Boston Properties' $1 billion purchase of a Park Avenue office tower in Midtown Manhattan was more than the nation's biggest deal of 2002.
At $679 per square foot, it was the highest price many real estate industry professionals could recall for an office building. But despite the stagnant economy, no gasps came from onlookers. There was only acknowledgement that prices are up and bound to go even higher for the best buildings in the best markets around the country as investors shift money to real estate.
In Baltimore, a few trophy office buildings sold in the first four weeks of this year, pushing the dollars spent last month to nearly the total for all of last year.
"There's been a confluence of events that's been a real boon to real estate," said Warren Dahlstrom, a senior director in the financial services group at Cushman & Wakefield real estate company in Washington. "But there are not that many good markets. There are a ton of bad markets. That's the dark cloud eclipsing the silver lining."
Possible war in Iraq and a persistent economic downturn have not dampened sales in Washington, New York, Boston and Chicago, the best markets, he said.
They have benefited most from a rush to real estate from sagging stocks by wealthy private buyers, institutional investors such as pension funds, and overseas funds newly encouraged to spend in the United States.
Also fueling the trend are historically low interest rates that make borrowing cheap.
The competition has sent buyers sifting through some secondary markets like Baltimore for a few buildings that are filled with well-known tenants whose long-term leases provide steady income.
January's biggest sales were those of the Candler Building in the Inner Harbor, which Boston Properties sold for $65 million to HRPT Properties Trust, and the First Union Tower, at Baltimore and St. Paul streets, which Crow Family Holdings and partners sold for $50.2 million to Harbor Group International.
Smaller suburban buildings dominated sales last year in the Baltimore region.
Philip C. Iglehart, managing director and principal of investment sales at Colliers Pinkard real estate company in Baltimore, brokered the sale of the Candler Building and said that, after a spate of sales, there are not too many "trophy" buildings left that are being sought by investors.
The number is not likely to increase until rents increase, and that is not expected until the economy improves and businesses again lease more office space, he said.
"How many more [sales] there will be in Baltimore, I don't know," Iglehart said. "We're not a D.C. or a New York. We need to wait and see. There are a lot of terrific buildings that don't have the level of occupancy required to generate the values the buildings are really worth."
The vacancy rate among the Baltimore region's offices is about 14.6 percent, compared with 6.2 percent in the high-flying Washington market and 16 percent in the depressed Northern Virginia market.
Despite a 15 percent vacancy, Boston is achieving record sales prices. It is considered an exception in real estate circles, because buyers believe the buildings will lease again soon, brokers said.
Generally, real estate professionals consider a 10 percent vacancy rate a healthy market for leasing and construction of new buildings.
Even with Baltimore's mediocre leasing environment, sales prices in the Baltimore region have been rising, according to CoStar Group Inc. real estate information. In 2001, about 90 sales were valued at $182.2 million, for an average of $81.26 a square foot.
That compares with $146.97 a square foot nationally.
Last year, the Baltimore region sold 77 buildings valued at $140.4 million, an average of $93.56 a square foot. That compares with $154.79 a square foot nationally. CoStar said sales that occurred late in the year were not included in the total.
Some of the biggest purchases last year in the Baltimore region were made by Corporate Office Properties Trust, which spent more than $100 million on suburban office buildings here and elsewhere. The Columbia-based real estate investment trust has about $200 million in bids out.
Randall M. Griffin, president and chief executive, said that while prices have risen, he is not sure that they will go much higher in the short term. The dearth of properties for sale has led him to make unsolicited offers - many of them for buildings too small to attract the big pension funds.
"There's a benefit to knowing the market," Griffin said. "We're here, people know we can close. ... The problem is the credit analysis of the tenants. There are a lot of properties on the market with terrible-credit tenants."
Tim Hearn, a partner at NAI KLNB Inc. real estate company, said the potential for growth in government- and defense-related companies in the Baltimore-Washington corridor has meant that some buyers are willing to acquire select buildings that are not totally filled in anticipation of leasing them.
Many of those buildings have been bought by Corporate Office Properties Trust, Hearn said. Other short-term owners are expected to sell their buildings within five to seven years, he said, and they will likely attract several bidders when they do. The ones with tenants could fetch top dollar for the region, as much as $200 a square foot, Hearn said.
The competition is not expected to wane in the next year locally or nationally, said Dahlstrom of Cushman Wakefield. Some of the investors will come from outside the United States.
German investors benefiting from changes in the law that improve tax advantages and loosen investing rules should mean an influx of capital this year, he said. They will compete with U.S. real estate investment trusts, individual buyers and pension funds.
Dahlstrom said pension funds, in particular, long have been seeking to increase the amount of real estate in their portfolios so that their assets are diversified from stocks and bonds. They typically seek to hold 10 percent of their capital in real estate, but until the stock market crashed three years ago they had been able to achieve only 4 percent to 6 percent.
Even as some have achieved the 10 percent mark, they are seeking more real estate because of the stable returns, Dahlstrom said.
Those returns have enticed many investors to spend now on more buildings. Boston Properties will continue to look for acquisition opportunities in the markets where the company operates, said Tom O'Connor, a vice president at Boston.
That means investment in New York and Washington.
The Park Avenue building that Boston Properties recently bought, Citigroup's headquarters, "is a very high-quality, extremely well-located building in Manhattan, one of the strongest markets in the country. Rents remain high," O'Connor said.
The competition for other buildings will remain high, O'Connor said.
"There continues to be a lot of capital chasing quality, well-leased buildings in strong real estate markets," he said.
1. First Union Tower, 7 St. Paul St.
Sale price: $50.2 million
Price per square foot: $132
Buyer: Harbor Group International
Seller: Crow Family Holdings and partners
2. Candler Building, 111 Market Place
Sale price: $65 million
Price per square foot: $116
Buyer: HRPT Properties Trust
Seller: Boston Properties
3. 399 Park Ave., New York:
Sale price: $1 billion
Price per square foot: $679
Buyer: Boston Properties
Seller: Citibank