Sparkle's gone out of New York market

Real Estate Weekly, Oct 8, 2008 by Daniel Geiger

The profound makeover of some of the biggest players in the financial industry has cast new waves of uncertainty on how well the city's commercial real estate sector will fair during the credit turmoil and its aftermath.

Wall Street's widespread investment in mortgage securities that went bad has unfolded into a systemic crisis that has toppled or forced takeovers or reorganizations of a string of institutions, including companies that have major portfolios of office space in Manhattan.

Economists and financial regulatory officials now fear a deepening of the credit crisis that could further shut down the borrowing facilities that corporations in many sectors of the economy depend on to fund their daily operations.

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It could also push more Wall Street firms, who have been made vulnerable by months of write-downs, to the brink and continue to cause others to topple or be acquired in emergency deals.

Already the casualties have been grim, amounting to one of the worst episodes of tumult in history on Wall Street.

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In a continuation of the unprecedented series of collapses and takeovers in recent weeks, last Monday it was announced that Citigroup would acquire Wachovia for a fire sale price of $2 billion in a government-arranged deal to prevent Wachovia from what appeared to be an imminent collapse.

Washington Mutual, the nation's largest thrift, was seized by regulators lthe week previously as it teetered near bankruptcy and was subsequently quickly sold off to JPMorgan Chase.

In mid-September, Merrill Lynch arranged its $50 billion sale to Bank of America to stave off a cash crisis. Lehman Brothers declared bankruptcy and was then partially acquired by the British bank Barclays. Later that week, the federal government purchased an $85 billion majority stake in AIG to stave off that company's collapse. It is expected that AIG will be dismantled and sold off in the coming months. Other pieces of Lehman Brothers that were not acquired by Barclays are also likely to get sold.

At the start of last week, Morgan Stanley and Goldman Sachs, the last two major investment banks after the exit of Merrill, Lehman and Bear Stearns, reorganized into bank holding companies to stabilize their financial position amid the tumult.

Experts worry that the result will be millions of square feet of office space dumped on the market in the coming weeks and months, putting immediate downward pressure on rental and occupancy rates.

"The office market will definitely be affected, we're already starting to see the effect in deals that are getting put on hold or renegotiated," said Peter Riguardi, president of Jones Lang LaSalle's New York City brokerage operations. "I think that we'll see rents fall by about 15% or so in the next few months, but hopefully the economy will begin to right itself."

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Real estate experts have been comforted by the fact that takeovers will keep much of the operations of firms hit by the crisis in operation. Merrill's deal with Bank of America and Barclays' takeover of Lehman were hailed because both buyers were adding new businesses through the purchases and were expected to preserve the bulk of Merrill and Lehman's operations.

Still, Riguardi estimated that the consolidations are likely to result in a net loss of space. Ken Rapp, a vice chairman at CB Richard Ellis, said that merging firms, even those with little redundancy, often shed back office functions.

"Companies usually don't need two human resources or accounting departments," Rapp said.

Just how much space will come available has remained an elusive question that many brokers say will only be answered as the effects of the tumult permeate the real market in the coming months.

Lower Manhattan could be particularly hard hit by the problems because AIG was one of the district's biggest tenants, with 800,000 s/f in 70 Pine Street. The firm had also signed a sublease for another 800,000 s/f with Goldman Sachs at 180 Maiden Lane over the summer.

Merrill's takeover meanwhile comes as the firm is in negotiations to renew the more than two million square feet it has at the World Financial Center. Speculation has been brewing among brokers that Bank of America would like to bring part of the company closer to its new midtown headquarters, One Bryant Park.

The bank would seem to have the perfect opportunity to move at least part of Merrill's operations nearby. Bank of America is planning to vacate a 400,000 s/f block of space at 114 West 47th Street to relocate to the new tower, which it developed in partnership with the Durst Organization.

The bank had been planning to sublease the space until its expiration in 2014. Now it could opt to keep it and extend its term there so that it can have at least some of Merrill's operations just a few blocks away. Large vacancies downtown brings the need for the commercial office space planned for the World Trade Center site into question. Bruce Mosler, chief executive of the real estate services firm Cushman & Wakefield, said that he felt that the construction timeline for some of the commercial development at the WTC site should be extended so that new vacant office towers don't add to existing vacancies in the market.