February 20, 2008

NY Real Estate

The saga of the NY real estate is very interesting to me. Last year Sam Zell have sold his company to the Balackstone group, for record price, which the buyer immediately broke it into pieces and flipped some properties to investors. One of those investors is Macklowe, which I have been talking about for the past two posts.

Macklowe financed the properties on one year loan with almost no equity and he has been caught swimming naked, as the credit crunch meant no more wily nelly financing. His financing package totaled $7 billion for the purchase. To compound his problems banks began at the end of 2007 with massive layoffs due to record losses from the subprime debacle. That means occupancy in NY will have to decline and cash flows from these building will be less than when he bought them making it tougher to cover mortgage payments. For example, the occupancy of the Worldwide Plaza, one of the properties, at the time of the purchase was 98.28%. The annual revenue at contribution was $152.5 million and net operating income stood at $121.4 million. The debt service coverage ratio at contribution was 2.56 times.

As of Sept. 30, occupancy at the Worldwide Plaza had fallen to 93.6%, year-to-date revenue stood at $96.9 million and net operating income only stood at $51.2 million and the debt service coverage ratio had fallen to 0.95 times - or, in other words, not enough to keep up with $53.6 million in debt service payments.

The office real estate market in NY is like no other. Investors collect these building not to earn any return while they own it but rather as prestige and trophy collection. For example the GM building, which is owned by Macklowe and being auctioned off, never made him a dime in return nor did it earn the previous owner any profit, which is none other than Trump. However, they made their returns in spades when they sold it.

Investing in NY real estate is such a leap of faith in the city and its place in the world. I am not sure I can have such faith in the future.

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