Private equity capital accelerates major push for Manhattan class A real estate assets
New York City, NY – The concurrence of low interest rates and a robust investment sales market has opened the door for private equity to take a leading position in the acquisition of class A office buildings in Manhattan, according to recently released research from Avison Young. Thirty-six percent of capital directed into the office market year-to-date has been from private equity, up from 29% in 2012 and just 8% in 2011. Pricing for class A office buildings has subsequently accelerated due to strong investor demand.
The increased activity from private equity comes as institutional investors are pulling back and, in some cases, disposing of assets. According to Avison Young’s research, 19% of capital directed into the New York City’s commercial real estate market year to date has been from institutional investors, down from 29% in 2012 and from 49% in 2009.
“While institutional investors began to dispose of major class A assets, private equity capital has been quick to accelerate purchases and assert a strong presence in New York City,” says Avison Young Principal Jon Epstein, who is also a member of the firm’s Capital Markets Group in New York. “These investors are opportunistic and, sensing a forthcoming pricing spike on the horizon, are pushing to acquire the few high-caliber office assets that are on the market.”
A number of class A office buildings hit the market during the second quarter and sales of properties such as 499 Park Avenue, 425 Lexington and 650 Madison Avenue by The Carlyle Group, as well as the listing of 7 Times Square by Boston Properties, are viewed as rare commodities likely to garner great value in the future.
Despite total dollar volume of second quarter New York City commercial real estate sales being up more than 19% year-over-year, increasing to $7.3 billion from $6.1 billion and producing one of the best quarters in the past few years, Avison Young notes that this increase is due primarily to three transactions that amounted to over $3.3 billion. Without these completed transactions, market volume remained flat and transaction volume actually slipped by 28%.
“The number of class B buildings that are trading right now is lethargic,” notes Neil C. Helman, Avison Young Principal and also a member of the firm’s New York City-based Capital Markets Group. “Private equity, the new driver of the market, overwhelmingly prefers investing in class A assets, which is making it difficult for smaller class B office buildings to locate a buying audience, as evidenced by some recent offerings failing to sell. Rental growth for these properties has stalled, other than in Midtown South, while operating costs have continued to eat away at profits. Refinancing seems to be the best available and most prudent option.”
With condominium sale prices in excess of $2,000 per square foot (psf) quickly becoming the norm due to limited supply and end-user demand, land prices are being thrust into previously untested heights, according to Avison Young. Total dollar volume of land sales increased year over year from $72 million in 2009 to $1.2 billion in 2012, a 155% compounded annual growth rate.
Lack of supply has pushed down the dollar volume of land sales so far this year, which stands at approximately $339 million, down from $500 million in the first two quarters of 2012. Average price per buildable square foot (sf) across the market remains strong given the supply shortage, with Manhattan averaging around $400 per buildable sf in both the first half of 2012 and the first half of 2013. That said, prices for land suited to prime luxury residential development have recently soared to $700 to $800 per buildable sf in some cases - all in response to the end-user condominium prices being attained at new projects.
“So far this year, more than 40% of investment sales transactions in Manhattan have been in the residential sector, totaling over $3.5 billion in sales,” adds Helman. “Investor interest will continue particularly as rents and land prices continue to climb. The escalating price scenario ensures that most new construction will be for condominium, which in turn will keep vacancy for the rental segment extraordinarily low.”
Avison Young remains confident that the second half of the year will prove to be strong for investment sales activity as the economy continues to grow. Interest in value-add and opportunistic investments – particularly in Midtown South and Midtown West – will remain strong. Avison Young believes this trend will persist especially as progress is made on the Hudson Yards development and the expansion of the 7 Subway line.
“While interest rates remain low, residential condominium sales and office cap rates will maintain their strength and drive investors and developers into the market,” notes Greg Kraut, Principal and Managing Director of Avison Young’s New York City office. “Low interest rates should remain central to skyrocketing prices as the eventuality of rate increases seem not to be on the radar screen or are reasonably distant for most real estate investors. Opportunistic and value-add investments will remain the backbone of the markets. However, if interest rates start to tick upward, more investors will feel the need to buy now and a buying frenzy could ensue.”
Additionally, class A trophy assets will continue to drive this segment of the office market higher, while interest rates remain low, according to Avison Young research. A limited supply of residential development sites will drive prices higher especially as growth in the residential condominium prices persist.
Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 1,200 real estate professionals in 48 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multi-family properties.