12 Office Titans Dish on Why This Market's Different
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One thing that surprises Boston Properties CEO Owen Thomas about the national office sector is that buildings are selling for record prices, yet rents aren't at peak.
Numbers to chew on: Last week, the sale of 1095 Avenue of the Americas was reported to be in the works for nearly $1,900/SF, while DC's PNC Plaza recently went for $1,075/SF. "Interest rates are what make this cycle different," Owen told moderator Jay Neveloff, a partner at Kramer Levin, during a fireside chat at the Bisnow Office Leasing & Development Expo last week at 4 World Trade Center. (See our previous coverage here.) Development is one of the most interesting places to invest for shareholders, he says, because you can deliver at a lower cost than what older buildings are trading for. Look at markets where technology, healthcare and energy are growing: "Cities with that exposure will do great." Boston Properties owns 45M SF in NYC, San Francisco, DC and Boston.
“This is going to be the greatest market we’ve seen,” says Kilroy Realty CEO John Kilroy (right, a newly minted San Francisco resident, with Allen Matkins partner Tony Natsis, who moderated our "View from the Top" panel). His latest deal, last week, was Viacom inking 180k SF at Kilroy’s Columbia Square in Hollywood. His company has grown from a $3B market capitalization rate to $8.3B today, with properties from Orange County to Seattle. “People said the Internet would reduce office space, but tech is the biggest user now,” says John, citing his firm’s mega transactions with LinkedIn in Sunnyvale, CA, and Salesforce in San Francisco's SoMa. (Fun fact: If John could have another job, he'd compete in foil kiteboarding; Tony would be a high school basketball coach and math teacher.)
Brookfield diversified from a NY-centric office focus to multiple sectors in DC, LA, Houston, Denver, San Francisco, Seattle, and even Mumbai and Shanghai (it has 19M SF in the development pipeline globally, with 10M SF of that in the US), says president Paul Schulman (right, with Columbia Property Trust CEO Nelson Mills). Here, it rebranded its famed World Financial Center to Brookfield Place in a $250M renovation; 3M SF has been leased to Time, BNY Mellon, Hudson's Bay, Jones Day and more. Columbia Property Trust, while still targeting core-plus and value-add assets, is reducing from 32 cities to eight or nine, Nelson says. It likes NYC, San Francisco, Boston and DC. (Real estate and these four cities need to get a room already.) In another life, Paul would be a history teacher and Nelson a world-class sailor.
World Trade Center Properties president Janno Lieber (right, with Jamestown's prez Michael Phillips) reports the $1.6B in tax-exempt bonds that developer Larry Silverstein sold to finance 3 World Trade Center are closed and in the bank. Michael—whose company owns assets like Chelsea Market and Milk Studios and was part of the JV that sold 111 Eighth to Google—predicts that Downtown will densify much like the Meatpacking District and Chelsea did with the High Line.
Cooper Robertson & Partners CEO Alex Cooper, Salesforce.com SVP Ford Fish and ESD president Kurt Karnatz, who moderated our mega-projects panel. Ford says it was critical that Salesforce stay close to transportation in San Francisco, particularly with the number of Millennials in the tech biz. (John Kilroy says Millennials comprise 24% of the overall workforce, jumping to 50% in the TAMI sector.) Its 2M SF campus will be in the heart of San Francisco's downtown. "Even one mile out was too far," he says. "The new workforce is flooding to the cities and wants a sense of community."
The investment market is competitive, says Normandy Real Estate Partners co-founder Jeff Gronning (right, with Rubenstein Partners founder David Rubenstein). "But where the top is, no one knows." His firm is looking to buy non-stabilized assets or those needing redevelopment, which can bring a 7% to 8% yield. He also prefers CBDs, and if he has to step out, it has to be Class-A and near amenities and transportation. David says he's following where multifamily is being built so his firm can invest ahead of the curve.
Blackstone senior managing director Frank Cohen, Clarion Partners head of asset management Craig Tagan and EisnerAmper real estate co-head Ken Weissenberg, who moderated our equity panel. Craig says he's been in the fund biz for 10 years, and its core index initially had 10 competitors—now it's 24. Half of its investors are foreign. "There's diversification, and returns are more compelling than London or Australia," he says. Overall, it's a pretty benign investment environment, Frank says—the economy is growing, fundamentals are strong and vacancies are dropping. He doesn't see why these factors or the push for efficiency should slow down.
Another sign efficiency and collaboration trends won't stop: WeWork is opening yet another office come Dec. 1, this time in Tel Aviv, reports co-founder Miguel McKelvey, the event's closing keynote. This brings the co-working community's locations to 21 in seven cities (including London), with over 15,000 members.