Office-Market Rebound
Could Be Years Away
NEW YORK -- It could be another four, five -- even six years before the office real-estate market rebounds, according to Nicholas Chermayeff, managing principal at Barrow Street Capital LLC, a real-estate investment firm.
Speaking at an Information Management Network real-estate investing conference in New York recently, Mr. Chermayeff said rents and occupancies have been dropping like stones -- with New York City being among the hardest hit. He shakes his head when he sees trophy buildings, such as the General Motors building in Manhattan continuing to lure multiple bidders and fetching record-high prices.
The recent sale of the prestigious General Motors building in Manhattan to Macklowe Properties for about $1.4 billion, or $800 a square foot, was "completely insane," he said. "I can't imagine anyone paying that price in New York" when vacancies are rising, the economy is getting worse, tax rates are going up, property taxes are on the rise, and the threat of terrorism lingers in the air, he said.
Historic-low interest rates have helped many buyers bid up properties. But as rates tick up, and rents and occupancies continue to fall, Mr. Chermayeff predicts it's just a matter of time before a major correction occurs.
"I think these trophy buildings that are trading at these lofty prices could correct 25% to 40% within five years," he said.
"We're not investing at all in New York," Mr. Chermayeff said. In fact, "we're not investing in office anywhere in the country right now because we're very bearish on the office fundamentals. We're selling all of our office buildings," he said.
"In our view, it's a dangerous and treacherous time" to be buying, he said.
Boyd Simpson, president of the Simpson Organization, is also avoiding trophy properties at today's overheated prices. He said pricing has been pushed up so high that he believes anyone bidding on them is doing so for "ego" -- rather than "investment" -- reasons.
Hugh Scott, managing director of CommonFund Realty, is slightly more bullish on office properties. He expects a rebound in demand in the next two years.
Several fund managers, such as Cia Buckley, senior managing director at JER Partners, said they don't expect a correction nationwide. Only certain overheated markets, such as New York and Washington, may experience sharp price dropoffs, they said.
In general, Mr. Scott avoids going after the fully leased, stabilized office properties that many pension funds and others have been chasing. He prefers, instead, to acquire underperforming properties that can be refurbished or turned around to generate bigger returns.
Simpson also sees opportunity in buying "value-added" properties. However, he cautions that investors cannot do so blindly. "They have to buy things that they know how to fix," he said.
Many fund managers at the conference said the key to real estate investment is diversification. Mr. Scott said it's important to have a good mix of different property types and geographical locations. He's nervous about apartment buildings, which he believes are pricey as a result of pension funds and others bidding up the values despite falling rents and occupancies.
He's also cautious on grocery-anchored shopping centers. He worries Wal-Mart Stores Inc.'s move into the grocery-store business could threaten the anchors at these shopping centers.
Henrik Jones, vice president of Offit Hall Capital Management, sees no "screaming opportunities" in the real-estate world today.
"We're not seeing a lot of transactions in 2003 that are real opportunities," where pricing is far below replacement cost, he said. Mr. Jones said investors should not expect to see the 20%-plus returns that investors enjoyed following the real-estate collapse in the early 1990s.
Email your comments to rjeditor@dowjones.com.