Hard Times for Status Properties : Oversupply of Commercial Space Makes Sales Tough
The Rockefellers want to sell the famed Rockefeller Center; Sears, Roebuck & Co. is having trouble selling its Sears Tower. Bloomingdale’s, the world-renowned retailer, is for sale, along with the real estate on which it stands.
“The ‘hidden values’ in real estate have been unhidden, and they’re not there,” says Michael Metz, a market strategist for Oppenheimer & Co.
The real estate market is suffering from oversupply, but experts say the excesses vary widely between second-tier and “trophy” properties.
“We have a two-tiered market with a vengeance,” said David Shulman, a Salomon Bros. director in real estate research.
Office Building Glut
Concerned about oversupply, Shulman is cautious about the real estate market. “There has been a decline in construction, but not anywhere near enough to correct the oversupply,” he said.
While construction will drop further, demand for office space continues to fall, he said. Retail space is less in demand because consumers are spending less vigorously than they did in the mid-1980s.
In the avalanche of takeovers and leveraged buyouts in the retail business, conventional wisdom held that even if the sales operations were not worth the price tag, the stores could always be shuttered and the real estate used for more lucrative operations.
But with a glut of office buildings available in the most prestigious areas of big cities, these “hidden” values are now looked at more skeptically.
Pension funds and international investors still want real estate. But experts say only quality properties need apply. Even for prestige properties, the going can get bumpy. Olympia & York Developments Ltd., the huge Canadian property developer, dropped out of talks in Chicago on buying the world’s tallest building, the Sears Tower, in a deal worth about $1 billion.
High vacancy rates among office buildings nationwide has made sales of the buildings soft as well, since empty buildings are not attractive investments.
Los Angeles has 12% of its office buildings vacant while Miami faces a 21% vacancy rate, according to a midyear report by New America Network, a real estate group.
What everyone expects to be hit the hardest are the non-trophy, second-tier properties. As rents stabilize, such properties lose their cache of low cost. In addition, this class has a huge overhang because of the billions of dollars in problem real estate assets that the Federal Deposit Insurance Corp. will sell under the savings and loan bailout law.
The supply provided by a minimum of $30 billion of these assets going on the market will likely depress real estate values, affecting previously unscathed real estate markets, analysts at Salomon Bros. concluded recently.
