Vacancies Raise Risks and Lower Value for Landlords
The New York Times reports: With the economic slump continuing, 1999 K Street, a new 12-story building in Washington's CBD was sold this month in an all-cash deal for over $200 million. The per-square-foot price was one of the highest ever paid in the nation’s capital. What makes the building especially valuable is the fact that it is fully leased for the next 15 years.
Meanwhile in Seattle, 1301 2nd Avenue sold for a drastically lower price per square foot, reflecting the dismal state of the Seattle market, where no major office buildings had sold in nearly two years. But there was another important reason: more than half of the building may remain vacant.
When the real estate market was hot, investors coveted space that was vacant, or would soon be vacant, because rents were steadily rising. But now, vacancy detracts from the value of a building.
The owners of One California Plaza, a 42-story building at 300 South Grand Avenue in Los Angeles, are also taking a haircut because of vacant space. The building is in contract to be sold to a New York company, Metropolitan Real Estate Investment, for roughly $225 million, or about $225 a square foot, according to Real Capital Analytics, a commercial real estate research company. The seller is Macquarie Office Trust, an Australian company, which paid $325 a foot for an 80 percent stake in the building in 2006. One-fifth of the building is unfilled, and a major tenant, the law firm of Skadden, Arps, Slate, Meagher & Flom, has not decided whether to renew leases that are expiring in a couple of years.
To clinch a deal on vacant space, the landlord must offer concessions like months of free rent and help in creating or refurbishing the offices. "We’re seeing the largest concession packages I’ve seen in the last 25 years," said Mary Ann Tighe, the chief executive of the New York region for CB Richard Ellis. "When you’re calculating what it costs to buy something, concession packages have to be part of that calculation."
Additional expenses will be accrued in converting a building that was designed for one tenant, like the Washington Mutual Center in Seattle, to multi-tenant use, said Robert M. White Jr., the president of Real Capital Analytics.
View the full article on The New York Times: Vacancies Raise Risks and Lower Value for Landlords
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