One mega deal at a mega price. The rest was dreary.
Chinese entities – such as the conglomerates – were once the dominant buyer in US trophy office markets, such as Manhattan. It ended with a big bang in the second quarter of 2017 when Chinese entities accounted for half of the commercial real estate volume in Manhattan, including its sixth largest transaction ever, the $2.2 billion purchase of 245 Park Avenue by the conglomerate HNA Group. It paid $1,282 per square foot, as it was called, “among the highest price per pound for this type of asset.” It was the last big Chinese property purchase in Manhattan.
But Google blew that deal out of the water, with its $2.4 billion acquisition of the iconic eight-story Chelsea Market at 75 Ninth Ave in Q1 this year. This was the second largest deal ever to close in Manhattan. And Google paid a breath-taking $2,181 per square foot. We will never again laugh about the inflated prices Chinese buyers were paying.
The property, built in 1934, now has 1.1 million square feet of office and retail space. It used to be the factory of National Biscuit Co. (later renamed Nabisco) where the Oreo cookie was invented and produced.
CommercialCafé, a division of Yardi, added in its report:
Nowadays, the property houses an eclectic mix of high-profile tenants, including Google, YouTube, the Food Network, and EMI. New owner Google also owns the building across the street at 111 Eighth Ave., which it acquired back in 2010 for $1.8 billion.
And here is what that Google deal did to the Manhattan office market: It more than doubled the total volume of sales! Without the Google deal, total transaction volume would have been $2.12 billion. With the Google deal, it jumped to $4.52 billion!
With only nine major deals in Q1 (red line, left scale in the chart below), Google’s mega-deal seriously moved the needle. But there weren’t enough of these mega-deals to bring back the good old days of Q1 2015, when 21 deals were made for a total of $10.1 billion (blue bars, left scale):
This according to CommercialCafé, which used Yardi Matrix data to analyze all Manhattan office transactions recorded through April 5, 2018, of $5 million or more, and larger than 50,000 square feet. In the case of mixed-use properties, only those with over 50% office space were taken into account.
And the dizzying price of $2,181 per square foot that Google forked over pushed the average price per square foot to a record $1,266, up 70% from Q1 last year:
While Google’s huge price-per-square foot inflated total sales volume as measured in dollars, total sales volume as measured in square footage wasn’t so hot, at 3.6 million square feet:
Google’s mega deal, at $2.4 billion, was five times larger than the second largest deal, 1700 Broadway, which was acquired for $464 million by Rockpoint Group.
Former Chinese buyers have turned into sellers. HNA Group, the same that did the last Chinese mega deal in Manhattan in Q2 2017, sold (in conjunction with MHP Real Estate Services) its building on 1180 Avenue of the Americas, for $305 million, the fifth largest transaction in Q1.
And there’s plenty of supply coming on the market in Manhattan. In Q1, three projects totaling 1 million square feet were delivered. In Q2, eight new projects totaling 6.5 million square feet are scheduled to be delivered, according to Yardi Matrix data, including the 2.5 million-square-foot 80-story tower, 3 World Trade Center.
Ironically, this tower, which was planned years ago, will put on the market precisely what everyone now needs absolutely the most of, going forward, as the industry is struggling with the brick-and-mortar meltdown: five floors of brick-and-mortar retail space; and it will share an additional 350,000 square feet of underground brick-and-mortar retail space with the WTC Transportation Hub.
The brick-and-mortar meltdown sets a record. And the second quarter starts out on the right foot. Read… Defaults of Retailers Hit “All-Time High” in Q1: Moody’s
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Funny, now that a New York Real Estate developer sits in the oval office.
Any idea of why the Chinese owners are now selling? Political pressure back home, or a foreshadowing of a collapsing market?
Chinese ‘hot’ money laundering out of China was being invested into prime NYC RE Commercial & Retail, plus Single Family Homes. When China’s Central Bank started enforcement against hot money laundering the jig was up and the speculators moved out all across the USA & CANADA due to regulation. Hot money laundering does not like regulatory framework.
MOU
A few Chinese oligarchs have been arrested, they must sell their assets.
Capital control. Many Chinese buyers bought not for investment purposes…..
