If the real estate press had its way, we’d have you believe that New York’s office sector was a bubbling mass of core assets just waiting to implode. Yes, office transactions in the city may have jumped 236 percent in 2010, helping push average cap rates down to 5.5 percent, but for all that ‘froth’ there still are opportunistic deals to be had.
Indeed, New York-based Savanna Real Estate expects to deploy around $200 million in equity – sourcing between four to six distressed transactions, primarily office deals – in New York in 2011, after closing four similar opportunities last year.
Instead, Savanna said it would continue to target over-leveraged sellers and financial institutions struggling to cope with “zombie properties”, where an inability to finance tenant improvements and leasing commissions was hitting occupancy levels. In 2010, Savanna closed three such deals, including the $56.5 million acquisition of the 40 percent occupied 104 West 40th Street from a joint venture between Principal Real Estate Investors and Mermel and McLain Management and the 75 percent occupied 5 Hanover Square property from troubled developer Kent Swig for $55.5 million.
In its latest transaction in December, the firm purchased the 513,000-square-foot office at 1375 Broadway by taking over the property’s separate ground lease and net lease. Although 90 percent occupied, with just 19 years left on the leases, the property was beginning to suffer from a lack of equity investment, putting downward pressure on rental income.
“New York has some extremely encouraging demand drivers that still make the city an attractive investment location,” said Bienstock, citing fewer than expected financial services job losses and lower vacancy levels. “The financial services sector is starting to hire again and is back in expansion mode. It’s slow growth, but it’s an indication that the New York market has hit bottom, has stablised and is working its way back up again.”
According to various media reports, Savanna currently is raising $500 million for its second institutional fund after closing its debut vehicle in 2006 on $313 million. The firm declined to comment on those reports.