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SL Green: Even Manhattan Has its Limits

NYC Office REIT Tempers Investor Expectations, Noting Economic Impact that Energy Pricing and Slower Job Growth Could Have on Lofty New York City CRE Market
January 29, 2016
SL Green Realty’s CEO Marc Holliday offered his frank assessment of New York City's office leasing, investment and financing market in his company's fourth quarter earnings conference call late yesterday.
SL Green Realty’s CEO Marc Holliday offered his frank assessment of New York City's office leasing, investment and financing market in his company's fourth quarter earnings conference call late yesterday.
The blisterring Manhattan office market may be losing energy - literally, according to SL Green Realty’s CEO Marc Holliday.

After SL Green posted strong results for the fourth quarter, Holliday gave an unvarnished assessment of the city's office leasing, investment and financing market in his company's fourth quarter earnings conference call late yesterday.

Holliday cited volatility in the overall global market and said that, while he expected the New York City market to continue to grow, he expects the growth will be at a slower pace from the exceptional activity seen in the second half of 2015. After several years of bidding up prices to historic highs, investor sentiment has substantially cooled over the past 50 days or so, even though the property fundamentals are still strong, he said.

"If you look at the last 45, 50 days in the market, there's obviously concern” among investors, Holliday said, “predominantly about potential bank exposure to the energy sector and what that might mean in terms of earnings visibility and whether or not that will result in some kind of people contraction.”

On the job front, Holliday said the REIT is expecting to see a bit of a rollback in job creation for the first time in the past four or five years in New York City.

By SL Green’s count, between 87,000 and 88,000 private sector jobs were created in New York City last year, of which about 30,000 were office-using. The REIT expects the the numbr of private-sector jobs created in 2016 number to drop to between 50,000 to 60,000, and hence only 12,000 to 16,000 office-using jobs created this year.

"By historical standards, in excess of 1% job growth is still a very good number,” Holliday said. “But it does reflect a slowing of this unprecedented rate of growth as, I think, businesses sort of catch their breath (from) a very significant expansionary period" over the past four to five years.

On the plus side, Holliday said there's still plentiful debt financing for high quality real estate, although that is not the case for out of favor, secondary, tertiary or transitional assets.

To illustrate his somber assessment of the investment market, Holliday discussed four particular NYC office buildings that are currently under contract to investors other than SL Green.

“1285 Sixth, which is a deal that Scott Rechler [CEO and chairman of RXR Realty] is doing, which is I think a very good down-the-middle deal. It's about a 4.5% cap going in (and) under $1,000 per foot, $950 a foot for a Sixth Avenue product, and shows that large transactions of $1.7 billion or more can still get done and capitalized in this market,” he said.

“787 Seventh, again with a going-in yield of about 4.5%, 4.6%... But we look at 787 as having above-market rents, and we think that there will be pressure in execution to keep those yields at those levels,” he said.

“850 Third Avenue is a deal being done at, from what our reconnaissance tells us, at around $875 a foot, a sub-3.5% going-in yield. There'll be real work there to kind of rework that tenancy in order to get up to a 5% or 5.5% or so stabilized yield, but that would be sometime out, probably five years or more And that's a deal that's about $460 million in price,” Holliday said.

“And lastly, 405 Park is rumored to be under contract at a purchase price of $240 million, but more importantly at a price per foot of $1,450 per foot on a stabilized basis. We project it'll be closer to $1,600 per foot. That was about a 3% going-in yield. And I would say, this transaction doesn't just flatter 280 Park, it picks it up and puts it on the pedestal,” he said.

So while the investment market is still very active, as with the leasing market, Holliday said he expects a slowdown in sales transaction volume this year. For its part, he added that SL Green is going to be very picky on the investment front this year.

“What it implies is that we believe that this year we might see one or two interesting opportunities, to exercise on them, maybe. And if we do, we'll do it in a way where they are either funded entirely by sales or with JV equity, period," Holliday said. “We're going to be very, very discerning on our purchases as we always are, at this point in the market.”


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