Major NYC REIT Activity & Holdingsbaruch.cuny.edu/realestate/pdf/REIT_whitepaper_fall2013.pdf · 2012, that outperform the overall Manhattan office market of 90.9% (see Tables 1 &

P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010www.baruch.cuny.edu/realestate

Introduction

The inaugural version of this paper,

published one year ago, observed

a shift in ownership of New York

office buildings from families to public real

estate investment trusts (REITs). Market

observers now see this trend accelerated

by the possible initial public offering (IPO)

of Empire State Realty Trust (ESB), a new

REIT controlled by the Malkin and Wien

families along with the Helmsley estate.

This shift is driven by several factors which

include estate taxes, division of assets

among multiple heirs, and rules limiting

the duration of estates. In support of

this last point, one of the primary reasons

given by ESB management for the IPO

is the necessity of the Helmsley estate

to divest itself of assets and dissolve the

estate. “Unavoidable, material change

is coming, driven by the requirement for

the executors under Leona Helmsley’s will

to sell her estate’s ownership interests

in properties supervised by Malkin

Holdings,” ESB said in a SEC filing. The

ESB IPO exemplifies, on a very large

scale, many of the issues that other

long-time family owners confront when

dealing with generational transition of real

estate: estate planning reality; partnership

negotiations and buy-outs; realized capital

gains; and the emotions that accompany

selling inherited assets that have held an

esteemed place in family lore.

While these REITs also control significant

Manhattan retail and suburban New York

properties, and non-New York properties,

the focus of this paper is on the Manhattan

commercial office holdings of these REITs.

As this paper goes to press, the ESB IPO

is moving forward and expected to clear various legal and investor hurdles but has not yet

launched. Assuming a successful completion of the IPO, it would increase the amount of

Manhattan office space controlled by major REITs to 76.90 million sq. ft. – up from 72.36

million sq. ft. However, comparing only the same four REITS the previous version reviewed -

SL Green Realty Corporation (SLG), Boston Properties, Inc. (BXP), Brookfield Office Properties

(BPO) and Vornado Realty Trust (VNO) – that figure would be down slightly to 71.03 million

sq. ft.

While the amount of Manhattan office space dropped slightly on a same-REIT basis, the

amount of mortgage debt collateralized by the four major REITS increased to $19.77 billion

from $18 billion a year previous, and that figure is $20.29 billion if ESB’s debt is included.

This increased use of debt is representative of favorable capital market conditions, and the

high quality of the properties owned by REITs in desirable Manhattan locations, according to

statements made by the REITs.

Capital markets continued to provide low interest rate-fueled liquidity in 2012, and

corporate access to capital was largely immune from European bond market turmoil. With

this availability of capital, REITS continued to access low-cost funding as they had the year

previous. The same trend identified in the previous version of this paper continues to hold,

as favorable capital market conditions provide REITs with corporate-level debt and equity (in

addition to mortgages). As a result, REITs have a measurable “cost of capital” advantage

compared to all but the largest private owners and operators when it comes to competing

for deals and providing incentives to tenants. This capital is structured in several ways,

including unsecured corporate debt, preferred stock, and common equity which can be

increased via secondary equity offerings. Proceeds from capital events can then be used

to pay for property capital expenditures, tenant improvements (T&I), leasing commissions,

capital expenditures, and competitive property maintenance, all creating an advantage over

less well-capitalized owners.

FALL 2013 RESEARCH PUBLICATION

Major NYC REIT Activity & Holdings

A 2013 Analysis of the Notable REIT-owned Manhattan Office Properties & PortfoliosA research report prepared for The Steven L. Newman Real Estate Institute, Baruch College, CUNY by Benjamin Polen, MBA.

1290 Avenues of the Americas


– 2 –

MAJOR NYC REIT ACTIVITY & HOLDINGS FALL 2013

Brookfield Properties specifically highlighted favorable capital market conditions in its

annual report when it note that “the cost of borrowing is currently less than [Brookfield’s]

projection for future inflation due to macro-economic policies designed to stimulate growth,”

which BPO said provides a “tremendous opportunity to finance our assets at attractive rates

on a long-term basis.” The firm described itself as “very active” in the debt and equity

markets in 2012, completing nearly $2.5 billion of financings and reducing its total cost of

capital by issuing new equity “in the form of perpetual preferred shares at lower interest

rates than existing securities which [Brookfield] bought back” during 2012. Specifically, in

April 2012 Brookfield issued C$150 million of senior unsecured notes at 4.00% due in 2018,

and in September 2012 issued $250 million of preferred shares at a yield of 4.60% due in

2018.

