NYC Commercial Real Estate Crash

Okay, local movie theater lease runs out, tenant asks for rent reduction, Moronic owner doesn't want to hear of it,....tenant leaves, monthly rent collection drops to $0 per month for almost 1.5 years.

What is the market rent on such a place? I mean who even goes to movies anyway?

Well the place is about to finally be re-rented for somewhere between $20,000-$25,000 a month, maybe.

I always do the math on these things. Essentially they have to make near $1,000 in PROFIT PER DAY, just to cover the rent. Then there's the enormous cost of air conditioning and heating a large space. Paying staff. The cost of the films and projectors. Insurance. Accounting. Cleaning costs....

Oh yeah, there's a movie theater 1.5 miles away, and another 3 miles away - both of which are BETWEEN this theater and the mass population of Long Island.

I told my wife how much the market rent was and she too was incredulous, calling anyone who would take on that lease a (bleeped) Moron.

But like a good joke, I had to interrupt her clamoring to tell her something even more incredulous.

It turns out, the previous motion picture theater owner was paying an astounding $52,000 per month.

So, for one thing, how stupid was this 'old coot' owner to not come to some type of deal with the exiting tenant?

And in macro terms, realize that this example is indicating that NYC-metro area commercial rents are looking at a 50% drop ALREADY. And this drop is occurring WITHOUT higher interest rates - which are inevitable.

I almost titled this post - "Screaming Bull Market In An Empty Theater"!

NYC - Going Down...

This may shock Floridians, Nevadans, and the 10 people still left in Detroit...

But New York City hasn't really experienced any economic woes yet. Due to its political connections and access to Bernanke's runaway printing press, Wall Street has continued to quietly boom.

HOWEVER, recently, and I mean very recently like in the past 1.5 months, commercial *for rent* signs have appeared everywhere.

Again, Floridians by now are accustomed to half-filled plazas and malls but it's a new and scary development here on Long Island where I live. Certainly, when NY topples it will mean another leg down for everyone else - no matter how deluded they are that they already saw the bottom!

Of course retail rents are waaaay too expensive and store space is waaaay over-supplied, still. Tiny stores need to make $200 IN PROFIT, EVERYDAY, just to cover the rent, never mind pay the utilities, insurance, the workers, etc. Obviously the spate of store closings implies that consumers in these parts are cutting back.

Even the oldest yacht club in the country, right down the street for me, is boarded up and for sale:

$4 million bucks?

I figure you'd need 400k a year in income to carry a property like that. Obviously it's already failed as a social/yachting/pool club but that's what it's designed for. PLUS right next to it are two other, similar yacht clubs including the one my first wife and I were married in.

Hmmmmm....

$400,000 per year divided by 12 months = $33,333 per month in overhead.

It's a terrific location for say a new private school. I could charge 20 kids $1,500 a month (cheaper than daycare!) or more...

I could pimp out the facility for a wedding or two per month for another $10,000...

I could rent the moorings out if there are any boaters left....and maybe even run a for-profit pool club in the summer - although there are a million pools out here already.

For all that risk, maybe, MAYBE I can earn 100k per year.

Obviously a lower purchase price is needed. Or I'd need some wealthy benefactor to donate much of the purchase price. I'd happily call it Old Coot Academy!

Whatever. There's going to be a whole lot of tantalizing retail/commercial renting opportunities in the next few years - as NYC real estate drops 30+%.

Empire Of Debt

I promised my kids a couple of weeks ago that one day soon I'd take them to the top of the Empire State Building.

But the next day my BIL dissuaded me. He said that it's now *like* $20 to take the elevator to the top. WOW.

Now I'm not spending $60 or $80 - if my wife is included - for that! My kids can skip that or, google the view.

When you think about it, though, it's not that expensive. Not only is it priced for one-in-a-lifetime visiting tourists, but also those elevators have to cost quite a bit to run and maintain. And there is probably drastically heightened security up there since 9/11. So it's really not as outrageous to charge $20 a head as it sounds.

Plus I once read something crazy like the Empire State Building was only worth $15 million because of all the long-term, below-market leases there. I'm skeptical of that low number but believe it essentially. Alright I found something from 2002:

NEW YORK – The Empire State Building, the cinematic backdrop for everyone from King Kong to Cary Grant to Tom Hanks, has changed hands. Donald Trump and his Japanese partners have agreed to sell the fabled 102-story structure.

The sales price is a stunner: US$57.5 million. That represents only a tiny fraction of the $1 billion that many analysts say the building would be worth without its burdensome 114-year master lease.

Drawn up in 1961, that lease provides for payments of only $1.97 million a year on the 2.5 million-sq.-ft. (225,000-sq.-m.) building. And the lease rate actually drops to $1.72 million from 2013 to 2076, when the lease term expires.

That low-ball lease has depressed the storied skyscraper's market value. So much so, in fact, that the $57.5 million purchase price is considered high, yielding an estimated annual return of just 3.4 percent. The buyer, however, is Empire State Building Associates, an investor group led by New York real estate maven Peter Malkin. And that same group also holds that master lease, which runs through 2076.

Therein lies the buy rationale. With leaseholder and owner in the same stable for the first time since 1961, the legendary tower can now be more easily sold with significantly better financing terms.

The sale closes - perhaps - a tumultuous, byzantine chapter for the facility built in 1930-31. Since the early 1990s, Trump, Malkin and real estate heiress Leona Helmsley have slugged it out for control of the Empire State Building.

Having checked the site now I see that adults do in fact pay $20 a ticket, children ages 6-12 pay $14, seniors pay $18, and that one can pay-up ($45) for a faster ride to the top. I don't see a mention of young children - are they free or are they even allowed? - so perhaps I should in fact take them now before my son turns six. Twenty bucks for the three of us is fine. I did go to the top of the WTC when I was a child but don't remember ever ascending the Empire State Building.

SRS Fundamentals

That's merely one page of a fifty page report you can read here.

Of course, none of this is news to us SRS holders....

See also - On The SRS.