, building values nationwide have dropped 5 to 10 percent, according to Green Street Advisors, a research firm in Newport Beach, Calif.

Therefore, landlords “have to increase their net operating income — but pretty quickly,” said Kevin Brennan, an executive vice president for Studley in San Francisco.

In a recent survey of Manhattan and seven metropolitan areas around the country, Studley found that in all but one, increases in asking rents in buildings that have been sold in the last two years have significantly outpaced the market as a whole.

Even in Orange County, Calif., where a shrinking mortgage industry has emptied hundreds of thousands of square feet of office space, asking rents in newly sold buildings have risen disproportionately. In April, Blackstone flipped its newly acquired Orange County portfolio to Maguire Properties, a Los Angeles company. Maguire has since sold some of those buildings, including Tower 17 in Irvine, in order to pay down its debt. But this week Banc of America Securities downgraded Maguire’s stock, saying that “Orange County is in the midst of a real estate recession.”

Landlords are raising rents just as building values appear to be dropping slightly in many cities as a result of the credit squeeze; in addition, the leasing market is slowing. Even in Midtown Manhattan, the amount of space leased in the third quarter declined 23.4 percent from the same period last year, in part because few large blocks of space are available, according to Cushman & Wakefield, the brokerage company.

In areas covered by the Studley survey, the average asking rent increase for the newly sold buildings was 21.2 percent, compared with an average market increase of 12.6 percent. The only market in which new owners were not seeking much of a premium was Atlanta, where the large volume of vacant space keeps rents in check, said Steven E. Coutts, who directs national research at Studley.

The robust rent projections in loan documents are fueling the rise in asking rents, but it is far from certain that tenants will go along, Mr. Coutts said. The projections “say they need to achieve certain numbers,” he said, “but only time will tell if the market is willing to pay those rents.”

In Manhattan, where many people are nervous about the prospect of layoffs in the financial services industry, asking rents continue to rise. But most of the recent leasing has involved relatively small blocks of space. During the last quarter, which ended on Sunday, nine leases were signed in Manhattan with annual rents of more than $150 a square foot, Cushman & Wakefield said in a market report.

But rents are often not as high as they appear to be. In a new 20,000-square-foot lease at 712 Fifth Avenue, for example, the nominal annual rent is $170 a square foot, but the tenant is getting six months’ free rent and $40 a square foot for refurbishing the office, brokers said.

In Orange County, landlords are offering signing bonuses, said Jeff Osborn, the managing director of CB Richard Ellis’s Anaheim office.

Landlords in Washington, where the pace of leasing this year is half of what it was last year, have also sweetened their concessions, said Phillip S. Thomas Jr., a managing director of Cassidy & Pinkard, a local brokerage.

In Chicago, nearly all of the city’s prime buildings have traded in recent years, sometimes more than once. Space is tight and will remain so until several new buildings are completed in 2009, so landlords may have the upper hand for now. “For ’07 and ’08, the picture looks pretty good for us,” said Stephen A. Smith, a managing director at Jones Lang LaSalle, which manages 25 million square feet of property in downtown Chicago.

Other brokers were not so sure. “Demand is out there, and it’s pretty strong,” said David J. Burden, a senior managing director at Cushman & Wakefield in Chicago. “But it remains to be seen if the taking rates will be close to the asking rates.”

And in Chicago, as elsewhere, the investment market has stalled. Tishman Speyer had intended to flip three buildings it bought from Blackstone, but was able to dispose of only one of them, 101 North Wacker Drive.

But asking rents are probably not going to reflect the lower values soon, said Charlie Malet, the national director of leasing for Shorenstein Properties, which bought 46 buildings in Portland, Ore., from Blackstone in March.

“Most of the people who have bought properties in the last couple of years are well capitalized, and they aren’t going to prove themselves wrong in the first six months of ownership,” Mr. Malet said. “Their attitude is, ‘If I’m wrong, let the market tell me I’m wrong a couple of years from now.’”

Copyright 2007 The New York Times Company

Posted by: The What at October 3, 2007 3:16 PM