Hopes For NYC Office Market Rebound Dented By Sale Of Midtown Skyscraper At 97% Discount. But There's A Lesson To Learn For Investors In The Data

CBRE's Q2 2024 report on America's office market featured several positive data points, hinting that 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 midtown office tower was auctioned off as a distressed asset for only $8.5 million. The final hammer price represents a 97% plunge in value from its 2006 sale price of $332 million. 

The property at 135 W. 50th Street is a classic New York-style skyscraper – a behemoth glass-and-steel tower that takes up almost half a New York City block. It was built in 1963, and though it was showing some signs of age, its size and location still made it an asset that could deliver returns to its investors as recently as 2006. Commercial property value is determined by the amount of revenue the asset generates per square foot. 

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

David Sturner, whose father developed and then sold the property, admitted to the New York Times that the building "wasn't the greatest asset we owned" while also adding that it was a "solid property." In the space of two decades, it's gone from being a "solid property" to getting only one bid at an auction, a bid that was 97% less than its last sale price. 

Even when COVID and remote work’s damage to office markets nationwide is calculated, the decline in value for 135 W. 50th is quite a shock to real estate investors. If there is any silver lining, this may represent the bottom of the market. David Sturner expressed that hope to ‘The Times,' saying, "What's shocking is how fast the valuations dropped now that we've seemingly reached the bottom, or close to it."

Analysts See A Dramatic Split in the Office Property Market 

The CBRE Q2 statistics for America's office market look to bear that out. The average "asking rent" of $36.13 per square foot is 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 into 2.4 million square feet more office space than they moved out of for the quarter.

CBRE's 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 biggest markets and prime office space was responsible for the lion's share of the net absorption nationwide. That also seems to be the trend in New York City. 

In a recent market interview with Bloomberg Television, BXP Vice President Hillary Span noted the "vacancy rate in the Park Avenue submarket is less than 10%, which is quite tight by historical standards." She also shared her belief that the market is "bifurcating." She said, "Those properties that are newly constructed, that have been reinvested in by their ownership and are well located, are generally doing 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, is certainly long past the days of being considered a "prime" office property. This may help to explain why its owners, UBS, decided on a novel method of cutting their losses. They auctioned off the building itself and the land beneath it separately. The most recent auction sale of $8.5 million was for the building and only the building. 

The land beneath it was auctioned off for $219 million. Adding that to the $8.5 million building price results in $227.5 million in total revenue from the two sales. That's still a loss of over $100 million from the $332 million purchase price in 2006. With that said, the investor has cut their losses. Now, they're positioned to find new opportunities in the market ahead of the highly anticipated interest rate cut. 

Investors who want office property should look for newly constructed or renovated assets in prime locations. These buildings are still in high demand in the office market and can deliver returns. By contrast, older buildings with minimal features in less-than-ideal locations will likely face continued struggles in the market. Keep this in mind when assessing commercial assets or REIT portfolios. 

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