Weekly News & Capital Markets Perspective

November 17, 2011

This week’s perspective is provide by Jim O’Connell: Jim O'Connell

ARE YOU KIDDING?

Not that I have anything against New York or the Empire State Building but come on!  Maybe part of the problem is me being based in the Midwest and living and working everyday with the value disparities between Midwest markets and the likes of New York, Washington DC and all the other big first tier markets.  But given that we all do business using US currency, at what point do investors finally take notice of the difference between the two worlds in terms of pricing and returns?

Reading this week’s Property Report in Wednesday’s WSJ, their cover story is about how the owners of the Empire State Building may use it as an anchor piece of a new REIT.  That alone really wouldn’t be much of a news item.  But what caught my eye was that according to a recent valuation, with the inclusion of a recent $550 million renovation, this iconic old building’s value is an estimated $1.65 billion with a “net annual income of $63 million” according to Commercial Mortgage Alert.  I know that the $63 million estimate may not be the complete story on the property’s NOI but using the numbers from the article, the 102 story landmark’s estimated value is a 3.8 cap rate on an 80 year old multi-tenant property.  Is there that much extra safety in the New York City location to take a return that much lower? 

I guess the answer is yes for many but for those of you looking for good properties in relatively stable markets don’t ignore that you can find cap rates approaching double digits for similar investments in the second tier cities in our country’s heartland.  As all those markets improve with the economy there will be a growing number of compelling opportunities that should merit notice . . . don’t be too quick to dismiss them.

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