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New York Sun
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September 15, 2003
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| Office Market Turns Around |
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| Dan Dorfman |
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For the past two years, termites have been gnawing away at the city’s commercial real estate, due largely to 9/ 11, a sagging economy, softening rents, and a sloppy stock market.
But that’s changing. The industry is emerging from the doghouse.As a result, one of the life-bloods of the city’s economy is beginning to pump again, with rent-stabilized buildings in hot demand.
Larry Schwarzwalder, treasurer of Tishman Realty & Construction Co., one of the Big Apple’s leading construction management and real estate development concerns, sums it all up: “We’re seeing positive signs; things are definitely picking up.”
John Cicero, managing principal of Miller,Cicero LLC.,a top commercial real estate appraiser, tells me: “We’re seeing brisk investment sales activity across the board, from small multifamily buildings to large Class A office buildings.” Documenting this, he points to record sales for the General Motors building, which sold at $700 per square foot,and the Capitol at Chelsea residential building, which went for almost $500,000 an apartment. And that’s in the face of soft rentals.
Mr. Cicero also reports a strong investor demand for rent-stabilized buildings, spurred by new city provisions which permit decontrol and allow for bigger rent hikes. “In the past,” he says, “we used to see modest increases when apartments turned over; now the increases are substantial.”
He attributes the stepped-up level of sales activity to such catalysts as lower interest rates, an improving economy, continued uncertainty about the direction of stocks and bonds, and relatively little new construction.
Implicit in the increased sales, notes Mr. Cicero, is expected improvement in the weak rental market — both residential and commercial, especially in better properties in prime locations. Citing industry statistics on the commercial front, he notes that the average second quarter lease rate for Manhattan’s office buildings ran $38.32 per square foot, down 11% from year-earlier levels. He calculates the figure is running about the same in the current quarter, suggesting to him that “things are beginning to normalize.”
An obvious question: How long can sales prices improve in the face of continued soft rentals? Mr. Cicero’s response: At some point, possibly sooner than later, the market will come back in balance, with sales and rentals moving in the same direction.
Principal Paul Pariser of Taconic Investment Partners, a real estate development and investment company, also notes a perkier office market, notably in the past two months, during which the firm signed leases for over 300,000 square feet. With rents having gotten less expensive, the demand for space is more compelling, he says. “I think we’re seeing a market bottom in rentals, so prices should appreciate,” he tells me. He believes, too, “we’re seeing a citywide phenomenon, with all owners doing a little better.”
Another sign of a rebound in commercial real estate is the start of major new construction. For example, the Durst Organization is putting up a two million square-foot 50-story building at 42nd street and sixth avenue that will cost more than $1 billion. Work will begin next year on the building, which is scheduled to open in January of 2008. Its first lease is a beauty; Bank of America committed for one million square feet.
What does it all mean? To Mr. Cicero, “It makes sense to invest in New York City real estate. The fundamentals are sound and there is no over-building like in the ‘80s.”
Meanwhile, let’s not ignore the risks — namely, the threat of rising interest rates or another act of terrorism.
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