NYC property market still hot even as private equity exits

The private equity and other pooled funds that have made century-old buildings some of the hottest properties in Manhattan have been cashing out at double the rate of a few years ago, but strong buying from other investors has assuaged fears that the market is peaking.

The institutional investors and real estate investment trusts that are taking private equity’s place indicate a comfort level for older buildings that have been renovated in Midtown South, the district accounting for many of the transactions.

These buildings are now considered Class A, whereas a decade ago they were not. The arrival of Apple Inc (AAPL.O), Facebook Inc (FB.O) and Google Inc (GOOGL.O) over the past decade has made Midtown South, which extends for about 20 blocks south of 34th Street, the mecca for technology, advertising and media companies.

The rush by funds to acquire and renovate the district’s warehouses and commercial “showroom” buildings is largely over as the better properties along the Fifth Avenue and Park Avenue South corridors have been fixed up and sold.

“Manhattan has been pretty picked over,” said James Murphy, an executive managing director of commercial real estate company Colliers International.

Demand is so strong that the availability of office space in Midtown South was about half the U.S. average in the second quarter.

The market for the bare-brick, open-space layouts that characterize the district took off in 2011, when Google paid $1.9 billion for a 2.9 million square-foot building in the Chelsea neighborhood there.

Since then, Midtown South rents have shot up to record levels nearing $75 a square foot, Murphy said. That is still less than what the glass and steel office buildings fetch in Midtown but pricier than downtown, where demand is more scattered.

Leasing and sales have been strong over the past 18 months. Some institutional and even foreign investors are buying significantly renovated buildings despite their less attractive locations in the middle of a block.

“That’s something you really have not seen before,” Murphy said.