millercicero (dot) com - Trophy Building Sale Sets New Record
Reis, Inc.
October 07, 2003

Trophy Building Sale Sets New Record
Although office rental rates have fallen and vacancy rates have risen in most US metros over the past year 1, sales of first-class office buildings have drawn hordes of bidders, racking up record sale prices in the process. Despite speculation that the days of the trophy office tower were numbered following the World Trade Center disaster, the demand for high-profile office space continues to thrive. Although casual observers may see a disconnect between the soft office market (Reis reports a total negative net absorption of 7.3 million square feet for the nation's top 50 markets at mid-year 2003) and the soaring prices being paid for trophy office buildings, there is more than meets the eye when evaluating these properties. Location, future income potential and the credit-worthiness of current tenants all factor into the analysis. As a result, an abundance of capital, which at one time would have found its way into the stock market, has instead been invested in the comparatively "stable" real estate sector, sending bids for choice properties through the roof. With interest rates remaining relatively low and persistent investor skepticism regarding other asset classes, trophy properties have become the investment vehicle of choice. "Trophy properties have replaced blue chip stocks as a safe place to invest in a low-interest-rate environment," believes James D. Kuhn, the president of Newmark Real Estate.Ê However, shrinking cap rates and low interest rates have made it increasingly difficult for equity funds, REITs, and offshore buyers to compete with private REITs and high net-worth investors who are aggressively trying to recoup money lost in the stock market, according to Granite Partners LLC.

In fact, Granite reports that while the year-to-date investment volume of office space is on par with the level of sales activity during 2002, there has been an eruption of trophy property sales in the third quarter of 2003, with 162 domestic office transactions amounting to $11.7 billion. Of all the activity registered to date, nearly 60% has occurred in New York, Los Angeles, Boston, Chicago, and Washington, DC. Interestingly, however, nowhere has the rush toward quality space been more apparent than in Manhattan--which along with Chicago and Hong Kong comprise the "Big Three" world skylines. On September 26 of this year, a whopping $1.4 billion was paid for the 1.8-million-square-foot General Motors (G.M.) Building. At an outlay of roughly $764.00 per square foot according to Reis, the sale of the G.M. Building at 767 Fifth Avenue will go down as the most ever paid for a US office building. The sale demonstrates that there is "still a place for trophy properties," according to John Cicero, a managing principal in Miller Cicero, a commercial real estate appraisal company. Although more than two dozen groups bid for the property, which is widely considered by local brokers to be one of the best--if not the best--office properties in the city, developer Harry Macklowe won out in the end due to his willingness to put down a $50 million nonrefundable deposit--successfully enticing bankrupt insurance company Conseco to accept his bid.

In these trying and uncertain economic times, the overall stability of an investment becomes a huge selling point. Trophy buildings, in particular, tend to be very desirable, as they are typically filled with good-credit tenants tied to stable, long-term leases, thereby reducing the project's exposure to high-turnover costs and escalating vacancy levels. The G.M. Building is no exception. Apart from its namesake, major G.M. Building tenants, which include high-end cosmetics producer Estee Lauder, Bank Of America, and Salomon Smith Barney, Inc., among others, help the building generate a reported current net operating income of $77.2 million--a sum that is expected to climb even higher by the end of the year, as built-in rent hikes in some leases take effect. Reis estimates a going-in cap rate of 5.5% for this transaction, an exceedingly low rate as office buildings go, and a further testament to this property's appeal.Ê Still, local market experts believe that the G.M. Building's purchase by Macklowe will only make sense if rents rise above the $100 per square foot level. Nevertheless, with current rents ranging from $40 to $70 per square foot for long-term tenants, and with more recent leases in the $80 to $90 psf range--as well as the existence of some triple-digit leases for space on the upper floors--the building's revenue stream should satisfy its new owner. Additionally, the possible redevelopment of the property's exclusive retail space located in a prime location on Fifth Avenue only enhances the property's overall appeal.

The hunt for trophy buildings is by no means limited to New York. In the past 12 to 18 months, major deals have been signed in cities on both coasts, setting local records in the process. Earlier in 2003, the sale of the famed John Hancock Tower in Boston made headlines, as Beacon Capital paid an astounding $910 million for the 60-story tower and two neighboring buildings, at an estimated cap rate of 8.5%, according to Reis. Similarly sweet deals were completed over the past year for a majority interest in Arco Plaza in Los Angeles, which went for $270 million and the Aon Center in Chicago, which sold for $465 million.

Of course, these days, trophy buildings are rare commodities. Despite the steady volume of office sales nationwide, the total value of 2003 transactions in New York City could end up below the total for 2002 because of the scarcity of properties actually being offered for sale, said Darcy Stacom, an executive vice president of CB Richard Ellis. Counting all of the sales that have closed, are under contract, or are in active negotiation, Stacom estimates that activity this year could total nearly $5 billion--and that is heavily skewed by the sale of the GM Building. "A typical year is about $6 billion," she says.

With the stiff competition for choice properties in today's marketplace, having accurate market intelligence as quickly as possible gives investors a competitive advantage that can make the difference between winning and losing a deal.Ê Fortunately, Reis's recently introduced Sales Comparables Module offers its clients frequently updated sales coverage of office, apartment and retail (and soon-to-be-added industrial) properties in all 80 of its markets, making it the leader in real estate intelligence. In fact, Reis SE subscribers had the benefit of accessing a confirmed record of the recent General Motors Building transaction in the Reis Sales Comparables database on September 30th, just two business days after the official closing of this sale.

21 West 38th Street, 15th Floor, New York, NY 10018 | Phone: (212) 642-4300 | Fax: (212) 642-4312
Legal  -  Privacy  -  Appraisal orders or inquiries  -  Comments?
© Copyright 2007 Miller Cicero, LLC All worldwide rights reserved.
Designed & Maintained by Freedom Development

For residential valuation services contact our affiliate, Miller Samuel Inc.