Are We There Yet?

For those with children, depending on their age, the cry from the backseat “are we there yet?” can invoke either wonderful memories of years gone by or dread with your summer vacation nearing. However, most recently, this cry is not heard from children, but from some of the most intelligent and respected real estate industry experts and analysts, who are much more intelligent than I with respect to Capital Markets and rental numbers.

With the national office vacancy rate edging up from 16.4% in the fourth quarter of 2009 to 16.7% in the first quarter of 2010, this rise in vacancy was described as being positive, as this was “the fifth straight quarter of decelerating declines.” This is good news in many ways, as we are all searching for the next run up in real estate values and rents, which of course translates to higher profits, commissions and salaries. For simplicity, business cycles typically consist of 4 components, and having gone through an extreme contraction, it would appear we are in the trough and ready for expansion.

Over the past few months, we have seen the sale leaseback of 452 Fifth Avenue, the purchase of 417 Fifth Avenue, 125 Park Avenue, 600 Lexington Avenue and most recently 340 Madison Avenue. 340 Madison sold for $570M or $760/square foot. Comparing this price to what was paid only four years ago ($550M) does not show that large of a drop off in base price but a closer look reveals that today the building is 92% leased as compared to 4 years ago when 340 Madison was only 40% leased. Though it should also be mentioned that four years ago, a building with pending turnover or even vacancy was looked upon as increasing value positive and not a negative.

Have fundamentals returned? Economic principals of real estate value may indicate that scarcity and supply and demand may have contributed to the cost not having dropped even further, but a positive capitalization rate for one would/is nice to see.

What does the sale of 340 Madison have to do with Property Management? Simply, many who are in the profession of property management forget it is our responsibility to help increase value by reducing costs and continuing to educate ourselves on the fundamentals of what constitutes value. The industry has evolved and has entered the “trough.” Many owners have lost properties and or gone into foreclosure due to many reasons, namely timing, but they also strayed from the basic fundamentals. These investors have learned, and will not make the same mistake. It is my belief that unless all team members responsible for managing an asset can help in increasing its value, then they may need to find another line of work. What do you think?

Jack Terranova, PE LEED AP
Senior Vice President
Cassidy Turley, New York