Biggest Real Estate Deals of 2006


As the housing market withers, demand for billion-dollar complexes and towers is growing to record heights

While investors and homeowners fretted over the housing slump in 2006, one of the year's most noteworthy real estate stories went largely unnoticed: Hundreds of billions of dollars poured into office towers, industrial buildings, and retail centers, setting the stage for what is certain to be a record-shattering year for commercial property deals.

To put it in perspective: Half of the biggest U.S. single-asset real estate deals in history were announced or closed in the past 12 months. Commercial real estate represents 90% of the most expensive deals of the year, the top eight of which are each more than $1 billion. Last year's biggest deal, the sale of 200 Park Ave. in New York for $1.7 billion, was the only billion-dollar property sale in 2005.

Paradoxically, the largest deal of the year—and of all time—was the sale of MetLife's (MET) Stuyvesant Town residential complex to Tishman Speyer for $5.4 billion. Other colossal transactions include the pending $1.8 billion sale of the Mall of America in Minnesota, San Francisco's $1.05 billion Bank of America (BAC) Center, and the $880 million State Street (STT) Financial Center in Boston.

Impervious Market

While residential home sales are down 11.5% from last year, more than $236 billion of commercial real estate transaction volume was recorded during the first 10 months of 2006, vs. $231.9 billion a year earlier, according to the National Association of Realtors.

Rising rents and occupancy rates in office and industrial buildings driven by rising employment and increased trade contributed to the boost, the association said in its December Commercial Real Estate Outlook report. Office buildings, which account for 8 of the year's 10 biggest real estate deals, represented $105 billion in transaction volume in the first 11 months of 2006, a 31% increase over the same period in 2005.

"We're seeing a wave of capital that has entered or would like to enter the commercial real estate industry," says Dan Fasulo, director of market analysis at commercial real estate research firm Real Capital Analytics. "And there are no signs of abatement anytime soon."

Commercial real estate is appealing because it tends to have a much higher rate of return than residential properties. Many investors in commercial real estate have hit their return objectives much faster than expected in the last year, Fasulo says, leading to a glut of "unintentional flippers" who want to reinvest their proceeds.

Returns on real estate investment trusts (REITs), which focus on large-scale commercial projects, are up more than 32% year-to-date, vs. a 15.75% increase in the S&P 500 Index. In the past five years, REITs rose at a compound annual rate of 23.5%.

"The conditions that make for stable growth of the economy are now being reflected in the commercial real estate sector," says Brad Case, vice-president for research and industry information at the National Association of Real Estate Investment Trusts. "When the economy is good and employment growth is solid, businesses need office space."

Manhattan office owner SL Green Realty (SLG) and retail property manager Alexander's were among the top-performing REITs of the year, returning 80% and 65% year-to-date, respectively.

DIVERSE SOURCES

This year the types of investors dealing in and out of the profitable asset class of commercial real estate were more varied than ever. Foreign buyers, large institutions, pension funds, and even individual entrepreneurs traded billions of dollars for millions of square feet.

The 2005 runup in oil prices left Middle Eastern investors saddled with wealth—and hungry for a skyscraper or two. In June, 2006, Dubai-based Isthithmar, a government-controlled private equity firm, snatched 280 Park Ave. in Manhattan from REIT Boston Properties for $1.2 billion.

Hong Kong's Hudson Waterfront Associates, another big foreign player in the year's priciest transactions, shelled out $1.05 billion in March for San Francisco's Bank of America Center, and $1.25 billion that same month for the AXA (AXA) Financial Center in New York.

Real estate giant Tishman Speyer also appears twice on 2006's 10 biggest list. In December the New York-based owner of Rockefeller Center helped break its own record (the $1.72 billion MetLife building) for most paid for an office building when it announced the $1.8 billion sale of 666 Fifth Ave. The firm purchased the 41-story tower in 2000 for $518 million.

EXCEPTIONAL EXCEPTION

After handing over $5.4 billion for Stuyvesant Town and Peter Cooper Village one month earlier, you might say the company needed the return. Stuyvesant Town is the only residential property among the year's biggest real estate deals, and it happens to be No. 1—by a long shot (see BusinessWeek.com, 10/18/06, "The World's Biggest Real Estate Deal").

How could an apartment complex originally conceived as affordable housing be valued at such a lofty price? The answer is size. With an estimated 8 million square feet and 80 acres of property split among 110 buildings and 11,000 apartments, its dimensions far surpass that of any single office building.

Will Tishman Speyer break its own record once again in 2007? Will foreign investors continue to gobble up U.S. real estate as the U.S. dollar weakens? Possibly. But one thing's for certain—giant properties will continue to garner skyscraping prices.

According to global real estate services provider Colliers International, office space rents will increase in 2007, with central business district lease rates jumping 12% to 15%. In midtown Manhattan, San Francisco, Chicago, and Seattle, rents are expected to rise as much as 30% next year. Office construction is expected to increase 25% over 2006 levels. This bodes well for commercial property prices.

"You can only trade so much real estate in one year, but all the ingredients we had for 2006 exist for 2007," says Ross Moore, Colliers' senior vice-president and director of market and economic research. "I'm just waiting for the Chinese to arrive."

Click here to see the biggest real estate deals of 2006.


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