THE office sales steamroller is continuing to crush all previous records.
While sales two years ago were based on a wing and a prayer that future rents would rise, the actual and dramatic escalation in office rents has turbo-charged the buying frenzy.
“We did predict it, but seeing it is another matter,” agreed Ron Cohen, executive director of Cushman & Wakefield.
“It is overwhelming to see properties trading for more than $1,000 a foot and renting for more than $140 a foot. We were worried about the market and interest rates, and meanwhile we have a huge increase in rates and values and the liquidity is strong in the market.” The city has already registered more than $30.2 billion in property closings of all kinds with transactions in the pipeline that will bring that number to a record $36 billion. This is a third more than last year’s record $20.2 billion. Of these, 62 percent are office buildings.
“I see it continuing to go straight up,” said an enthusiastic Scott Latham, executive director of Cushman & Wakefield.
Leonard Boxer, Chairman of the national real estate practice at Stroock Stroock & Lavan notes that the most recent record breaking transactions have provided a big boost to the strength and vitality of the city’s real estate market.
“It’s a symbol of confidence in this city and comforting to see transactions of great magnitude are occurring,” Boxer said.
Among those deals are the whopping $5.4 billion sale of Stuyvesant Town/Peter Cooper Village to Tishman Speyer Properties and the $1 billion sale of 1211 Avenue of the Americas to Beacon Capital.
With construction costs increasingly leading to high tabs for new development and replacement costs, Midtown office building sales are settling in between $800 and $1,100 a foot, depending on future rents and vacancies.
Downtown, the Koeppel Co. office building at 26 Broadway is expected to fetch numbers in the mid$350s a foot.
That’s because the move towards residential conversion is retreating and the demand for solid A and B class offices is returning.
Oddly, there has been very little sales activity Downtown. In previous years, many buildings were sold for conversion and there were a number of straight office building trades.
At the end of last year, 100 Wall St. was sold for $134 million. More recently 30 Broad St. traded for $100 million or $283 a foot and 75 Wall St. for $273 a foot.
“Certainly there is more demand for Downtown office product than there was a year or two ago,” said Jon Caplan, executive director of Cushman & Wakefield.
Caplan said most companies have a compelling need to be in the marketplace.
However, “an unanticipated event can change this,” he warned.
Investors are after office buildings because there is a continued demand from office users, too, just as there is in Midtown.
Darcy Stacom agreed.
She’s the vice chairman and partner with CB Richard Ellis, and was the investment broker for MetLife in its recent sale of Stuyvesant Town/Peter Cooper Village and for One Madison Avenue last year.
“It’s the leasing market that’s become incredibly energized as the amount of available space is quickly being absorbed and little office development is on the horizon.” That’s because the barriers of entry for office development are so extreme in New York, and it is so hard to put together a site, that there is not going to be a lot of supply coming on, added H. Henry Elghanayan, a principal of Rockrose Development.
New office towers will have to fetch rents of $100 a foot, noted James D. Kuhn, president of Newmark Knight Frank.
“Although some good buildings are getting those numbers, because of construction costs and land prices, there aren’t that many that will get built.
This places upward pressure on the purchase of existing buildings,” he said.
The number of potential buyers has also steadily increased, despite a cut in cap rates that leveled off what one could earn by simply depositing the funds in a bank.
Numerous international buyers seeking safe dollar havens are also hoping to stash funds in Manhattan bricks without much regard for future returns. Groups from Spain, Italy, Ireland and the Middle East have turned up as bidders for major properties.
Yet even the Dubai-based Istithmar has made it clear it is not going to be taken advantage of and has pulled away from deals that didn’t make any financial sense.
Istithmar prefers buying off-market transactions and did not participate in the bidding for Stuyvesant Town/Peter Cooper Village, although the country of Qatar teamed up with local real estate investment trust Vornado Realty Trust in a losing run for that property.
The Australians have been active national investors but, so far, they have turned their noses up at the low city yields.
The sheer size of the deals is also creating the need for buckets of equity and that in turn is creating a new marketplace for placing funds.
That’s why Woody Heller, executive managing director of Studley, is noticing the return of syndication.
“Who does it and in what form varies slightly but the concept and principal remains the same [as the deals made from the 1960s into the 1980s].” Essentially those with money are investing in other people’s deals. But that means taking on partners who expect later returns on their capital.
“As you borrow more and more money, there is an attraction to taking on equity rather than debt because there is not enough money to pay debt service currently,” explained Heller.
Over the last year, a market has developed in socalled bridge loans that supply fast equity at a preferred return with a one-year term.
It diversifies the risk and syndicates the equity in smaller chunks, said Andrew Mathias, chief investment officer of SL Green Realty Trust.
These bridge loans, pioneered by Lehman Bros., allow bidders to win and close their deals quickly.
Later, the winners can shop and syndicate pieces to equity investors who require more time to understand the asset.
“The pension funds and consortiums want to get their hands around it,” explained Stacom of the followup marketing process that occurs after closing.
Beacon Capital’s recent $1.5 billion purchase of the Post’s headquarters tower at 1211 Avenue of the Americas through Douglas Harmon of Eastdil Secured was funded with such a bridge loan.
After the deal closed, Beacon began touring groups of potential equity investors through the tower. Other properties bought with bridge equity have included 200 Park Avenue and 1540 Broadway.
“It’s driven pricing in these cases to the next level,” said Andrew Matthias, chief investment officer of SL Green Realty Trust. He calls it an interesting trend to watch, especially if the pocket of liquidity dries up, and Lehman decides it doesn’t want to put in its capital.
The number of city transactions has also been fueled by short-term horizon investors taking advantage of the sharp increases in value to cash out.
Two Park Avenue was sold by a German fund operated by SEB Asset Management to locally based L&L Holdings for $450 million.
Rama Bassalali of RMB Properties represented the seller and procured the buyer.
“The group is a fund and they don’t buy just to hold forever,” he explained.
“Their strategy is to buy, make improvements and hold for three years.” The seller’s huge profit was reinvested in a deal in Europe.
Building owners use various criteria to decide when to sell their assets.
“We look at every property and what it will contribute to the bottom line, and when we’ve squeezed the most juice out of the lemon, we will look to sell,” quipped Matthias at a recent speech to the Young Men’s/ Women’s Real Estate Association.