At the end of 2012, Brookfield said that its weighted average cost of capital, assuming

a target long-term 12% return on common equity, was 7.13% compared to 7.23% a year

earlier. BPO argued that its business strategy of Class A properties in Class A locations with

institutional tenants helps support its low cost of capital, specifically stated that its “cost of

capital is lower than many of [Brookfield’s REIT] peers because of the amount of investment-

grade financing that can be placed on [Brookfield’s] assets, which is a function of the high-

quality nature of both the assets and the tenant base that compose [Brookfield’s] portfolio.”

Supporting this idea, SL Green’s annual report makes a statement that connects its ability

to offer quality property with its balance sheet and access to capital: “The leasing of real

estate is highly competitive, especially in the Manhattan office market. We compete for

tenants with landlords and developers of similar properties located in our markets primarily

on the basis of location, rent charged, services provided, balance sheet strength and liquidity

and the design and condition of our properties.”1

SL Green took advantage of capital markets when, in November 2012, it entered into a

$1.6 billion credit facility which refinanced, extended and upsized an existing credit facility.

The 2012 credit facility consists of a $1.2 billion revolving credit facility, which matures in

March 2017 and a $400 million term loan facility, which matures in March 2018. The revolving

credit facility and term loan facility currently bear interest at 145 basis points and 165 basis

points over LIBOR.

Boston Properties took advantage of

the capital market conditions in 2012 to

complete a $1 billion offering of 3.85% senior

unsecured notes due in 2023 and used cash

to redeem notes carrying a 6.25% coupon.

BXP utilized equity markets during 2012 to

issue $249.8 million in “at the market” (ATM)

secondary stock offerings. It has structured

the ATM so that an additional $305.3 million

remains available for issuance.

Vornado redeemed $510.2 million in senior

unsecured debt during 2012. VNO issued

$290.9 million of preferred equity shares

carrying a 5.7% coupon during 2012, while

it redeemed $250 million of two separate

preferred issuances that carried a 7.0%

coupon. At the property level, Vornado

refinanced its 70% owned 1290 Avenue of

the Americas for $950 million in a 10 year,

3.34% interest-only deal. This deal not only

provided very low and attractive terms, it

also allowed VNO to retain $522 million in

proceeds after repaying the existing loan

and closing costs. VNO also refinanced 350

Park Avenue in a $132 million five year term

loan with a 3.75% interest rate and two years

of interest-only payments.

REIT Real Estate Market PerformanceBy analyzing the REITs’ office property

data, it is possible to bring together real

estate and capital markets, with the access

to public data shedding light on the mostly

private world of real estate holdings. This

analysis incorporates the view of U.S.

Securities & Exchange Commission (SEC)

filings, public website information, and

industry press reports.

The vast holdings and associated debt of

New York City’s largest REIT owners of office

space is quantified in Table 1. The REITs

control and manage nearly 80 million sq. ft.

of Manhattan office space. Even when joint

venture (JV) partnerships are subtracted, the

proportional ownership to REIT shareholders

Table 1: Manhattan Office REITs ownership, debt & occupancy (2012)2

Manhattan Office Market - REIT Overview

REIT OccupancyOwned & Managed (sq. ft.)

Proportional Ownership

(sq. ft.)Property Debt

Total Debt / sq.ft.

Brookfield Office (BPO) 93.8% 18,345,000 15,768,000 $ 4,258,000,000 $ 232

Boston Properties (BXP) 92.8% 7,415,580 6,349,915 3,849,182,000 519

Empire State Realty Trust (ESB)

77.0% 5,907,042 5,907,042 584,816,000 99

S.L. Green (SLG) 94.1% 24,372,379 22,765,706 6,874,670,000 282

Vornado (VNO) 95.9% 20,209,000 17,503,071 4,792,877,000 229

Total Debt/sq.ft. 92.9% 76,941,001 68,293,734 $20,359,545,000 $265

1Emphasis was added by an author of this white paper.2BXP’s total debt includes partner loans of $450 million made to GM Building, not counted in proportional debt. The office space totals only include Manhattan office space. Vornado’s office space total does not include a 132,000 sq. ft. building in Paramus, NJ that is 100% owned. SL Green’s sq. ft. totals include 280 Park Avenue and 3 Columbus Circle but do not include its Downtown Brooklyn properties. ESB data as of September 30, 2011.


