Executive Summary
- Manhattan office market closes Q3 with $4.4B in sales volume
- prices reach $908 per square foot, mark best Q3 since 2016
- Kushner and Brookfield strike $1.3B deal for 666 5th Ave.
- 1.4 MSF 55 Hudson Yards ready to come online in Q4
After reaching new highs during 2015 and 2016 in terms of sales, the Manhattan office market cooled down in 2017 to more sustainable levels. However, sales activity bounced back during the final months of the year, and kept the pace throughout most of 2018. Office sales took a breather during the year’s second quarter, but got back on track during Q3, rising above the $4 billion mark yet again, aided by two major deals that fetched over $1 billion each.
The highlight of the quarter was Brookfield Properties’ $1.28 billion acquisition of the leasehold interest in the troubled 666 Fifth Ave. Having struggled for years to pay off the massive debt on the building, owner Kushner Cos. finally struck a deal with Brookfield in which the latter took a 99-year lease on the property, paying the rent for the entire term upfront, according to The New York Times. Vornado also sold its 49.5% stake in the 1.4 million-square-foot office portion of the property to Kushner for $120 million. The deal with Brookfield finally relieves the financial burden on Kushner, which had been dealing with high vacancy and huge debt payments ever since it bought the tower in 2007 for $1.8 billion. Keep reading to see other highlights regarding the Manhattan office market in Q3.
Manhattan Office Market Concludes Q3 With $4.4B in Sales
Following two consecutive quarters that recorded over $4 billion in sales volume, activity on the Manhattan office market slowed down the pace during Q2 2018, when sales dropped 37% compared to Q1. That drop proved to be a blip, however, as $4.4 billion worth of office properties changed hands during Q3, marking a 61% increase compared to Q2. The third quarter of 2018 also recorded a significant increase in office sales compared to the third quarter of 2017; nonetheless, Q3 2017 was an exception and the only quarter in four years to record less than $1 billion in sales volume.
Office Sale Prices Reach $908/Sq.Ft., Mark Best Q3 Since 2016
The average price per square foot paid for Manhattan office assets rose 11% year-over-year, closing Q3 at $908. Prices were 28% below the high point recorded in the first quarter of 2018, but they were 3% above Q2’s average of $879. This past quarter also recorded the highest Q3 numbers since 2016, when office space in Manhattan traded at an average of $1,017 per square foot.
Kushner Offloads 666 5th Ave. in $1.3B Deal With Brookfield, Disney Snags ABC HQ for $1.2B
666 Fifth Ave., Manhattan
The largest deal of the quarter was Brookfield Properties’ acquisition of the leasehold interest in 666 Fifth Ave. from Kushner Cos., for a whopping $1.3 billion. Property owner Kushner had been struggling for years to find tenants and pay off the $1.2 billion mortgage that is due to mature in February 2019. Kushner also managed to buy Vornado’s 49.5% stake in the property for $120 million.
Brookfield will operate the 39-story, Class A+ building and plans to undertake a major redevelopment program to upgrade it. “With its ‘Main and Main’ location, direct transportation access and currently unrefined physical characteristics, 666 Fifth Ave. has the potential to be one of New York City‘s most iconic and successful office properties,” Ric Clark, senior managing partner and chairman of Brookfield Property Group, said in an official statement.
Barbara Walters Building, 47 W. 66th St., Manhattan
The second-largest office deal of the quarter also fetched a hefty price tag: Silverstein Properties purchased ABC’s Upper West Side headquarters complex for nearly $1.2 billion in July, from ABC’s parent company, the Walt Disney Co. The deal included 401,972 square feet of office space at 125 W. End Ave., 316,000 square feet of space at the Barbara Walters Building, 287,822 square feet at 77 W. 66th St., 133,835 square feet at 147 Columbia Ave., 129,885 square feet at 30 W. 67th St., and 99,841 square ffet at 149 Columbia Ave. According to Yardi Matrix data, the sale was aided by a $715 million loan held by Deutsche Bank.
The portfolio sale is just a small part of Disney’s plan to revitalize the broadcasting industry and expand its business–the company is also in the midst of acquiring most of 21st Century Fox in a deal valued at roughly $52.4 billion. Disney, which currently owns ABC and ESPN, has plans to compete with the established tech giants and introduce two new streaming services similar to Netflix.
Disney also closed the third-largest office sale of Q3, shelling out $650 million to lease the site at Four Hudson Square for 99 years from Trinity Church. It plans to demolish the existing buildings at 304 Hudson St., 137 and 143 Varick St., 50 Vandam St. and 275 Spring St., and develop a 1 million-square-foot complex to house the offices of ABC, WABC-TV, The View, and Live with Kelly and Ryan.
3 Million Sq. Ft. of New Manhattan Office Space Ready to Come Online in Q4
Developers are expected to deliver 9 projects to the market during Q4 2018, totaling over 3 million square feet of Manhattan office space. The final months of the year will thus prove busy for the market, after no developments came online during Q3.
The largest project scheduled for Q4 delivery is the 1.4 million-square-foot office tower at 55 Hudson Yards. The 51-story project owned by Mitsui Fudosan America was initially scheduled for completion in August, but that deadline was moved to November 2018. Located in the Chelsea submarket, the building is subject to a 30-year PILOT ground lease held by the New York City Industrial Development Agency, expiring in 2044, per Yardi Matrix data.
The second-largest project scheduled for completion in Q4 is the 861,868-square-foot high-rise at 390 Madison Ave. Owned by Clarion Partners, the 32-story spec building is expected to come online by the end of November, and will feature 41,503 square feet of retail space as well as 127 parking spaces.
Methodology
We used detailed Yardi Matrix data to analyze all office transactions with price tags equal to or exceeding $5 million to close in Manhattan during the third quarter of 2018. Our analysis, based on data recorded up until October 1st, 2018, includes completed office buildings equal to or larger than 50,000 square feet that changed owners during the quarter. In the case of mixed-use assets, only properties featuring over 50% office space were taken into account. We counted portfolio deals as single transactions and excluded distressed sales altogether.
To make sure the trends and comparisons presented in our analysis are valid, we excluded portfolio, partial interest and ground lease deals from our calculation of the average price per square foot.
While every effort was made to ensure the timeliness and accuracy of the information presented in this report, the information is provided “as is” and neither CommercialCafe nor Yardi Matrix can guarantee that the information provided is complete.
Property images courtesy of Yardi Matrix.
