Thursday, July 8, 2010

US commercial sales in H1 below average

Lack of available supply sparking demand for the few deals being offered

(NEW YORK) US commercial real estate sales in the first half totalled about a quarter of the average of the previous six years as owners kept properties off the market, impeding investors with record funds for purchases.

Buyers and sellers completed US$34.2 billion of deals through June, or 26 per cent of the average first-half dollar volume since 2004, according to preliminary figures from Real Capital Analytics. The total was about 12 per cent of the 2007 peak, when US$277.7 billion of properties changed hands in the same period, data from the New York-based real estate research firm show.

Sales climbed 58 per cent from last year's first half, when purchases dried up after the US credit crisis and recession sent values tumbling. A dearth of available properties has sparked demand for the few deals being offered, according to Alan Kava, co-head of Goldman Sachs Group Inc's Real Estate Principal Investment Area in New York.

'People are frustrated that not a lot has been trading,' Mr Kava said. 'When something does come to market, that lack of supply is causing almost a feeding frenzy. People have real estate funds that are not on an infinite time line - they need to put capital to work.'

Private equity real estate funds have a record US$104 billion of equity available for US deals, research firm Preqin Ltd reported last month. Blackstone Real Estate Advisors has the most to invest, with Goldman Sachs second, according to Preqin.

More than half of the US$8.4 billion available for Goldman Sachs's property funds is reserved for overseas investments, Mr Kava said. Blackstone has about US$12 billion for real estate purchases, said Peter Rose, a spokesman for the New York-based private-equity firm.

In top markets such as New York and Washington, owners who owe more than their properties are worth are finding new sources of equity and lenders are willing to restructure their loans, said Sam Chandan, Real Capital's chief economist.

In less attractive markets, banks have been extending loans, waiting for higher prices so they don't record losses, according to Mr Chandan. That has kept troubled assets off the market, he said.

There also is little incentive for owners who bought as the market climbed to sell now. Values in April were down 41 per cent from their October 2007 peak, according to the Moody's/REAL Commercial Property Price Index.

'The problem is more on the supply side than the demand side,' said Dan Fasulo, a Real Capital managing director. 'Our investors are regularly complaining there's not enough quality listings available for purchase.'

Demand for properties is strongest in New York, Boston, Washington and San Francisco, 'where domestic and foreign investors alike have sought to acquire high-quality assets', said Mr Chandan.

Those four markets accounted for 20 per cent of first-half sales, compared with about 15 per cent last year, according to Real Capital. For office buildings, the largest category, the cities made up almost 35 per cent of the volume, up from almost 32 per cent last year.

Manhattan totalled US$2.92 billion of completed sales in the first half, up 70 per cent from a year earlier. About US$1.42 billion were office deals, up 62 per cent.

SL Green Realty Corp, New York's largest office landlord, was both a buyer and seller. The company agreed in May to sell a 45 per cent stake in Manhattan's McGraw-Hill Building at 1221 Avenue of the Americas to Canada Pension Plan Investment Board for US$576 million, a deal that values the building at about US$500 a square foot, according to Real Capital.

It also purchased 600 Lexington Ave for US$636 a square foot, and agreed to buy 125 Park Ave, a tower across 42nd Street from Grand Central Terminal. That deal was valued at about US$507 a square foot, based on data in a company statement.

Those prices reflect a rebound off market lows reached last year, when similar midtown Manhattan properties sold for about US$350 a square foot, said Mr Chandan. In 2006 and 2007, readily available loans that were packaged and sold as commercial mortgage-backed securities helped drive prices for top Midtown skyscrapers beyond US$1,000 a square foot.

'We basically went around the world talking to capital sources, in Asia, Europe, Middle East, Canada, and domestically, and hearing the same thing,' said Andrew Mathias, SL Green's president and chief investment officer. 'People's confidence in Manhattan was not at all shaken, because of the extraordinary supply/demand metric that exists here, where you have very, very limited new supply, and the interest rate environment.'

The company paid US$523 million for its two acquisitions, combining both closed and contracted deals. Its sales of partial property interest totalled US$663 million.

The biggest completed deal of the year so far was Monsanto Co's purchase of Chesterfield Village Research Center, a research and development complex in Chesterfield, Missouri, from Pfizer Inc, according to Real Capital. Monsanto paid US$435 million, said Kelli Powers, a spokeswoman for the St Louis-based company.

Distressed building sales probably will remain scarce, Mr Chandan said. There are US$184.6 billion of troubled properties facing foreclosure or bankruptcy, out of a total US$239 billion since the credit crisis started in 2008, according to a June 1 Real Capital report. - Bloomberg

Source: Business Times, 8 Jul 2010

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