By Matt Tracy
(Reuters) -Several overseas investors were interested in SL Green Realty (NYSE:SLG)'s 245 Park Ave tower before Japanese real estate developer Mori Trust bought half of it, a source familiar with the matter said, an illustration of how some corners of the property market have withstood falling prices.
Office space in Manhattan has sold at steep discounts this year due to rising interest rates, oversupply and remote working. But property experts said prime locations were resilient, such as those convenient for commuters.
"Office assets have faced significant challenges since the onset of COVID-19, but it's worth noting that Class A properties in commutable locations, specifically those close to Grand Central (station), have fared better compared to office in secondary locations," said Ran Eliasaf, founder of Manhattan-based real estate private equity firm Northwind Group.
Monday's deal for 245 Park Ave put a gross value of $2 billion on the property, a small premium to the $1.96 billion SL Green paid HNA Group in September 2022, the source said.
SL Green is selling Mori $500 million in mezzanine debt, and Mori paid cash for its nearly 50% stake, the source said. Mori could not be reached for comment.
The Park Avenue building was almost 84% occupied at the end of the first quarter, according to a Barclays (LON:BARC) report on Tuesday, an attraction for foreign investors. In addition, the REIT in April refinanced $500 million in debt on a nearby property against market expectations.
Market participants, however, said that the worst was yet to come for lower quality offices, both in New York City and around the U.S. Vacancies rose for lower quality buildings across the country in the first quarter, according to Moody's (NYSE:MCO).
"While SL Green Realty Corp's sale of 245 Park Avenue is a positive sign for NYC office investors, it is important to note that one transaction does not accurately reflect the overall state of the market," Eliasaf said."
Many offices this year have sold at less than their initial purchase price or even defaulted, particularly in New York, Washington, D.C., San Francisco and Los Angeles, as borrowers struggle to keep up on payments and refinance debt.
"We’re still not in a deep crisis, and if you continue really starting to see more defaults towards the fall, you’ll see more people rushing to sell and you are going to see deeper discounts," said Mayra Rodriguez Valladares, a bank and capital markets risk consultant at MRV Associates.