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Introduction
The inaugural version of this paper,
published one year ago, observed
a shift in ownership of New York
office buildings from families to public real
estate investment trusts (REITs). Market
observers now see this trend accelerated
by the possible initial public offering (IPO)
of Empire State Realty Trust (ESB), a new
REIT controlled by the Malkin and Wien
families along with the Helmsley estate.
This shift is driven by several factors which
include estate taxes, division of assets
among multiple heirs, and rules limiting
the duration of estates. In support of
this last point, one of the primary reasons
given by ESB management for the IPO
is the necessity of the Helmsley estate
to divest itself of assets and dissolve the
estate. “Unavoidable, material change
is coming, driven by the requirement for
the executors under Leona Helmsley’s will
to sell her estate’s ownership interests
in properties supervised by Malkin
Holdings,” ESB said in a SEC filing. The
ESB IPO exemplifies, on a very large
scale, many of the issues that other
long-time family owners confront when
dealing with generational transition of real
estate: estate planning reality; partnership
negotiations and buy-outs; realized capital
gains; and the emotions that accompany
selling inherited assets that have held an
esteemed place in family lore.
While these REITs also control significant
Manhattan retail and suburban New York
properties, and non-New York properties,
the focus of this paper is on the Manhattan
commercial office holdings of these REITs.
As this paper goes to press, the ESB IPO
is moving forward and expected to clear various legal and investor hurdles but has not yet
launched. Assuming a successful completion of the IPO, it would increase the amount of
Manhattan office space controlled by major REITs to 76.90 million sq. ft. – up from 72.36
million sq. ft. However, comparing only the same four REITS the previous version reviewed -
SL Green Realty Corporation (SLG), Boston Properties, Inc. (BXP), Brookfield Office Properties
(BPO) and Vornado Realty Trust (VNO) – that figure would be down slightly to 71.03 million
sq. ft.
While the amount of Manhattan office space dropped slightly on a same-REIT basis, the
amount of mortgage debt collateralized by the four major REITS increased to $19.77 billion
from $18 billion a year previous, and that figure is $20.29 billion if ESB’s debt is included.
This increased use of debt is representative of favorable capital market conditions, and the
high quality of the properties owned by REITs in desirable Manhattan locations, according to
statements made by the REITs.
Capital markets continued to provide low interest rate-fueled liquidity in 2012, and
corporate access to capital was largely immune from European bond market turmoil. With
this availability of capital, REITS continued to access low-cost funding as they had the year
previous. The same trend identified in the previous version of this paper continues to hold,
as favorable capital market conditions provide REITs with corporate-level debt and equity (in
addition to mortgages). As a result, REITs have a measurable “cost of capital” advantage
compared to all but the largest private owners and operators when it comes to competing
for deals and providing incentives to tenants. This capital is structured in several ways,
including unsecured corporate debt, preferred stock, and common equity which can be
increased via secondary equity offerings. Proceeds from capital events can then be used
to pay for property capital expenditures, tenant improvements (T&I), leasing commissions,
capital expenditures, and competitive property maintenance, all creating an advantage over
less well-capitalized owners.
FALL 2013 RESEARCH PUBLICATION
Major NYC REIT Activity & Holdings
A 2013 Analysis of the Notable REIT-owned Manhattan Office Properties & PortfoliosA research report prepared for The Steven L. Newman Real Estate Institute, Baruch College, CUNY by Benjamin Polen, MBA.
1290 Avenues of the Americas
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MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013
Brookfield Properties specifically highlighted favorable capital market conditions in its
annual report when it note that “the cost of borrowing is currently less than [Brookfield’s]
projection for future inflation due to macro-economic policies designed to stimulate growth,”
which BPO said provides a “tremendous opportunity to finance our assets at attractive rates
on a long-term basis.” The firm described itself as “very active” in the debt and equity
markets in 2012, completing nearly $2.5 billion of financings and reducing its total cost of
capital by issuing new equity “in the form of perpetual preferred shares at lower interest
rates than existing securities which [Brookfield] bought back” during 2012. Specifically, in
April 2012 Brookfield issued C$150 million of senior unsecured notes at 4.00% due in 2018,
and in September 2012 issued $250 million of preferred shares at a yield of 4.60% due in
2018.
