Have the chickens come home to roost? In Buffalo on October 1st, One Seneca Tower, one of the tallest and largest office buildings in Upstate New York sold at a public auction to the bond holder plaintiff for a reported $28 million. There was some limited competition but ultimately the other bidders dropped out. The winning bidder was protecting the bondholders who reportedly are owed $91 million. It is possible with more market exposure the value of the property could be considerably more or less than $28 million. The January, 2005 sale of One Seneca Tower in the city of Buffalo for reportedly $85.04 million occurred when the building was near full occupancy. This now 40+ year old, 38-story office building totals 850,000 s/f. Since 2005 the building lost almost all its tenancy.  Today, the building is almost fully vacant. Some reported court filings last year estimated the building value as low as $18 million and as much as $30 million. Based upon the original reported $85.04 million acquisition price, this represents a reduction in value of 65-79% since 2005. This is a drop from $100 per s/f to a low range of $21-$35 per s/f. These low numbers must shock New York City investors especially in Manhattan where large office buildings generally sell in the $500-$1,000 per s/f. There has been some rationalization when the property sold in 2005 for a reported $85.04 million the building was leased at relatively long terms at high rents. Thus, the leased fee interest was probably estimated. It would be interesting to know whether the appraiser was of the opinion that the leases were above or at market.  If they were above market the leased fee interest would have exceeded the fee simple interest. If that was the case, the appraiser probably would have noted that in the report, outlined the market terms and possibly would have shown that the income over the market represented some type of bonus income. There is also the possibility that the appraiser concluded that the leases were at market levels. Thus, the fee simple interest could be equivalent to the leased fee interest. For that scenario, the leases in place at the time of the 2005 purchase would have been substantiated by market rentals at the same rent levels. This is possible since in 2005 the market was on the upswing. Given these possibilities, what type of value is most reliable? Even if the actual rents in the building were at market levels, it’s likely the appraiser forecasted some continuance of similar rent levels in the later years of a 10+/- holding period and that there would not be a large long term exodus from the building without any offsetting absorption. There are various building scenarios outlined as follows: 1)Above market occupancy with above market leases 2)Above market occupancy with market leases 3)Average occupancy with above market leases 4)Average occupancy with market leases 5)Below market occupancy with above market leases 6)Below market occupancy with market leases and 7)Empty building status. Thus, #1 would have the highest value and #7 would have the lowest value. It’s likely that there would be a continuous value decline from 1-7. So if the 2005 appraised value was at the reported $85.04 million purchase price that most likely is “above market occupancy with above market leases” or #1.  The reported $30 million 2014 value would be classified as “empty building status” or #7. The gap between #1 and #7 in the Buffalo example represents a 65% value reduction. This is more likely in Upstate New York or a north and central western New England market.  However, in a market like Manhattan or Boston the gap between #1 and #7 would be substantially less because of strong positive demand factors which drive high rents and high absorption. There are myriad of reasons for this diminishment of value in Upstate New York and parts of New England for downtown buildings. The primary overall reason is external obsolescence. External obsolescence is the diminishment of value attributed to factors outside of the property such as over supply and/or lack of demand. The oversupply is attributed in part to the numerous local, state and federal programs which assist new projects. Real estate tax credits/abatements, grants, low interest loans, etc. artificially add to supply of space in varying degrees. Eventually, this disrupts the natural supply and demand dynamic of the market. It’s logical that if supply of any commodity is artificially increased the value or price of that commodity in the overall market will decrease or in street talk; “lay an egg.” The question is “have the chickens come home to roost?” John Rynne, MAI, SRA is the president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y. Tags: