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Wednesday, October 03, 2007


OFFICE LANDLORDS CONTINUE TO RAISE RENTS EVEN AS FLIPPING SLOWS 

Office Landlords Continue to Raise Rents Even as Flipping Slows - New York Times

In Chicago, Tishman Speyer flipped 101 North Wacker Drive as part of its deal with the Blackstone Group.


The flipping craze has slowed down, considerably. So, how to continue maximizing as much revenue as possible? By raising rent. After all, owners now stuck with properties they hoped to sell have to find a way to cover debt service.


In Chicago, for example, rents usually do not budge much. Since February, however, when Blackstone bought Equity Office for $39 billion, asking rents for prime office buildings downtown have spiked, causing sticker shock for tenants whose leases are expiring in the next year or two. In August, Blackstone sold six downtown Chicago buildings from the Equity Office portfolio to Tishman Speyer, the New York real estate company, for about $1.72 billion.

When Equity Office owned the 40-story tower at 30 South Wacker Drive, the asking annual net rent (without electricity and other operating costs) was $17 a square foot, said Joseph Learner, an executive vice president at Studley, a brokerage that represents tenants. “When Blackstone came in, they jumped the price to $25 net,” he said. “Now, Tishman Speyer wants $28.” (Tishman Speyer executives declined to comment.)

The recent rent increases — a phenomenon that some real estate specialists have labeled the Blackstone effect — are not limited to Chicago. Nor was the trend limited to the Blackstone-Equity Office merger and its aftermath, in which Blackstone sold 253 buildings in the Equity Office portfolio for a total of $27 billion, according to CoStar Group, a research company in Bethesda, Md. Some of these buildings were flipped again by the new buyers.

In the first six months of this year, more than half the office buildings that sold for $5 million or more nationwide had been held for less than two years, according to Real Capital Analytics, a New York research company.

As prices escalated, the capitalization rate — the initial rate of return on the buildings — declined, sometimes to levels of only 5 percent or less.

Lenders were often willing to finance 95 percent or more of the purchase in the expectation that far more rent could be wrung out of the space, once existing leases expired. Commercial loans are pooled and sliced into bonds carrying different levels of risk. But these bonds have recently become a tougher sell.



Since most deals were heavily leveraged, many owners are now left with debt service that is not covered by the building’s cash flow. And owners who counted on being able to flip their buildings for a higher price can no longer do so. In recent weeks, building values nationwide have dropped 5 to 10 percent, according to Green Street Advisors, a research firm in Newport Beach, Calif.

Therefore, landlords “have to increase their net operating income — but pretty quickly,” said Kevin Brennan, an executive vice president for Studley in San Francisco.


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