Bank of America raised price targets for all New York City office real estate investment trusts by an average of 5% last week, citing rent growth and a hike in asset values for well-located properties in the city. The affected REITs are SL Green Realty Trust, Boston Properties, Reckson Associates Realty, Equity Office Properties Trust and Brookfield Properties.
Sales of Class A properties in Manhattan have teetered toward cap rates of less than 5% and the price per square foot has been around $1,000, said Jim Sullivan, an analyst at Green Street Advisors. This reflects intense demand over the past year and the continued prospects for NOI growth over the next several years.
Low cap rates have had the greatest impact on net asset value estimates for SL Green, which has seen its NAV increase by 6.7%. By comparison, the average increase for its peers is about 3%, according to John Kim, an analyst at Bank of America.
New York office REITs are expecting to see rent growth of 25% over the next three years, Kim said. Office vacancies dropped from roughly 10% to 6.9% between mid-year 2005 and 2006, and asking rents have increased by about 10% during each of the past two quarters. Market participants also pointed to a limited amount of new supply slated to hit the market in coming years with just 6.45 million square feet of new office space under construction.
Besides rising rents and shrinking vacancies, analysts pointed to a surge in long-term foreign capital. International investors accounted for more than 23% of all Manhattan office acquisitions during the first half of the year, up from just 6% during the same stretch last year. This included the sale of 6 Times Square for $300 million to Dubai-based Istithmar Holdings, which also spent $1.2 billion to buy 280 Park Avenue last month. Market participants estimated that Istithmar accepted a cap rate of just 3.75% on the property, but they added that long term upside may be replacing cap rates in valuations for the New York midtown market.