– 3 –

is nearly 70 million sq. ft. The mortgage debt used to support this ownership is significant

and grew more than $2 billion in 2012 to $20.28 billion. The use of mortgage debt per sq.

ft. grew from $249 per sq. ft. in 2011 to $264 per sq. ft. in 2012. Applying a required loan-

to-value ratio of 65%, this mortgage debt would require an average appraised value of $406

per sq. ft., a more than reasonable assumption given both in-place income and comparable

recent transaction prices.

Occupancy & Rents

The five REITs analyzed all have average occupancy levels of 92.9% as of December 31,

2012, that outperform the overall Manhattan office market of 90.9% (see Tables 1 & 2).

However, an apples-to-apples analysis of the REITS ex-ESB shows an average occupancy level

of 94.4% for 2012 compared to 94.1% in 2011. Empire State Realty Trust’s Manhattan office

portfolio occupancy of 76.9% certainly stands out and brings down the average of the group.

As reported previously by the Newman Real Estate Institute and throughout the press, the

Empire State Building has undergone a thorough building systems upgrade over the past

several years, and the low occupancy levels are a result of management’s strategic decision

to largely empty the building of smaller tenants and re-tenant the retrofitted building with

larger, corporate tenants. Even within the ESB portfolio, the Empire State Building has the

lowest occupancy level of 67.3% while its other buildings average 85.0% occupancy.

The differential between REIT occupancy levels and market occupancy is measureable,

with average REIT occupancy levels 325 basis points higher than the market. Vornado’s

occupancy levels are 500 basis points greater than the overall Manhattan market and

represent the best occupancy performance of the group. According to Cushman &

Wakefield, Manhattan average asking rents rose to $59.60 per sq. ft. in March 2013,

representing an increase of 1.2% from March 2012. Cushman and Wakefield also noted

that at $51.97 per sq. ft., “Midtown South asking rents rose the most substantially, mainly

due to higher priced blocks of space placed on the market. The portfolio rents of the REITs

average $53.28/sq. ft. across their Manhattan office holdings. This is 11% less than average

market asking rents of $59.60/sq. ft., because the portfolio rents reflect older, below market

leases. The under market rents represent potential upside to release space at greater rents

upon lease expiration. The differentials among the REIT portfolio rents reflect the nature of

their holdings. Brookfield’s lower rents reflect its older, below-market leases and its large

Downtown holdings, a submarket with lower rents than the overall Manhattan office market.

Boston Properties’ higher rents show the horsepower of the General Motors Building, which

obtains some of the highest rents in Manhattan. Vornado and SL Green’s rents hover around

the current average asking rents. Though these two REITs are below the average Class A

rents, this provides the opportunity to obtain higher rents upon issuing new leases. Indeed,

the REITs are capitalizing on the improved leasing market and capturing higher rents.

A comparison of the same four REITs

(excluding ESB) from the previous version

of this paper shows average rents of $54.38

in 2012, up slightly from $54.16 in 2011.

Including ESB, the average rents drop to

$53.17 (see Table 5).

Leasing Activity

When leasing or renewing leases, REITs

have an advantage in offering tenant

improvements (T&I) and other concessions.

This is due to their lower cost of capital, as

discussed above. Especially over the past

two years, the four REITs analyzed have all

successfully raised capital through equity

and corporate debt sources. These capital

sources are generally unavailable to most

private family owners, and private equity real

estate demands a greater return than what

is offered by REITs to their public investors.

Given the rent and occupancy performance

of the four REITs, near-term lease expirations

and the ability to compete on T&I offer an

opportunity to capture higher rents. The

REITs are succeeding on this frontier.

In 2012, Brookfield faced a significant

amount of vacant space in its Lower

Manhattan portfolio, as described in the

[2012 publication of the look at Manhattan

REITs]. BPO said the REIT’s “highlight of

2012” was the 17-year lease with Morgan

Stanley for 1.2 million sq. ft. at One New

York Plaza.


Table 2: Manhattan Office Market

Market Occupancy Asking Rent Inventory (sq. ft.)

