Downtown vs. Midtown building buys: The sales of two cities

Oct.October 30, 2007 11:16 AM

Call it the tale of two New Yorks.

Office space in Downtown Manhattan rents at a discount to Midtown space, and the pricing difference is even greater for office building sales.

Average asking rents for Downtown office space have risen to $39.23 per square foot in the last year — now hitting 65 percent of the average Midtown asking rent of $60.34 per square foot, according to CB Richard Ellis research.

But the expected parallel for building sale prices isn’t borne out, because Midtown offers more solid income projections and doesn’t face the same long-term market uncertainty. Recent transactions paint a startling picture of just how widely these sales markets diverge. Red-hot demand for Midtown office buildings means prices per square foot are between $600 and $1,000. Downtown in the past year fetched less than $300 a square foot and ran as low as $219 per foot.

“If you want to be on the West Coast, there’s one San Francisco,” says Kent Swig, president of Swig Equities and one of Downtown Manhattan’s largest landlords. “If you want to be in New York, there’s two New Yorks, Midtown and Downtown. And, frankly, Midtown has captured the investor marketplace more.”

Midtown has reigned supreme for decades as the preferred office location, thanks to its proximity to Grand Central and Pennsylvania stations, and easy-to-navigate streets on the grid. Year-to-date through Sept. 19, the average sales price per square foot for Midtown office space is $602.79, according to CoStar Group.

Coveted addresses snared far more. The 225,108-square-foot office building at 220 West 42nd Street sold in June to the Paramount Group Inc. for $208 million, or $924 per square foot. Istithmar, an affiliate of the Dubai government, closed a deal in June in which it paid $1.2 billion for the 1.2 million square feet of Class A office space at 280 Park Avenue, or $1,000 a square foot.

By contrast, Downtown prompted some investors to shy away for practical and emotional reasons. The most obvious are the delays in rebuilding at the World Trade Center site and the lingering fears that whatever new towers rise will be terrorist targets. Investors also mention Downtown’s complicated layout and distance from Grand Central and Penn Station as drawbacks.

Recent office deals Downtown have commanded far lower prices than in Midtown. For example, Swig Equities bought 45 Broad Street in August for $34.5 million, or $276 per square foot, including a combined 70,000 square feet of existing space and 55,000 square feet of air rights. That same month, 55 Broadway, with 300,000 square feet, sold for $82 million, or $273 per square foot, to Broad Street Development. Last fall, the 146,000-square-foot office building at 90 William Street sold for $32 million, or $219 per square foot, to investors Mario Procida and Louis Greco.

Year-to-date through Sept. 19, CoStar lists the average price per square foot for Downtown deals as just $259.64 — 57 percent lower than the average for Midtown.

“It’s the last submarket to come up, and the first to fall in a weak market,” says Shobi Khan, senior vice president at Equity Office Properties, whose firm’s investment strategy is exclusively focused on Midtown.

Khan’s company closed on a deal in mid-July for the office tower at 1540 Broadway. Equity spent roughly $525 million for 900,000 square feet of office space, or about $583 per square foot. Equity Office also spent $500 a square foot for the Verizon building at 1095 Avenue of the Americas, or roughly $500 million for 1 million square feet of office space, and will pump in another $350 to $400 million for renovations.

Defying skepticism from Wall Street and the real estate community, he insists the company will reap a better than 8 percent return on its now 18-month-old investment in 1095 Avenue of the Americas.

“We’re very bullish on Midtown,” Khan says. “It’s got transportation and synergies; other clients want to be in Midtown.”

While real estate executives do not expect the Downtown/Midtown sale price gap to close any time soon, they say it will narrow.

Swig, who acquired roughly 4.1 million square feet of space Downtown in the last three years, says the frequency of deals is increasing — and so are prices. He bought property from between $45 per square foot and $195 per square foot, but is seeing the floor move above $250 per foot.

“The discrepancy between Midtown and Downtown is still greater than it should be,” he said. “Downtown’s long-term growth potential is one of the great opportunities in the market.”

Low prices and the prospect of jumping into a rising market are prompting new interest in Downtown from families and offshore investors who have traditionally shunned the area, says Bruce Surry, executive vice president of CB Richard Ellis.

The announcement last month that federal and state officials will lease around half of the Freedom Tower sent a signal that World Trade Center site rebuilding efforts are finally gaining real traction. Yet even though he sees a revival under way Downtown, Surry admits: “People have to see steel go up in the trade center site. Until that happens, there will be some degree of caution.”

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