Last year HNA Group ran afoul of authorities, both domestic and foreign, and has gone into full retreat mode since: the sale of 1180 Avenue of Americas is just the starter, as the embattled Chinese conglomerate is currently seeking a buyer for their share into the Hilton group and is openly talking about “reorganizing” their investments abroad
Earlier this year Anbang Group, the Chinese insurance company that made headlines in 2014 for buying the Waldorf Astoria New York from Blackrock, was nationalized by Chinese authorites and its chairman, Wu Xiaohui, has “disappeared” into the terrifying Chinese legal system.
The Chinese government is currently going through Anbang’s foreign holdings to see what is “strategic” and can be kept and what can be sold for cold hard cash.
Mao Zedong once wrote: “Hit one to educate a hundred”* and I have no doubt this is what Chinese authorities are trying to do now, albeit they are restraining themselves from using traditional Chinese heavy-handed tactics to avoid “spooking the economy”, a depressingly common feature of governments worldwide nowadays.
HNA Group has to obey orders emanating from the State Council to the letter and “set an example” in typical Maoist fashion to avoid a fate worse than Anbang’s. The conglomerate’s existence and its leadership’s lives depend on this.
* I am aware this is an ancient Chinese saying that Mao himself used according to the tradition of “Use the past to serve the future”.
That reminds me of Confucius’ “Beat your children every day: if you don’t know why, they will.”
FED tightens, Trump reduces US deficit, aka, China surplus. China needs Dollar for all the debt they borrowed in dollar. The first phase of US blowing bubbles and excess capacity through out the world is done. The 2nd phase of US tightening to stress the world’s bubble has begun. All elites know it. Shore up USD.
Symbolic gesture-Google has made a fortune monetizing my cookies
lollzzzllzzz
Anxiously await Amazon’s purchase of World Financial Center (downtown Wall Street area of manhattan) offering the opportunity of her new employees @ HQ2 to commute on the Rockaway ferry to my beautiful beach-side Queens neighborhood (the Rockaway Peninsula), as they might have on Puget Sound to commute from Seattle to one of the San Juan islands!!!… PJS
Any reason the new 3 World Trading Center can’t be used for Office space instead?
Because companies have been shutting down “working from home” since years ago.
I never seen the leadership of country in such denial. The glut of office and retail is going to be off the charts.
There’s more empty retail in downtown San Jose now than there was in 2012.
Interesting read. Any insight into whether the big Silicon Valley firms could be behind the insane ($600-800k) over-asking and crazy-high home sales ($1600-2000/soft for a shack on 5000sqft lot anyone?)? These seem to just be getting more and more extreme as time goes on.
Everyone talks about it like it’s “Facebook money” or “Google money” as if it’s only those employed by these companies that can afford it. Could the underlying problem be a magnitude bigger? Corporate buyouts of dwellings surrounding their campuses with no regard for community impact or diversity?
As a 2 physician household all we can afford is renting a tiny town house with our 4 kids at an outrageous price (who would’ve thought for all those student loans we could live like this!). At least with a manageable commute I get to see my kids for 1-2hrs awake each day. Schools are closing in San Jose and Redwood City, I know at least 1-2 Palo Alto elementary schools have decreasing enrollment coming in, no families can afford this anymore. When will this turn around?
When will this turn around?
Never. Ever.
You have to do something (or not, depending on priorities, one might chose to suck it up). The “living costs markets” will remain irrational longer than anyone will care to be alive :)
A two physician household with 4 kids could live a very decent and nice life in, say, Denmark or Germany. The situation in Denmark is that, if one is willing to move away from Copenhagen and out into “the provinces”, an epic journey of about 200 km, a good medical practice can be bought very cheaply and “out there” it is easy to get space for a boat or to play golf.
The USA, being a huge country, should offer similar tradeoffs to the life-work balancing game.
Uh….an average doctor salary is probably 25% in Germany or Denmark compared to NYC.
Right. Picking doctors is picking a case where U.S. pay is way higher and not just in NYC.
The AMA limits doctor supply. It is strange this gets a pass from most people. It is very anti-market.
You have to look at the salary less expenses and what the difference will buy you.
Above a fairly low threshold, spending more money on something doesn’t improve the quality or the experience in proportion any more.
