"After two bearish years, 2010 will be a transitional year" that will be marked by fundamentals beginning to recover, Holliday said. "With a rebounding economy, I believe we'll see an inflection point in the leasing market."
Holliday predicted that by the second half of next year, landlords will begin pulling back on concession packages, which have generally grown more generous this year. In the meantime, he said, the current uptick in leasing will continue as tenants sense that rents may soon start going back up, and therefore take action to avoid missing out on the opportunities now available. However, Holliday said owners' financial results would still be affected by current market conditions for a couple more quarters.
While Manhattan's availability rate is expected to continue creeping upward into 2010, with downward pressure on rents, the specter of increasing vacancy rates appears not to be affecting S.L. Green's existing portfolio. During the quarter that ended Sept. 30, the REIT maintained a 95.7% occupancy rate in its Manhattan office properties, increasing occupancy at 100 Park Ave., 625 Madison Ave., 750 Third Ave. and 1515 Broadway. The REIT signed 28 office leases totaling 251,888 square feet during Q3, according to an earnings report released Monday evening.
The average starting rent on these deals was $47.31 per rentable square foot, up 5.2% over previously fully escalated rents. In S.L. Green's suburban office portfolio, though, starting rents slid downward by 5.7% to $29.46 per square foot.
At S.L. Green's retail properties, same-store GAAP NOI saw a year-over-year increase of 5.9% for Q3. Year to date, same-store GAAP NOI has grown 3.5%.
Even so, the company's Q3 results reflected the market's continued ailments. Funds from operations totaled $78.1 million, or $0.98 per diluted share, a decrease of 28.5% from the $83.1 million for the same quarter last year. Net income to common stockholders fell 93% from $28.8 million in Q3 2008 to a loss of $2.5 million for the most recent quarter.
Revenues and EBITDA for Q3 of this year reached $249.6 million and $141.7 million, respectively, a year-over-year decrease of 7% and 6%, respectively. In a release, S.L. Green attributes this mainly to lower investment income and greater loan loss reserves during 2009 compared to '08.
During Tuesday's earnings call, Holliday said the REIT's overall Q3 performance was in accordance with the guidance it had issued and "should have contained no surprises." Despite the drop in earnings, he accentuated the positive. "I thought we had a good quarter."
S.L. Green successfully refinanced two of its Manhattan properties during Q3, closing on a $145-million refi of 420 Lexington Ave. and retiring the $175-million mortgage on 100 Park Ave. with a $215-million recap. It also sold a 49.5% interest in 485 Lexington Ave. and took over control of 100 Church St., with full beneficial ownership of the 21-story Lower Manhattan property expected to occur in the first quarter of '10. That will mean a leasing assignment of 600,000 square feet at 100 Church, but president and CIO Andrew Mathias said Tuesday that "we're very confident our leasing team is up to the challenge."
Mathias said that the next 12 to 24 months will offer "significant opportunities" for S.L. Green to utilize its capacity as a structured debt provider. Unlike other large operators, such as Vornado Realty Trust and the newly launched REITs formed by Brookfield Asset Management and Marathon Real Estate Mortgage Trust, S.L. Green has not been actively raising huge amounts of capital lately to take advantage of distressed situations. Holliday said thus far, debt defaults haven't generated many buying opportunities as far as S.L. Green is concerned.Mp>However, he added, "We believe the pipeline is beginning to open. We're very hopeful that in '10, we'll see a very transaction-rich environment."
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
