Paramount Sees Opportunity for Rent Growth in New York

Albert Behler, CEO of Paramount Group, Inc. (NYSE: PGRE), joined REIT.com for a CEO Spotlight video interview during REITWeek 2015: NAREIT’s Investor Forum, held in New York.

Paramount owns office properties in New York, San Francisco and Washington, D.C. In November 2014, the company raised $2.3 billion in the largest IPO by a U.S. REIT to date.

Behler offered some historical perspective on the company, which was formed in 1978. Paramount began life as an investment vehicle for the Otto family of Germany. Behler joined the company in 1991. Since 1995, Paramount has focused on investing in high-barrier-to-entry cities.

In the last two years, the company took a close look at its operations, according to Behler.

“We had a terrific portfolio of 12 assets that wasn’t really fully exploited with regard to driving rents up and generating cash flow. We were operating the company as a typical private equity company on a value-add type basis,” Behler said. Taking the company public was seen as the most beneficial vehicle for its shareholders and “a wonderful way to give our investors liquidity,” Behler added.

Turning to conditions in Paramount’s main markets, Behler explained that about 75 percent of its net operating income (NOI) is generated in New York. The company is mainly invested in Midtown Manhattan, where fundamentals have been improving in the last couple of years, according to Behler.

“In certain parts of Midtown, we are in the single-digit availability rate, and that’s normally when there is the possibility of a rent spike. Our portfolio has some expirations over the next 24 months, so we are geared up to take advantage of that opportunity,” he said.

Behler said Paramount is seeing solid demand for 100,000-square-foot leases. “There is an opportunity in our buildings to get these bigger spaces, and we want to reap the benefits for our shareholders,” he said.

Meanwhile, suburban markets in Washington, D.C., are still quite soft, Behler said. San Francisco, however, “is by far the hottest market in the U.S. right now,” Behler said. Rental levels are above peak levels from 2007.

“We are pretty bullish that San Francisco has some ways to go still,” Behler observed. Behler also noted that capitalization rates in all three markets are heading lower.