This means that once past the point where one can afford high quality, “where you will be in relation to your peers” matters a lot to how wealthy you will feel. If all around you can easily afford 1000 US restaurant bills and 1500 per month gym memberships and you cannot, you won’t be invited and you will feel left out and struggling even while being in the top 5% income bracket.
Relocating to a “smaller pond”, where the norms are 100 dollar restaurant bills and 150/mo gym memberships and your earnings allow for 5x that, will mean that now you’re suddenly comfortably wealthy, even though “moving down to” the top 8% bracket.
Ed, the AMA has zero control over doctor supply and there is no secret agenda by the medical profession to limit supply. Actually many of us are wondering about there being enough doctors to provide our care as we age.
Possibly the draconian imposition of EMR, increasing regulatory burdens and declining fees is a secret government conspiracy to drive doctors into early retirement but only Julian Assange can answer that question.
Whether conspiracy or accident, it’s working. I have enough savings to retire tomorrow. I planned to work until age 70 but retiring on full SS benefits next year at 66 is starting to look good. They’ve sucked all the joy out of the practice of medicine.
When will this turn around?
When does QE TRULY end? The world (particularly as it exists today) is profoundly deflationary. The powers that be have a huge (>$10 trillion around the globe) vested interest in seeing that this deflation never manifests itself. The fact that bankers, property owners (particularly leveraged ones) and bureaucrats can float along on nice, steady 2% (or greater) inflation, without a care in the world and raking in the funny money means the joke is on the rest of us.
Relocating to a smaller size town along the I80 Interstate in Nevada would get you a 2300 sq. ft. 4+3 for $250k to $350k on a 1/2 acre lot !! And these smaller towns need good doctors ! No traffic, no crime to speak of, way less stress, and only 4 to 6 traffic lights in the entire town ! Good restaurants as well. Personally I got tired of big cities 20 years ago and moved out ! Cheers, see you here !!
Been giving a lot of thought to Taos, NM. Beautiful area, great food and culture.
Michael,
Correct on all three. Plus many more. Friend of mine went out there for those reasons. She loved it, except for the long period of cold in the winter. After about the second winter, she’d had enough.
I think you better keep your place in the warm part of the county so you can escape Taos in the winter for a few weeks at a time.
The weather doesn’t bother me. We had a second home in the area for 15 years and used it all year round. The winter days aren’t bad because of the strong and frequent sunny days. The trouble is that temps can easily drop 30 degrees or more at night (or if it’s cloudy – I could always tell when it was about to rain because the temp would drop precipitously. Never really bothered me. I loved riding my horse through the snow at night under a clear sky with a million stars.
Meanwhile, I’m biding my time and doing my research, waiting for the next financial shoe to drop and pick up a retirement house for cheap.
Hey there Doc.
Err…What’s up doc? :-)
I’m a tech worker from SF and moved further north in California. You might consider Lake and Mendocino counties. We need Docs up here too in a big way. And it is still very affordable. My wife and I moved here 5 years ago and live on 5.5 acres with our own well and total quiet. No commute to speak of…only 15 minute drive to work. There are no stop lights in our town on the lake here. And traffic jams are unheard of.
So come on up here. The water is cold but there is plenty of it!! :-)
Exactly what is the advantage Google enjoyed by over paying for this building? If The Chinese are bugging out and retail space sits empty shouldn’t prices be falling?
Record low interests rates and all cash deal. They’re sitting on over $50 billion after all.
Yes. If they waited the interest would be higher. No to mention it is a historical building not a ugly and badly done Condo.
I don’t remember exactly, but I read somewhere that the area is an excellent co-location spot for high frequency trading. It is the closest spot in NYC to the termination point of the cabling laid down from Chicago to New Jersey for HFT. They would be across the Hudson River from microwave transmission lines, as well as, The Stevens Institute of Technology, an excellent engineering school.
Make sense. Ad sense real time bidding is like HFT anyways. But I would really be surprised if their data center is in New York city.
It sure sounds like a top in US real estate is at hand.
It’s all funny money anyways. The Chinese with laundered money, and Google with all those funny ad revenue.
I wonder if they just rang the bell which signals the “top”. It is usually an act of hubris which makes the signal.
I hear the market top bell.