Private equity makes biggest moves in office sales market, execs say

By Hiten Samtani | January 14, 2013 06:00PM

The private equity sector made the greatest moves in 2012’s Manhattan office trading market, while institutional investors had a rather quiet year, said executives at Colliers International during a luncheon held to discuss the firm’s 2013 forecast. Private equity firms—which include foreign investments— made 47 percent of total office purchases, representing an estimated $4.4 billion of the total $9.4 billion Manhattan market, executives said. In comparison, foreign and institutional investors were each responsible for 16 percent of total sales in the year.

Individuals and private companies made 26 percent of total purchases. In comparison, real estate investment trusts made 10 percent of purchases, and institutional investors made 10 percent of purchases. In contrast to 2011, the majority of trades in 2012 were of Class B office space, which pushed the average sales price up to $492 per square foot, and the average sales price of Class A office space to $538 per square foot.

Robert Freedman, Colliers’ chairman of the Tri-State region, said that private equity was looking to the real estate industry to make a return on underperforming properties by upgrading and repositioning them.

Michael Cohen, president of the Tri-State region, added that the trend would continue. “Equity is seeking higher returns and will continue to as long as we have the volatile stock market and low interest rates,” Cohen said.

On the leasing side, the total square footage of new office leasing in Manhattan was roughly 23.8 million square feet in 2012, a 14.9 percent decrease from last year’s level of roughly 27.9 million square feet.

Joseph Harbert, president of Colliers’ eastern region, attributed the decrease partly to a decline in available inventory, especially in Midtown, but also to the effects of Hurricane Sandy. “We lost November,” Harbert said. “Essentially, we had a two-month quarter.”

Colliers Chief Economist Peter Kozel said the financial sector, which long held the lion’s share of Midtown office space, had been ceding ground to other sectors including technology. Employment in the tech sector in 2012 was at an all-time high of 197,000, he said, and had been rising steadily through the recession. “New York City is going back to lead an industry-led economy,” he said.

“I think we’re now past the tech-bubble point,” Harbert said. “It’s a permanent part of our city’s economy.”

The tech sector’s growth is partly responsible for the success of leasing in Midtown South, despite disappointing news elsewhere in Manhattan, as The Real Deal previously reported.

“The irony is … that we’re renting space that’s not vacant in the short term,” Cohen said, adding that the area generally attracted tenants looking to lease larger spaces.

Landlords received 90.8 percent of their asking rent price in Midtown South, indicating a robust market in comparison to Midtown North, where they received only 82 percent of the asking rent price.

But Kozel said technology and other growing industries — such as consulting, advertising, education and hospitality — take up less space than the industries — including finance, legal, engineering and publishing — that they have usurped in the Midtown office market. As a result, the loss of demand from declining industries is estimated to be 18.8 million square feet, while the addition from growing industries is estimated to be only 16.7 million square feet.

“By their nature, they use less space,” Kozel said.