At the end of 2012, Brookfield said that its weighted average cost of capital, assuming
a target long-term 12% return on common equity, was 7.13% compared to 7.23% a year
earlier. BPO argued that its business strategy of Class A properties in Class A locations with
institutional tenants helps support its low cost of capital, specifically stated that its “cost of
capital is lower than many of [Brookfield’s REIT] peers because of the amount of investment-
grade financing that can be placed on [Brookfield’s] assets, which is a function of the high-
quality nature of both the assets and the tenant base that compose [Brookfield’s] portfolio.”
Supporting this idea, SL Green’s annual report makes a statement that connects its ability
to offer quality property with its balance sheet and access to capital: “The leasing of real
estate is highly competitive, especially in the Manhattan office market. We compete for
tenants with landlords and developers of similar properties located in our markets primarily
on the basis of location, rent charged, services provided, balance sheet strength and liquidity
and the design and condition of our properties.”1
SL Green took advantage of capital markets when, in November 2012, it entered into a
$1.6 billion credit facility which refinanced, extended and upsized an existing credit facility.
The 2012 credit facility consists of a $1.2 billion revolving credit facility, which matures in
March 2017 and a $400 million term loan facility, which matures in March 2018. The revolving
credit facility and term loan facility currently bear interest at 145 basis points and 165 basis
points over LIBOR.
Boston Properties took advantage of
the capital market conditions in 2012 to
complete a $1 billion offering of 3.85% senior
unsecured notes due in 2023 and used cash
to redeem notes carrying a 6.25% coupon.
BXP utilized equity markets during 2012 to
issue $249.8 million in “at the market” (ATM)
secondary stock offerings. It has structured
the ATM so that an additional $305.3 million
remains available for issuance.
Vornado redeemed $510.2 million in senior
unsecured debt during 2012. VNO issued
$290.9 million of preferred equity shares
carrying a 5.7% coupon during 2012, while
it redeemed $250 million of two separate
preferred issuances that carried a 7.0%
coupon. At the property level, Vornado
refinanced its 70% owned 1290 Avenue of
the Americas for $950 million in a 10 year,
3.34% interest-only deal. This deal not only
provided very low and attractive terms, it
also allowed VNO to retain $522 million in
proceeds after repaying the existing loan
and closing costs. VNO also refinanced 350
Park Avenue in a $132 million five year term
loan with a 3.75% interest rate and two years
of interest-only payments.
REIT Real Estate Market PerformanceBy analyzing the REITs’ office property
data, it is possible to bring together real
estate and capital markets, with the access
to public data shedding light on the mostly
private world of real estate holdings. This
analysis incorporates the view of U.S.
Securities & Exchange Commission (SEC)
filings, public website information, and
industry press reports.
The vast holdings and associated debt of
New York City’s largest REIT owners of office
space is quantified in Table 1. The REITs
control and manage nearly 80 million sq. ft.
of Manhattan office space. Even when joint
venture (JV) partnerships are subtracted, the
proportional ownership to REIT shareholders
Table 1: Manhattan Office REITs ownership, debt & occupancy (2012)2
Manhattan Office Market - REIT Overview
REIT OccupancyOwned & Managed (sq. ft.)
Proportional Ownership
(sq. ft.)Property Debt
Total Debt / sq.ft.
Brookfield Office (BPO) 93.8% 18,345,000 15,768,000 $ 4,258,000,000 $ 232
Boston Properties (BXP) 92.8% 7,415,580 6,349,915 3,849,182,000 519
Empire State Realty Trust (ESB)
77.0% 5,907,042 5,907,042 584,816,000 99
S.L. Green (SLG) 94.1% 24,372,379 22,765,706 6,874,670,000 282
Vornado (VNO) 95.9% 20,209,000 17,503,071 4,792,877,000 229
Total Debt/sq.ft. 92.9% 76,941,001 68,293,734 $20,359,545,000 $265
1Emphasis was added by an author of this white paper.2BXP’s total debt includes partner loans of $450 million made to GM Building, not counted in proportional debt. The office space totals only include Manhattan office space. Vornado’s office space total does not include a 132,000 sq. ft. building in Paramus, NJ that is 100% owned. SL Green’s sq. ft. totals include 280 Park Avenue and 3 Columbus Circle but do not include its Downtown Brooklyn properties. ESB data as of September 30, 2011.
