That looks like a top of the market price for the Sony Building in the heart of Manhattan’s Midtown. Sure it’s a trophy building near the most prime locations in one of world’s best (and certainly America’s top) real estate market(s). But paying $1.1 billion at a time when rents appear to have crested is a swallow hard proposition. 

Sporting the distinctive Chippendale crown, designed by legendary architect Philip Johnson in the early 1980s, the 37-story tower is wedged in among Trump Tower, the IBM Building, and other shadow inducing structures along comparatively narrow Madison Avenue. Indeed its views are not first rank and the building lacks the green amenities of today’s gold standard LEED office projects, which can command the highest office rents. Maybe there will be opportunities to convert street level space into high-end retail, and transform some of the upper floors into hotel rooms and condominiums, but new owner Joseph Chetrit will need to get out his checkbook again and dig deep for all the needed upgrades. 

One thing I’ll bet on—over the long-term the Sony Building will hold value and at some point Mr. Chetrit will be able to unload the property with some appreciation. Now he rightly figures that New York will continue to attract global business like no other U.S. market and there will be enough demand from well-heeled tenants for his gilded space. But given his rich cost basis and depending on how he finances the deal, he is erecting some tall hurdles in the way of feeling totally comfortable about his investment in its early years.

When buyers approach sub 5% cap rate territory even in New York or DC, it’s time to back off, and that’s what most investors have been doing lately, showing good discipline. It’s the Sony Building priced deals that tend to really sober up players.

Meanwhile, developers try to lure blue-chip tenants into new complexes slated above and adjacent to West Side rail lines just as big media companies struggle to figure out how to make money in a more dis-intermediated world and the big financial institutions signal continued lack of appetite for expansion.   As noted before, most office tenants have reckoned how to do more with less space, tamping down growth in overall demand.

Now you can figure the U.S. economy is slowly getting better and Europe has a chance to turn around, but does anyone detect enough oomph to escalate rents and demand in confronting some of these other market forces? At least it appears another recession can be averted, but slow growth is slow growth.   

I guess it’s testament to the New York market—Class A product in the top districts will command top dollar. You just can’t get more top than the Sony Building deal. And nobody will ever fail to recognize the top of this building thanks to Philip Johnson.