Occupiers, Conversions, Bloomberg Give NYC Office Sales Market A Boost

Sales of office properties surpassed the billion-dollar mark between April and June, a far more active period than the quarter and year prior as buyers pounced on deals, according to new Avison Young data provided to Bisnow.

Institutions are largely holding off making purchases — but that’s creating opportunity for end users, family offices, private buyers and high net worth individuals, Avison Young principal and Head of Tri-State Investment Sales James Nelson said in an interview.

Those deals, plus a handful of office buildings sold to become residential conversions, indicate that buyers are taking advantage of what may be the market’s low point.

“Investors are certainly warming up to the idea of acquiring office and getting more comfortable,” Nelson said. “It would suggest that we're certainly on the way back up with office.”

Office sales totaled $873M across 10 transactions during the most recent quarter, Avison Young’s figures show. But wrapping in acquisitions of three office properties that are destined for residential conversions brings that total to nearly $1.2B.

Nearly half of that total came from Bloomberg Philanthropies’ $560M acquisition of 980 Madison Ave., where it had reportedly taken over much of the space, from RFR.

The Bloomberg Philanthropies deal is emblematic of a pattern that has dominated in recent quarters, Nelson said.

“The trend we've been talking about [with] office is either end users buying their own buildings or private and foreign investors, but not so much institutional,” he said. “Owner-operator users continue to acquire office for their own use, and the investors who are buying continue to be largely private.”

An office building with a high vacancy rate might look like a headache to an institutional investor looking for a building’s cash flow, Nelson said. But to an end user, that property represents an opportunity.

Gourmet Home Products co-founder and President Jack Saadeh purchased 148 Madison Ave. for $31.3M, and he plans to use part of the building for his company’s offices.

“We see end users stepping up and making long-term commitments to New York,” Nelson said. “It's an incredible thing for the market because it's signaling the companies want to be here.”

That dynamic has fueled an increase in office and office condo sales. The quarter’s $873M total is more than double the $403.1M of office properties that changed hands in Q2 last year and works out to a dollar volume more than four times higher than Q1. 

The uptick in activity is still far from the office market's peak. The second quarter’s annualized volume was just 43% of the 10-year average, according to Avison Young.

Family offices and high net worth individuals were most active in the market, and their typical price range is between $50M and $250M, Avison Young principal and Director of Operations Erik Edeen said.

Nuveen's June sale of 780 Third Ave. for $177M to Sovereign Partners, run by brothers Darius and Cyrus Sakhai, fits that bill.

Another factor that is beginning to create movement in the office sales market is conversions, which accounted for $327M across five sales during Q2.

Not all of those conversions are residential, Nelson said. One of the five conversion sales is a multifamily property that is slated to become a single-family home, and another is a former shelter that is expected to become an office property. However, the three largest conversion sales were all office to residential.

The largest was the $147.5M sale of 222 Broadway, which new owners TPG Real Estate Partners and GFP Real Estate plan to turn into a luxury apartment building. Columbia Property Trust also bought 101 Franklin St. for $96.5M with similar intentions, and Sunlight Development acquired the landmarked 95 Madison Ave. out of bankruptcy for $65M.

The next move to watch is when those projects actually get built. Edeen said anything sold for $200 per SF or less is more likely to be developed sooner because of the cost of construction.

While the sale of 222 Broadway worked out to $195 per SF, 101 Franklin sold for $478 per SF and 95 Madison traded for $445 per SF.

“Where you have that obsolescence is where you're going to probably see a lot of the conversion take place,” he said.

But that may change in the coming months as more buyers eye deals with the state’s inclusion of tax breaks for office-to-residential conversions in this year's budget, Nelson said. 

“Once converters heard about the tax incentives in April, this is now the time when you're going to start seeing some of these closings show up,” he said. “It's an incredibly attractive abatement, right? I mean, in some cases we’ve valued buildings where the value of the tax abatement is almost as much as the value of the building itself.”

Buyers are likely taking advantage of a moment when office leasing is picking up and sublease supply is dwindling, but institutional capital hasn’t yet sprung into action because those firms are waiting for an interest rate cut, Nelson said. 

“There's still a lot of bystanders in this market,” he said. “And that's why, even if the fundamentals are saying that it's getting better, that's why we have not seen a sales volume that's more consistent with the 10-year average.”

CORRECTION, JULY 17, 5:15 P.M. ET: RFR sold 980 Madison Ave. to Bloomberg Philanthropies. A previous version of this story incorrectly stated the seller as RXR. This story has been updated.