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is nearly 70 million sq. ft. The mortgage debt used to support this ownership is significant
and grew more than $2 billion in 2012 to $20.28 billion. The use of mortgage debt per sq.
ft. grew from $249 per sq. ft. in 2011 to $264 per sq. ft. in 2012. Applying a required loan-
to-value ratio of 65%, this mortgage debt would require an average appraised value of $406
per sq. ft., a more than reasonable assumption given both in-place income and comparable
recent transaction prices.
Occupancy & Rents
The five REITs analyzed all have average occupancy levels of 92.9% as of December 31,
2012, that outperform the overall Manhattan office market of 90.9% (see Tables 1 & 2).
However, an apples-to-apples analysis of the REITS ex-ESB shows an average occupancy level
of 94.4% for 2012 compared to 94.1% in 2011. Empire State Realty Trust’s Manhattan office
portfolio occupancy of 76.9% certainly stands out and brings down the average of the group.
As reported previously by the Newman Real Estate Institute and throughout the press, the
Empire State Building has undergone a thorough building systems upgrade over the past
several years, and the low occupancy levels are a result of management’s strategic decision
to largely empty the building of smaller tenants and re-tenant the retrofitted building with
larger, corporate tenants. Even within the ESB portfolio, the Empire State Building has the
lowest occupancy level of 67.3% while its other buildings average 85.0% occupancy.
The differential between REIT occupancy levels and market occupancy is measureable,
with average REIT occupancy levels 325 basis points higher than the market. Vornado’s
occupancy levels are 500 basis points greater than the overall Manhattan market and
represent the best occupancy performance of the group. According to Cushman &
Wakefield, Manhattan average asking rents rose to $59.60 per sq. ft. in March 2013,
representing an increase of 1.2% from March 2012. Cushman and Wakefield also noted
that at $51.97 per sq. ft., “Midtown South asking rents rose the most substantially, mainly
due to higher priced blocks of space placed on the market. The portfolio rents of the REITs
average $53.28/sq. ft. across their Manhattan office holdings. This is 11% less than average
market asking rents of $59.60/sq. ft., because the portfolio rents reflect older, below market
leases. The under market rents represent potential upside to release space at greater rents
upon lease expiration. The differentials among the REIT portfolio rents reflect the nature of
their holdings. Brookfield’s lower rents reflect its older, below-market leases and its large
Downtown holdings, a submarket with lower rents than the overall Manhattan office market.
Boston Properties’ higher rents show the horsepower of the General Motors Building, which
obtains some of the highest rents in Manhattan. Vornado and SL Green’s rents hover around
the current average asking rents. Though these two REITs are below the average Class A
rents, this provides the opportunity to obtain higher rents upon issuing new leases. Indeed,
the REITs are capitalizing on the improved leasing market and capturing higher rents.
A comparison of the same four REITs
(excluding ESB) from the previous version
of this paper shows average rents of $54.38
in 2012, up slightly from $54.16 in 2011.
Including ESB, the average rents drop to
$53.17 (see Table 5).
Leasing Activity
When leasing or renewing leases, REITs
have an advantage in offering tenant
improvements (T&I) and other concessions.
This is due to their lower cost of capital, as
discussed above. Especially over the past
two years, the four REITs analyzed have all
successfully raised capital through equity
and corporate debt sources. These capital
sources are generally unavailable to most
private family owners, and private equity real
estate demands a greater return than what
is offered by REITs to their public investors.
Given the rent and occupancy performance
of the four REITs, near-term lease expirations
and the ability to compete on T&I offer an
opportunity to capture higher rents. The
REITs are succeeding on this frontier.
In 2012, Brookfield faced a significant
amount of vacant space in its Lower
Manhattan portfolio, as described in the
[2012 publication of the look at Manhattan
REITs]. BPO said the REIT’s “highlight of
2012” was the 17-year lease with Morgan
Stanley for 1.2 million sq. ft. at One New
York Plaza.
MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013
Table 2: Manhattan Office Market
Market Occupancy Asking Rent Inventory (sq. ft.)
Midtown 89.9% $ 66.34 241,464,881
Midtown South 93.1% 51.97 64,941,188
Downtown 92.0% 40.28 84,856,334
Total 90.9% $ 59.60 391,262,403
Source: Cushman & Wakefield, Q1 2013
REIT vs Market Performance
REITOccupancy vs Market
(basis points)
BPO 290
BXP 190
ESB -1390
SLG 320
VNO 500
Average -018
Average ex-ESB +325
Table 3: REIT Performance compared to Market
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However, Brookfield has still to find a new tenant for Nomura Holding’s 800,000 sq. ft.
space at Brookfield Place (as it renamed the World Financial Center).
In 2013, Brookfield will have 398,000 sq. ft. of space expiring in Midtown, and 3,442,000
sq. ft. in Lower Manhattan, at average rents of $34.00 and $35.00 per sq. ft., respectively.
These below market, relatively small spaces should be easy for the company to re-lease.
However, Brookfield will lose a large tenant in 2013, since Nomura Holdings indicated it will
be vacating its 800,000 sq. ft. space at the World Financial Center when its lease expires.
Nomura signed a 900,000 sq. ft. lease in Midtown at Worldwide Plaza (privately owned by
George Comfort & Sons). Re-tenanting that space is already a major priority for Brookfield.
SL Green increased the occupancy levels in its Manhattan same-store operating properties
to 93.8% in 2012 from 93.0% in 2011. During 2012, SLG leased 3.7 million sq. ft. in Manhattan,
of which 3.0 million sq. ft. represented office leases that replaced previously occupied space.
SLG’s mark-to-market rents on these 3.0 million sq. ft. of signed Manhattan office leases that
replaced previously occupied space was 7.5% for 2012.
The highlight of SLG’s leasing activity during 2012 was the signing of Manhattan’s largest
non-sale leaseback office lease, a 1.6 million sq. ft. lease with Viacom for all of the of the
office space at 1515 Broadway. In addition, SLG fully leased up 100 Church Street with the
485,000 sq. ft. renewal and expansion of New York City.
Boston Properties leased 246,000 of its 989,000 sq. ft. development at 250 West 55th
Street in December 2012 to law firm Kaye Scholer. The building’s floorplates and layouts
are designed to meet the needs of law firms, BXP has stated publicly. Including this new
lease, the development property is now
46% pre-leased. BXP said it expects the
building to open in late 2013, and Kaye
Scholer said it expects to move into the
office sometime in mid-2014.3 BXP does not
provide annual leasing figures for its existing
portfolio. However, BXP appears to have
incurred leasing vacancies of 13,227 sq. ft.
of its Manhattan office space in 2012. Since
BXP does not provide this figure directly,
it can be derived through other figures
provided by the company. BXP began
2012 with 332,757 sq. ft. of scheduled lease
expirations in Manhattan, and 184,820 sq. ft.
of vacant space. It ended 2012 with 530,803
sq. ft. of vacant space.4 By subtracting that
change in vacant space from 2012 scheduled
lease expirations, the 13,277 loss leased
MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013
Portfolio Rent Performance
REIT Average Rents / sq. ft.
BPO 32.84
BXP 88.44
ESB 39.99
SLG 55.17
VNO 60.29
Average $ 53.28
Average ex-ESB $ 54.38
Table 5: REIT Portfolio Rents as of December 31, 2012
(ESB as of September 30, 2011)
Manhattan Office Market 2012 REIT Leasing Activity
REIT Leased (sq. ft.)
BPO 2,116,000
BXP 304,105
ESB na
SLG 911,651
VNO 1,950,000
Total 5,281,756
Table 6: Leasing Activity(BXP estimated from company filings)
REIT Owned & Managed (sq. ft.) Market Share (% sq. ft.)
