New York Building's Record Price
Shows Office Market's Strength

In a sign that demand for commercial real estate continues unabated despite the recent turmoil in the debt markets, investors agreed late last week to buy 450 Park Ave., a boutique office building in midtown Manhattan, for $1,589 a square foot, or about $510 million.

The price -- believed to be the most expensive on a per-square-foot basis for an office building in U.S. history -- demonstrates that trends like strong foreign currencies and the availability of equity are helping the market for commercial office space, at least in premium markets such as New York, despite concerns over tighter lending practices.

"We identified this asset as something we wanted from the very beginning and were willing to do what we needed to do to make this happen," says Keith Rubenstein, principal of Somerset Partners LLC, a New York-based private-equity firm that won the bidding. Somerset is capitalized by European family trusts and high-net-worth individuals who see New York buildings as a bargain compared with the prices being asked for office space in London and Dublin.

Real-estate experts regarded the bidding for 450 Park -- a 321,000-square-foot building designed by Emery Roth & Sons and built in 1971 -- as a bellwether of the market in a time of increasing skittishness among real-estate investors and lenders. The 33-story building at 57th Street and Park is being sold by a partnership that includes New York State Common Retirement Fund and Taconic Investment Partners LLC, which paid $158 million, or about $492 per square foot, in 2002. "It was simply time to mine a fantastic asset sale for us," said Paul Pariser, co-chief executive of Taconic.

The contract shatters the per-square-foot record set just four weeks previously, when Italy-based Gruppo Zunino agreed to pay $1,476 a square foot for New York's 660 Madison Ave., according to data provided by real-estate research firm Real Capital Analytics. These transactions -- combined with a third contract signed last month when a partnership that includes New York-based real-estate investment firms Witkoff Group and Stellar Management agreed to pay about $1,200 a square foot for New York's 405 Park Ave. -- show that prices have only increased in the past few weeks for the best properties in Manhattan, the country's strongest office market.

The $510 million price doesn't include additional terms and costs that will be borne by Somerset, making its bid attractive to the sellers.

The records follow predictions from some real-estate experts that unrest in the debt markets would cause sky-high prices for office buildings to drop. Since April, lenders have been tightening their lending standards and balking at the high levels of debt, as much as 90% in some cases, that some commercial buyers had placed on properties to finance their acquisitions.

Presumably, these tougher standards would reduce the number of potential buyers, helping to bring sales prices back down to earth. Already, some analysts had revised their estimates of the value of portfolios owned by real-estate investment trusts to reflect the new landscape.

But the trio of contracts for well-located New York buildings shows that the frenzy isn't over, at least for prestige properties. If some investors have been forced to the sidelines, others are primed to step in, especially those who have plenty of equity at their disposal or foreign investors who can take advantage of the weak dollar.

"These trades sum up the juxtaposition of the decline of the dollar and the overflowing liquidity that is increasing the number of buyers to many markets in the U.S., and clearly New York is their preferred destination," says Douglas Harmon, senior managing director of Eastdil Secured, who brokered both the 450 Park and 660 Madison transactions.

For 450 Park, Somerset Partners was willing to assume an existing commercial mortgage-backed security loan of $175 million and use its own equity to pay the balance of the purchase price. Somerset will either keep the existing mortgage in place or refinance but won't leverage more than about 70% of the acquisition price, says Mr. Rubenstein. The building is about 85% leased with rents in the low-$70s a square foot, about half the current market rate.

Somerset Partners also owns 1801 K St. N.W. in Washington, D.C., another well-placed building in a market where rents are soaring and where it is difficult for competitors to build.

New York's "Plaza corridor," near the former Plaza Hotel between 48th and 67th streets, with easy access to the commuting routes into Grand Central Terminal, is perhaps the most coveted submarket in the country. In June, average asking rents in the corridor climbed to $104.92 a square foot for top-quality space known as Class A, says Robert Sammons, director of research for Colliers ABR, a real-estate services firm.

These transactions should be welcome news for any company holding large swaths of New York real estate, including the publicly traded REITS Vornado Realty Trust and SL Green Realty Corp., as well as the closely held Macklowe Properties, which purchased seven buildings for about $7 billion from Equity Office Properties Trust in connection with that REIT's merger with the private-equity firm Blackstone Group.

Indeed, industry observers have speculated that Harry Macklowe and his son Billy might put some buildings back on the market to ease refinancing of the transaction. If these more recent deals are a guide, the Macklowes likely could get a price equal to what they paid in February.

Billy Macklowe declined to comment on his plans, except to say that he has several options: "We're continuing to execute on our strategies as planned and are committed to seeing the investment through to its successful conclusion. And we will be in a position to successfully exit our acquisition financing."

Email your comments to rjeditor@dowjones.com.