Bloomberg News

Midtown Manhattan Office Values Near Peak, Green Street Says

June 03, 2011

(Updates with additional comments from analyst, starting in fifth paragraph.)

June 3 (Bloomberg) -- Midtown Manhattan office values are within 15 percent of their mid-2007 peak, as real estate investors flock to the city expecting rent growth, Green Street Advisors Inc. said.

Office prices in Midtown have recovered 88 percent of the value lost since the 2008 credit crisis, which made loans for real estate acquisitions scarce, the Newport Beach, California- based research firm wrote today in a report introducing its Manhattan Office Property Price Index.

“Value appreciation for midtown Manhattan office properties has been red-hot,” wrote Michael Knott, a real estate investment trust analyst at Green Street. “The market continues to benefit from improving fundamentals, a brighter outlook and strong investor demand. Midtown is one of the world’s most desirable office markets in which to invest.”

Rents have started to recover in midtown Manhattan, the biggest and most-expensive U.S. office market, and will probably continue to climb, Knott said. Lease rates for Midtown office space rose 1.6 percent from June 2010 through March after falling 27 percent since September 2008, according to data from brokerage Cushman & Wakefield Inc.

Search for Yield

Office values in all of Manhattan are poised to exceed the 2007 peak in the next 12 months, Knott said in an interview. Investors are seeking higher yields, with 10-year U.S. Treasury notes at 3 percent.

“There’s still a push toward hard assets,” he said. “You’ll continue to see that as the outlook for fundamentals has improved and is likely to continue to come along.”

The report was issued with Green Street’s national office market update, which found that values had returned to within 20 percent of the peak. Markets such as New York and Washington, which combine high demand with government regulations that make it hard to build new supply, led the surge.

Today’s U.S. jobs report, which showed payrolls growing at the slowest pace in eight months and the unemployment rate rising to 9.1 percent, may temper a recovery for the U.S. office market, Knott said.

“If this is something other than temporary, it will be a drag for forecasts of recovery -- not only for the U.S. overall but even for Manhattan,” he said. “It has to have, at least at the margin, a negative implication, though probably not as negative” for Manhattan.

Investment-Quality Buildings

Only the values of Manhattan buildings owned by REITs and other publicly traded real estate companies are used to calculate the Green Street index, according to Knott. Those properties represent a good proxy for the borough’s investment- quality office stock, he said.

The index is dominated by buildings owned by four publicly traded companies: Boston Properties Inc., Brookfield Office Properties, SL Green Realty Corp. and Vornado Realty Trust.

Public companies own more than 50 million square feet (4.6 million square meters) of Manhattan office buildings, or about 15 percent of the market, according to Green Street.

Offices in all of Manhattan have recovered about 78 percent of the value lost in the slide, which lasted from mid-2007 to mid-2009, according to the report. “The trough was deep but short-lived,” Knott wrote. Prices now have returned to mid-to- late-2006 levels.

Downtown Challenges

Lower Manhattan properties have not recovered as strongly, gaining back 41 percent of their value since hitting bottom in 2009, according to Green Street.

Downtown still “faces challenges,” including lease expirations at Brookfield’s World Financial Center and additional space expected as two World Trade Center towers open in the next three years, Knott wrote.

Last week’s announcement that Conde Nast Publications Inc. would take about a third of the 3 million-square-foot One World Trade Center could help downtown landlords fill their vacancies, he wrote.

“Conde Nast is a trend-setter,” Knott said in an e-mail. “By virtue of planting a giant flag downtown, this becomes a more hip destination for others to consider.”

Green Street indexes measure value by surveying brokers and real estate executives and include transactions in negotiation. Other indexes, including Moody’s Investors Service’s Moody’s/REAL Commercial Property Price Index, only use completed transactions.

--Editors: Christine Maurus, Daniel Taub

To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel in New York at kwetzel@bloomberg.net


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