C.M.O. 5.6.2010

Credit Market Overview

May 6, 2010

On March 6th of 2009 the intra-day low on the S&P was 666.79.  It was not only the low price traded on that day but the lowest price seen for the previous 10 years.  The ubiquitous gallows humor on Wall St. made quick work of the three 6’s and their representation as the “Number of the Beast” in the New Testament of the Christian Bible.  For many investors it did indeed feel as if they were on the “devil’s doorstep”.

Although we are just 14 months to the day past that date, the heated frenzy seems to have cooled and most prognosticators are focusing these days more on higher numbers not lower; at least as the stock market is concerned.

In the “everything that goes around comes around” category another set of triple 6’s has been in the news but this one refers to that iconic address on 5th Avenue in New York City which the Carlyle Group is trying to sell for somewhere between $600MM and $700MM.  Yes, I was thinking that too, what are the chances it sells for $666MM?

That a trophy property of this caliber is even on the block is a sign that we are in very different times than we were on 3/6/09.  If further confirmation is needed it might be that the average rent on the two floors of retail space in the building is going for $2,500/sq. ft. which is more than that fetched for similar squats on the Champs-Elysees in Paris, Ginza in Tokyo or Causeway Bay in Hong Kong.

Wanting to sell is one thing but as we now know from watching Goldman Sachs’ (GS) four horsemen school Congress, every seller needs a buyer and vice versa.

The question then becomes whose got 2/3’s of a brick lying around to plop down on 41 stories of steel and glass growing out of the Big Apple’s bedrock?

The answer is: the world.  At least according to Ken Krasnow, a managing director with building-sale specialist Massey Knakal, who says, “foreign governments are almost the only game in town”.  KK states that as long as a building is within walking distance to the U.N. foreign governments are among the very select few that are willing to pay top dollar and most frequently do so in cash.  The downside to dealing with this type of buyer is the associated bureaucracy as deals can take years vs. months to close.

Things appear to be picking up on the residential side of the street as well.  Real-estate brokerage firms are reporting the strongest start to the spring selling season in two years.  Dolly Lenz, a top-selling broker at Prudential Douglas Elliman, says of her perspective buyers, “everybody feels richer, or at least less poor”.

Understanding that everyone has a different idea of what “rich” and “poor” is, it is interesting to note that last year only 18% of the apartments priced at $2MM and above sold while they currently make up about 40% of sales.  “Where people perceive values sales are happening”, according to Hall F. Willkie, President of Brown Harris Stevens.

Value in real-estate, like beauty in art, lies in the eyes of the beholder and nothing proves that more than the purchasing of at least six apartments by Rebekah Mercer and Sylvain Mirochinikoff in Trump Place at 240 Riverside Blvd. whose intent is combine the contiguous spaces spanning three floors to create a 13,962 sq. ft. triplex.  “It’s going to be one of the all-time great apartments”, according to Donna Olshan of Olshan Realty.

I’m not sure any of us could disagree Donna.

Enjoy the week.

Jim Delaney

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