Midtown 89.9% $ 66.34 241,464,881

Midtown South 93.1% 51.97 64,941,188

Downtown 92.0% 40.28 84,856,334

Total 90.9% $ 59.60 391,262,403

Source: Cushman & Wakefield, Q1 2013

REIT vs Market Performance

REITOccupancy vs Market

(basis points)

BPO 290

BXP 190

ESB -1390

SLG 320

VNO 500

Average -018

Average ex-ESB +325

Table 3: REIT Performance compared to Market


– 4 –

However, Brookfield has still to find a new tenant for Nomura Holding’s 800,000 sq. ft.

space at Brookfield Place (as it renamed the World Financial Center).

In 2013, Brookfield will have 398,000 sq. ft. of space expiring in Midtown, and 3,442,000

sq. ft. in Lower Manhattan, at average rents of $34.00 and $35.00 per sq. ft., respectively.

These below market, relatively small spaces should be easy for the company to re-lease.

However, Brookfield will lose a large tenant in 2013, since Nomura Holdings indicated it will

be vacating its 800,000 sq. ft. space at the World Financial Center when its lease expires.

Nomura signed a 900,000 sq. ft. lease in Midtown at Worldwide Plaza (privately owned by

George Comfort & Sons). Re-tenanting that space is already a major priority for Brookfield.

SL Green increased the occupancy levels in its Manhattan same-store operating properties

to 93.8% in 2012 from 93.0% in 2011. During 2012, SLG leased 3.7 million sq. ft. in Manhattan,

of which 3.0 million sq. ft. represented office leases that replaced previously occupied space.

SLG’s mark-to-market rents on these 3.0 million sq. ft. of signed Manhattan office leases that

replaced previously occupied space was 7.5% for 2012.

The highlight of SLG’s leasing activity during 2012 was the signing of Manhattan’s largest

non-sale leaseback office lease, a 1.6 million sq. ft. lease with Viacom for all of the of the

office space at 1515 Broadway. In addition, SLG fully leased up 100 Church Street with the

485,000 sq. ft. renewal and expansion of New York City.

Boston Properties leased 246,000 of its 989,000 sq. ft. development at 250 West 55th

Street in December 2012 to law firm Kaye Scholer. The building’s floorplates and layouts

are designed to meet the needs of law firms, BXP has stated publicly. Including this new

lease, the development property is now

46% pre-leased. BXP said it expects the

building to open in late 2013, and Kaye

Scholer said it expects to move into the

office sometime in mid-2014.3 BXP does not

provide annual leasing figures for its existing

portfolio. However, BXP appears to have

incurred leasing vacancies of 13,227 sq. ft.

of its Manhattan office space in 2012. Since

BXP does not provide this figure directly,

it can be derived through other figures

provided by the company. BXP began

2012 with 332,757 sq. ft. of scheduled lease

expirations in Manhattan, and 184,820 sq. ft.

of vacant space. It ended 2012 with 530,803

sq. ft. of vacant space.4 By subtracting that

change in vacant space from 2012 scheduled

lease expirations, the 13,277 loss leased


Portfolio Rent Performance

REIT Average Rents / sq. ft.

BPO 32.84

BXP 88.44

ESB 39.99

SLG 55.17

VNO 60.29

Average $ 53.28

Average ex-ESB $ 54.38

Table 5: REIT Portfolio Rents as of December 31, 2012

(ESB as of September 30, 2011)

Manhattan Office Market 2012 REIT Leasing Activity

REIT Leased (sq. ft.)

BPO 2,116,000

BXP 304,105

ESB na

SLG 911,651

VNO 1,950,000

Total 5,281,756

Table 6: Leasing Activity(BXP estimated from company filings)

REIT Owned & Managed (sq. ft.) Market Share (% sq. ft.)

Brookfield Office (BPO) 18,345,000 4.7%

Boston Properties (BXP) 7,415,580 1.9%

Empire State Realty (ESB) 5,907,042 1.5%

S.L. Green (SLG) 24,372,379 6.2%

Vornado (VNO) 20,901,000 5.3%

Total 76,941,001 19.7%

Table 4: REIT Manhattan Office Market Share

3BXP annual report; Kaye Scholer press release - http://www.kayescholer.com/news/press_releases/Kaye-Scholer-Signs-Lease-for-its-New-York-Office-Building-19December20124Not including Two Grand Central Tower, which was sold in 2011.

sq. ft. figure is derived. However, BXP did

not report the new rents it received for the

space, or what T&I it paid. In 2013, Boston

Properties has Manhattan scheduled leases

expirations of 61,886 sq. ft. at average rent

of $86.20 per sq. ft. Through mid-2013,

BXP has signed several leasing deals above

$100 per sq. ft. in 510 Madison Avenue, to

hedge fund tenants who require less floor

space than traditional law firms and financial

services tenants. The high end office building

features a private spa and swimming pool for

executives.

