Tenant Rap

mitchsteir Tenant RapThe Commercial Observer: A lot has been written recently about how the leasing market has picked up. Is it merely pent-up demand being unleashed?
Mr. Colacino: The market is very striated now. You have large-scale bank spaces that are sitting on the market and will continue to decline in price and are not going to be leased very easily or in the foreseeable future. In the very high end, you’ve got no activity whatsoever, so no one really knows what the most premium spaces are going to be trading at in the next go-around. … In the middle, where you have relatively high-quality space on good floors in good buildings, I think you’ve seen an increase in demand recently, which has caused at least a stabilizing effect on prices and maybe an increase to some extent on prices. But the larger market as a whole is still trending downward over a long period of time.

So, then, what we’re seeing in that segment is sort of your classic flight to quality?

Mr. Colacino: Well, it’s a flight to the middle, that’s the most interesting thing. Usually, when you talk about a flight to quality, you’re talking about the most premium spaces, and the idea is that to some extent you’re trading up, so everybody moves up a rung on the ladder. What we’re seeing is kind of a flight to the high end of the middle. … At the top end of the market, it’s going to be interesting to see if we see dramatic downturns in the $175-a-foot super-premium buildings, as those hedge fund guys don’t really think that’s such a good idea anymore.
Mr. Steir: Right. There’s only a few buildings that would fall under that category.

And they’re generally small spaces …
Mr. Steir: Right. So where will the pricing of GM and 9 West 57th et al. go from here?

To go back to my initial question, this recent reinvigoration of the leasing market, do you see that as a temporary thing?

Mr. Steir: I think to know the answer to your question, we have to see where we are a year from now. But I think the value plays will obviously see tremendous activity, and the space will be leased. And the non-value plays will sit. Now, what we’re still waiting for, which I think we’re on the cusp of seeing, is a major tenant to relocate with considerable [capital expenditure] that they will need to incur in the transaction. … And also [what happens at 11 Times Square] will be sort of a litmus test for the health of the market, because it’s very difficult for the first tenant in that building to be anyone other than a large-block user. A 100,000- or 150,000-square-foot tenant, no matter what the space is priced at, is not going to be the first tenant in a 1 million–square–foot development.

Mr. Colacino: I think 120 Park is also a similar version of the same story. How that goes is going to determine to some extent what the future of the market is. If it just sits there for a really long period of time and people continue to look at it as a way to kind of price other alternatives down, I think that’s a sign that the market is going to have a long, slow decline.

Isn’t one of the issues that it’s unclear who the tenant base is going to be? I mean, we don’t have huge financial firms anymore.

Mr. Steir: We’re still losing jobs in New York City, so we have to see what tenant group becomes the new leadership. But I will tell you that the stock of buildings is not expanding. We’ve had relatively little development over the past decade as contrasted to decades past, and it won’t take a whole lot to cause the market to get a little healthier, even though I don’t really see a material change in the direction of pricing until we get into the single-digit availability, and I don’t see that happening for at least a year and a half, two years.

Mr. Colacino: I have a more optimistic overall macroeconomic view than my partner does. Because I think that while the Lehman story is a terrible tragedy, and a real estate tragedy, the Barclays story is really not getting reported that much. But the fact of the matter is that Barclays is going to grow in New York and is going to bring more worldwide financial capital flavor to New York, and that’s true of all the major European banks. We also haven’t even begun to write the story of China. Let’s say that you’re a Chinese company and you need to do business in the United States. Where are you going to go? You’re not going to go to Los Angeles. You’re not going to go to San Francisco. You’re going to come to New York.

So then are you two pitching a lot of work overseas?
Mr. Colacino: We bought approximately 50 percent of a Paris-based company with offices in 14 E.U. countries two years ago. And as we look at the French financial institutions, and we think of our partnership with our French company, we’re very optimistic about the possibility of large French organizations coming in greater waves to New York.

Have you made any recent trips to China?

Mr. Colacino: We brought our 100 top people, which we do in our winter trips, to Beijing and Hong Kong in 2006, and that’s quite an undertaking … and we have nice pictures of us climbing up the Great Wall of China together.

Have you been fielding a lot of résumés from Wall Street refugees?

Mr. Colacino: Absolutely. We’re finding incredibly talented people who are available to us in a way that they were never available before. We just hired someone from Lehman Brothers, for example, who has a résumé that’s vastly better than mine. And so, we’re picking up very, very talented, smart people at compensation levels that were difficult to visualize a few years ago. So there’s a silver lining in every cloud.

Do you see more consolidation in the business? Are you looking to consolidate at all with anyone?
Mr. Steir: At this point now we’re the only major national-slash-international occupier-side firm that exists, and we see incredible opportunities in expanding our platform, both here and abroad. What was the statistic you gave me the other day, Mike? What percentage of the business remains fragmented?

Mr. Colacino: The tenant-rep business is about a $5 billion a year business, of which 40 percent plus or minus is concentrated in the major players, us included. That means 60 percent of the tenant rep market is being serviced by small companies, by regional companies, even by individual practitioners. So from a sales perspective, it’s a very inefficient and disorganized market.

Mr. Steir: And we’re an unusually well-capitalized outfit. We have virtually no debt. We’re looking to be the acquirer. We’re talking to people every day. As you know, we took 50 percent more space at 399 Park in this environment. We’re the only major company that has not reduced splits to the brokers and they remain the highest in the business, and we certainly don’t plan to change that. 

Everyone talks about all of these looming loan defaults on buildings in the coming years. What impact will that have, if any, on the leasing market?
Mr. Steir: Well, listen, there’s certainly a reasonable amount of assets that are troubled. In the near term, that has an effect, paradoxically, of somewhat tightening the market, because until the picture clarifies, tenant and broker will approach a building like that as toxic to do a long-term lease. I mean, one would have to be insane.

Mr. Colacino: On the other side of the equation, the buildings that have no complicated CMBS structures and therefore have simplicity, they’re actually more valuable. For example, 399 Park has no mortgage on it, and it’s not a coincidence that we’re going to 399, because we understand the capital structure, and there is no risk associated with a mortgage or CMBS.

Mr. Steir: We’re going to go through a cycle. Worldwide Plaza is, in a microcosmic way, an example of what we’re going to see, where there’s new ownership, a new capital structure in place. It’s a wonderful building, and it’s a building now with a new, much more manageable capital structure, and it’s seeing a lot of activity, and I wouldn’t be surprised if in 6 to 12 months they didn’t have a reasonable amount of their space rented.

Mr. Colacino: This is going to be very slow motion, this process. You couldn’t exaggerate or overestimate how slowly it’s going to go, because what’s happening is, there’s a dozen reasons why people don’t make decisions. People don’t want the assets back on their books, so foreclosure is not a remedy for most of these problems. The special servicers are vastly overwhelmed. … And of course, all of the operators now, they’re hanging on by their fingernails, collecting fees, and in place … and so they’re doing everything that they can to mitigate their interactions with the bankers or with the special servicers to make it look like, ‘Hey the building may be underwater, all of the equity’s gone, and all my equity’s gone, and a lot of the debt’s gone, but the fact of the matter is that I’m still doing leasing, I’m still running the building effectively; keep me in place, and let’s build some sort of future together where I get a little something and you get something as well.’ That could go on for years, because there’s no trigger that’s going to say everything’s changed.

Mr. Steir: Other than a dramatically improved marketplace.


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