Bloomberg News

NYC Office Prices Plateau as Slowing Economy Limits Demand

October 06, 2011

(Updates with comment from investor beginning in sixth paragraph.)

Oct. 6 (Bloomberg) -- Manhattan office prices have plateaued after coming within 18 percent of their mid-2007 peak, as Europe’s debt crisis, bank job cuts and the economic slowdown limit demand, Green Street Advisors Inc. said.

“Manhattan may face headwinds in coming months,” the Newport Beach, California-based research firm wrote today in a report on its index of office prices in the borough. The “rebound off the trough may have run its course,” it said.

Investment-quality offices in Manhattan have rebounded after losing 54 percent of their value in the wake of the 2008 credit crisis, which made loans for property purchases scarce, according to the report. Property buyers flocked to New York in the last two years, looking for safety and steady cash flow in the biggest, most expensive U.S. office market.

Office prices were “virtually unchanged” for the four months through September, Green Street said. Capitalization rates, a measure of real estate returns, have stalled at about 4.5 percent in midtown Manhattan after reaching 7.9 percent after the credit meltdown. Cap rates are net operating income divided by the sales price, so they go down as values rise.

While value gains have stalled, “investor demand remains healthy, as a broad ‘flight to quality’ may provide stability for top buildings with secure cash flows,” Green Street said.

‘Too Frothy’

Demand for high-quality, well-leased properties in coastal cities like New York became “too frothy” in the last six months, said Ronald Dickerman, president of Madison International Realty Investors, a real estate private-equity firm based in Manhattan. “Everybody’s been chasing the same deals,” he said.

In the first half of the year, investors were willing to accept lower yields on the expectation of robust rent increases that would “make everything okay five years from now,” Dickerman said in a phone interview. “Now all of a sudden people are scratching their heads and saying, wait a minute, the economy is looking much softer than people thought.”

Cutbacks at financial firms may restrain demand for office properties as the U.S. unemployment rate hovers above 9 percent. Global financial companies have announced plans to cut more than 120,000 jobs this year, according to data compiled by Bloomberg Industries.

Four Landlords

Only the values of Manhattan offices owned by REITs and other publicly traded real estate companies are used to calculate Green Street’s index, which includes completed sales and deals being negotiated. The gauge is dominated by buildings owned by four companies: Boston Properties Inc., Brookfield Office Properties, SL Green Realty Corp. and Vornado Realty Trust.

New York overtook London as the top commercial-property investment market for the first time since 2007 after improved access to financing spurred more U.S. deals, brokerage Cushman & Wakefield said yesterday. Investment in the New York area grew 166 percent in the 12 months through August from a year earlier.

Manhattan office leasing declined 36 percent in the third quarter as demand retreated from a 12-year high reached in the previous three months, Cushman said Oct. 4. A total of 6.4 million square feet (594,600 square meters) of leases were signed in the three months through September, down from about 10 million in the second quarter, when Conde Nast Publications Inc. signed a 1 million-square-foot deal at 1 World Trade Center in lower Manhattan, according to the New York-based brokerage.

Prices for commercial properties in the U.S. were unchanged last month, Green Street said in a separate report. Values remain about 9 percent below their August 2007 peak, after rising 48 percent from the bottom reached in May 2009, according to the report.

Market momentum “has ebbed as the economy has weakened and fear has crept into the markets in recent months,” the firm said.

--With assistance from Neil Callanan in London. 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 at kwetzel@bloomberg.net


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