Someone forgot to tell the Canada Pension Plan Investment Board that the Manhattan office market is unappealing.
The pension fund said Monday it has taken minority stakes in two office towers, including a 50-storey giant in the Rockefeller Center complex in the heart of midtown Manhattan, arguing the New York office market is turning the corner after being walloped during the economic downturn.
The purchases will see CPPIB acquire 45-per-cent ownership stakes in 1221 Avenue of the Americas and 600 Lexington Ave. from SL Green Realty – Manhattan’s largest office landlord – for a total consideration of $663-million (U.S.), including debt. The properties have a combined value of $1.45-billion including stakes held by other owners.
“It’s a function of looking at a market that is strengthening, and being able to find the opportunities that work for us,” said Graham Eadie, senior vice-president of investment for CPPIB.
“We have been looking for real estate opportunities, and the market has obviously been very weak over the last year or two. We’re starting to see the opportunities now and want to execute against those.”
The fund has been searching for U.S. properties to add to its $7.1-billion (Canadian) real estate portfolio, and announced another deal in April to partner with Kimco Realty Corp., North America’s largest operator of community shopping centres, in a joint venture to acquire prime neighbourhood shopping centres across the U.S. market.
Mr. Eadie said CPPIB plans to boost its real estate portfolio in future from 6 per cent of the fund’s total holdings, but would not reveal a target for growth.
He said the fund is in talks to acquire more U.S. properties, because “it’s an area where we’ve been able to find the quality of asset we’re looking for at the prices we want right now.”
The 2.5-million-square-foot McGraw-Hill building in Rockefeller Center has the publishing firm as a key tenant, along with Société Générale SA and Morgan Stanley. It will be managed by Rockefeller Group International Inc., which owns the other 55 per cent of the building.
The smaller 600 Lexington Ave. property, which is 300,000 square feet and 36 storeys, is a “boutique” office space with smaller tenants and no major anchor. SL Green will be the majority owner and manager of the building.
“We think the leasing market is starting to improve and stabilize in that market, so we think it is a good time to enter,” Mr. Eadie said. “And these are our first deals in the Manhattan market.”
Shant Poladian, a real estate analyst at Canaccord Adams Inc., says the office market in Manhattan has strengthened significantly in recent months and companies operating in the sector are reporting better financial results. He said Brookfield Properties Corp., another major New York office property owner, reported leasing volume in Manhattan has bounced back to its five-year average rate.
A key factor for growth in Manhattan’s depressed office market has been the rapid recovery of major players in the financial services sector, such as Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co. With growing profitability, the firms have been hiring and their office space requirements are growing.
“The market’s already turning,” Mr. Poladian said. “Barring some contagion coming out of the European debt situation, things have actually been improving quite a lot.”
SL Green is “a strong player in the Manhattan market” but has fairly high debt levels, Mr. Poladian said, so selling minority stakes in two buildings is a logical move to raise financing without tapping the public market. - 2010 May 11 GLOBE & MAIL
Macklowe's Split! - 2010 May
Are Deals Financable?
Fillmore, Deutsche Bank Pact Hit a Snag
CB Richard Ellis Investors is back in the bidding for the office portion of 1540 Broadway, a skyscraper in New York's Times Square connected to landlord Harry Macklowe.
A deal hasn't closed, but a person familiar with the matter said CBRE Investors, the asset-management unit of CB Richard Ellis Group Inc., would pay as little as $355 million, a major drop in value.
"That's a harsh price for a very well located building," said Dan Fasulo, managing director of property-tracking firm Real Capital Analytics.
According to city records and loan-marketing documents, Mr. Macklowe attributed the value of the office building to over $950 million when he bought it in February 2007 as part of a $7 billion skyscraper spending spree. The tower's 880,000 square feet of office space had sold in 2006 for $525 million.
In early 2008, unable to refinance short-term debt, Macklowe Properties handed back control of the seven skyscrapers to lenders led by Deutsche Bank AG. Deutsche has been trying to sell 1540 Broadway along with the nearby Worldwide Plaza, also part of the Macklowe portfolio. Eastdil Secured is the sales broker. CBRE was in the mix early for 1540 Broadway, then hedge fund Fillmore Capital Partners LLC was close to securing both towers. The Fillmore deal died last week, putting CBRE's deal back in the saddle, according to several people familiar with the matter. - 2009 February 18 WALL ST. JOURNAL
An effort by real-estate hedge fund Fillmore Capital Partners and Deutsche Bank AG to salvage a troubled debt investment in two prominent Manhattan skyscrapers has hit the rocks.