Sustainability and Climate Change

The awareness of corporate responsibility

to environmentally sustainable practices

is shared by the four major REITS. Case

in point, as one of the largest owners and

developers of office properties in the

United States, BXP said it “actively works

to promote our growth and operations in a

sustainable and responsible manner across

its five regions.” BXP said that its focus is

on sustainability initiatives for the design and

construction of new developments, while also

working to improve the operation of existing

buildings and internal corporate practices.

Sustainability initiatives are centered on

energy efficiency, waste reduction and water

preservation, as well as making a positive

impact on the communities in which the REIT

conducts business.

Brookfield also has a rigorous sustainability

program. In 2012, Brookfield secured 16 new

LEED certifications. Among the properties

certified is the Grace Building on Bryant

Park. The REIT also has a successful and

expanding electric vehicle charging station

program. In 2012, 18 charging stations

were installed throughout North America to

reach 35 in total. Another 10 stations will be

installed in 2013.

Following Hurricane Sandy, Brookfield

reported minimal collateral damage to its

Lower Manhattan office portfolio and all


properties in Lower Manhattan were fully operational by November 17. However, Sandy

left a wake of destruction, leaving hundreds of thousands without homes and displacing

businesses throughout the Tri-State area. Brookfield aided the Sandy Relief efforts by:

• Providing free office space in 250 Vesey Street to small businesses and nonprofits

displaced by Sandy

• Coordinating two volunteer days through the Stephen Siller Tunnel to Towers

Foundation to facilitate the relief efforts on Staten Island, attended by over 75

Brookfield employees.

• A $100,000 donation to the Mayor’s Fund to Advance New York City’s dedicated

Sandy relief fund.

Likewise, SLG faces possible risks associated with the physical effects of climate change.

While the REIT acknowledges that it “cannot predict with certainty whether climate change

is occurring and, if so, at what rate” it recognizes that “the physical effects of climate change

could have a material adverse effect on its properties, operations and business.”

Manhattan Office Transactions

Overall, REITs were net sellers of property during 2012, as measured by size. The total

Manhattan office space controlled by REITS decreased to 71,033,959 sq. ft. at the end of

2012 from 72,366,683 sq. ft. in 2011.

Just outside of Manhattan, SL Green sold its 1.5 million sq. ft. One Court Square tower in

Long Island City, Queens for $481.1 million to Waterbridge Capital. Within Manhattan, SL

Green sold its fee interest at 292 Madison Avenue for $85.0 million. SLG also sold a 49.5%

partnership interest in 521 Fifth Avenue at what the company stated was an implied gross

valuation of $315.0 million, or $685 per sq. ft. on the 460,000 sq. ft. building. The transaction

at 521 Fifth Avenue allowed SLG to realize a relatively quick gain of $19.4 million, as in

January 2011 SLG had bought out a JV partner in the building in a transaction that valued

the building at $492 million, or $502 per sq. ft.

In December 2012, SLG acquired a 35.5% interest in 315 West 36th Street, a 147,619 sq.

ft. office building at a gross purchase price of $45.0 million. Also in December 2012, SLG

– 5 –



– 6 –

acquired a 68,000 sq. ft. mixed use retail,

office and residential building at 131-137

Spring Street in SoHo for $122.3 million,

or about $1,799 per sq. ft. (the high price

per sq. ft. represents the premium for retail

space in SoHo).

Vornado has aggressively increased its

focus on retail property in Manhattan, while

remaining a major owner of office space.

Vornado’s acquisition of the retail portion

of 666 Fifth Avenue was arguably one of

New York’s deals of the year in 2012. In

December 2012 Vornado acquired a retail

condominium in the building (at the corner

of 53rd Street) for $707,000,000 in cash. The

property has 126 feet of frontage on Fifth

Avenue and contains 114,000 sq. ft., 39,000

sq. ft. in fee and 75,000 sq. ft. by long-term

lease from the an office condominium, which

is 49.5% owned by Vornado.

