In San Francisco, Tech Firms Happy With ‘B’ Office Space

The U.S. office market is in an era of sluggish growth, as noted in today’s paper. Just not in San Francisco, where fast-growing tech firms are gobbling up space, pushing office rents up.

Bank of America in Deal to Sell New York Office Tower

CoStar Group
Bank of America has agreed to sell 222 Broadway, a 31-story building in Lower Manhattan.

Bank of America Corp., in its latest move to shed some of its real estate, has reached a deal to sell one of its Manhattan office buildings to an investment group for about $230 million, according to multiple people familiar with the matter.

A team of Beacon Capital Partners LLC, a large U.S. office landlord, and L&L Holding Co., a New York developer, has agreed to buy 222 Broadway, a 31-story building in Lower Manhattan, and lease part of the building back to the Charlotte, N.C.-based bank, the people said. The price comes to just under $300 a square foot, the people said.

Bank of America has been selling some of its real estate holdings as part of an effort to sell off operations it doesn’t consider essential to its business. In February, it reached a deal to sell 100 Federal Street in Boston to Boston Properties for $615 million.

Earlier this year, Bank of America said it was seeking to sell two towers in the Charlotte area, and it tapped Jones Lang LaSalle Inc. to begin seeking buyers for 222 Broadway, a 1960s boxy tower across from City Hall Park.

The sale of the building, which hasn’t yet closed, would give the Beacon venture an ability to find new tenants for the top floors of the building, which the bank would be vacating, the people familiar with the matter said.

Beacon also owns 1211 Avenue of the Americas, which houses the headquarters of News Corp., the parent company of The Wall Street Journal.

Tech Companies Fill Fringe Office Spots

Today’s Journal looks at how the growing tech sector has been a bright spot in the national office market, with growing social media and web companies filling up buildings far from booming Silicon Valley.

But in an interesting twist, it’s not the traditional central business districts that are reaping most of the benefits. Instead, it’s been more off-beat locations with generally cheaper rents.

In the Boston area, for instance, Cambridge, Mass. has become a hot spot for tech companies, as seen by Google Inc., which is looking to grow by about 70,000 square feet to a total 300,000 square feet, joining companies such as Microsoft Corp. in the area. Cambridge saw rents shoot up 20% during 2011, as vacancy fell sharply to 10.8%, from 15.6% a year earlier, according to real estate services company Jones Lang LaSalle Inc.

Meanwhile in the financial district of Boston, rents rose a more modest 8.7% and the vacancy rate ticked up to 20.4% from 20.2%, according to Jones Lang LaSalle.

“We’re doing very, very well in Cambridge,” said Mortimer Zuckerman, chief executive of the large national landlord Boston Properties, which is Google’s landlord and the dominant office owner in Cambridge’s Kendall Square. “As a sector, they’re doing the best,” he said of tech firms. “They’re doing better than the financial sector; they’re doing better than a lot of law firms.”

Such gains have been noticed across the Charles River, and the city of Boston has been trying to build up its “Innovation District” on the South Boston waterfront, which, like Cambridge, is removed from the city center. Boston’s mayor, Thomas Menino, is publicly trying to lure Google there.

The same can be seen in New York, where the area between Midtown and Lower Manhattan, known as Midtown South, is the fastest growing district in Manhattan, and empty space is dwindling.

Tenants added more than 950,000 square feet of space during 2011 in the area, gains attributable almost entirely to the tech sector, said John Sikaitis, director of office research for Jones Lang LaSalle. Vacancy fell to 6.2% at the end of 2011, down from 9.1% a year earlier. As for the rest of Midtown: It fell slightly, to 11.5% from 12.2%.

In addition to the cheaper rents, Midtown South is filled with aging pre-war buildings, a plus for those employers that want a loft-like feel to their buildings. (In addition to owning the onetime freight warehouse at 111 Eighth Avenue, Google leases space in a former cracker factory in Pittsburgh, and a former warehouse at a Hughes Aircraft Co. manufacturing site in Playa Vista, Calif.).

Top Office Buildings Filling Up Faster

In a time of low rents, nice office space in cities is in higher demand.

Top buildings in downtowns across the U.S. saw a total 1.6% of total inventory fill up in 2011, compared with the slower 1% seen in all buildings, according to a report by brokerage Jones Lang LaSalle. The top buildings—defined as about a third of office buildings in central business districts—had a vacancy rate of 14.7% at the end of 2011, lower than a 17.6% vacancy for all buildings.

