The office slump

A look at the priciest building sales and biggest office leases of 2012 — amid a commercial market slowdown

Jan.January 01, 2013 07:00 AM

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The uncertain economy kept larger companies at bay in 2012 when it came to buying and leasing Manhattan office buildings.

On the investment sales side, the top 10 priciest building sales of last year included only three office buildings — a weak showing compared to the year before, when there were eight.

Meanwhile, there was a steep drop-off on the office-leasing front, which saw activity fall by as much as a third from 2011, preliminary data from Cassidy Turley revealed.

And while there were several big lease-renewal deals — including media giant Viacom’s record-breaking renewal and expansion at 1515 Broadway — large companies shied away from committing to big, new Manhattan spaces. Highlighting that, just one of the top 10 Manhattan office deals was a new lease (as opposed to a renewal) — a reversal of 2011 when nine of the top 10 leases were new, according to a review of data from the CoStar Group.

Below is a rundown of Manhattan’s priciest building sales (as recorded in public records) for 2012 and its biggest office leases (as collected by The Real Deal through brokerage reports and other sources).

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Big building sales

The aggregate value of the priciest 10 Manhattan investment sales for 2012 was $4.8 billion — down from $6.0 billion in 2011, an analysis by TRD of the largest closed transactions of 2012 showed. (TRD looked at majority interest sales only.)

The three office buildings that made the list were RXR Realty’s $720 million acquisition of the 910,473-square-foot 450 Lexington Avenue from Dubai investment fund Istithmar World in September, along with Crown Acquisition’s $390 million purchase of 530 Fifth Avenue in January and Normandy Real Estate Partners’ $360 million purchase of 575 Lexington Avenue in October.

David Eyzenberg, principal in the investment banking division of commercial firm Avison Young, said traditional large office building investors, such as real estate investment trusts and pension funds, are in a holding pattern because the market for returns is flat.

“They are not under pressure to sell and are having difficulty finding suitable replacement investments. Why sell at a 4.5 [capitalization rate] and buy at a 4.5 cap?” Eyzenberg said.

Indeed, seven non-office properties also made the list — a fact that was largely spurred by investors turning to other asset types they believed would produce higher returns, such as retail.

“In 2012, of the top 10, three were retail and four were residential. In 2011, there were no top 10 retail [sales] and only one residential,” said Charles Kingsley, a principal at Avison Young.

Some of the big non-office building deals that made the list were Vornado Realty Trust’s blockbuster $707.8 million purchase of the retail condo at 666 Fifth Avenue (which ranked at No. 2) and UDR’s $630 million purchase of Columbus Square, a group of five large apartment buildings on the Upper West Side with 710 units (which ranked No. 3).

As TRD reported throughout last year, multi-family properties like the Columbus Square deal grabbed the attention of investors, as the rental market appeared to have more of a potential upside than the office market.

“Purchasers were willing to pay top dollar for residential assets for their perceived strength/stability and growth potential,” Kingsley said.

In addition to RXR, Crown, Normandy, Vornado and UDR, the mega Midtown-based teachers’ pension fund TIAA-CREF was also a buyer on one of the 10 priciest buildings to sell in 2012. The fund — with nearly $500 billion in assets — paid Related Companies approximately $542.5 million for a 70 percent stake in the rental tower MiMA at 450 West 42nd Street.

Other buyers among the top 10 in 2012 included the Indian firm Sahara India Pariwar, which bought a portion of the famed Plaza Hotel; French jewelry store Richemont, which bought the retail at the St. Regis; the Chicago-based Strategic Hotels & Resorts, which bought the Essex House, a hotel at 160 Central Park South; and Invesco, which bought the Madison Belvedere, an apartment building with roughly 400 units at 10 East 29th Street.

While no brokerage firm dominated the top 10 investment sales, Eastdil Secured’s team of Douglas Harmon and Adam Spies represented the most deals, with three transactions totaling $1.38 billion. No other firm had more than one deal.

Darcy Stacom and William Shanahan, vice chairmen at the CBRE Group, handled the largest brokered deal, representing sellers of the 666 Fifth Avenue retail condo — Carlyle Group, Kushner Companies and Crown Acquisitions.


Leading office leases

Manhattan office leasing experienced a parallel slowdown in activity. The overall volume of deals declined in 2012 by about a third to roughly 27 million square feet from more than 40 million square feet in 2011.

Of the biggest 10 Manhattan leases in 2012, a stunning nine were renewals, illustrating the conservative tack many companies are taking to keep spending down.

“Companies did not want to spend capital,” explained Greg Taubin, executive managing director at tenant-rep firm Studley.

In addition to Viacom’s 1.6 million-square-foot renewal and expansion, Morgan Stanley renewed 1.2 million square feet at 1 New York Plaza in the Financial District. (The building was later hit by Hurricane Sandy and remained closed for several weeks. The office portion of the building has reopened, but its lower-level retail is being completely reconstructed because of the storm damage.)

Other large renewals included Swiss Bank UBS signing for 920,000 square feet at 1285 Sixth Avenue and Citibank taking 475,000 square feet at 601 Lexington.

While real estate insiders repeatedly said that banks and other financial service firms were scaling back office space in 2012, those companies ended up signing some of last year’s biggest Manhattan office leases.

Indeed, four of the top 10 leases were inked by banks — three of those were renewals, and the other was a renewal and expansion.

However, their leases may be part of a regional consolidation that reduces the company’s overall New York–area office footprint, said David Berkey, an executive vice president of leasing at Midtown-based landlord L&L Holding.

“They might be expanding at [one] building, but they are consolidating from other locations,” said Berkey, speaking generally about the large financial firms.

The only relocation lease on the top 10 list was the U.S. General Service Administration’s 270,000-square-foot lease at 1 World Trade.

In addition, some of the most active tenants taking space — those in the technology and media sectors — opted for less square footage per employee in 2012. And companies in other industries may soon follow suit, said Robert Sammons, a vice president of research for Cassidy Turley.

“Those that have been leasing recently [such as tech, media and advertising] use less square footage per employee, but other industries are now doing the same,” he said.

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