A record-breaking investment sales market is emerging as this year's top story. In a six-month period ending May 31, sales of properties exceeded $6.1 billion in Manhattan alone, reports Real Capital Analytics, and more than a dozen other markets broke records for volume in the first quarter.

Would-be sellers are likely to fuel even more deals this year, as rising interest rates and an uptick in leasing foreshadow the end of a sellers' market. “The investment market is off the charts and the leasing market has heated up,” confirms Bruce Mosler, president of Cushman & Wakefield's U.S. operations.

Investments in the Future

Through April, sales volume of properties valued at $5 million or more was running 40% ahead of last year despite the 10-year Treasury yield increasing 80 basis points, reports Real Capital Analytics. Greg Vorwaller, president of investment properties for CB Richard Ellis, says increases in medium- and long-term Treasury rates may actually boost sale volumes.

How can that be the case? Climbing rates have spurred many clients who had been “fence sitting” to place their properties on the market out of concern that interest rates may continue to rise, according to Vorwaller.

A recent surge in listings confirms Vorwaller's observations, with $12 billion in commercial properties placed on the selling block in April alone. But Bob White, president of Real Capital Analytics, believes the increased supply won't cause prices to decrease significantly. “There's so much pent-up capital that it looks like the buyers are going to absorb that [supply] and the sellers aren't going to lose too much of the advantage they've had in the market.”

White expects acquisitions by private investors, who are more likely to rely on debt, to fall off as interest rates rise. Institutions will then emerge as the dominant buyers. White predicts the preference institutional buyers have shown for high-quality properties will sustain high pricing of Class-A buildings while tempering demand for less well-located assets.

Office prices broke records in more than a dozen markets in the first quarter, White says. Recent high-dollar sales include the $235 million purchase of the Lipstick Building at 885 Third Ave. in New York, with CBRE representing the buyer, a joint venture led by Tishman Speyer Properties.

However, nothing this year is likely to top the $1.4 billion Macklowe Properties paid last year for the 1.8 million sq. ft. General Motors Building in New York in a deal brokered by Eastdil Realty.

In addition to nosebleed prices on select properties, overall investment sales volumes are reaching new heights in 2004. The first quarter's $11 billion in trading of office properties valued at $5 million or more marked a 30% increase over deal volume a year ago, reports White. “This market is doing nothing but gaining momentum.”

Tenants Feel a Sense of Urgency

Brokers say tenants are anxious to lock in low rental rates at the bottom of the market cycle, and activity is eating away at surplus space. Mitch Rudin, CBRE's president of leasing, says the opportunity for exceptional leasing deals will soon begin to close. The office vacancy rate fell from 16.7% at the end of 2004 to 16.5% in the first quarter, reports CBRE. Rudin predicts that trend will halt rental rate reductions later this year. “But not until 2005 will we see rental rates recover, and not until 2007 and 2008 will we be moving to equilibrium.”

Two deals in the first quarter have already topped the largest lease of 2003, in which News Corp. took 794,000 sq. ft. at 1211 Avenue of the Americas in New York. In February, Bank of America inked a deal for 1.8 million sq. ft. at 1 Bryant Park in New York. In January, Pricewaterhouse-Coopers leased 800,000 sq. ft. at 300 Madison Ave. in New York.

Off to a Brisk Start

The vigorous pace of investment activity boosted revenues at the nation's brokerages in 2003 despite a slow start in leasing. Cushman & Wakefield's leasing and investment sales totaled $40.2 billion in 2003, earning the No. 2 post on NREI's annual brokerage survey with one of the company's highest-grossing years ever. Cushman's Mosler says his company experienced a phenomenal start in 2004, with revenues through April up 22.8% year-over-year.

Those gains were overshadowed when CBRE's merger with 2002 frontrunner Insignia/ESG doubled the combined company's volume to $83 billion. This year, Vorwaller boasts that CBRE's investment and leasing activity in the first quarter was up 50% over last year, even before adding Insignia's business.

TOP 3 OFFICE LEASING DEALS OF 2004 (AS OF EARLY MAY)

Rank Building Location Size of Lease Tenant Name Tenant Rep
1 Bank of America Tower New York City 1.1 million sq. ft. Bank of America Corp. Jones Lang LaSalle
2 300 Madison Ave. New York City 800,000 sq. ft. PricewaterhouseCoopers Lou Varsames
3 World Financial Center, Tower A New York City 460,000 sq. ft. Cadwalader, Wickersham & Taft LLP Studley
Source: CoStar Group Inc.