NY office investment blooms, but are there enough trees?

With its effective rents blooming, New York's midtown office market continues to attract a buzz of foreign and institutional investors. And even the listless downtown market is enticing buyers.

At press time, a German investment group affiliated with Hugo Mann had reportedly signed a letter of intent to buy One New York Plaza, a 2.5 million sq. ft. property downtown, for $300 million. The group was in New York in late March to work out the details. The building was bought in 1989 for $140 million by Chase Manhattan, which subsequently invested heavily in the structure. Edward S. Gordon Co. is representing the investor.

Another German group was the buyer in the year's largest confirmed deal to date in New York. The U.S. affiliate of a German publisher, Paramount Group Inc., agreed to pay $135 million to Sanwa Bank for the 1 million sq. ft. One Financial Square in February. The structure is 60% leased, but it is just eight years old and is among the few modem buildings downtown. It has large 35,000 sq. ft. floor plates.

"There seem to be more German investors in town every week," says Scott Latham, executive director of Eastern Consolidated Properties Inc., a New York-based investment sales firm. Latham says the two deals may be driven in large part by the strong German mark that can increase initial yields considerably. Paramount outbid about 12 others for One Financial Square, which was originally expected to fetch about $100 million.

The strong midtown drew most of the attention last year, and it's still the prime attraction. Office building sales totaled a healthy $822 million, with midtown buildings accounting for $728 million of that total, according to New York-based Edward S. Gordon Co. Inc. Foreign investors, the dominant players in 1994, are being joined by U.S. pension funds, investment groups and wealthy New York families.

The year's second largest confirmed sale closed in mid-March, when Zell/Merrill Lynch Real Estate Partners Ill purchased 850 Third Avenue for $68 million. The seller was The Prudential Realty Group, which took back the building in 1993. The $124 per sq. ft. price was higher than expected in part because Prudential reportedly offered 65% seller financing.

Zell/Merrill Lynch was looking for a trophy building in New York for some time but settled on the 32-year-old, 500,000 sq. ft. midtown structure that's 80% leased. "The choice here was to buy a major building with a great rent roll that they can improve," says Darcy Stacom, Cushman & Wakefield's senior director who represented Prudential. The deal demonstrates that major buyers are confident enough in the market to be flexible. "You have a major player that can't get exactly what it wants saying, `We'll create it," Stacom says, adding that she's hopeful this might serve as a beacon for the investors still on the sidelines.

Latham says there will be 30 or more major office sales this year compared to about 20 last year. "Investors are getting good current yields (between 8% and 12%) and tremendous capital appreciation (potential)," he says. But there are fewer institutional buildings being put on the block, which will perpetuate the sellers' advantage that characterizes the market now.

"The number of inquiries has remained steady, but I don't anticipate the same activity the market saw last year," says Richard Baxter, managing director of Edward S. Gordon, which says it arranged $305 million in office building sales last year, or 37% of the transactions involving buildings of more than 100,000 sq. ft. "With many of the foreclosed properties sold, there's not as much product. I think there may be a bit of a lag coming."

"The market won't suddenly dry up, but it will be slow," Stacom adds.

Most agree that Japanese banks are beginning to sell off their REO. In addition to the Sanwa Bank sale, Fuji Bank agreed to sell 410 Park Avenue to an Israeli-owned company, Eastgate Realty, for $34 million in February.

Many assets acquired during the throes of the recession will be put on the market this year. For example, 1140 Avenue of the Americas, a 200,000 sq. ft. midtown building bought for $11 million in 1992 by a partnership that includes New York-based Murray Hill Properties, is expected to come on the market soon -- for a reported $26 million.

In addition to German players, investors from Hong Kong and Mainland China are the most active foreign bidders. Eastern investors, particularly those anticipating the return of Hong Kong to Chinese rule, see an opportunity to diversify their portfolios and enter the U.S. market at a steep discount.

Latham, who spent the month of December in Hong Kong talking with 35 investment groups, says, "Hong Kong investors have an opportunity to sell (their Far East investments) at the top of the market and invest here at the bottom."

Edmund Lau of EY Lau Co. Inc., a New York-based firm that represents Asian investors in U.S. real estate, says news of New York investments are beginning to file back to Hong Kong. "This could be the tip of the iceberg (for Asian investment here)," he predicts.

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