Hopes for the New York office market have been dashed by the sale of Midtown skyscrapers at a 97% discount. But there is a lesson to be learned for data investors

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CBRE’s Q2 2024 report on the Americas office market presented more positive data, suggesting the sector is entering a recovery phase. However, the positive mood was darkened in New York City when a nearly 1,000,000-square-foot office tower was auctioned as a distressed asset for just $8.5 million. The final hammer price represents a 97% drop in value from its 2006 sale price of $332 million.

The property at 135 W. 50th Street is a classic New York skyscraper—a huge glass and steel tower that takes up nearly half a New York City block. It was built in 1963 and although it showed some signs of age, its size and location still made it an asset that could provide returns to its investors even in 2006. The value of commercial property is determined by the amount of income that the asset generates. per square foot.

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This property was generating enough revenue to achieve a sale price of $332 million, so it had the rental income and occupancy statistics to justify that price. In its heyday, it was the home of the New York Telephone Company (the forerunner of Verizon) and Sports Illustrated magazine. Today, it sits at 65% vacant, a devastating statistic for the value of any commercial asset.

David Sturner, whose father developed and then sold the property, admitted to the New York Times that the building “wasn’t the biggest asset we owned,” adding that it was a “solid property.” In the space of two decades, it went from being a “solid property” to only getting one bid at auction, an offer that was 97% less than the last sale price.

Even when accounting for the damage caused by COVID and remote work in office markets nationwide, the drop in value for 135 W. 50th is a shock to real estate investors. If there is a silver lining, it may represent the bottom of the market. David Sturner expressed this hope for The Times, saying: “What is shocking is how quickly the ratings have fallen now that we seem to be at or near the bottom.”

Analysts see a dramatic split in the office real estate market

CBRE’s Q2 statistics for the American office market seem to confirm this. The average “asking rent” of $36.13 per square foot represents a 0.5% improvement over Q2 2023. The market also had a positive net absorption rate for the first time since Q3 2022. Overall, tenants moved 2.4 million more square feet of office space than they moved for the quarter.

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The CBRE report also found that the prime or Class A office market is the most desirable sector. The vacancy rate of 15.5% for prime office buildings is 3.6% lower than the national average of 19.1%. Year over year, leasing statistics improved in most of America’s largest markets, with prime office space accounting for the lion’s share of net absorption nationwide. This seems to be the trend in New York as well.

In a recent interview with Bloomberg Television, BXP Vice President Hillary Span noted that “the vacancy rate in the Park Avenue submarket is less than 10%, which is pretty tight by historical standards.” She also shared her belief that the market is “bifurcating”. She said: “Those properties that are newly built, have been reinvested in by their property owner and are well located, generally do quite well.”

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135 W. 50th Street Property was on the wrong side of the equation

The 135 W. 50th Street property, built in 1963, has certainly outlived its days of being considered a “prime” office property. This may help explain why its owners, UBS, decided to adopt a new method of cutting losses. They auctioned the building itself and the land below it separately. The most recent $8.5 million auction sale was for the building and the building only.

The land beneath it was auctioned for $219 million. Adding that to the $8.5 million construction price comes to a total of $227.5 million in revenue from the two sales. That’s still a loss of more than $100 million from the $332 million purchase price in 2006. That said, the investor cut his losses. Now, they are positioned to find new opportunities in the market ahead of the much-anticipated interest rate cut.

Investors seeking office properties should look for newly built or renovated assets in prime locations. These buildings are still in high demand in the office market and can offer returns. Conversely, older buildings with minimal features in less than ideal locations will likely face continued market struggles. Keep this in mind when evaluating commercial assets or REIT portfolios.

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