Brookfield Office (BPO) 18,345,000 4.7%
Boston Properties (BXP) 7,415,580 1.9%
Empire State Realty (ESB) 5,907,042 1.5%
S.L. Green (SLG) 24,372,379 6.2%
Vornado (VNO) 20,901,000 5.3%
Total 76,941,001 19.7%
Table 4: REIT Manhattan Office Market Share
3BXP annual report; Kaye Scholer press release - http://www.kayescholer.com/news/press_releases/Kaye-Scholer-Signs-Lease-for-its-New-York-Office-Building-19December20124Not including Two Grand Central Tower, which was sold in 2011.
sq. ft. figure is derived. However, BXP did
not report the new rents it received for the
space, or what T&I it paid. In 2013, Boston
Properties has Manhattan scheduled leases
expirations of 61,886 sq. ft. at average rent
of $86.20 per sq. ft. Through mid-2013,
BXP has signed several leasing deals above
$100 per sq. ft. in 510 Madison Avenue, to
hedge fund tenants who require less floor
space than traditional law firms and financial
services tenants. The high end office building
features a private spa and swimming pool for
executives.
Sustainability and Climate Change
The awareness of corporate responsibility
to environmentally sustainable practices
is shared by the four major REITS. Case
in point, as one of the largest owners and
developers of office properties in the
United States, BXP said it “actively works
to promote our growth and operations in a
sustainable and responsible manner across
its five regions.” BXP said that its focus is
on sustainability initiatives for the design and
construction of new developments, while also
working to improve the operation of existing
buildings and internal corporate practices.
Sustainability initiatives are centered on
energy efficiency, waste reduction and water
preservation, as well as making a positive
impact on the communities in which the REIT
conducts business.
Brookfield also has a rigorous sustainability
program. In 2012, Brookfield secured 16 new
LEED certifications. Among the properties
certified is the Grace Building on Bryant
Park. The REIT also has a successful and
expanding electric vehicle charging station
program. In 2012, 18 charging stations
were installed throughout North America to
reach 35 in total. Another 10 stations will be
installed in 2013.
Following Hurricane Sandy, Brookfield
reported minimal collateral damage to its
Lower Manhattan office portfolio and all
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properties in Lower Manhattan were fully operational by November 17. However, Sandy
left a wake of destruction, leaving hundreds of thousands without homes and displacing
businesses throughout the Tri-State area. Brookfield aided the Sandy Relief efforts by:
• Providing free office space in 250 Vesey Street to small businesses and nonprofits
displaced by Sandy
• Coordinating two volunteer days through the Stephen Siller Tunnel to Towers
Foundation to facilitate the relief efforts on Staten Island, attended by over 75
Brookfield employees.
• A $100,000 donation to the Mayor’s Fund to Advance New York City’s dedicated
Sandy relief fund.
Likewise, SLG faces possible risks associated with the physical effects of climate change.
While the REIT acknowledges that it “cannot predict with certainty whether climate change
is occurring and, if so, at what rate” it recognizes that “the physical effects of climate change
could have a material adverse effect on its properties, operations and business.”
Manhattan Office Transactions
Overall, REITs were net sellers of property during 2012, as measured by size. The total
Manhattan office space controlled by REITS decreased to 71,033,959 sq. ft. at the end of
2012 from 72,366,683 sq. ft. in 2011.
Just outside of Manhattan, SL Green sold its 1.5 million sq. ft. One Court Square tower in
Long Island City, Queens for $481.1 million to Waterbridge Capital. Within Manhattan, SL
Green sold its fee interest at 292 Madison Avenue for $85.0 million. SLG also sold a 49.5%
partnership interest in 521 Fifth Avenue at what the company stated was an implied gross
valuation of $315.0 million, or $685 per sq. ft. on the 460,000 sq. ft. building. The transaction
at 521 Fifth Avenue allowed SLG to realize a relatively quick gain of $19.4 million, as in
January 2011 SLG had bought out a JV partner in the building in a transaction that valued
the building at $492 million, or $502 per sq. ft.
In December 2012, SLG acquired a 35.5% interest in 315 West 36th Street, a 147,619 sq.
ft. office building at a gross purchase price of $45.0 million. Also in December 2012, SLG
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MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013
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acquired a 68,000 sq. ft. mixed use retail,
office and residential building at 131-137
Spring Street in SoHo for $122.3 million,
or about $1,799 per sq. ft. (the high price
per sq. ft. represents the premium for retail
space in SoHo).
