Big New Deals Spotlight Improving Fundamentals, Investor Interest Expanding Beyond Tech and Energy-Centric Markets
Several big deal office investments announced this week underscore investors' growing optimism for the foremost segment of the nation’s commercial real estate
market even as they hope the unsightly spectacle in Washington does little real harm to the recovering economy.
In New York this week, buyers continue to make this one of the top investments markets in the world. So in demand is this market, that existing owners are reluctant to let go of their trophy assets because of the prospects for growth. At the same time, they want to take advantage of the dollars being flung about by buyers; so partial sales dominated the deals this week.
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Activity too has been accelerating elsewhere across the country in markets that have largely been passed over by large institutional buyers since the economy started back on the road to recovery. Sales have ramped up in such markets as Los Angeles, even San Francisco, which has been out of favor this year is regaining suitors.
Walter Page, CoStar Group’s director of U.S. research, office, said the U.S. office market in the third quarter “had its highest level of net absorption in over five years. Specifically, office net absorption over the past 12 months is up 50% from one year earlier, standing at 64 million square feet.”
The strength of office demand, combined with limited supply, is driving up asset prices , rental rates and likely to spur new development. "The market is now reaching a turning point that will be marked by increased rent growth and the resumption of new construction in some markets,” Page said.
The third quarter 2013 marks the first time in seven years that the U.S. office market can look more confidently toward 2014 with leasing activity, expansion and pricing picking up at a faster, more sustainable rate across the nation, according to analysis by Jones Lang LaSalle.
"There is resurging strength in the U.S. office market buoyed by improving fundamentals and a pick-up in expansion activity across diversified industries and geography,” said John Sikaitis, director of office research for the Americas at Jones Lang LaSalle. “In prior quarters, expansion activity was focused in tech and energy-centric markets. This quarter, more than 87% of markets have posted positive absorption through October. We expect these gains to move higher into 2014.”
New York Is the Epicenter
New York attracted the most commercial property investment worldwide during the last year, according to Cushman & Wakefield’s annual Winning in Growth Cities
report released this week. And that activity was evident this week.
Montreal, Quebec-based Ivanhoé Cambridge announced this week that it acquired a 51% managing member interest in 1211 Avenue of the Americas, a 2 million-square-foot office building
in New York from an affiliate of Beacon Capital Partners LLC. The transaction represents an investment of more than $850 million and thus values the building at nearly $1.67 billion.
Also this week, American Realty Capital New York Recovery REIT agreed to acquire a 48.9% equity interest in Worldwide Plaza on Eighth Avenue between 49th and 50th streets in Manhattan. The sellers, George Comfort & Sons and RCG Longview, will retain the remaining 51.1% equity interest.
American Realty Capital New York Recovery REIT expects to acquire its 48.9% equity interest in this world-class Manhattan office tower for $220.1 million, thus valuing the 49-story, 1.8 million-square-foot property at $450 million.
Brookfield Office Properties Expanding Out West
Pure play office investment activity (those excluding owner-occupied deals) more than doubled in each of the last two quarters from the year-earlier periods in Los Angeles, according to data CoStar COMPs. More than $2 billion sales were completed in each quarter compared to less than $1.5 billion in the combined second and third quarter of 2012.
One reason for the upsurge this year was exemplified by the deal just completed by Brookfield Office Properties, which acquired Los Angeles-based MPG Office Trust Inc. The deal gives Brookfield seven LA office properties totaling 8.3 million square feet.
The firm will also acquire two additional assets in downtown Los Angeles: FIG@7th, Brookfield Office Properties’ newly redeveloped retail complex, as well as a strategically located development site.
These were the remaining assets of the MPG Office Trust, which had been selling off its Los Angeles properties in the past year to other investors. In June, it sold US Bank Tower and the Westlawn off-site parking garage and a month later sold Plaza Las Fuentes.
Meanwhile, investment sales activity in the Pacific Rim financial center of San Francisco, which at one point led all other office markets in office investment activity with about $3 billion of purely investment office sales in the first three quarters of last year, has cooled off to around $1 billion in sales activity so far this year.
"This market had gotten too pricey for many investors,” said Carlos Ortea, a real estate economist with CoStar Group who analyzes the San Francisco market. “A number of assets in the Financial District sold for sub-4% cap rates in the final quarter of 2012. Thus far this year, investors have been focused on less expensive mid- to lower-grade assets and value-add opportunities where they can find them.”
In addition, more institutional players are looking to focus on development opportunities due to the surge in rents/pricing and many owners are holding on to top-tier assets for the time being, Ortea said.
Noting the underlying strength of the fundamentals in San Francisco, Brookfield Office Properties entered the San Francisco market for the first time this week with the purchase of 685 Market St. It acquired the 205,000-square-foot Class A office building for $80 million.
"San Francisco has been a market we've been enthusiastically pursuing and 685 Market Street presented the right opportunity," said Mark Brown, global chief investment officer of Brookfield Office Properties. "The market has experienced significant growth in recent years, specifically in the technology sector, and the strength of the location and a repositioning program of this asset will attract significant interest across various industries."
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