Is commercial real estate carrying New York City's rising economy? Furthermore, how long can the market hold out in the city as undercurrents of a tightening lending market begin to roll through?
   Indicators of New York's growing financial health arrived in the form of credit rating upgrades from all three major rating agencies over the last several weeks. Shortly after Standard & Poor's assigned the city a rating of AA, Fitch Ratings upgraded its assessment of New York's bonds to AA-, adding that the bonds are expected to be insured by an insurer rated AAA.
   When Moody's Investors Service increased the city's credit rating from Aa3 to A1, what Mayor Michael Bloomberg termed an economic "clean sweep" was complete.
   "For the first time in city history, our bond rating is now in the AA-category from all three major rating agencies, which will result in lower debt costs for the city and our taxpayers," Bloomberg noted in a statement. "This is a vote of confidence for New York City."
   This triple vote of confidence can be largely attributed to swelling tax revenues -$5.4 billion above original budget estimates, according to Fitch Ratings' explanatory statement accompanying its rating change announcement – spurred by the performance of the city's real estate markets and corresponding Wall Street investments.
   While the 13% rise in single-family home sales over a year ago reported by Moody's underscored New York's sustained avoidance of the residential market woes that have gripped other parts of the country, the thriving commercial sector drove real estate's substantial success within the local market.
   The city features the nation's lowest commercial real estate vacancy rates, according to a Reuters report – with office vacancies in Manhattan particularly rare. The borough's office vacancy rate dropped 2.5 percentage points from midyear 2006 to its midyear 2007 rate of 5.3%, reported Cushman & Wakefield.
   Corresponding with these and other emphatically positive indicators, "Real estate transaction-related revenues are estimated at about $1.5 billion higher than budget, with several large commercial transactions accounting for the bulk of the increment," stated Fitch.
   The agency added that although real estate profits are "notoriously difficult to estimate," their unquestionable overperformance in fiscal year 2007 helped New York reach the end of the fiscal year with a surplus for the fourth consecutive year and reward the local government's fiscally conservative practices.
   At the same time, however, even the most conservative financial plans may not be enough to counteract certain threatening economic situations that the rating agencies, New York's financial planners and some commercial real estate professionals portend for this currently booming market.
   The city's projections for commercial real estate's future as New York's economic buoy already assume "meaningful drops in corporate and real estate transaction taxes," coupled with an overall reduction of Wall Street profits, Fitch said.
   Yet high and increasing levels of debt, which colored the agency's impressions of New York City's financial well-being even as the credit upgrades were awarded, remain a dominant concern.
   In addition, citing "revenue vulnerability to the cyclical securities industry and real estate market," Fitch echoed the hints of worry currently drifting in: that an inevitable spillover of residential real estate's troubles into the commercial world, as well as a spillover of the nation's general real estate trends into New York City, will bring the current run to an end, thus slowing or shutting off a previously prolific profit pump for the city.
   The complications surrounding a recent high-profile Midtown Manhattan transaction could be emblematic of the tides of tightening credit in commercial real estate deals.
   After agreeing to purchase a landmark Third Avenue office tower known as the Lipstick Building because of its unique elliptical shape, Los Angeles-based Metropolitan Real Estate Investors and two Israeli financial partners were suddenly faced with newly demanding deal terms from lender Wachovia Bank, the New York Times reported.
   Less leverage and a higher interest rate were among Wachovia's revised requirements that sent the buyers on a search for new financing sources and new investment partners. Although a new loan from Royal Bank of Canada and a $60 million investment from Goldman Sachs enabled Metropolitan to eventually complete its transaction, the shift from the original 90% debt-based financing to a more equity-focused deal reveals a growing trend, the New York Times added.
   The article identified rising interest rates, subprime residential foreclosures and growing doubts regarding rating agencies' standards as contributors to a spike in the costs of borrowing in commercial real estate.
   In the case of the Lipstick Building, projected rent increases to assure future cashflow would have been accepted under the old underwriting regime, but with the arrival of a possibly long-lasting new era in commercial lending and the markets, the rules have begun to change, even in New York City.
E-FYI
NAI Global Forms Multifamily Group
Princeton, N.J.-based NAI Global, a network of independent commercial real estate firms, has created the NAI Global Multifamily Group, a specialty practice group focused on providing comprehensive services to owners, investors, developers and real estate investment trusts in the multifamily sector.
   The group will assist private and institutional clients with the acquisition and sale of multifamily properties and portfolios, market research and valuation, NAI Global says, as well as work with owners and asset managers to maximize the value of existing properties and reposition underperforming assets.
   "NAI Global completes over $40 billion in transaction volume annually, including over $10 billion in investment sales," says Rick Kimball, executive vice president of U.S. brokerage operations at NAI Global. "The formation of the group aligns our resources to provide more specialized services to clients with interests in the multifamily sector."
RBC Launches Small-Balance Program
RBC Capital Markets, part of the Royal Bank of Canada, has introduced RBC Streamline, a program that provides fixed-rate financing for multifamily and other commercial real estate properties that require capital of $500,000 to $5 million.
   As part of the new program's development, RBC Capital Markets assembled a team of individuals with experience in small-loan lending, customized technology to allow for a paperless loan processing workflow, and developed processes designed to guide small-loan borrowers through the loan experience, the company says.
   "RBC Streamline represents an entirely new option for small-loan borrowers and the mortgage brokers who serve them," says Dan Smith, managing director and head of RBC Capital Markets' real estate mortgage capital business. "This loan program combines the best of global capital markets and local bank service by giving small loan borrowers a wide range of flexible options, commercial real estate expertise, minimal costs, responsive service and speed."
E-Dealmakers
NY: HAMPTON INN, UTICA
WHAT: This 83-room Hampton Inn includes amenities such as an indoor pool, a business center, a meeting facility, a fitness center, guest laundry, a complimentary hot breakfast bar, DVD players and high-speed Internet access.
    WHO: The Atlantic Northeast office of U.S. Realty Capital brokered the construction loan after an existing construction loan commitment expired and was not extended.
    $$$: $6 million.
    TERMS: The 12-month loan and two-year mini-perm loan were sized at 90% of cost. LTV: 80%.
    U.S. Realty Capital: (585) 264-9030.
NY: 127 FULTON ST., NEW YORK
WHAT: 127 Fulton St. is a condominium conversion project located in the Financial District of New York City. Built in 1892, the building is now slated to feature eight full-floor luxury residences and ground-floor retail space.
    WHO: AFC Realty Capital, a New York-based real estate investment bank, arranged the financing for the sponsor, 127 Fulton Street LLP.
    $$$: $20 million.
    TERMS: Financing included a $15 million loan for property acquisition and construction, a $2 million letter of credit and a $6.8 million construction surety. The interest rate is in the mid-7% range.
    AFC Realty Capital: (212) 245-2050.