Vornado has aggressively increased its
focus on retail property in Manhattan, while
remaining a major owner of office space.
Vornado’s acquisition of the retail portion
of 666 Fifth Avenue was arguably one of
New York’s deals of the year in 2012. In
December 2012 Vornado acquired a retail
condominium in the building (at the corner
of 53rd Street) for $707,000,000 in cash. The
property has 126 feet of frontage on Fifth
Avenue and contains 114,000 sq. ft., 39,000
sq. ft. in fee and 75,000 sq. ft. by long-term
lease from the an office condominium, which
is 49.5% owned by Vornado.
VNO increased its investment in a
massive residential project, Independence
Plaza, located in Manhattan’s Tribeca
neighborhood. On December 21, 2012,
VNO acquired a 58.75% interest in the
property by buying one of the equity
partners’ 33.75% interest for $160,000,000,
exercising a warrant for 25% of the equity
and contributing the appreciated value
of its interest in the subordinated debt as
preferred equity. This transaction values the
property $844,800,000.
Boston Properties did not purchase or sell any New York office properties during 2012.
However, it did add a building from its development pipeline into service. On April 30,
2012, BXP completed and fully placed 510 Madison Avenue into service. The building, on
the corner of East 53rd Street, has approximately 356,000 net rentable sq. ft. In the start of
2013, Boston Properties has shifted to selling assets. “We are in the market selling assets
right now, and in 2013 we could sell a billion dollars or more,” Boston Properties president
Douglas Linde said on a conference call to analysts in the call, noting that the firm sold 125
West 55th Street in Manhattan. In June 2013, BXP put its 1.2 million sq. ft. Times Square
Tower on the market for a reported $1.2 billion asking price. In May 2013, Boston Properties
sold a 40% interest in the GM Building for a reported $1.4 billion to the Zhang and Safra
families in a transaction valuing the building at $3.4 billion, about $1,880 per sq. ft.
These recent transactions can be used as benchmarks to analyze REIT portfolios by
providing a guide of values per sq. ft. While individual property values will vary, this per sq.
ft. metric can be applied across an entire portfolio to provide a bird’s eye view of value.
Value of Manhattan Office Holdings
Applying market information from comparative sales to an income capitalization analysis is
a powerful way to estimate the value of the REITs’ Manhattan office holdings. Comparative
sales report information about recent market transactions can be used to determine the
value of other properties. Typically private information, such as a capitalization rate (cap
rate) or the current yield on a property, is occasionally divulged in market sales. Since
property sales are often reported (or easy to compute) on a per sq. ft. basis, that price mark
represents a property condition, location, income, risk, and upside.
The comparative sales approach, when combined with income capitalization can provide
an accurate depiction of property and portfolio value. Cap rates are the current yield on a
property, determined by dividing net operating income (NOI) by the market price or value.
Backing into a market value, the income capitalization method divides NOI by an appropriate
cap rate to determine a property price.
Cap rates differ among property types and markets, but as of mid-year 2013, cap rates for
Class A Manhattan office space were in the 4.0% to 5.0% range, while Class B space was in
the 5.0% to 7.0% range. Just as a junk bond carries a high yield, higher cap rates can signify
higher risk, while lower cap rates are typically associated with core, stabilized properties.5
New York, as usual, offers an exception, as office investors may be willing to accept a lower
cap rate due to high vacancy or other factors in the short term if they think they can quickly
lease the property or increase rents on near-term lease expirations.
A valuation based on a 5.0% cap rate would value the GM Building at $5.171 billion,
compared to when BXP acquired the property in a $3.95 billion transaction in 2008. But this
cap rate analysis does not always compare to the market. As noted above, BXP sold a 40%
stake in the GM Building for a reported $1.4 billion, valuing the building at $3.4 billion, which
is a value of approximately $1,880 per sq. ft.6
When used together, such as in the Vornado and BXP examples below, it is possible to see
how different cap rates, when applied to NOI, result in different values per sq. ft., providing
a basis for reviewing comparable sales.
MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013
5Of course, as an asset class, real estate differs from bonds significantly, since real estate can provide long-term capital appreciation, as opposed to a return of par value.6FFO = Net Income + Amortization & Depreciation – Gains from Sale of Real Estate.
399 Park Avenue & Citigroup Center
Applied to financials Vornado provides for
its New York office holdings,7 a 5.0% cap rate
results in a valuation of $15.4 billion or $882/
sq. ft. A more aggressive 4.0% cap rate
results in a portfolio value of $19.3 billion, or
$1,103/sq. ft.8 With recent investment sales
in the $700+ per sq. ft. range, this may be a
fair assessment, even with the low cap rate.
While Boston Properties does not provide
the same level of detailed information as
Vornado, BXP does breakout NOI for its
Manhattan office portfolio. An applied cap
rate derives a portfolio valuation. The same
5.0% cap rate applied to BXP generates a
value of $6.4 billion or $1,012/sq. ft.
Taking the portfolio values from Table
12 and subtracting mortgage debt (Table
1) provides a net asset value (NAV) for the
Manhattan office holdings of the REITs. This
net asset value is the equity that a portfolio
level investor would have in the aggregated
properties.13
The values in Table 13 show the implied
leverage of the REITs’ Manhattan portfolios,
based on an estimated value per sq. ft.
Using the valuation in the top left cell as an
example, if BPO’s Manhattan office portfolio
is valued at $400 per sq. ft., it would have a
total value of $6.3 billion (Table 12), a loan-
to-value (leverage) of 55% (Table 13).
As observed previously, the West Side,
Park Avenue, and Penn Station are all
favored development areas, as indicated by
investment activity by the four REITs.
Vornado has publicly argued for the
upzoning of Park Avenue to allow for bigger
buildings. Additionally, both Vornado and
Brookfield have substantial development
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MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013
Cap Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
Value ($B) $ 25.7 $ 22.1 $ 19.3 $ 17.2 $ 15.4 $ 14.0 $ 12.9
NOI Multiple 33.3 28.6 25.0 22.2 20.0 18.2 16.7
FFO Multiple 31.2 26.7 23.4 20.8 18.7 17.0 15.6
NOI $ 1,471 $ 1,260 $ 1,103 $ 908 $ 882 $ 802 $ 735
Table 9: Vornado’s New York Valuation per sq. ft. (2012) 12
Vornado’s New York Office reported financials
Description 2012 Annual
Net Income $ 573,996,000
+ Depreciation & Amortization 252,257,000
- Gain from sale -
Funds From Operations (FFO $ 826,253,000
Table 8: Vornado’s New York Office 2012 financial performance 10, 11
7VNO’s NYC income data includes a 132,000 sq. ft. Paramus, NJ office building with gross rents of $2.3 million (based on annualized rents of $20.28 @ 87.1% occupancy) in its calculations, amounting to approximately 0.25% of NYC office income.8Based on proportionate owned sq. ft., as Vornado’s 10-K, Note 2, p 173: “Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities.”9NOI based on reported New York Office Revenues minus New York Office Operating Expenses minus General and Administrative expenses. Does not include depreciation and amortization or interest and debt expense. 10Net Income = NOI – (Depreciation & Amortization) – (Interest and Debt Expense).11In this analysis, Vornado’s income from owned office space in New Jersey is included in their New York office financial reporting, since information to separate this out is not available.12Based on proportionate owned sq. ft., as Vornado’s Note 2, p 173: “Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities.” 13Excluding any unsecured, corporate level REIT debt.
