1301 New York Avenue Purchased For $135 Million

1301 New YorkNakash Holdings (the investment arm of Jordache Enterprises) purchased 1301 New York Avenue from Boston Properties on August 22nd. The 201,281 RSF office building is entirely occupied by the Department of Justice (DOJ) under a GSA lease. The reported $135,000,000 ($670.70) price translates to an estimated cap rate between 5.2% and 5.4%, depending on how the real estate tax base is ultimately established in the new lease. That kind of cap rate wouldn’t be unusual in Washington, DC except that 1301 New York is pretty generic, class-B product. The value here is clearly in the 15-year federal lease.

What does it take to yield a low 5% cap sale?

First, it takes a buyer committed to paying a premium for safe cash flow. Jordache Enterprises has proven itself to be that class of buyer. The firm purchased 1400 New York Avenue, another DOJ-leased building, in March at a reported going-in cap rate of 5.1% (that building also had a new 15-year firm GSA lease). Last year, the firm purchased a 17,550 SF Apple store in Santa Monica, California for $60 million–a 3.7% cap.

Second, the sale probably needs to happen in Washington, D.C. The real estate economics here have traditionally been different, due to constrained supply and federal largesse (though that is obviously on the wane these days). The pricing for 1301 New York on a per-square-foot basis is about average for large sales in the city. More significantly, the city’s prospectus rent cap is arguably below market. Boston Properties negotiated its 15-year lease at the maximum rent allowed under the cap, which is about “market” for well-located class-B space (and probably well below market given that base rent will remain flat through the term). Outside Washington, DC, long-term leased federal properties tend to be outsized compared to their market area. The rents are often above market and the buildings are overbuilt for the markets they are in. Both conditions lead investors to grapple with the possibility that the properties could be worth less at the expiration of the lease. This isn’t likely to be the case at the corner of 13th Street and New York Avenue.

Third, it takes term. Firm term. And lots of it. 1301 New York’s 15-year non-cancelable lease is tacked onto the final seven months of the current GSA lease. Jordache, therefore, will enjoy guaranteed federal tenancy through March 12, 2029. That makes this (as of this moment) the longest running lease in Washington, DC. As we’ve discussed in the past, GSA lease terms are getting shorter and there are, in fact, relatively few large GSA leases anywhere in the United States that have greater than ten years of remaining term*.

Since the beginning of last year there have been four government-leased property sales that have traded in the low 5% cap range or below. All of them have been in Washington, DC. With treasury yields and interest rates forecasted to rise, we might expect these sales to mark the lowest cap rates in this cycle. Yet these long-term leased properties are becoming rarer, even as the capital chasing them is growing. We expect the market for these special assets to remain incredibly competitive.

* To see this for yourself, visit our “bubble graph” and click on the “Rent vs. Remaining Term” button. You’ll see that, at the time we produced this interactive graphic, there were only 66 GSA leases anywhere in the United States that were larger than 75,000 SF and had greater than 10 years of remaining term.