Transactions: Biggest single-asset MOB deal?

Unit of German bank pays $332.5M for Manhattan MOB leased by NYU Langone

By John B. Mugford

In what looks to be the largest investment ever made for a single medical office building (MOB) – at least to date – the real estate arm of a German bank closed in late May on the acquisition of an ambulatory facility in midtown Manhattan occupied by NYU Langone Medical Center.

In late May, Eschborn, Germany-based Commerz Real, the real assets investment manager of Frankfurt-based Commerzbank AG, acquired the 25-story, 389,522 square foot building at 222 E. 41st St., for $332.5 million, or $854 per square foot (PSF). The capitalization (cap) rate, or first-year expected return, was 4.45 percent, according to the healthcare real estate (HRE) research firm Revista.

The seller was Atlanta-based Columbia Property Trust Inc. (NYSE: CXP), a publicly traded real estate investment trust (REIT) that also has an office in New York.

If the tower acquired by Commerz Real looks like one of the many upscale, “Class A” general office towers often found in Manhattan, it’s because that’s precisely what the facility was originally built as back in 2001. For a decade or so after Columbia acquired the property for $324.5 million – according to Revista – in 2007, the building was fully leased by the Jones Day law firm.

When Jones Day, whose lease was expiring in 2016, announced in recent years that it would relocate to an office near Battery Park in Lower Manhattan, Columbia started a marketing campaign to fill the building. As it was doing so, NYU Langone Medical Center, part of the rapidly expanding New York-based NYU Langone Health, approached the landlord about leasing the entire building.

The health system, which subsequently signed a 30-year triple-net lease, was reportedly attracted to the 222 building for its location, which is near Grand Central Terminal and just a few blocks from the main hospital. The facility also features newer construction and efficient, open floor plates, which made it easier to make the transition from a traditional office building to an outpatient medical center.
As soon as Jones Day moved out, NYU Langone and Columbia began a massive repurposing project.

In a May 2016 article in Commercial Property Executive magazine, Nelson Mills, the president and CEO of Columbia Property Trust, said the REIT was “investing approximately $140 per square foot in tenant improvements, and NYU Langone has indicated they expect to spend considerably more per square foot of their own capital to achieve the conversion.”

Mr. Mills added that the REIT considered such a big investment to be “merited in light of the lease being a 30-year initial term, with two extension opportunities, and the building’s construction and infrastructure are well-suited to accommodate this type of transition.”

In April of this year, NYU Langone Health opened the first phase of its multi-specialty ambulatory care facility in the building.

In a news release, the health system stated that the newly repurposed facility “creates space to relocate clinical services from NYU Langone’s main campus and other locations to accommodate expanding, hospital-based inpatient programs, including its newly launched programs for heart and lung transplantation.

More outpatient specialty programs will open up spaces in the coming months, NYU Langone says.

 

NYU Langone’s growth

“NYU Langone is experiencing tremendous growth in both inpatient and outpatient programs, with more than six million outpatient visits taking place last year,” said Dr. Andrew W. Brotman, senior VP and vice dean for clinical affairs and strategy, and chief clinical officer at NYU Langone.

“This expansion, coupled with our commitment to bring more services to the communities where people live and work, makes the opening of this new facility strategically important.”

NYU Langone, an academic medical center affiliated with NYU School of Medicine, has more than 230 ambulatory locations, the system says, and is in the midst of adding more than 1 million square feet of new clinical space in New York in 2018. Included is the recent opening of its $1.4 billion, 18-story, 830,000 square foot Helen L. and Martin S. Kimmel Pavilion inpatient tower on its main campus just a couple of blocks from the 222 building.

In coming weeks, NYU Langone also plans to open a new ambulatory care center in Manhattan’s Lower East Side. The $32.9 million, 55,000 square foot Joan H. and Preston Robert Tisch Center at Essex Crossing is at 175 Delancey St., near the Williamsburg Bridge.

The system also signed a lease, according to local reports, for all 200,000 square feet of a six-story building at 159 E. 53rd St., which recently underwent a $150 million renovation.

For Columbia, which now owns a portfolio of 19 “Class A” properties totaling about 9 million square feet in New York, San Francisco, and Washington, D.C., selling the office tower is part of a multi-year culling and re-focusing of its portfolio.

Under Mr. Mills’ leadership, the REIT has sold 58 properties valued at $3.6 billion since 2012 and reduced the number of markets in which it owns properties from 32 to seven. During that time, according to reports, Columbia has invested $2.8 billion on 10 buildings in its core markets of San Francisco, Washington and New York.

The company put the building at 222 E. 41st St. on the sales block earlier this year, with a New York-based capital markets team from Los Angeles-based CBRE Group Inc. (NYSE: CBG) marketing the property. That team was led by Darcy Starcom and Bill Shanahan.
As noted, the deal is likely the largest to date for a single MOB.

Prior to the deal, Revista says the largest single-asset MOB transaction in its database was the sale of the 10-story, 458,396 square foot Baylor Charles A. Sammons Cancer Center in Dallas, which sold for $290 million in a transaction that closed June 30, 2017.