SL Green Offloads Manhattan Office Condo for $101M
SL Green has sold the 132,542-square-foot office component of 609 Fifth Avenue in Midtown Manhattan.
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609 Fifth Avenue. Image from Google Street View.
SL Green has agreed to the $100.5 million sale of the 132,542-square-foot office component of 609 Fifth Avenue, a 13-story, 168,394-square-foot building in Midtown Manhattan. The REIT expects the deal to close later this month. The buyer, though unidentified, is a domestic investor.
SL Green, Manhattan’s largest office landlord, sold the retail portion of the same building back in June 2020 for $168 million, Commercial Observer reported. London-based Reuben Brothers acquired the 29,000-square-foot component, home to a three-story flagship Puma store and a luxury clothing retailer.
609 Fifth Avenue’s office space is currently vacant. The property was leased by WeWork in 2018 for $85 per square foot, TheRealDeal noted, but the coworking giant terminated the lease in 2021, paying a reported $11.4 million settlement to SL Green.
Constructed in 1925 with renovations planned for this year, 609 Fifth’s 11 stories of office space have floorplates between 5,209 and 15,193 square feet. SL Green had invested in capital improvements in recent years, replacing the building core and adding elevators, also shifting the lobby from Fifth Avenue to 49th Street.
Manhattan’s Vacancy Problem
Office vacancy has been elevated since the beginning of the pandemic, registering at 15.7% across the country, according to CommercialEdge’s May national office report. While Manhattan’s direct availability was tighter than the national figure — 14.3%, per a first-quarter report from Avison Young — vacancy in high-value, high-rent markets like Manhattan hits harder due to significantly higher vacancy costs.
Despite the risk factors, however, investors are confident the market will return to some semblance of normality. The Avison Young report shows total transaction volume for the first quarter hit $3.8 billion, the highest level for a single quarter since late 2018, and nearly two-thirds of last year’s total investment volume. That said, while leasing activity is increasing — a practically inevitable outcome for the country’s largest office market — it will still take some time before market fundamentals return to normal.
What are the benefits of investing in commercial real estate?
Investing in commercial real estate can offer a variety of tax benefits, such as accelerated depreciation, mortgage interest deductions, and reduced tax burdens for beneficiaries. For instance, if an investor buys a commercial property for $3 million, and its value increases to $4.5 million before the investor passes away, the investor’s beneficiaries will only need to pay taxes on the $1.5 million that the property has appreciated, not the entire $4.5 million sale price. This can save an investor’s heirs hundreds of thousands or even millions of dollars.
For more information, please visit www.commercialrealestate.loans/blog/the-top-10-tax-benefits-of-investing-in-commercial-real-estate.
What are the risks associated with investing in Manhattan office condos?
Investing in Manhattan office condos comes with a few risks. The first is the elevated office vacancy rate, which was 14.3% according to a first-quarter report from Avison Young. This is higher than the national vacancy rate of 15.7% reported in March by data provider Yardi Matrix. Additionally, vacancy costs in high-value, high-rent markets like Manhattan are significantly higher due to the higher vacancy costs.
The second risk is the potential for distressed office assets. Reports of distressed office assets are on the rise across the city, with one of the largest — Brookfield Asset Management’s 1.4 million-square-foot skyscraper at 175 W. Jackson Blvd. — being taken over by LNR Partners, the tower’s $258 million CMBS loan’s special servicer, as reported by BisNow in March.
Finally, there is the risk of increasing office rents and concessions. Office rents have climbed significantly since last year, averaging $42.42 per square foot, compared to $40.48 in the first quarter last year, an increase of 4.8% over the year. At the same time, concessions — even for high-end space in Fulton Market and in the West Loop — are growing. Though trophy assets in these submarkets have enjoyed high demand, office deliveries slated for this year are likely to boost any potential tenant’s position in finding new space.
What are the current trends in commercial real estate financing?
The commercial real estate landscape has undergone — and is regularly undergoing — a great deal of change. This has been driven by a number of factors, such as the rapid rise of e-commerce, long-term systemic issues in the retail sector, the growth in popularity of coworking space, needs of the Millennial and Generation Z workforces, and shifts in market demographics and household formation.
Debt funds, which generally consist of private equity firms, sovereign wealth funds, pension funds, and similar institutions, are growing as an alternative source of commercial real estate debt, especially due to their additional flexibility and ability to move more quickly than traditional lenders. In 2017, U.S. and North American debt funds originated $32.3 billion of debt, though not all of this is in the United States, as some of these debt funds are invested in CRE debt in other markets, such as Canada and Europe.
In terms of loan products, borrowers can expect to find a variety of loan products, such as fixed-rate loans, adjustable-rate loans, bridge loans, and mezzanine loans. Fixed-rate loans are typically the most popular option, as they offer the most stability and predictability. Adjustable-rate loans are also available, and can be beneficial for borrowers who are looking for a lower initial rate. Bridge loans are short-term loans that are used to bridge the gap between the purchase of a property and the permanent financing, while mezzanine loans are used to finance the purchase of a property when the borrower does not have enough equity to do so.
What are the advantages of SL Green's sale of the Manhattan office condo?
SL Green's sale of the Manhattan office condo has several advantages. First, the vacancy rate in Manhattan is lower than the national average, at 14.3%, according to a first-quarter report from Avison Young. This means that the sale of the office condo is likely to be more profitable than in other markets. Additionally, the sale of the office condo is likely to be a boost to the local economy, as it will bring in more capital and create more jobs. Finally, the sale of the office condo is likely to be a sign of confidence in the market, as total transaction volume for the first quarter hit $3.8 billion, the highest level for a single quarter since late 2018, according to Avison Young.
What are the potential tax implications of investing in commercial real estate?
Investing in commercial real estate can have a variety of tax implications. One of the most important things any commercial real estate investor should do is find a qualified tax professional who knows and understands the field. Working with a professional can help you reduce your levels of stress and use some of the best strategies when it comes to taxes and your property.
When it comes to taxes, there are a few helpful strategies for reducing taxes for commercial real estate investors. Wages paid to employees or independent contractors are tax deductible on Schedule E of the tax return. Additionally, any professional fees incurred, such as legal fees, property management fees, and accounting fees, are also tax deductible.
It is important to note that if you work with independent contractors and you pay them more than $600 in a single calendar year, you will have to send and file 1099s for them, since you qualify as a professional commercial real estate investor.
For more information on the potential tax implications of investing in commercial real estate, it is best to consult a qualified tax professional.