New York’s Office Market Gets Crushed, Bubble Deflates

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Where the heck is the Foreign Money when you need it?

The market for office buildings in one of the hottest and most overheated real-estate markets in the world, New York City, just went into the deep-freeze. If you see the word “plunge” a lot below, it’s because that’s what happened in the first quarter of 2017.

It was exactly what no one in the industry needed. Sales of large office properties (those with over 50,000 square feet) that closed in Q1 2017 plunged 63% year-over-year, from $5.54 billion in Q1 2016 to $2.1 billion. It was the lowest transaction amount in any quarter since Q1 2013.

According to Commercial Café, which analyzed data from Yardi Matrix and PropertyShark, that $2.1 billion in Q1 office sales, in total 10 deals, was down an ear-ringing 80% from the $10.3 billion, and 26 deals in Q1 2015.

This chart shows the plunge in billion dollars:

In terms of square footage sold, a similarly ugly picture emerges. Sales plunged 39% year-over-year to 2.8 million square feet, the lowest in the data series going back to 2013, and down 74% from the glory days of Q1 2015:

The average price per square foot of these sales plunged 23% year-over-year, to $741 per square foot, and 36% from the peak, which occurred in Q2 2015. It was the lowest average since Q1 2014. It was an ugly quarter.




Commercial Café attempted to see some kind of silver lining, and if not a silver lining, at least some hope:

Yet with the presidential election now in the rearview mirror, and with the unemployment rate at a record low of 4.8% as of February, the market is likely to pick up steam over the following months.

It sure would be nice. And some bounce-back is likely. Nothing plunges like this without some sort of rebound – based on the time-honored theory that nothing goes to heck in a straight line. But the rebound better be huge to put the market back on track. And that looks unlikely.

Of the 10 deals, 8 properties were located in Manhattan and 2 in Brooklyn. The largest transaction, at $1.04 billion, was Asian money. Commercial Café:

Singaporean sovereign wealth fund GIC acquired a 95% stake in 60 Wall St. from Paramount Group, for $1.04 billion. As a result, Paramount will retain a 5% stake in the Downtown Manhattan property, which houses Deutsche Bank’s U.S. headquarters. The banking giant is the sole tenant of the 47-story, 1.6 million-square-foot office tower.

But that was the only one of the 10 largest deals where the acquirer was a foreign entity. Where did all the Asian money go?

In 2016 in the US overall – a year when office sales fell 7% and leasing activity was hampered by office tenants that were “reluctant to make any major moves pending the conclusion of the presidential election” – offshore buyers accounted for 43% of the 50 largest office deals. And those from Asia alone accounted for 16%!

These were the trophy transactions that got global attention. Foreign entities were involved in innumerable smaller deals that only got local attention. But in Q1, these foreign entities – whether sovereign wealth funds or shady newly-minted mega-insurance companies – didn’t show up in New York City.

Hope remains that this will work out somehow, that Q1 isn’t going to be an indicator for what the rest of the year will look like. And so Commercial Café expects the New York City office market “to pick up steam in the upcoming months.” And that would require a slew of foreign buyers to materialize.

A bubble continues to expand until enough buyers lose interest in the lofty valuations and in the slim financial opportunities, if any, that these deals at the peak offer. Then it begins to deflate. Commercial real estate, not only in New York City but in the US overall, has been in a phenomenal boom that started in 2009 with property prices and rents both soaring for eight years straight.

The big freeze in New York City may be another sign that this bubble too can only go so far, and that peak craziness has been reached. The Fed is now specifically fretting about this commercial real estate bubble, and how to contain it before it takes down the financial system. Read…  Commercial & Residential Real-Estate Bubble once again a Risk to “Financial Stability,” and the Fed is Worried




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  24 comments for “New York’s Office Market Gets Crushed, Bubble Deflates

  1. NotSoSure
    Apr 12, 2017 at 10:08 pm

    Makes sense really. Anything that has real estate and tangible asset will be punished heavily. For example AirBnb vs Hilton, Tesla vs GM, Amazon vs Walmart. Everyone is trying to be as “real asset” light and liability heavy as much as possible because those real assets are akin to having an albatross around your neck.

    Investment Banks, Pension funds, Sovereign Wealth Funds, Private Equity, various investors, heck every area of finance seem to agree on this.

