Sellers scarce in 'buyer's market.'

Real Estate Weekly, Feb 19, 1992 by Darcy A. Stacom

New York is a buyer's market, without a lot of buildings for sale.

Although Manhattan's office leasing market is depressed, the majority of owners have not been placed in a situation where they are forced to sell. Interest rates are at their lowest levels in years, and owners are able to service their mortgages despite lower cash flows.

The majority of Manhattan's primary inventory is controlled by corporations, institutions and individuals with the financial strength to ride out a depressed market, especially with lender cooperation, which has been forthcoming.

The current real estate cycle, resulting from overbuilding and corporate retractions, has seriously impacted the leasing market. It has provided an opportunity for tenants to take advantage of the market, and the result has been a flight to quality. In each segment of the market, primary and secondary tenants are upgrading.

The secondary markets have been hard hit, with some tenants upgrading to primary buildings. The areas of greatest distress, and, therefore, the largest opportunities lie in the secondary markets.

The few primary buildings that come up for sale due to unresolved debt structures, partnership disputes or priority needs for capital, will be sold at levels that are significantly below previous years' and will allow buyers to compete in today's rental market.

Looking back at 1991, a limited number of transactions were completed. The per square foot prices varied dramatically from $80 to over $1,000 per square foot, as did the initial and overall yields, from 7 percent to 10 percent initially. The only statement which can be made about investments in 1991 is that compared to historical transactions on comparable properties, the 1991 transactions were substantially lower in price.

In 1991, there were eight sales, for a combined price of $334 million. In 1990, there were nine sales for a combined $535 million. Even more dramatic is the contrast with 1989, when there were 18 sales worth $1.4 billion.

As has always been the case in New York, buyers' and sellers' motivations varied in 1991, but were primarily focused on a need for capital for sellers, and a prestigious location or building for buyers.

For the transactions completed last year, the motivation of the sellers included the need to raise capital to pay investors, governmental disputes, and a Chapter 11 auction. The motivations of the buyers included those who responded to properties' triple A locations and the prestige of the property, and several for the yield, both existing and potential.

No major sale occurred in 1991 due to foreclosure, as most lenders and owners were in the process of workouts. One sale did occur in 1991 as a result of a Chapter 11 filing, 16 East 34th Street, and as many as five other major properties were placed under Chapter 11 protection.

The only major development involving financing was the restructuring and sale of the CALPERS mortgage on 60 Broad Street involving Li-Ka Shing of Hong Kong. The mortgage was purchased for $57 million, a writedown of over $100 million, from its original face value of $160 million. A joint venture ownership agreement was reached between Olympia & York and the LI family as part of this transaction.

In many ways, the 1992 investment market will be similar to 1991: sales will occur, albeit on a limited basis. It is anticipated that foreclosures and Chapter 11 proceedings will play a more significant role in shaping the real estate market in 1992, especially in downtown Manhattan. For the third consecutive year, New York will be a buyer's market. But, sellers will be scarce.