Shrinking skyscrapers

A view of the New York Times building. Bloomberg News

Owning a New York office building used to signal a landlord had arrived at the top of the heap. But a crippled financial industry has tarnished the prize, judging by financial results and forecasts of two large real estate companies.

"If you define our four markets as Boston, Washington, DC, New York City and San Francisco, I would say the strongest market is Boston, followed by Washington, followed by San Francisco, followed by New York," Doug Linde, Boston Properties BXP.N president told analysts during a conference call recently.

Fueled by rich rents from investment banks, insurance companies, hedge funds and private equity firms, New York easily topped that list over the past four years.

Some of those financial tenants no longer exist and others are merging or cutting their staff.

Canadian-based Brookfield Properties, which owns 10 million square feet of office space in downtown Manhattan, acknowledged the negative impact the financial industry will have on that market.

"We are anticipating some downward pressure which will become more apparent in rent, particularly in 2009," Dennis Friedrich, Brookfield's head of US commercial real estate told a conference call.

Real estate services company NAI Global expects the New York office space availability rate, now around 5 percent, to grow to 8.5 to 10 percent as consolidating financial-services companies dump more leased space onto the market.

It also sees New York real estate prices falling by as much as 20 percent.

High barriers to supply, a highly educated workforce and an ability to attract global capital may help offset near-term tenant risk, Property & Portfolio Research Inc said in a report last Wednesday.

"But given the dubious fate of America's investment banking industry, New York's longer-term worry could be competition from other global financial centers," the report said.

Among Boston Properties' 1,200 tenants, Citigroup Inc is its biggest rent generator, contributing $77 million annually. A unit of Lehman Brothers Holdings Inc, the investment bank that filed for Chapter 11 bankruptcy protection, is third, contributing about $43 million a year.

Forty-eight hedge fund tenants account for about $57 million annually. Citadel Investment Group, a hedge fund that has recently sought to quell rumors it is liquidating some of its portfolios, accounts for about $10 million of that.

Fifty-one investment management firms account for about $49 million, and 48 private equity firms contribute $35 million of revenue to Boston Properties.

Lehman's bankruptcy and the close of law firm Heller Ehrman LLP prompted Boston Properties to set aside $13.2 million, or 15 cents per share of funds from operations in the third quarter in case neither met their rent obligation. So far, the two have not defaulted on their rent.

Leaning on the side of caution, Boston Properties forecast that the space of both will remain vacant in 2009, shaving off $50 million from next year's total rent and pushing down occupancy to 92.5 percent from a current 95 percent.

Boston Properties says it sees funds from operations, a measure of performance of a real estate investment trust, to be between $4.65 and $4.90 per share in 2009. The midpoint of that range would make it about flat with 2008.

Brookfield owns the World Financial Center, where Merrill Lynch & Co occupies 2.6 million square feet. Bank of America Corp is in the process of buying Merrill, and veteran banking analyst Richard Bove, of Ladenburg Thalmann, has said he expects 10,000 jobs will be lost from the overlap.

Bank of America co-owns a new midtown office building, which can house about 6,000 workers.

"From our standpoint it appears to be too early to project what the ultimate impact of the merger will have on Merrill's occupancy at the World Financial Center," says Friedrich.

Agencies

(China Daily 11/03/2008 page11)