FBR Sees A Massive Amount of Distressed Asset Sales In The NY Office Market

August 26, 2009 2:45 PM EDT
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FBR Capital Markets issued a research note on the Manhattan office market. FBR said leasing activity has picked up, but the bid-ask spread on asset pricing remains too wide for a material amount of transactions to occur. Additionally, FBR said the pickup in leasing activity is not likely sustainable, but 2H09 levels should be higher than 1H09.

Even though the leasing activity is not sustainable that won't necessarily translate into lower vacancy rates, but could continue to drive down the average price point of Manhattan office leased space.

FBR favors the best capitalized names with the highest quality space, and in Manhattan, it recommends
Boston Properties (NYSE: BXP) and has an Outperform rating on it.

The majority of leasing activity continues to be renewals as landlords are offering "blend and extend" deals to keep tenants in their space longer. Some of these renewals are on the shorter end, 2-5 years, because tenants are still uncertain about their business prospects much further out than that.

One example of how drastically rents have fallen in NYC: Wachtell Lipton Rosen & Katz signed a five year renewal on 250,000 square feet at 51 West 52nd Street for $62.00/foot, space that would have been over $110 foot a year ago.

FBR analyzed the roughly $500 billion of 2004-2007 vintage CMBS issuances of at least $1B in size from Bloomberg's database, and based on its initial review, it expects to see exponentially more underwater loans maturing over the next 12 months. While an immaterial amount of the $500 billion of "bubble" issuances matured in the first half of 2009, FBR's data suggests that $7 billion will mature in first of 2009 followed by $25 billion in the first half of 2010 and another $12 billion in the second half of 2010. FBR expects the overwhelming majority of these issuances to be underwater at maturity.

Therefore, FBR expects a massive amount of foreclosures and distressed asset sales in 2010, which should provide opportunities for well-capitalized REITs to be able to buy some trophy real estate on the cheap.

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