    #AmericaIsAlreadyGreat

    • Larry
      Apr 13, 2017 at 10:48 am

      I’m not so sure Tesla and Amazon are great examples of being real asset light. Amazon requires gobs of warehouse space and has server farms production studios and more. They employee nearly 350k people, who all represent real resources. Tesla may not be delivering on sales volume, but they are the opposite definition of being light on “real assets”. They actually make cars, just not at the margins or numbers that suggest a competitive threat to GM.

      AirBnB is absolutely the SV dream business of being a rent extracting middleman that is a “technology” company. Uber, WeWork, all those companies are highly valued because they have less assets depreciating on the book (though WeWork does build out the office space it subleases in order to sub-sub-lease it again).

      • Thor's Hammer
        Apr 14, 2017 at 6:25 pm

        Defining a real or tangible asset is a bit problematic. For instance, one could easily put the entire output of Microsoft on a few hard drives and walk away with them in your briefcase. A bit harder to do with Teslas. Does that make software less tangible than cars?

        I prefer to use the criteria of use value to decide. Let us take as an example the “smart phone.” In order to determine whether it is a tangible asset to an individual one must weigh the actual benefits of ease of access to information against the vast amount of time wasted in maintaining continual connectivity and the social loss of replacing face to face human interactions with digital “friends”. By that standard the smart phone is not an asset but a liability to the vast majority of individuals and to society as a whole. What does that imply about the real value of Apple?

        Use value is obviously entirely contextual. If you are on Comac McCarthy’s “The Road” instead of the I70 a few bullets for your gun are worth more than all the smart phones in the world and it’s pretty hard to eat Teslas.

  2. akiddy111
    Apr 12, 2017 at 10:16 pm

    The Quarter would have looked even worse if the 60 Wall Street deal with the Singapore Investment Fund did not happen.

    …And this is the kind of activity we’re seeing with the S&P 500
    at close to all time highs.

    • VegasBob
      Apr 13, 2017 at 12:04 am

      Wait till the Fed starts letting some of its maturing assets roll off its balance sheet instead of reinvesting the proceeds.

      This will have the effect of slowly destroying some of the trillion$ of counterfeit electronic money the Fed conjured from nothing to pay for those assets. In other words, the money bubble will start to deflate, as will all the other bubbles created by the Fed – stocks, bonds, real estate.

      The alternative is to try to keep the bubbles expanding, but that will completely destroy the few remnants of the middle class that have not already been economically destroyed by Fed policies over the past 20 years or so.

      It should be quite a show. Got popcorn?

      • Frederick
        Apr 13, 2017 at 3:11 am

        Just got the XXXL with extra butter

      • Gershon
        Apr 13, 2017 at 5:20 am

        The alternative is to try to keep the bubbles expanding, but that will completely destroy the few remnants of the middle class that have not already been economically destroyed by Fed policies over the past 20 years or so.

        The Fed’s engineered boom-bust cycles every eight years or so are the most efficacious means for the Wall Street-Federal Reserve Looting Syndicate to defraud and asset-strip the American middle and working classes and transfer their property and assets to the Fed’s oligarch cohorts. The destruction of the middle class will continue unabated unless/until this criminal private banking cartel finally gets put in check.

      • JZ
        Apr 13, 2017 at 11:02 am

        Middle class destroyed? NO. Middle class turned into debt/rent/wage slaves? maybe.
        Until working people can no longer save 1$ at the end of the year after all basic cost of living is paired for, they will NOT stop.
        Save your pop corns for later, this will last until zero saving after expense for more than 75% of the W2 folks.
        W2 folks will adapt as well. They will all turn into speculators in the casino and transfer all of their existing savings into the hands of the few who have an edge in the transfer game.

        We are NOT there yet. We are just in the process.

      • economicminor
        Apr 13, 2017 at 11:47 am

        The middle class is diminishing due to many factors. Health care cost up, insurance up, rents up, food up, utilities up.. everything up except their incomes..

        What the FED would do IF they reduce their balance sheet is destroy the pension funds and many PE groups who rely upon the CMBS that underline these extreme valuations.

        And the destruction of the pension funds will finish off most of the elderly who rely upon this income. The retirees or about to retire, who already have cut back on consumerism will just stop.. And that will send the entire economy into a tail spin..

        So the FED needs to figure out how to prop up the system more or the entire house will come tumbling down.

