NYC landlords that can't find buyers turn to borrowing instead

[NEW YORK] At a time when commercial-property purchases have slowed to a trickle, Manhattan landlords who can't sell are still getting money out of their buildings - by turning to lenders.

A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest US market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 per cent from the same period in 2016, to US$15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.

At the same time, the market for debt on commercial properties is booming. Investors of all stripes - from banks and insurance companies to hedge funds and private equity firms - are plowing into real estate loans as an alternative to lower-yielding bonds. That's giving building owners another option to cash in if their plans to sell don't work out.

"Sellers have a number in mind, and the market is not there right now," said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. "Owners are pulling out capital" by refinancing loans instead of finding buyers, he said.

At 237 Park Ave, Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for US$810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for US$850 million in loans that value the 21-story building at more than US$1.3 billion, according to financing documents. The owners kept about US$23.4 million.

"The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery," said Scott Rechler, chief executive officer of RXR.

A representative for Walton Street declined to comment.

The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns US$15 billion of real estate throughout New York, New Jersey and Connecticut. That's a departure for Manhattan's property owners, who in prior years would pursue one track at a time, he said.   Plunging Sales Across the US, sales of office towers, apartment buildings, hotels and shopping centers have been plunging since reaching US$262 billion nationally in 2015, just behind the record US$311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85 per cent in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.

Many landlords who have been holding their buildings for several years are eager to collect on recent gains, according to Spencer Levy, head of Americas research at brokerage CBRE Group Inc. Even as buyers balk, lenders are writing loans large enough for owners to pay off existing debt and keep something extra for themselves, he said.

BLOOMBERG