U.S. CMBS, Office Sales Likely to Rise in 2011

As prices for high-end New York office buildings start to rebound, so will the market for bonds that bundle property loans

(Bloomberg) — Prices of high-quality New York office buildings and sales of commercial mortgage-backed securities are likely to increase in 2011 as the U.S. economy recovers and interest rates stay low, said a panel of real estate executives. Demand for refinancing will be "tremendous" as 2012 approaches because of the high volume of loans taken out in 2005 to 2007 with five-year maturities, said P. Sheridan Schechner, managing director at Barclays Capital Inc.

"There's definitely a need for the CMBS market," Schechner said today at the Real Estate Briefing hosted by Bloomberg Link in New York. "This year was around $10 billion or so. Next year there's a wide divergence of opinion. A lot of people think it will be about $25 billion. I think it will be closer to $50 billion."

The market for bonds that bundle commercial property loans has been starting to rebound after drying up two years ago during the financial crisis. U.S. sales of commercial mortgage- backed securities totaled about $8.2 billion this year, up from $3.4 billion last year, according to Bloomberg data. Issuance tumbled 95 percent to $11.2 billion in 2008 from a record $234 billion in 2007 as the credit crisis sapped demand. Sales of U.S. office buildings rose to $20.9 billion in January through September of this year, up 31 percent from $15.9 billion a year earlier, according to Real Capital Analytics Inc., a New York-based property-data provider.

'Pent-Up Demand'

"We like the fundamentals in New York City," with little new supply and "a lot of pent-up demand," said Andrew Mathias, president and chief investment officer of SL Green Realty Corp., a real estate investment trust and Manhattan's largest office landlord. "Toward the end of last year, we saw a real change in the leasing market."

SL Green this year bought a stake in 600 Lexington Ave., paid $330 million for 125 Park Ave. and sold a $576 million stake in the McGraw Hill Cos. headquarters. The company also sold its stake in 510 Madison Ave., which Boston Properties Inc. bought for $312.2 million in August. "We saw an entire class of buyers, high-leverage buyers, basically disappear" when credit markets seized up, Mathias said. "That allowed us to snap up some good deals."

While New York might look expensive within the U.S., it ranks sixth among world financial centers such as London, Hong Kong and Moscow, said Albert Behler, president of Paramount Group Inc., a closely held real estate investment company with 12 million square feet of office space in Manhattan, San Francisco and Washington worth about $10 billion.

New York 'Attractive'

New York "is relatively attractive right now," Behler said. "It's one of the few markets if you compare to other cities where you can buy assets substantially below replacement cost." Paramount has been looking to make purchases in New York since 2008, he said.

"We didn't find much in 2009 and now the markets are opening up," Behler said. "We're looking forward to buying some more assets in the city." Paramount, founded in 1968 by Werner Otto, gets the majority of its money from foreign investors. In September, Paramount paid $151.1 million, or $791 a square foot, for 1899 Pennsylvania Ave. in Washington.

Foreign investors are "only interested" in so-called trophy properties, which remain scarce, Behler said. Commercial real estate offers value relative to fixed- income investments, Schechner said. "If you're looking at alternatives, commercial real estate looks pretty attractive right now," he said.

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