New York office market bolstered by sale valuing tower at $2bn

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New York City’s largest office landlord has agreed to sell a stake in a prominent tower that gives it a $2bn valuation, a modest markdown from its previous price that came as a relief to a commercial property market beset by vacancies.

SL Green will sell the 49.9 per cent stake in Manhattan’s 245 Park Avenue building to Japan’s Mori Trust, supplying much-needed cash to the real estate investment trust.

The deal announced on Monday is one of the largest New York City office transactions since the US Federal Reserve began raising interest rates in March 2022, hastening a downturn for the office sector precipitated by remote working.

SL Green has been a particular victim: Its shares fell from more than $80 last March to dip below $20 earlier this year. On Monday, they jumped 19.8 per cent to $28.22.

Harrison Sitomer, SL Green’s chief investment officer, said its Park Avenue properties were still commanding robust rents in spite of the broader market turmoil. He also predicted more deals would be in the offing, with foreign investors such as Mori searching for bargains in the world’s largest office market.

“There’s been a notable momentum shift for groups wanting to find product in New York,” he said, citing growing inquiries from potential partners. “Investors that are well-capitalised are going to continue to see opportunity in New York.”

Other real estate executives were heartened by the valuation, which approached the $2.2bn that China’s HNA Group paid for 245 Park in 2017 when the market was near its peak. They also saw it as proof that choice New York office properties still appealed to foreign investors.

“Rumours of New York’s demise are greatly exaggerated,” wrote Ruth Colp-Haber of Wharton Property Advisors, calling the deal “an unmistakably positive development”.

Bryan McDonnell, who leads the real estate debt business at asset manager PGIM, said more transactions were needed to help establish pricing in a confused market. He also expected other developers to explore similar transactions to raise cash in a challenging environment.

“I do think a lot of these big operators that are heavy in office are trying to find ways to shore up liquidity,” he said. “SL Green’s not alone.”

The 245 Park building was built in 1967 and hosts businesses including the investment managers Ares Capital and Angelo Gordon. While it boasts a prime address across the street from Grand Central Station, it has been shedding crucial tenants in recent years and was in need of renovation.

SL Green announced a plan for a revamp, including new lobbies and amenities, when it bought the building out of bankruptcy last year following a dispute with HNA, its one-time partner. As part of that deal, SL Green assumed $1.76bn in mortgage and mezzanine loans attached to the property, which come due in 2027.

Monday’s transaction contrasted with the gloom hanging over office towers and their owners since the Covid-19 pandemic accelerated a trend towards remote working. In many US cities, office occupancy has hovered around 50 per cent, prompting tenants to dump space on the sublease market and landlords to reduce rents.

The newest and most advanced buildings, such as SL Green’s One Vanderbilt, have defied those trends and continued to command record rents. Older buildings, however, have fallen out of favour, with some owners handing them back to lenders.

A recent study by broker JLL found that office buildings in New York had lost $76bn from their most recent sales prices.

Uncertainty about the prospects for offices and rising rates has damped investment activity. The volume of office transactions in US central business districts was down 70 per cent in May compared with May 2020, according to MSCI Real Capital Analytics.

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