After ‘09 Slump, Office Condos Will Rise Again

NEW YORK CITY-Although the year-over-year decline in Manhattan’s office condominium market for 2009 was not as steep as it was in the investment sales arena, it’s telling that slightly more than two-thirds of the transaction volume last year came from a single building. Forty-three of the 70 condo sales for ’09 occurred at 139 Centre St., which co-owners Young Woo & Associates and Angelo Gordon Real Estate Funds are marketing as medical office space within the Chinatown community.

With a total of 54,328 square feet sold for a combined $63.2 million, the 139 Centre deals averaged 1,820 square feet each. Absent 139 Centre—which Time Equities Inc.’s Michael Rudder says is a niche unto itself within a niche sector of just 76 buildings and 8.2 million square feet—the office condo market in Manhattan saw a drop-off from 64 transactions in 2008 to 27 last year.

“Massey Knakal just released a report saying that the number of investment sales in ’09 was down 75% from the previous year and 92% from the peak,” Rudder tells GlobeSt.com. “This is similar, although the decline isn’t quite as drastic.”

However, Rudder, whose firm controls slightly less than 10% of Manhattan’s office condo space and just released its year-end report on the sector, is confident that 2010 will see a rebound. “There will definitely be more transactions,” he predicts. One reason, he says, is an improvement in the lending climate. “Through the Obama administration’s stimulus program, they’ve improved the SBA lending for small businesses, so there’s great financing available,” he says.

The effects of that improvement are already being seen in the first quarter of this year. “Last week, we closed a couple of smaller deals where one of the groups got 90% financing,” says Rudder, director of office leasing and sales at TEI. “But more than that, with all of the deals we’ve closed recently, the buyers just feel like now is the right time to make a move and lock it in. If it’s not at the bottom, it’s very close, and everyone who’s been in business for a while knows what it’s like to rent space when the market starts increasing, which could certainly happen in the next few years.”

For tenants that do choose to buy rather than lease their space at office-condo properties such as TEI’s 131 W. 33rd St., the payoff is long-term, if not always immediately evident. “We do a 10-year analysis of the costs of owning compared to leasing,” says Rudder. “If you get financing with a 75% loan to value and then on an annual basis pay your common charges, real estate taxes and mortgage, for the first four years or so it’s going to cost a little bit more to own. After the fifth year, your costs of ownership are going to be less than if you rented. Your rent escalates over the 10 years, whereas your ownership costs stay pretty consistent. And that doesn’t even take into account the benefits of appreciation” on the value of the office condo.

“So essentially, if you’re going to be in business for more than five years, it makes sense to own,” Rudder says. Naturally, that option is generally more viable for smaller office tenants; in TEI’s year-end report, the total size of deals ranged downward from 19,000 to 385 square feet.