        • Tom Kauser
          Apr 13, 2017 at 12:20 pm

          They talk of gold confiscation and the forming of a caste system as a result!

          Once everybody realizes there is a global gold standard attention will be drawn away from tit for tat actions toward – how do we get our gold back ?

          Get your peanuts!

        • JZ
          Apr 13, 2017 at 5:16 pm

          The prop up has been going on for years now. It is not the FED that does the prop, it is the middle class. The FED had fun.
          Now the middle class still needs to prop what the FED wants to prop, so let’s all keep at it until we tap out.

      • Shawn
        Apr 13, 2017 at 12:22 pm

        Very good point, asset price inflation had a lot to do with Trump’s election. The irony is that Yellen was probably rooting for Clinton.

  3. OutLookingIn
    Apr 13, 2017 at 2:32 am

    The recent super growth strength of the ETF sector, which is now in excess of $2.4 trillion and has surpassed the hedge fund sector in terms of capital size, shows where capital has flowed to.
    A case in point is the ishares real estate mortgage ETF (REM) which is now back to nose bleed levels, last seen in early 2008 just before collapsing in early 2009.
    The bad news about the ETF sector is that the two biggest investors are insurance companies and pensions. When the return to ground level occurs the people at the bottom, such as retirees and those with savings policies in their 401’s will be hit hard. Only in 2009 the sector was much smaller with far fewer financial products. The wipe out will be epic.

    • Frederick
      Apr 13, 2017 at 3:14 am

      The metals are sure catching a bid of late Look for a smash down any day now to crush the optimism as usual Buy the dip people and keep on stacking if you know what’s good for you Removing Alcoa hat now

  4. hidflect
    Apr 13, 2017 at 6:20 am

    China has cracked down on the long running Iron Ore rort that was being used to export money out of the country. I think I outlined the scam in a previous post. That’s one of the factors, I’m sure. Whatever pool of money they collectively managed to offshore on behalf of players is now obviously shrinking.

    Which also explains the plummeting Iron Ore price.
    http://www.perthnow.com.au/news/iron-ore-price-drops-to-fivemonth-low/news-story/115f9feb0a4d4fdcdd09552d63282dd0

    • Frederick
      Apr 13, 2017 at 10:12 am

      That’s great news I’m going to be buying tons of rebar in the next 6 months or so Bring the rout please

  5. Ishkabibble
    Apr 13, 2017 at 10:57 am

    “Where the heck is the Foreign Money when you need it?”
    ==========

    Tesla!

    • MC
      Apr 13, 2017 at 12:40 pm

      Sorry, that is where US pension funds’ and insurance companies’ money is.

      Foreign money may be found, among other places, in Sydney, Melbourne, Toronto and, to a lesser extent, the SoCal housing market.

  6. Smingles
    Apr 13, 2017 at 11:14 am

    Wolf,

    This is slightly off-topic, but… did you see Wells’ mortgage numbers?

    Applications down 23% in Q1. Not pretty.

    • akiddy111
      Apr 13, 2017 at 1:19 pm

      Did WFC give Q1 #’s for new mortgage applications ?

    • Frederick
      Apr 13, 2017 at 3:14 pm

      Who in gods earth is dumb enough to go into debt for bubble priced real estate when the deflationary collapse is staring us square in the face That could explain the horrible numbers GOT GOLD? This thing is gaining momentum folks Beware

    • DH
      Apr 13, 2017 at 6:23 pm

      I think that was just down from Q4, but about the same as Q1 of 2016, right? I’m trying to temper my hope.

  7. akiddy111
    Apr 13, 2017 at 1:35 pm

    Continuing with the more slightly off topic, Wells’ just reported Auto originations are down quite significantly.

    Here is the excerpt from their Q1 report :

    “{Auto originations of $5.5 billion in first quarter, down 15 percent from prior quarter and down 29 percent from prior year, as continued proactive steps to tighten underwriting standards resulted in lower origination volume}”

  8. Robert
    Apr 13, 2017 at 2:09 pm

    It’s a mistake to make any assumptions that the Fed is “fretting” about the present situation: the big banks that own the Fed have hundreds of subsidiaries, including any number of vulture funds that are waiting to pounce- or ready to trigger the collapse. I liked Bill Fleckenstein’s comment, years ago, that the one thing the Fed doesn’t worry about is interest rates.

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