Insignia report: office sales market 'buoyant'

Real Estate Weekly, Nov 13, 2002

Office building sales activity in Manhattan has been extremely buoyant during the first ten months of 2002, according to an analysis just released by Insignia/ESG. Despite the fact that leasing velocity is lower than it was in 2001, and office rents have declined as much as 15-25% over the past two years, the appetite for commercial real estate investment has brought prices to unprecedented levels.

In Midtown where the majority of transactions have occurred, 24 sales were completed so far this year totaling 10.61 million SF, compared to 6.76 million SF for all of 2001. Moreover, sellers are seeing record prices for their properties. At an average of $382 per SF, sales prices are up 25% from last year's $305 per SF average, according to Insignia/ESG.

Class A properties traded higher at an average of $406 per SF, while Class B office buildings averaged $250 per SF. Predictably, Class B properties with greater lease up risk, many of them Downtown, are not faring as well. However Class B buildings with high occupancy rates are achieving returns in accordance with sellers' expectations. Another trend, given these current market conditions, is that investors are planning to hold on to these assets for, on average, seven to 10 years, as opposed to holding them for three to five years, in hopes that the economic climate will once again change for the better over the long-term.

"At a time when stock market prices are extremely volatile, many investors including pension funds, financial institutions, REITs, foreign sources and high-net-worth entrepreneurs are redirecting their focus to long-term positions in safer assets," said Richard Baxter, executive managing director of Insignia/ESG's Capital Advisors Group.

Downtown's sales activity, still recovering from the effects of 9/11, has been understandably sluggish with only three sales having taken place this year. 12.43 million SF traded last year for $3.75 billion, but only 1.49 million SF changed hands since January 2002 for a total of $223.5 million. Prices have dramatically dropped 50% from an average of $302 per SF in 2001 to $150 per SF this year, Insignia/ESG reports.

As for Midtown South, only two Class B office building sales totaling 352,000 SF were transacted to date, down from 784,000 SF in all of 2001. Sales prices in Midtown South averaged $302 per SF, 32% higher than last year's average of $229 per SF.

The sales of two Midtown Class A properties--399 Park Ave. and 717 Fifth Ave.--have set a new benchmark for office building sales prices. The former building, bought by Boston Properties from Citigroup, traded at $1.06 billion, or a staggering $631 per SF. The latter was sold by Yale University to Walton Street Capital for $266 million, or $611 per SF.