New York City Buildings Elusive Target for Investors

Investors wait for the bottom to fall out, but it may not happen in Manhattan

(Bloomberg)—Prices for Manhattan real estate may never fall enough for vulture investors circling the island looking for bargains on distressed buildings.

"Everybody is still hoping the bottom will fall out," , Peter Duncan, president and chief executive officer of George Comfort & Sons Inc., said today at the Real Estate Briefing hosted by Bloomberg Link in New York. "Here in Manhattan, that may never happen."

Demand for top-tier assets and record low interest rates has pushed up prices rapidly on the best buildings in New York, said William Macklowe, chief executive officer of William Macklowe Co. Private equity real-estate funds have raised $79.6 billion from the beginning of 2009 through last month, according to Preqin Ltd., a London-based research firm.

It has been difficult even to acquire debt at a discount, said Duncan, whose firm led a group that purchased Manhattan's Worldwide Plaza in July 2009. Developer Harry Macklowe, William Macklowe's father, lost the building to lender Deutsche Bank AG after he was unable to refinance almost $7 billion in debt used to finance acquisitions in 2007.

Mezzanine Loans

"We have been trying to buy the mezzanine at a good return even if we don't get to the asset," Duncan said. "Because we may not get there."

With the Federal Reserve keeping interest rates low to spur economic growth, distressed property owners have more room to maneuver. This changes where value is to be found in debt purchases and means some so-called mezzanine loans may be in the money that were expected to be wiped out, said Macklowe.

Mezzanine loans are a form of higher-interest debt that's subordinate to a first mortgage. Unlike a mortgage, through which the bank has a lien on the property itself, a mezzanine loan is secured by a pledge of equity ownership in the borrowing entity that bought the property.

U.S. commercial property prices tumbled for a third straight month in August to the lowest level in eight years, according to Moody's Investors Service. Values are down 45 percent from the October 2007 peak. More than 25 percent of sales in August involved distressed real estate, Moody's said Oct. 19.

The willingness of lenders to provide financing is a critical component of a recovery in real estate prices, said Stephen Meringoff, a managing partner at Himmel & Meringoff Properties in New York.

"We've seen a resurgence of the willingness of lenders to put money out," said Meringoff, whose firm owns and operates more than 2 million square feet of office and retail space. "Without leverage real estate is just another mediocre asset class."

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