How much is that building really worth? Real estate is padding the numbers

Since the start of the COVID-19 pandemic, the generally agreed-upon value of commercial real estate has dropped 35%. We think it’s a good bet the true drop in value is even worse.

Take a recent CRE deal that painted an optimistic picture of the commercial real estate (CRE) market but now looks a tad shady after the Wall Street Journal dug deeper into the details: SL Green Realty sold a 49.9% stake in a New York City office building at 245 Park Avenue for $2 billion last June.

The deal caught a lot of people’s attention in the CRE market. Buildings in New York, Los Angeles and other major cities are facing record-high vacancy rates and a tsunami of defaults is expected as CRE mortgages come due over the next two years.

So a welcome dose of good news caused SL Green’s stock price to jump 20% on the day the deal was announced. The reality? The $2 billion price tag – the bottom-line number that market watchers and investors count on as “the truth” – wasn’t everything SL Green wanted the world to believe it was.

Mori Trust, the Japanese investor that bought into the Manhattan office tower, also secured a 6% discount on the building’s debt load valued at more than $500 million. SL Green failed to mention the sale of its debt in its earning report or press release, according to the Journal. In addition to securing $174 million in cash from Mori Trust, SL Green managed to reward its shareholders to boot.

The sale also skewed market values for metropolitan office buildings to some degree. How much so may become a matter of interest for the U.S. Securities Exchange Commission.

Landlords giving tenants millions to stay put

Landlords are increasingly offering cash gifts and incredibly generous discounts to attract and retain tenants. The Journal estimates building owners are giving away millions of dollars in free rent, building alterations and other kinds of financial enticements in what’s a famished dog-eats-dog market.

Most tenants know the ball’s in their court. Of course, so do the landlords. Not all tenants may appreciate how much landlords need them or the variety of perks they can offer to tip a good deal into the great column.

For example: Amenities such as housekeeping, food & beverages, furniture and parking may be worth pricing out and negotiating over. Also: Newer Energy Star-rated heating, ventilation and air-conditioning equipment, plumbing fixtures and lighting keep energy costs down.