Michael D. Fascitelli
Real estate markets across the nation are coming back nicely, but deal flow is slowing over concerns about the debt situation in Europe, the financial stalemate in Washington, and the continued volatility in the global markets, says the chief executive officer (CEO) of one of the country’s top real estate firms.
“Things are going a little slower than expected,” notes Michael D. Fascitelli, president and CEO of Paramus, New Jersey–based Vornado Realty Trust and a trustee of the Urban Land Institute. “Most people in the real estate industry thought 2011 was going to be good growth, and it was for the first half of the year. The second half hasn’t been. It’s not 2008, where there was almost no activity. It’s been slowly getting better, but we have hit a pause because of the global uncertainty.”
Rents are gradually improving. Cap rates are low – commercial real estate prices are coming back, particularly in major metropolises such as New York City and Washington, D.C., Fascitelli adds, and are expected to slowly improve in 2012—if there are no major economic hiccups. “Rents are coming back and rents are better in New York City and D.C. than most other places,” he continues. “New York and Washington have been the favorites of buyers and the markets.”
Unfortunately, Fascitelli continues, the problem is that no one knows what’s going to happen in the near or long term, and today most important decisions are at a stalemate. “In Washington, both the Republicans and the Democrats seem to just want to stare each other down, so we might have to wait until after the 2012 elections for some of the urgent problems to be handled,” he says. “The European debt crisis seems to go on and on. For most people, the working assumption is that people are going to just sit and wait.”
On the last day of November, the world’s major central banks moved to provide cheap emergency loans to banks in Europe. The banks said in a statement that the purpose was “to ease strains in financial markets and thereby mitigate the effects of strains on the supply of credit to households and businesses and so help foster economic activity.” Says Fascitelli: “The coordinated effort by the EU, EU central bank and Fed is an attempt to provide liquidity, and keep the markets and economy moving forward, minimize chance of double dip, and increase probability of better growth.” (For a follow-up story run today in the New York Times, see “A Treaty to Save Euro May Split Europe.”)
With a strong balance sheet, Vornado—one of the largest owners and managers of real estate in the United States—is ready for deals. “We are well positioned for whatever happens in the future,” Fascitelli says. “There hasn’t been much distressed property on the markets yet, and there seems to be a floor on other attractive assets. We’re ready for acquisitions and there are a lot of properties out there we’d be interested in. By now, we thought there would be a lot of distressed assets being offered for sale. But debt restructuring and lower rates can carry a building for longer periods of time now, and many owners are working with their lenders to get financing extensions. There haven’t been as many defaults as we previous thought, although there is still deleveraging going on.”
15 Penn Plaza (Artist Rendition)
Foreign investment in U.S. properties is strong, but most overseas buyers are looking for top-tier buildings in major markets. “Washington, D.C., and New York are the best two markets from a foreign investor point of view,” Fascitelli says. “And then any other city is a distant third. If you asked 100 people in a room where they want to buy property, 90 to 95 would raise their hands for New York and Washington, D.C. The remainder would be spread out, with a third saying Boston, a third San Francisco, and, maybe, a third Los Angeles. Overseas investors are focused on 24/7 markets and are being fairly selective.”
New development, except for select markets, is not a factor in the markets today. Last year, Vornado received approval to construct a 68-story, 1,216-foot-high (371-m-high) tower on 34th Street in New York. With an initial design by Pelli Clarke Pelli, 15 Penn Plaza is opposite Pennsylvania Station, one of the busiest transit hubs in the nation. The company wanted to get the approvals now so that it could be ready when the time is right to build; actual construction is probably years away. “Nothing’s changed,” he adds.
Fascitelli says that “2012 will be a very interesting year, and right now, the forecast is still murky. We are looking at the next 12 months very cautiously. The global economy could be on a soft footing. It’s hard to say. But if we don’t have a disastrous event, we should have growth in the real estate markets—not fast growth, but still growth.”