In all the confusing crosscurrents of today’s real estate news, there was an interesting data point that brought clarity to where we sit today. The Real Deal just reported that Capstone Equities and AmTrust are purchasing 360 Lexington Avenue, a 270,000 square foot office building on 40th Street, for $65 million from Savanna. The purchase price was just 1/3 of the $180 million that Savanna paid for the building in 2019.
I don’t usually focus on individualized transactions in my commentaries. However, I believe that this transaction is a particularly useful reference point as a market bellwether. That is because Savanna bought the building in 2019, just before the pandemic. Accordingly, this sale clearly illustrates the havoc that has been wrought by the last half decade and the change in the perception of office by tenants and the increase in interest rates. Savanna’s difficulties have been well-chronicled and may have played a role in the sale. That said, if we are looking for price discovery, this deal is as vivid an example of the drastic fall in office evaluation that has been widely predicted by experts.
This occurs on the eve of the first Federal Reserve interest rate cut, which will be coming at the open market committee meeting next week, with the only question whether it will be 1/4 or 1/2 point. However, as RXR’s Scott Rechler recently pointed out, in Bloomberg earlier this week, don’t expect any major changes to the market. We will not be seeing the days of 0% interest rates again, and in fact that is probably a good thing as we need a period of normalized rates in the 3 to 4% range, which are well within historical norms.
The problem with quantitative easing, which lasted for over a decade is that for the longest time it seemed like the last line of the Eagles’ Hotel California: “you can check out anytime you like, but you can never leave”. Well, we are finally out and after the Fed’s corrective efforts, finally headed in the right direction.
Looking more broadly at the developed world, we see much of the same over in Europe as the European Central Bank cut its interest rates again by a quarter point today. At the same time, perhaps the most famous development in Europe, London’s Canary Wharf had its credit downgraded three notches by the Fitch rating service to lower junk status. This follows much ballyhooed comments by the Canary Wharf architect of how some of the offices will be converted to residential green space and retail/restaurants. And returning to home, we hear that plans are afoot for a widened park area in the center of Park Avenue north of the Helmsley Building which is in the midst of its own existential crisis.
But here’s the good news. In the next couple of years, we will see a more normal inflation and interest rate environment. The bad news is that it comes too late for some real estate operators. Of course, one person’s distress is another person’s opportunity and funds are lining up for the chance to jump into the office pool when the water is sufficiently warm. As with the 360 Lexington Avenue purchase, expect more deals at dramatically lowered price points. Even though we know which way the wind is blowing, expect the unexpected and you won’t be surprised.
At the outset of the pandemic, I predicted that it would take 10 years for the consequences of the office revolution to fully play out. We’re not even halfway there. However, as our friend Dan Alpert of Westwood Capital once said in the New York Times about the Empire State Building, “like the pyramids, it will be there forever.” With its vibrant neighborhoods, cultural and sports institutions, and yes, lower crime rate than other cities New York is well-positioned to survive and thrive. But unlike the pyramids which were burial monuments, our city is constantly evolving so we’re going to have to keep looking to the future to ensure our continued success.
Thank you,
Ruth Colp-Haber
