At a time when commercial- property purchases have slowed to a trickle, Manhattan landlords who can't sell are still getting money out of their buildings -- by turning to lenders.
A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals in New York City, the largest U.S. market for offices, apartments and other commercial buildings.
Transactions in the first half of the year tumbled about 50pc from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.
At the same time, the market for debt on commercial properties is booming. Investors of all stripes - from banks and insurance companies to hedge funds and private equity firms - are ploughing into real estate loans as an alternative to lower-yielding bonds. That's giving building owners another option to cash in if their plans to sell don't work out.
"Sellers have a number in mind, and the market is not there right now," said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt, "Owners are pulling out capital" by refinancing loans instead of finding buyers, he said.
At 237 Park Avenue, Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for $810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for $850 million in loans that value the 21-storey building at more than $1.3 billion, according to financing documents. The owners kept about $23.4 million.
"The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery," said Scott Rechler, chief executive officer of RXR.
A representative for Walton Street declined to comment.
The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns $15 billion of real estate throughout New York, New Jersey and Connecticut.
That's a departure for Manhattan's property owners, who in prior years would pursue one track at a time, he said.
Across the US, sales of office towers, apartment buildings, hotels and shopping centres have been plunging since reaching $262 billion nationally in 2015, just behind the record $311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85pc in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.
Many landlords who have been holding their buildings for several years are eager to collect on recent gains, according to Spencer Levy, head of Americas research at brokerage CBRE Group Inc. Even as buyers baulk, lenders are writing loans large enough for owners to pay off existing debt and keep something extra for themselves, he said.
Typically, a lender would rather see excess cash put back into the building for renovations and maintenance, rather than into the landlord's pocket, Levy said. But given how competitive the lending landscape has become, it's now easier for borrowers to negotiate more-favourable terms.
"Some lenders will bend more on that point than others," Levy said.
The tough sales market has put some property owners in a bind - most notably Kushner Cos., which has struggled to find partners for 666 Fifth Avenue, the Midtown tower it bought for a record price in 2007. The mortgage on the building will need to be refinanced in 18 months.
Apartment landlords have been among the most active in using debt to extract cash from recently built projects, according to Craig Bender, head of US lending for ING Real Estate Finance. A lot of construction loans from a five-year building boom are coming due, and many developers who might have sold completed properties are instead taking out new mortgages, he said.
In January, Michael Stern's JDS Development Group secured $660 million in debt against American Copper, a pair of new rental towers on Manhattan's eastern edge. The financing, arranged by Appel at Jones Lang LaSalle, followed an earlier attempt to sell a minority interest in the 761-unit property, named for its copper facade. JDS and its partners were able to cash out a large chunk of equity with the new loan, Appel said.
Stern declined to comment on the financing.
Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyses data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he said.
In a market where building sales are few and far between, it can be challenging to find a comparable transaction to get a reading on prices for an appraisal, according to Levy of CBRE.
There are other ways to calculate a property's value, but it's impossible to account for changes on a real-time basis, Levy said.
"There is always concern that it is too high, or too low, but there are many protections in place," Levy said. "Still, at the end of the day, there is always going to be a judgment call."