VNO increased its investment in a

massive residential project, Independence

Plaza, located in Manhattan’s Tribeca

neighborhood. On December 21, 2012,

VNO acquired a 58.75% interest in the

property by buying one of the equity

partners’ 33.75% interest for $160,000,000,

exercising a warrant for 25% of the equity

and contributing the appreciated value

of its interest in the subordinated debt as

preferred equity. This transaction values the

property $844,800,000.

Boston Properties did not purchase or sell any New York office properties during 2012.

However, it did add a building from its development pipeline into service. On April 30,

2012, BXP completed and fully placed 510 Madison Avenue into service. The building, on

the corner of East 53rd Street, has approximately 356,000 net rentable sq. ft. In the start of

2013, Boston Properties has shifted to selling assets. “We are in the market selling assets

right now, and in 2013 we could sell a billion dollars or more,” Boston Properties president

Douglas Linde said on a conference call to analysts in the call, noting that the firm sold 125

West 55th Street in Manhattan. In June 2013, BXP put its 1.2 million sq. ft. Times Square

Tower on the market for a reported $1.2 billion asking price. In May 2013, Boston Properties

sold a 40% interest in the GM Building for a reported $1.4 billion to the Zhang and Safra

families in a transaction valuing the building at $3.4 billion, about $1,880 per sq. ft.

These recent transactions can be used as benchmarks to analyze REIT portfolios by

providing a guide of values per sq. ft. While individual property values will vary, this per sq.

ft. metric can be applied across an entire portfolio to provide a bird’s eye view of value.

Value of Manhattan Office Holdings

Applying market information from comparative sales to an income capitalization analysis is

a powerful way to estimate the value of the REITs’ Manhattan office holdings. Comparative

sales report information about recent market transactions can be used to determine the

value of other properties. Typically private information, such as a capitalization rate (cap

rate) or the current yield on a property, is occasionally divulged in market sales. Since

property sales are often reported (or easy to compute) on a per sq. ft. basis, that price mark

represents a property condition, location, income, risk, and upside.

The comparative sales approach, when combined with income capitalization can provide

an accurate depiction of property and portfolio value. Cap rates are the current yield on a

property, determined by dividing net operating income (NOI) by the market price or value.

Backing into a market value, the income capitalization method divides NOI by an appropriate

cap rate to determine a property price.

Cap rates differ among property types and markets, but as of mid-year 2013, cap rates for

Class A Manhattan office space were in the 4.0% to 5.0% range, while Class B space was in

the 5.0% to 7.0% range. Just as a junk bond carries a high yield, higher cap rates can signify

higher risk, while lower cap rates are typically associated with core, stabilized properties.5

New York, as usual, offers an exception, as office investors may be willing to accept a lower

cap rate due to high vacancy or other factors in the short term if they think they can quickly

lease the property or increase rents on near-term lease expirations.

A valuation based on a 5.0% cap rate would value the GM Building at $5.171 billion,

compared to when BXP acquired the property in a $3.95 billion transaction in 2008. But this

cap rate analysis does not always compare to the market. As noted above, BXP sold a 40%

stake in the GM Building for a reported $1.4 billion, valuing the building at $3.4 billion, which

is a value of approximately $1,880 per sq. ft.6

When used together, such as in the Vornado and BXP examples below, it is possible to see

how different cap rates, when applied to NOI, result in different values per sq. ft., providing

a basis for reviewing comparable sales.


5Of course, as an asset class, real estate differs from bonds significantly, since real estate can provide long-term capital appreciation, as opposed to a return of par value.6FFO = Net Income + Amortization & Depreciation – Gains from Sale of Real Estate.

399 Park Avenue & Citigroup Center

Applied to financials Vornado provides for

its New York office holdings,7 a 5.0% cap rate

results in a valuation of $15.4 billion or $882/

sq. ft. A more aggressive 4.0% cap rate

results in a portfolio value of $19.3 billion, or

$1,103/sq. ft.8 With recent investment sales

in the $700+ per sq. ft. range, this may be a

fair assessment, even with the low cap rate.

