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Recent surge in large commercial transfers.

Recent surge in large commercial transfers

After three years of negligible transaction volume in the commercial investment sales market, the pace of activity has increased sharply over the past few months.

The past three years have been marked by the virtual absence of large commercial transfers in the 100,000-square-foot-plus category. Between 1980 through the end of 1986, there were generally 15 to 25 transfers per year of these properties. Between 1987 and the present, there has been less than a handful of closings of these large office properties. Aside from the Crown Building auction, which has a special niche in the Twilight Zone all by itself, 1740 Broadway and 15 East 26th Street are the only major office properties to close in over two years.

All of a sudden, the activity in the large commercial sector appears to have dramatically increased. We have heard that a deal to acquire a large property at Madison Avenue and 46th Street has been signed. A 475,000-square-foot property on Park Avenue is reportedly in contract with initial yields in the 10 percent-plus range and a price of $210 per square foot. We just closed a deal on a 400,000-square-foot commercial building at 31st Street and 11th Avenue which was bought by a professional investor for $33 per square foot. And we have first-hand knowledge of at least six other major Midtown properties where serious discussions are drawing towards a conclusion.

Where is the demand coming from and how have the economics changed?

There has been a tremendous recent surge in demand from foreign investors who now sense that the bottom may be approaching and are trying to acquire some large commercial properties at 30 percent to 50 percent off price levels of two years ago. Except for a small handful of local professionals, almost all of this aggressive money is derived from foreign sources. especially Sweden, England, the Benelux Countries and the Middle East (again).

We have been greatly surprised to find out that most of the local professionals who were responsible for the bulk of the secondary office building acquisitions in the early to mid-1980's are, at least temporarily, out of the market. A number of them appear to be preoccupied with re-financing their earlier acquisitions, many of which were done with five-year bullet loans, as well as keeping these properties occupied in the face of a wave of tenant bankruptcies in Midtown South and Wall Street. We recently approached the Manhattan commercial investment community discreetly with a complicated 200,000-square-foot deal involving the sale of an operating leasehold with an extremely favorable purchase option in the future. The deal was well located in Midtown and required a professional operator who could both understand and live with an unconventional deal structure as well as have the ability to lease a number of 20,000-square-foot floors coming due in the next two years. The deal was so favorably structured that it required only about a $2 million equity investment that would cover acquisition and rent-up and no need to secure any debt financing. While three years ago it would have been easy to find 15 to 20 qualified groups to bid on the transaction, we found that almost all were completely out of the market for new deals, except for less than a handful. The deal is finally near completion.

Anyone who has been following the Manhattan transfers has noted a recent increase in sales of investment-grade, multi-unit residential properties, that is to say, below 96th Street. Most of this activity has been of the walk-up variety, although a growing number of elevator transfers have been appearing which indicates that many owners do not see an upturn in the co-op/condo market in the foreseeable future. These elevator buildings are still in tremendous demand by investors. The elevator buildings that have transferred recently generally are on multiples of 5.5 to 6.5 times the gross rent roll, which is down from 8.5 to 10.5 just a few years ago. We recently represented, for example, a professional investor in acquiring 1 Jane Street, a 37-unit elevator building with five stores at the corner of Greenwich Avenue which went for about a 5.5 gross rent multiple and was an all-cash deal.

The commercial acquisition market is indeed heating up but the rules have changed. The lenders are returning to the market but they are insisting that the borrowers have at least 25 percent to 30 percent equity in the deal, versus 0 to 10 percent five years ago. That's the bad news. The good news is that prices are down so markedly that there are actually substantial returns on equity available going-in most cases. In a new survey of some of the most active professionals in town, we have found that most of them are devoting their time to raising new sources of equity to take advantage of some very favorable opportunities that are beginning to appear. Many of them appear to be succeeding and therefore we predict that sales activity in both the residential and commercial sectors of Manhattan will continue to increase. The Manhattan market is large and has a lot of depth and there is tremendous pent-up energy.

Peter Hauspurg President Eastern Consolidated Properties, Inc.
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Title Annotation:Mid-Year Review & Forecast Section III
Author:Hauspurg, Peter
Publication:Real Estate Weekly
Date:Jun 26, 1991
Previous Article:Bergen County continues as active submarket.
Next Article:Commercial builders back senior housing.

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