Buyer bets on long-term tenant at 1211 Avenue of the Americas

While many building buyers are seeking to snatch up partly vacant office buildings and fill them up at today’s high rents, Beacon Capital Partners’ purchase of the fully-occupied 1211 Avenue of the Americas last month was evidence of an opposite sort of investment strategy.

In the second-priciest buy in the history of the U.S. for a single building, at more than $1.5 billion, following the $1.7 billion sale of the MetLife Building last year, Boston-based Beacon bet on the predictable cash-flow from the building between 47th and 48th streets. Beacon beat out more than 30 competing national and international bids.

News Corporation is the largest tenant in the tower, occupying 56 percent of its 1.85 million square feet of space. It’s the parent company of the Fox broadcast network, and also counts the tabloid newspaper the New York Post among its media properties. News Corp. expanded its space in the building last year and has a lease through 2020.

That limits any huge upside in revenues, but also provides Beacon with a stable investment.

“Signing one tenant to a huge lease locks in an income stream. Really they’re not buying real estate; they are buying a bond from News Corp.,” said Dan Fasulo, director at research firm Real Capital Analytics. “There is no upside; they can’t raise rents to $90 a square foot if that’s where the market is in 10 years.”

Not every big real estate investor uses a steady-state strategy. Broadway Partners in April spent $420 million to buy 522 Fifth Avenue, taking control of the 550,000-square-foot building as J.P. Morgan Asset Management went ahead with plans to be out this summer, leaving the building vacant.

Broadway took advantage of the tight Midtown office market and last month signed up investment bank Morgan Stanley to occupy the entire building, between 43rd and 44th streets, an impressive $80 a square foot in rent. The average Midtown office rent is $50.35 a square foot, and the vacancy rate is at a tight 6.9 percent.

“Buyers are paying more for properties with vacancy or vacancy coming up than for properties with leases in place where they’ll be getting x money every year,” said Fasulo. “It’s indicative of how healthy the market is right now.”

Broadway “leased up their building very quickly,” said Mike Forrest, investment sales broker at Marcus and Millichap.

It’s a seller’s market right now, since investors have huge amounts of capital they want to put into New York City real estate. While vacant or soon-to-be-vacant buildings are still the top choice, the scarcity of space means they’ll take fully-occupied buildings like 1211 Avenue of the Americas, too.

Most aggressive buyers are willing to stretch their investment horizon to rationalize early thin yields and record low cap rates for a longer -term investment, said Doug Harmon, managing director at Eastdil. The firm represented Jamestown, the real estate investment fund that sold 1211 Avenue of the Americas and notched about $1 billion in profits on the sale. Market observers say Beacon faces a significant hurdle in its quest for profits, because rising interest rates are impacting cash flows.

“For people to rationalize and afford to win assets, they need to lengthen their investment-time horizon,” Harmon said. “Of the bidders who wanted it the most, they weren’t buying to flip it in two, three or five years.”

While News Corp. is locked in for another 14 years, many other tenants are now on leases below market rates. That means Beacon can charge more when they either renew or move on, said Harmon. Current leases average in the $50s and will expire in the next six years. Tenants in the building include J.P. Morgan and Wachovia.

The abundance of buyers and scarcity of space has inflated prices overall in the building sale market.

Beacon paid around $800 per square foot for 1211 Avenue of the Americas, while Broadway Partners snapped up the less upscale 522 Fifth Avenue for $750 per square foot. Some office buildings recently have fetched more than $1,000 a square foot, including the recent $1.2 billion buy of 280 Park Avenue by Dubai’s Istithmar, a deal that closed in June.

“Five years ago it would have been difficult to find more than a handful of investors who could acquire a single deal over a half-billion dollars,” Harmon said.

“There is not enough supply to satisfy even a tenth of the capital available for real estate,” he added. “Investors might as well put more out in bigger chunks when they get that hard-fought opportunity.”