Institutionals Office sector in US metropolises

The US office real estate market is busy shaking off the crisis. In the large metropolises in particular, there are signs of recovery. In Manhattan, for example, rents are starting to rise despite high vacancy rates. The reason for this is the high quality standard that tenants have in terms of space, location and flexibility. As early as the middle of this year, rents were able to exceed the cyclical high reached during the pandemic.¹ The largest contracts were concentrated on brand-new and recently renovated spaces, which has prompted the landlords of premium spaces to increase prices. Most recently, top rents in New York’s Manhattan district rose by 4.7% to 75.39 US dollars per square metre compared to year-end 2021, and total rents rose by 4.3% to 72.03 US dollars per square metre by mid-year.²

A similar picture can be seen in Washington, D.C. After a rather weak start in the first quarter of this year, the US capital’s office real estate sector was stronger again in the second quarter. As in New York City, the demand for high-quality space is driving top rents up.³ For example, the

average top rent for office space by mid-2022 amounted to 78.70 US dollars per square metre, which is equivalent to a slight increase compared to the end of 2021. And this despite increasing vacancy rates.⁴

This is a very positive trend, considering that the pandemic had severely affected the office real estate market in the US. On the other hand, higher interest rates can have a dampening effect on the gradually increasing transaction dynamics. It’s no coincidence that the Association of Foreign Investors in Real Estate in its recent report stated that office investments in the post-COVID era are likely to require a higher level of precision than in previous cycles.⁵ As Commerz Real recently concluded two major deals in the US office real estate segment and, on top of that, opened its first US office in 225 Liberty St. in Lower Manhattan, this precision can be assumed.

Commerz Real also knows about a rather anticyclical behaviour of its tenants. In the numerous lease negotiations that took place during the pandemic, tenants have consistently decided to keep the original spaces. As a reason, they named first-class spaces in the best location with outstanding amenities, good transport connections and short commutes to the office. This in turn confirms Commerz Real’s strategy to rely on first-class properties of class A and to consider properties of classes B and C if they are suitable for renovation or repurposing.

The US real estate portfolio in hausInvest, Commerz Real’s open-ended real estate fund, is an impressive indicator of this. Six of the total of twelve properties are office properties. In New York, Commerz Real owns 222 East 41st Street near the Grand Central Terminal in Midtown. There, a New York University medical centre, the NYU Langone Health System, occupies more than 36,000 square meters of the building. The lease runs until October 2046. The office real estate portfolio also includes The National in the central Loop business district in Chicago and the Dexter Station in Seattle, which is used by Facebook. The latest additions are the 1900 N St. NW building in Washington, D.C. acquired in June as well as the newly renovated 100 Pearl Street office tower in New York’s Financial District, just a few minutes’ walk from the new Commerz Real headquarters, originating from a spectacular deal in the previous year.

Commerz Real is not concerned that the vacancy rate for offices there has risen to a record high of 18.5 percent.⁷ Rather, it is convinced that there will always be demand for the right location and the right quality. This is demonstrated not only by the long-term fully leased office portfolio, but also by the rest of hausInvest’s US portfolio, which also includes four hotels worth 914 million US dollars and two shopping centres worth around 158 million US dollars.

This is by no means the end of the story. Visiting New York on the occasion of the opening of Commerz Real’s US office⁸ gave fund management the opportunity to take a look at further office and residential properties in Midtown Manhattan and Brooklyn. As an experienced buyer, Commerz Real looks at 3,000 to 5,000 options worldwide every year. Acquisitions are only made if they fit into the differentiated and diversified portfolio. The purchase price is only one factor of many, as significant value corrections are barely expected in first-class locations. Higher interest rates may deter other players. In addition, there is liquid equity: thanks to a daily cash flow, cash in the fund of around 2.3 billion US dollars, primarily in hausInvest, and a solid currency hedging and forecasting strategy, deals can be concluded relatively quickly – for example, when it comes to the purchase of the first US residential properties in the near future.