The pending purchase of a prime New York City office property for a reported $2.25bn (€1.57bn) highlights a tension dominating today’s commercial real estate market.
Starved for yield by the persistence of low interest rates, institutional investors are increasingly turning to real estate to make up difference. But most institutions want properties in major cities that are fully leased to long-term corporate clients – and that demand has pushed yields close to pre-crisis lows for those scarce trophies.
If completed, the acquisition of 1095 Avenue of the Americas by a consortium led by Ivanhoé Cambridge would come at a cap rate of about 4.5%, said one source familiar with the transaction.
That still represents value for large institutional investors, according to one market participant. “While we think this is a great price, we also think this will be a very good deal for the buyer as well,” he said.
This is because the US economic expansion, though moderate, remains well ahead of activity in the Europe and Asia, making the US one of the few places where pension funds can invest large sums in assets that offer reasonable returns over long time periods.
The seller Blackstone declined to comment. The private equity company acquired the 42-storey property as part of its $39bn purchase of Sam Zell’s Equity Office Properties Trust in 2007.
Ivanhoé Cambridge, the property unit of public pension fund Caisse de Dépôt et Placement du Québec, is working in collaboration with Chicago-based Callahan Capital Partners to increase its office property holdings in the US. Both parties declined to comment.
Callahan Capital has long-standing ties with Canadian pension investors. CEO Tim Callahan was previously CEO of Equity Office Properties Trust and Trizec Properties, a real estate investment trust that was sold for $8.9bn in 2006 to a joint venture between Brookfield Properties and Blackstone.
Canadian investors have been the biggest foreign buyer of American commercial properties since 2010, according to research firm Real Capital Analytics, buying $8.3bn in property through September, after $11.1bn in 2013.
The wave of ex-US buyers has helped push yields near pre-crisis levels. In some cases, transactions are taking place with enough debt that loan-to-value ratios are reaching 80%, or even 85%, said one property lawyer representing lenders and institutional investors. At present, he said, such debt levels are confined to high-quality, fully leased assets. But the appetite for prime US property raises a key question, he says: “How many lessons have been learned since the crisis?”
While investors say pricing is still rational, institutions are becoming cautious. Principal Global Investors last summer capped fundraising for its first debt fund at $550m in order to maintain the 8-10% return target desired by the pension funds and other institutions in the fund.