Commercial Mortgages: are high priced deals masking a decline in New York City commercial real estate?

Arizona-Home-Loan-Team-Matt-and-Judy-Callahan-300x199Are unusually large commercial mortgages masking a decline in mortgage origination in New York City? Two large deals represent the bulk of sales in the second quarter. Without these deals the numbers would indicate a decline in the commercial real estate sales in New York City.

This year has seen an increase in high value mortgages in Manhattan. Deutsche Bank has been at the forefront for many of these loans. Its activity in the second quarter gave it an 8 percent share of the commercial real estate market in the city. The group was the principle originator for the high value mortgages that defined the second quarter. Deutsche was primarily responsible for the 2.3 billion dollar refinance deal of the GM building at 767 Fifth Avenue and the 1.2 billion dollar purchase of 245 Park avenue by Chinas HNA group. These two deals alone represent a massive share of the 5.6 billion in commercial real estate deals that closed in the second quarter.

Data indicates that the New York City commercial real estate market is being propped up by these large loans. The top 5 mortgage originations so far this year have accounted for 20 percent of all commercial mortgages. A steep increase when compared to 2016 and 2015 when large mortgages represented 13 and 14 percent of all commercial loans. In terms of total value mortgage originations appear flat, but without accounting for these massive loans mortgage issuance has declined by some 2 billion dollars so far this year.

The question is are these large commercial mortgages hiding a decline in the New York commercial real estate market?

Sales of commercial real estate are down by 60 percent when compared to the same period last year. Commercial property sales amounted to 5.6 billion in the second quarter of this year. The rise in sales in the second quarter marks a 74 percent improvement over the first, when sales amounted to just 3.2 billion. But the two mortgages mentioned above clearly represent a huge percentage of the total sales this quarter. Commercial mortgage deals are down considerably in terms of volume. Manhattan has seen on average 141 commercial real estate deals close per quarter from 2013 and 2016. Only 71 commercial real estate deals above 10 million dollars have closed so far this year. 66 of these deals closed in the second quarter alone.The decline in total sales volume and the apparently flat rates of mortgage origination suggest a trend, that a few high value mortgages are concealing an apparent slow down in Manhattans commercial real estate market.

Commercial mortgage demand is cooling due to a number of immediate factors, such as interest rate uncertainty and new regulations on Chinese investment.

Interest rate uncertainty is making it harder for many building owners to refinance, or for commercial loans to close. Maturing commercial mortgage backed securities are compounding the need for more tenants to refinance and adding to uncertainty about the mortgage market. But the Chinese government has recently clamped down on the ability of its citizens to acquire foreign real estate. Chinese investors have contributed a staggering 18 billion to Manhattans commercial real estate market. These factors only compound the uncertainty about the future of commercial real estate in New York City.

Dennis Dahlberg
Level 4 Funding LLC  Private Hard Money Lender
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About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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