Expect more of this. There hasn’t been much office space built, and there’s little in the pipeline—only 6.1 million square feet of top space in downtowns, according to Jones Lang LaSalle. That eases the pain for existing landlords, giving tenants fewer options from which to choose.

“Large blocks of space will continue to come at a premium across most geographies and tenant leverage will continue to slip with almost no new supply to speak of,” the report says.

For top buildings—termed “skyline” buildings by the brokerage—Portland, Ore. and Bellevue, Wash. have the lowest vacancy, at 8% and 9%, respectively. Bringing up the rear: Stamford, Conn. and Miami, Fla., with 25% and 26% vacancy.

Q&A: Will the Euro-Zone Crisis Cripple Commercial Real Estate?

Mark Battrell Photography Inc.
Jacques Gordon, of LaSalle Investment Management

With Europe in economic turmoil, Developments asked Jacques Gordon, global investment strategist, LaSalle Investment Management, what the debt crisis could mean for commercial real estate in the United States. A subsidiary of Jones Lang LaSalle, LaSalle Investment Management manages $43 billion in real-estate investments for pension funds, insurance companies, governments and individuals.

This exchange has been edited for clarity and length.

WSJ: How will the European debt crisis affect U.S. real estate?

Mr. Gordon: We expect going forward the biggest impact will be on office tenancy. It’ll be modest. We expect downsizing of European banks and financial companies on the East Coast in cities like Boston and New York.

WSJ: What about the impact on U.S. credit markets?

Mr. Gordon: As far as the ripple effect in terms of credit contraction happening here the way it’s happening in Europe, we don’t see that. There’s a very severe credit contraction going on in all industries in Europe and real estate industry is getting hit hard. Major lenders in Europe are shutting down their real estate lending desks. Very little lending is going on except for prime properties and prime borrowers. The question being, with that massive credit contraction which is almost at the 2009 level intensity in U.S. terms, would that come over here? We’ve looked at that and we don’t see that.

WSJ: Why not?

Mr. Gordon: European lenders after the financial crisis never came back here in a significant way. European lenders had a large market share in terms of 2002 and 2005 time frame. But in 2010 and 2011 they pretty much folded up shop….Also, our subprime debt was bought by German and French banks. I don’t think the reverse is true. I don’t think American lending institutions have lent to empty office buildings in Greece or condos in Madrid or Italian shopping centers. American lenders if anything got overexcited about lending here to residential but they did not get overexcited about Europe.

WSJ: Do you agree with the notion that the European debt crisis was one of the reasons U.S. real estate investment sales slowed in the second half of the year?

Mr. Gordon: I would put Europe’s problems in the top two reasons. I’d probably say our own downgrade in our government debt and concerns about U.S. debt market were also a factor. My sense is a lot of the nervousness just in the last 45 days is starting to lift again.

WSJ: Does the debt crisis pose a challenge in 2012 for top-tier U.S. markets that have relied on foreign investors for investment sales?

Mr. Gordon: I’d say no. There are other sources for money that are not European, such as Korean money and other sovereign wealth funds outside Europe. Norway is just getting started. I don’t see that the pullback of German money, which was a predominant source of investor capital, will change pricing in our iconic properties because there are other buyers. Also German international funds are still getting modest levels of investments so they do not have pressure to sell.

WSJ: Are any pockets of the U.S. real estate markets benefiting from European distress?

Mr. Gordon: The fall in the euro has helped European exports. French, German and Italian goods are coming in at levels that are almost back up to pre-2008 levels. So European occupiers of office space in U.S. may be shrinking but European providers of goods and occupiers of retail spaces may actually be increasing. It’s too early to tell if there’s going to be a real trend there but our own observation is European goods in shopping centers we run are all doing very well.

WSJ: Do Europe’s problems provide real-estate investment opportunities for U.S. investors?

Mr. Gordon: As the U.S. real estate market continues to recover….more North American investors will start to look to Europe for enhanced returns. It might not be a part of the world that’s growing but it’s a part of the world where mezzanine debt is scarce. Banks are not willing to lend more than 50%. So as loans come due, the borrower has to do something, either pay down the loan or refinance it. I think a lot of American investors are looking at that opportunity. I think it’s a good one. It certainly gives a yield that’s three or four times higher than buying the underlying real estate…The idea that Europe is an economy or civilization in perpetual decline is not correct. In the last thirty years we’ve seen a lot of positive surprises.