2012 Manhattan Office Portfolio
Manhattan Office 2012
Revenue $ 481,844,000
Expenses 160,386,000
NOI $ 321,458,000
Table 10: BXP’s Manhattan Office Net Operating Income (2012)
New York Office 2012
Revenue $ 1,374,984,000
Operating Expenses 602,833,000
NOI $ 772,151,000
Table 7: Vornado’s New York Office 2012 NOI 9
Cap Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
Value ($B) $ 25.7 $ 22.1 $ 19.3 $ 17.2 $ 15.4 $ 14.0 $ 12.9
NOI Multiple 33.3 28.6 25.0 22.2 20.0 18.2 16.7
Value/sq. ft. $ 1,687 $ 1,446 $ 1,266 $ 1,125 $ 1,012 $ 920 $ 844
Table 11: BXP’s Manhattan Office Valuation (2012)
REIT $ 400 $ 500 $ 600 $ 700 $ 800 $ 900 $ 1,000
BPO 6.3 7.9 9.5 11.0 12.6 14.2 15.8
BXP 2.5 3.2 3.8 4.4 5.1 5.7 6.3
ESB 2.4 3.0 3.5 4.1 4.7 5.3 5.9
SLG 9.1 11.4 13.7 15.9 18.2 20.5 22.8
VNO 7.0 8.8 10.5 12.3 14.0 15.8 17.5
Total $ 34.1 $ 41.0 $ 47.8 $ 54.6 $ 61.5 $ 68.3 $ 75.1
Table 12: NYC REIT portfolio value using per sq. ft. comparable
P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010www.baruch.cuny.edu/realestate
– 8 –
plans for the Penn Station area.
In January 2013, Brookfield commenced development on its 5.4 million sq. ft. Manhattan
West project, located between 31st and 33rd Streets and Eighth and Ninth Avenues by 2013
by launching a platform over the railroad tracks on top of which this mixed-use project will
be built. BPO obtained $340 million of construction financing for the development project.
Vornado began the process of re-tenanting and redeveloping 280 Park Avenue, of which
50% is co-owned with SL Green.
Vornado shelved its plans to redevelop the site of the Hotel Pennsylvania into a 2.8 million
sq. ft. office tower. In its annual report VNO said it is “evaluating other development and
redevelopment opportunities” at the Hotel Pennsylvania, but press and other reports cite a
hold on the project.
Conclusion
Even in the face of economic uncertainty, the demand for New York office property by
major REITs and other real estate investors remains strong. REITs are aggressively acquiring
prime Manhattan office space through both outright purchases and by taking advantage
of creative capital uses, as shown by Vornado’s use of mezzanine debt to partner with SL
MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013
Green at 280 Park Avenue. Existing space
is being released at higher rates, and
tenants are signing leases on development
projects, an economic vote of confidence.
More than 11 million sq. ft. of office space
is under development or redevelopment by
the REITs, demonstrating their confidence in
the long term strength of New York’s office
market.
End Notes
Some numbers may differ slightly from
company figures due to rounding.
Net ownership is proportionate to
total shareholder ownership through JV
partnerships or subsidiary holdings, as
reported in securities filings. The method
of identifying holdings by net ownership
percentage is also utilized by Brookfield in
its annual report.
Most notably, as commercial property
values increased in 2012, Manhattan office
REITs shifted into selling gear. Both property
and capital were sold. ■
REIT $ 400 $ 500 $ 600 $ 700 $ 800 $ 900 $ 1,000
BPO 52% 42% 35% 30% 26% 23% 21%
BXP 104% 83% 69% 59% 52% 46% 41%
ESB 25% 20% 17% 14% 12% 11% 10%
SLG 56% 45% 38% 32% 28% 25% 23%
VNO 39% 31% 26% 22% 19% 17% 15%
Average 55% 44% 37% 31% 28% 24% 22%
Table 13: Implied 2012 portfolio leverage (loan to value)
© 2013 The Steven L. Newman Real Estate Institute, Baruch College, CUNY. Do not copy or distribute without written permission. The Newman Real Estate Institute gratefully acknowledges the support of the sponsors who make possible our efforts to promote critical thinking on topical issues for the real estate industry.
The views expressed in the research report are those of the author and not necessarily those of Baruch College, City University of New York, or any of its affiliated organizations, foundations, and sponsors. Please address inquiries to Jack S. Nyman, Executive Director, at:
Baruch College, CUNY137 East 22nd StreetBox C-0120New York, NY 10010
Tel: 646.660.6950 • Fax: 646.660.6951www.baruch.cuny.edu/realestate
William Newman, Founding Chair
Richard Pergolis, Co-Chair
Jack S. Nyman, Executive Director
Emily Grace, Associate Director of Research
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