Is a Trophy Building Like a Sports Franchise?

Price Appreciation Trumps Current Income... "A New World Record, The World's Largest Single Office Building Sale
-- The MetLife Building, $1.72 Billion." That's Cushman & Wakefield's full-page advertisement in yesterday's Wall Street Journal (June 8, 2005), trumpeting the building's sale to Tishman Speyer Properties.

That would make the sales price $614 per square foot, based on an NRA of 2.8 million square feet (per MrOfficeSpace). Metropolitan Life Insurance, the seller, will book a profit of $750 million, according to Slate (Psst, Wanna Buy My Skyscraper?, Apr 28, 2005).

Did the buyer over pay? Search me. Lots of readers responded to my Dispatch Will a Bursting (Housing) Bubble Hurt You? (May 31) with a similar question: Could the commercial market experience a bubble, too?

Like the residential housing market, commercial real estate has its bulls and bears. And, as the Wall Street Journal reported yesterday, many office building buyers fall into the bull camp. ("Office Space: Foreign, Institutional Investors Pay Up," June 8, 2005).

Last year "the average yield on office assets acquired by foreign buyers was 7.4%." For institutional investors it was 7.5%. Both were "below the 7.7% average for all office properties." (The WSJ's source was Real Capital Analytics.)

This emphasis on future appreciation, rather than current income, leads Phil Mobley with Kingsley Associates in Atlanta to pose an intriguing connection between commercial real estate and professional teams (Sports Franchises and Real Estate: Birds of a Feather?, Kingsley Associates Insight - May 2005).

The average yield for a National Football League team was 4% in 2003. Yet "despite low current yields, sports franchises have historically appreciated in value independently of NOI (Net Operating Income)." So are trophy buildings like sports franchises? What do you think?

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-- Peter Pike