1221 Avenue of the Americas
Someone forgot to tell the Canada Pension Plan Investment Board that the Manhattan office market is unappealing.
The pension fund said Monday it has taken minority stakes in two office towers, including a 50-storey giant in the Rockefeller Center complex in the heart of midtown Manhattan, arguing the New York office market is turning the corner after being walloped during the economic downturn.
The purchases will see CPPIB acquire 45-per-cent ownership stakes in 1221 Avenue of the Americas and 600 Lexington Ave. from SL Green Realty - Manhattan's largest office landlord - for a total consideration of $663-million (U.S.), including debt. The properties have a combined value of $1.45-billion including stakes held by other owners.
"It's a function of looking at a market that is strengthening, and being able to find the opportunities that work for us," said Graham Eadie, senior vice-president of real estate investment for CPPIB.
"We have been looking for real estate opportunities, and the market has obviously been very weak over the last year or two. We're starting to see the opportunities now and want to execute against those."
The fund has been searching for U.S. properties to add to its $7.1-billion (Canadian) real estate portfolio, and announced another deal in April to partner with Kimco Realty Corp., North America's largest operator of community shopping centres, in a joint venture to acquire prime neighbourhood shopping centres across the U.S. market.
Mr. Eadie said CPPIB plans to boost its real estate portfolio in future from 6 per cent of the fund's total holdings, but would not reveal a target for growth.
He said the fund is in talks to acquire more U.S. properties, because "it's an area where we've been able to find the quality of asset we're looking for at the prices we want right now."
The 2.5-million-square-foot McGraw-Hill building in Rockefeller Center has the publishing firm as a key tenant, along with Société Générale SA and Morgan Stanley. It will be managed by Rockefeller Group International Inc., which owns the other 55 per cent of the building.
The smaller 600 Lexington Ave. property, which is 300,000 square feet and 36 storeys, is a "boutique" office space with smaller tenants and no major anchor. SL Green will be the majority owner and manager of the building.
"We think the leasing market is starting to improve and stabilize in that market, so we think it is a good time to enter," Mr. Eadie said. "And these are our first deals in the Manhattan market."
Shant Poladian, a real estate analyst at Canaccord Adams Inc., says the office market in Manhattan has strengthened significantly in recent months and companies operating in the sector are reporting better financial results. He said Brookfield Properties Corp., another major New York office property owner, reported leasing volume in Manhattan has bounced back to its five-year average rate.
A key factor for growth in Manhattan's depressed office market has been the rapid recovery of major players in the financial services sector, such as Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co. With growing profitability, the firms have been hiring and their office space requirements are growing.
"The market's already turning," Mr. Poladian said. "Barring some contagion coming out of the European debt situation, things have actually been improving quite a lot."
SL Green is "a strong player in the Manhattan market" but has fairly high debt levels, Mr. Poladian said, so selling minority stakes in two buildings is a logical move to raise financing without tapping the public markets.
Janet McFarland