That looks like a top of the market price for the Sony Building in the heart of Manhattan's Midtown. Sure it's a trophy building near the most prime locations in one of world's best (and certainly America's top) real estate market(s). But paying $1.1 billion at a time when rents appear to have crested is a swallow hard proposition.
Sporting the distinctive Chippendale crown, designed by legendary architect Philip Johnson in the early 1980s, the 37-story tower is wedged in among Trump Tower, the IBM Building, and other shadow inducing structures along comparatively narrow Madison Avenue. Indeed its views are not first rank and the building lacks the green amenities of today's gold standard LEED office projects, which can command the highest office rents. Maybe there will be opportunities to convert street level space into high-end retail, and transform some of the upper floors into hotel rooms and condominiums, but new owner Joseph Chetrit will need to get out his checkbook again and dig deep for all the needed upgrades.
One thing I'll bet on—over the long-term the Sony Building will hold value and at some point Mr. Chetrit will be able to unload the property with some appreciation. Now he rightly figures that New York will continue to attract global business like no other U.S. market and there will be enough demand from well-heeled tenants for his gilded space. But given his rich cost basis and depending on how he finances the deal, he is erecting some tall hurdles in the way of feeling totally comfortable about his investment in its early years.
When buyers approach sub 5% cap rate territory even in New York or DC, it's time to back off, and that's what most investors have been doing lately, showing good discipline. It's the Sony Building priced deals that tend to really sober up players.
Meanwhile, developers try to lure blue-chip tenants into new complexes slated above and adjacent to West Side rail lines just as big media companies struggle to figure out how to make money in a more dis-intermediated world and the big financial institutions signal continued lack of appetite for expansion. As noted before, most office tenants have reckoned how to do more with less space, tamping down growth in overall demand.
Now you can figure the U.S. economy is slowly getting better and Europe has a chance to turn around, but does anyone detect enough oomph to escalate rents and demand in confronting some of these other market forces? At least it appears another recession can be averted, but slow growth is slow growth.
I guess it's testament to the New York market—Class A product in the top districts will command top dollar. You just can't get more top than the Sony Building deal. And nobody will ever fail to recognize the top of this building thanks to Philip Johnson.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
