NY market drives 34% jump in office sales

Real Estate Alert, July 7, 2004

Backed by a huge increase in activity in New York, sales of major office properties rose by a whopping 34% nationwide in the first half, according to Real Estate Alert's Deal Database.

Some $17.8 billion of deals closed from January to June, up from $13.1 billion in the same period last year, according to the database, which tracks sales of $25 million or more.

A large chunk of that activity occurred in New York. Sales there soared by 137%, to $4.8 billion, from $2 billion a year earlier. Lower Manhattan helped fuel that gain with $1.3 billion of sales activity in the first half, up from just $140 million in the first half of 2003. New York alone accounted for more than one-quarter of the nation's volume--an astounding percentage. By comparison, New York activity was just 15% of the total a year ago.

The strong demand drove up prices in Manhattan and pushed down initial yields to levels rarely seen. Multiple properties sold at prices that translated into sub-6% cap rates. Only one other market in the country, Washington, has seen such nosebleed prices.

Several other markets also saw their activity increase--albeit at more modest rates. They include Houston, San Diego, San Francisco, San Jose/Silicon Valley and Orange County, Calif. Declining activity was recorded in Philadelphia, Minneapolis, Northern Virginia and Maryland's DC suburbs.

San Francisco and San Jose/Silicon Valley are rebounding from a slump that followed the dot-com implosion of 2001. Those areas have become two-tiered markets--a mix of quality single-tenant properties under longterm leases, and properties that are troubled. That combination has attracted a broad mix of core and opportunistic players.

Nationwide, core and core-plus players are dominating the action. A number of New York private investors were especially active, including Joseph Chetrit, Joseph Moinian, Mark Karasick and David Werner. Institutional players that were busy in the first half include Wells Real Estate of Atlanta, Triple Net Properties of Santa Ana, Calif., and American Financial Realty, a Jenkintown, Pa., REIT, that targets properties net-leased to financial institutions.

German players--a force during the past three years in various office markets--continue to actively look for properties, but have in many cases been priced out of core offerings in New York and Washington. In a trend that took shape last year, more German players are looking elsewhere, including several West Coast markets, Dallas and Central Florida.

Real Estate Alert's Deal Database records sales of properties or majority stakes valued at $25 million or more. Deals tracked include medical offices, telecom properties, sale-leaseback transactions, and flex and mixed-use properties that have at least 50% office space. The database includes portfolios with at least one property valued at $25 million or more. In some cases, that has led to the inclusion of properties valued at less than $25 million. With portfolios, each property is counted separately in the appropriate market.

The number of properties that sold in the first half fell to 259 from 345 a year ago. But last year's figure was inflated by the sales of several large multi-state portfolios that consisted primarily of smaller properties.

Office-Property Sales by Market in the First Half
Sales of $25 million or more

                                 1H-04
                                 Amount          No. of
                                 ($Mil.)     Properties

 1 New York City                $4,785.6             28
 2 Los Angeles Area              1,537.1             28
 3 Chicago                       1,301.6              6
 4 Boston Area                   1,212.8             12
 5 Washington, DC                1,049.5             12
 6 Houston Area                    709.3             16
 7 Orange County                   699.1             10
 8 San Diego Area                  620.0              8
 9 San Francisco                   509.7              4
10 South Florida                   484.6             25
11 Atlanta Area                    481.9              8
12 Central/Northern Florida        469.8             14
13 Northern Virginia               465.1              8
14 San Jose/Silicon Valley         372.9              7
15 Northern New Jersey             296.9              7
16 Seattle Area                    280.1              4
17 Dallas Area                     266.1              7
18 Sacramento Area                 225.5              3
19 Las Vegas Area                  175.3              1
20 Maryland's DC Suburbs           168.5              5
   OTHERS                        1,709.5             46
   TOTAL                        17,820.9            259

                                  1H-03
                                 Amount         No. of
                                 ($Mil.)     Properties

 1 New York City                $2,022.1             15
 2 Los Angeles Area              1,390.7             44
 3 Chicago                         917.2              7
 4 Boston Area                   1,084.5              6
 5 Washington, DC                  982.8             15
 6 Houston Area                    293.0              5
 7 Orange County                   267.0              5
 8 San Diego Area                  374.4              9
 9 San Francisco                   115.3              3
10 South Florida                   199.2             11
11 Atlanta Area                    142.8             12
12 Central/Northern Florida        344.1             30
13 Northern Virginia               645.9             14
14 San Jose/Silicon Valley         210.3              4
15 Northern New Jersey             337.7              6
16 Seattle Area                    269.0             19
17 Dallas Area                     313.2             13
18 Sacramento Area                 157.9              9
19 Las Vegas Area                    3.1              2
20 Maryland's DC Suburbs           277.8              4
   OTHERS                        2,993.6            112
   TOTAL                        13,341.8            345