In 2006, the value of Manhattan building sales rose a whopping 51.7 percent to $31.1 billion from $20.5 billion a year earlier, according to an analysis provided by Real Capital Analytics, a research firm.
The biggest buyers came from all corners of the globe, the research firm found.
Money came into the New York market from many avenues, including domestic buyers, foreign buyers, REITs, institutions and investments funds.
“Probably the most impressive thing about 2006 has been the pure diversity of the different buyer groups,” said Dan Fasulo, director of market analysis for Real Capital Analytics. “You certainly have these funds like Blackstone that are active right now, and there’s a mix of institutional equity, high-net-worth individuals and foreign governments.”
Real Capital provided a breakdown of the biggest buyers for The Real Deal (see chart).
Private, in-state buyers such as Tishman Speyer represented the largest total dollar volume in 2006, accounting for nearly $9.2 billion in sales, up from $5.1 billion a year earlier. Private, out-of state buyers were also staking a claim in the city with a purchase volume of $2.5 billion last year, up nearly six-fold from $435 million in 2005.
Tishman Speyer, of course, made the biggest splash of the year with its $5.4 billion purchase of the 110-building Stuyvesant Town and Peter Cooper Village from MetLife. That single buy was bigger than all combined purchases from private in-state buyers in 2005.
Upstaging even that deal, though, was another in-state buyer, Harry Macklowe. His $7 billion purchase of eight Manhattan office properties from Equity Office Properties as it was being acquired by the Blackstone Group took place in 2007, however, so it wasn’t counted in the data.
Perhaps even more significantly, institutions saw the biggest dollar jump in purchases last year — part of a significant trend that shows how real estate has come to be just as desirable as stocks and bonds for investors.
Institutions gobbled up nearly $8.3 billion in Manhattan real estate, up more than fourfold from just $1.9 billion in 2005. Examples of deals included CalSTRS — the California State Teachers’ Retirement System — and its joint venture partner, Silverstein Properties, purchasing 575 Lexington Avenue for $400 million in October 2006; UBS Realty Investors purchasing a 97-unit apartment building at 308 East 38th Street in June 2006 for more than $59 million; and Principal Global Investors unit Principal Real Estate
Investors buying 1370 Sixth Avenue in January 2006 for $217 million.
It’s a trend that could have positive ramifications for the market in 2007 as well, Fasulo added.
“Almost everyone we talk with, they are raising their largest fund right now, which means these monies are going to be allocated over the next 12 months,” Fasulo said.
Prices have risen so high and so fast that Manhattan real estate is being traded more and more like conventional securities and other traditional investment instruments.
“There’s been an unprecedented appreciation in value,” said Adelaide Polsinelli, senior executive broker at Besen & Associates.
“People aren’t buying because of the return on the property, but because of the rates of appreciation. Everyone wants a piece of that in their portfolio. It’s an investment in a commodity — another form of trading.”
Foreign investors, meanwhile, spent nearly twice as much money on Manhattan real estate in 2006 compared to the year before, with purchases of $4.1 billion, up from $2.1 billion.
Deals included the highly publicized, high-priced transactions of Middle Eastern buyers. It wasn’t uncommon for these buyers to chase deals that fetched more than $1,000 per square foot, well above the Midtown average of $674 per square foot paid for office buildings last year.
Istithmar, which operates on behalf of the Dubai royal family, purchased 280 Park Avenue from Boston Properties for $1.2 billion with a cap rate of just 3.75 percent, and the site of the former Knickerbocker Hotel at 6 Times Square for $300 million, or $1,007 per square foot, among other buys.
A less visible Middle Eastern buyer, Fosterlane, the Atlanta-based investment arm of the government of Kuwait, paid Vornado Realty Trust $542 million, or $1,007 per square foot, for 350 Park Avenue.
“What’s interesting about [Middle Eastern buyers] is they did what new entrants typically do, they buy very high-profile, safe buildings,” said Woody Heller, executive managing director and group head of the capital transactions group at Studley. “As they bought more property and became more comfortable with the market, they became broader in their approach.”
Many foreign buyers are new to the market and find it attractive because the prices are considerably less than in Europe. An English buyer that Eastern Consolidated chairman and CEO Peter Hauspurg is working with to buy a group of 48 residential buildings in East Harlem offered close to the $250 million asking price, even though the buyer is new to New York and Harlem still hasn’t reached its full potential.
“If you’re from London our rents look undervalued,” Hauspurg said.
But not all foreign investors were active on the buy side of the market. Class A Manhattan space continued to be too pricey for German investors, who had been very active in the market just a few years before. The rules of typical German funds require them to pay dividends, and cap rates in Manhattan are too low for them to invest in the city at current prices.
“It’s difficult to do when the cap rates are where they are,” said Steven Kohn, president of Sonnenblick-Goldman. “When the expenses are factored in, it’s less than they would want.”
But the high prices made it an attractive environment in which to sell. German fund Jamestown sold 1211 Sixth Avenue to Beacon Capital LLC and Lehman Brothers for $1.5 billion, or about $800 per square foot. Jamestown acquired the property, which is 53 percent leased to News Corp., in 2000 for about $600 million. The deal provided investors its expected 8 percent return and delivered more than 200 percent of its invested capital four years ahead of schedule.
Although there was much discussion of activity from investment funds, purchase volume from that sector — which includes hedge funds — actually slipped to $3.6 billion in 2006 from $4.1 billion in 2005, according to Real Capital Analytics data. Condo converters represented $478 million in buys, down sharply from $3.16 billion in 2005 as the outlook for new development cooled.
Other players less active in the market in 2006 were the old New York real estate families such as Rudin, Rose and Durst, said Hauspurg. “Many have been on the sidelines because they haven’t made any sense of the pricing.” Some families have been shedding assets in an effort to get ready for the next cycle — whenever it comes, Hauspurg said.