While Boston Properties does not provide

the same level of detailed information as

Vornado, BXP does breakout NOI for its

Manhattan office portfolio. An applied cap

rate derives a portfolio valuation. The same

5.0% cap rate applied to BXP generates a

value of $6.4 billion or $1,012/sq. ft.

Taking the portfolio values from Table

12 and subtracting mortgage debt (Table

1) provides a net asset value (NAV) for the

Manhattan office holdings of the REITs. This

net asset value is the equity that a portfolio

level investor would have in the aggregated

properties.13

The values in Table 13 show the implied

leverage of the REITs’ Manhattan portfolios,

based on an estimated value per sq. ft.

Using the valuation in the top left cell as an

example, if BPO’s Manhattan office portfolio

is valued at $400 per sq. ft., it would have a

total value of $6.3 billion (Table 12), a loan-

to-value (leverage) of 55% (Table 13).

As observed previously, the West Side,

Park Avenue, and Penn Station are all

favored development areas, as indicated by

investment activity by the four REITs.

Vornado has publicly argued for the

upzoning of Park Avenue to allow for bigger

buildings. Additionally, both Vornado and

Brookfield have substantial development


– 7 –


Cap Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

Value ($B) $ 25.7 $ 22.1 $ 19.3 $ 17.2 $ 15.4 $ 14.0 $ 12.9

NOI Multiple 33.3 28.6 25.0 22.2 20.0 18.2 16.7

FFO Multiple 31.2 26.7 23.4 20.8 18.7 17.0 15.6

NOI $ 1,471 $ 1,260 $ 1,103 $ 908 $ 882 $ 802 $ 735

Table 9: Vornado’s New York Valuation per sq. ft. (2012) 12

Vornado’s New York Office reported financials

Description 2012 Annual

Net Income $ 573,996,000

+ Depreciation & Amortization 252,257,000

- Gain from sale -

Funds From Operations (FFO $ 826,253,000

Table 8: Vornado’s New York Office 2012 financial performance 10, 11

7VNO’s NYC income data includes a 132,000 sq. ft. Paramus, NJ office building with gross rents of $2.3 million (based on annualized rents of $20.28 @ 87.1% occupancy) in its calculations, amounting to approximately 0.25% of NYC office income.8Based on proportionate owned sq. ft., as Vornado’s 10-K, Note 2, p 173: “Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities.”9NOI based on reported New York Office Revenues minus New York Office Operating Expenses minus General and Administrative expenses. Does not include depreciation and amortization or interest and debt expense. 10Net Income = NOI – (Depreciation & Amortization) – (Interest and Debt Expense).11In this analysis, Vornado’s income from owned office space in New Jersey is included in their New York office financial reporting, since information to separate this out is not available.12Based on proportionate owned sq. ft., as Vornado’s Note 2, p 173: “Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities.” 13Excluding any unsecured, corporate level REIT debt.

2012 Manhattan Office Portfolio

Manhattan Office 2012

Revenue $ 481,844,000

Expenses 160,386,000

NOI $ 321,458,000

Table 10: BXP’s Manhattan Office Net Operating Income (2012)

New York Office 2012

Revenue $ 1,374,984,000

Operating Expenses 602,833,000

NOI $ 772,151,000

Table 7: Vornado’s New York Office 2012 NOI 9

Cap Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

Value ($B) $ 25.7 $ 22.1 $ 19.3 $ 17.2 $ 15.4 $ 14.0 $ 12.9

NOI Multiple 33.3 28.6 25.0 22.2 20.0 18.2 16.7

Value/sq. ft. $ 1,687 $ 1,446 $ 1,266 $ 1,125 $ 1,012 $ 920 $ 844

Table 11: BXP’s Manhattan Office Valuation (2012)

REIT $ 400 $ 500 $ 600 $ 700 $ 800 $ 900 $ 1,000

BPO 6.3 7.9 9.5 11.0 12.6 14.2 15.8

BXP 2.5 3.2 3.8 4.4 5.1 5.7 6.3

ESB 2.4 3.0 3.5 4.1 4.7 5.3 5.9

SLG 9.1 11.4 13.7 15.9 18.2 20.5 22.8

VNO 7.0 8.8 10.5 12.3 14.0 15.8 17.5

Total $ 34.1 $ 41.0 $ 47.8 $ 54.6 $ 61.5 $ 68.3 $ 75.1

Table 12: NYC REIT portfolio value using per sq. ft. comparable


– 8 –

plans for the Penn Station area.

