Google’s $2.4bn (£1.7bn) purchase of the Chelsea market building in New York this week was the second-largest sale of a building in the city’s history.
The blockbuster deal belies an uncertain market. New York investment volumes were down 44% year-on-year in 2017, according to Cushman & Wakefield.
Overall, US investment volumes were down 8%, but in gateway cities volumes were down by almost 24%. The fall was largely attributed to the cities’ reliance on big deals and the lack thereof last year.
“International buying fell 24% due to fewer gateway city opportunities,” Bruce Mosler, chairman, global brokerage, Cushman & Wakefield, said at MIPIM last week.
“Foreign investors are typically focused on the mega deals of $200m and above and, quite frankly, there simply wasn’t a high volume of opportunity there.”
READ MORE: Do US Treasury increases spell trouble for property?
US office investors and developers are grappling with how to play a market that is late-cycle, disrupted by WeWork and affected by policy changes such as US president Donald Trump’s tax reforms.
“Corporates are healthy, tax incentives have boosted their performances and this is a very good sign for the future of real estate”, Mosler said.
However, he said investors are concerned the rise of interest rates, hiked 0.25% by the Federal Reserve this week, could put pressure on capitalisation rates.
“However fairly valued real estate appears today, investors are beginning to worry about the spectre of rising interest rates and the resultant upward pressure on cap rates,” he says.
Opportunities for growth
Isaac Zion, co-chief investment officer, SL Green Realty Corp, New York’s largest office landlord, said he sees a lot of opportunity for growth in the city.
“The tax changes are clearly helpful,” he said. “The city’s budget office predicts another 40,000 jobs by the end of 2019. That’s a lot of space. If you look at that on a longer trend, coupled with infrastructure, we’re repurposing building, the transportation is there, the education is there. I think it’s one of the true global cities where people need to be and want to be.”
We’re actually trading at about a 30% discount. If there were better opportunities on the offer side, we would be looking at them for sure.” – Isaac Zion
However, the REIT has been selling assets over the past couple of years and deploying those proceeds back into its own stock.
“We’re actually trading at about a 30% discount,” Zion said. “If there were better opportunities on the offer side, we would be looking at them for sure.”
He expects to see the trend for joint venture investments in 2018 continue.
“If you’re looking at markets where you think the cap rates are a little too low, or things aren’t cheap enough… if you’re really committed to a marketplace for a long period of time, I would suggest recapitalising assets with partners.
“There’s plenty of money overseas and in the US looking for these opportunities. It’s not easy to buy these kind of assets, whether it’s a $1bn asset or $500m. So from a recapitalisation standpoint, I think that’s the best opportunity for global capital to invest in NYC.”
Christopher Hughes, Hines’ chief executive, capital markets & US East region, said the developer is doing more at this late point in the cycle.
“One of the things we’re really looking at in this next cycle is an expansion of cities and redefining what core markets really are.” – Christopher Hughes
Hines is diversifying from the office market into areas where it forecasts high demand: senior living, student housing and industrial.
It is also trying to identify the next wave of smart cities, where education levels and transport infrastructure are improving.
“One of the things we’re really looking at in this next cycle is an expansion of cities and redefining what core markets really are… where millennials want to be,” he said.
The developer is also making its workspace offering more flexible. Hughes says Hines’ chief innovation officer, appointed this year, found its vacancy globally was greater than the size of WeWork.
“If we’re not doing something to really activate that business we will fall behind on that,” Hughes said.
Changing face of renting space
Amazon’s high-profile hunt for its second city headquarters could change how office occupiers rent space.
Mosler said: “They have managed to, in my opinion, turn the art of how you leverage the process of finding space into a whole new level by spitting it out there and RFPing [requesting for proposal] the world and saying, ‘how badly do you want us?’
“I won’t speculate on where they will end up, but clearly it’s going to be driven by education, it will be driven by transportation and, I suspect in very large measure, driven by where they see the future for the next-generation Amazon.”
Brookfield Property Partners is responding to the market and impact of the “millennial movement” by creating a 14-asset global portfolio of 24-7 complexes which respond to the “live, work, play” trend.
Chairman Ric Clark said: “Increasingly, what is desired, if not demanded, are active 24-7 complexes in major cities that combine office space, retail, restaurants, bars, entertainment, open space, all technology-enabled with proximity to residential and hotels.”
Later this year, Brookfield plans to unveil a mobile app with Convene, the meetings and events space start-up it has invested in.
“The app will reimagine tenants’ interactions with their buildings,” Clark said. It will include food ordering capabilities for on-campus restaurants, events updates, a concierge service and a security messaging service.
INTERVIEW: Brookfield’s Ric Clark on Brexit, PRS and plans for the future
Last year, Brookfield also created the Brookfield Ventures fund to explore opportunities to invest in these innovations and technologies.
“When investing in real estate it’s important to not only look closely at market data and local economic factors and indicators, but also to consider the impact of long-term trends,” Clark said. “Their impact on our business will be significant for many years to come.”
To send feedback, e-mail Louisa.Clarence-Smith@egi.co.uk or tweet @LouisaClarence or @estatesgazette