In January 2013, Brookfield commenced development on its 5.4 million sq. ft. Manhattan

West project, located between 31st and 33rd Streets and Eighth and Ninth Avenues by 2013

by launching a platform over the railroad tracks on top of which this mixed-use project will

be built. BPO obtained $340 million of construction financing for the development project.

Vornado began the process of re-tenanting and redeveloping 280 Park Avenue, of which

50% is co-owned with SL Green.

Vornado shelved its plans to redevelop the site of the Hotel Pennsylvania into a 2.8 million

sq. ft. office tower. In its annual report VNO said it is “evaluating other development and

redevelopment opportunities” at the Hotel Pennsylvania, but press and other reports cite a

hold on the project.

Conclusion

Even in the face of economic uncertainty, the demand for New York office property by

major REITs and other real estate investors remains strong. REITs are aggressively acquiring

prime Manhattan office space through both outright purchases and by taking advantage

of creative capital uses, as shown by Vornado’s use of mezzanine debt to partner with SL


Green at 280 Park Avenue. Existing space

is being released at higher rates, and

tenants are signing leases on development

projects, an economic vote of confidence.

More than 11 million sq. ft. of office space

is under development or redevelopment by

the REITs, demonstrating their confidence in

the long term strength of New York’s office

market.

End Notes

Some numbers may differ slightly from

company figures due to rounding.

Net ownership is proportionate to

total shareholder ownership through JV

partnerships or subsidiary holdings, as

reported in securities filings. The method

of identifying holdings by net ownership

percentage is also utilized by Brookfield in

its annual report.

Most notably, as commercial property

values increased in 2012, Manhattan office

REITs shifted into selling gear. Both property

and capital were sold. ■

REIT $ 400 $ 500 $ 600 $ 700 $ 800 $ 900 $ 1,000

BPO 52% 42% 35% 30% 26% 23% 21%

BXP 104% 83% 69% 59% 52% 46% 41%

ESB 25% 20% 17% 14% 12% 11% 10%

SLG 56% 45% 38% 32% 28% 25% 23%

VNO 39% 31% 26% 22% 19% 17% 15%

Average 55% 44% 37% 31% 28% 24% 22%

Table 13: Implied 2012 portfolio leverage (loan to value)

© 2013 The Steven L. Newman Real Estate Institute, Baruch College, CUNY. Do not copy or distribute without written permission. The Newman Real Estate Institute gratefully acknowledges the support of the sponsors who make possible our efforts to promote critical thinking on topical issues for the real estate industry.

The views expressed in the research report are those of the author and not necessarily those of Baruch College, City University of New York, or any of its affiliated organizations, foundations, and sponsors. Please address inquiries to Jack S. Nyman, Executive Director, at:

Baruch College, CUNY137 East 22nd StreetBox C-0120New York, NY 10010

Tel: 646.660.6950 • Fax: 646.660.6951www.baruch.cuny.edu/realestate

William Newman, Founding Chair

Richard Pergolis, Co-Chair

Jack S. Nyman, Executive Director

Emily Grace, Associate Director of Research

Bibliography

Boston Properties, Form 10-K for the Period Ending 12/31/12.

Boston Properties, Supplemental Operating and Financial Data for the Quarter

Ended December 31, 2012.

Brookfield Office Properties, Annual Report for the Period Ending 12/31/12.

Brookfield Office Properties, Supplemental Information for the quarter ended

December 31, 2012.

Cushman & Wakefield, “Marketbeat Office Snapshot Manhattan” Q1 2013.

GlobeSt.com, “Investment Sales Dominate at Boston Properties,” May 1, 2013.

The Real Deal, “GM Building stake sells for $1.4B,” June 3, 2013.

SL Green Realty Corp, Form 10-K, for the Period Ending December 31, 2012.

SL Green Realty Corp, Fourth Quarter Supplemental Data, December 31, 2012.

Vornado Realty Trust, Form 10-K, for the period ending December 31, 2012.

Vornado Realty Trust, Supplemental Operating and Financial Data for the Quarter

and Year Ended December 31, 2012.

Documents

Major NYC REIT Activity & Holdingsbaruch.cuny.edu/realestate/pdf/REIT_whitepaper_fall2013.pdf · 2012, that outperform the overall Manhattan office market of 90.9% (see Tables 1 &