A contract was expected to be signed Monday in which Fillmore would acquire Worldwide Plaza and 1540 Broadway, office properties once worth a total of more than $2 billion. New York landlord Harry Macklowe had purchased the towers as part of his ill-fated acquisition of seven skyscrapers in 2007. Unable to refinance the buildings' debt, Mr. Macklowe turned control of the towers back to Deutsche Bank, the holder of the $1.2 billion first mortgage, in early 2008.
Last-minute talks late Sunday for Fillmore -- a junior "mezzanine" lender on the properties -- to buy the towers using Deutsche Bank financing fell apart, according to people familiar with the matter. It was unclear what caused the snag. One person familiar with the matter says there is still a small hope a deal could happen. The deal was so close to getting done the current buildings' management had been instructed to turn over the property Monday. That decision was reversed late Sunday.
Deutsche Bank, Fillmore and the other lenders involved had been trying to sell the properties since early 2008. And Deutsche Bank had agreed to provide financing to prospective buyers -- an incentive given the dreadful state of the credit markets. Early bids came in above $2 billion. But a tentative deal for General Electric Co.'s NBC Universal to take space in the pyramid-topped Worldwide Plaza, at 825 Eighth Ave., never materialized. That discouraged potential buyers who calculate returns on investment based on how much cash buildings generate from rent collections.
Executives from all parties involved either didn't return calls or declined to comment. - 2009 February 9 WALL ST JOURNAL
The travails of New York developers Harry Macklowe and his son, William Macklowe, continue. A mezzanine lender on 1330 Sixth Ave., an office tower Macklowe Properties purchased in 2006, has moved to auction off its interest in the tower after its loan matured.
The mezzanine lender is Cadim, the real-estate arm of Canadian pension manager Caisse de Dépôt et Placement du Québec. Cadim lent $130 million to the building and holds the most senior portion of several mezzanine slots. The loan matured Jan. 9. Other more junior mezzanine holders include Deutsche Bank AG, which also originated the $240 million senior mortgage. That loan was securitized.
The Macklowes, who have $100 million of equity in the project, purchased the 42-story tower in late 2006 for nearly $500 million, more than three times what it sold for six years earlier. The tower has a substantial amount of vacant space.
Mr. Macklowe, who last year had to hand back control of seven skyscrapers and sell four others because of debt problems, hired Carlton Group to find new investors to replace Cadim at 1330 Sixth Ave. Cadim then hired Eastdil Secured to run the auction. The auction is scheduled for April 22. Talks continue among the various parties. A Macklowe spokesman declined to comment. A Cadim spokesman declined to comment. - 2009 March 17 WALL ST. JOURNAL
Manhattan Won't Avoid Property Crunch
Manhattan prices fall most in 5 years
Number of 2008 sales falls 23%; units put up for sale jump 41%
Manhattan apartment sellers cut prices by the most in five years last year and unsold inventory rose to the highest since 1999 as the economy retreated.
The average listing discount climbed to 4.1 per cent, the highest since 2003, as buyers negotiated for reductions off the asking price. The number of condominiums and co-ops for sale jumped 41 per cent last year to 9,081 even as the median price reached a record US$995,000, appraiser Miller Samuel Inc and broker Prudential Douglas Elliman Real Estate said on Tuesday.
New York City is bracing for a drop in property values after three of the five largest investment banks collapsed. In the Hamptons, on the eastern end of Long Island, prices are already falling. Banks and securities firms have cut more than 180,000 jobs in the past year, according to Bloomberg data, as the recession entered its second year and the global credit crisis forced writedowns and mortgage-related losses of US$1.18 trillion.
'There clearly was long-running irrational exuberance out here in real estate,' said Diane Saatchi, senior vice-president for broker Corcoran Group Inc, in East Hampton. 'It's gone full circle from people who would pay any price because they had to have the house, to people who pick a price and take any house at that price as long as they think it's discounted.'
The median price in the Hamptons, New York's summer playground for the rich and famous, fell almost 13 per cent last year to US$850,000, the first decline since 2000. Discounts on Hamptons homes rose to 11.1 per cent in 2008, according to Miller Samuel-Prudential data.
Wall Street firms are expected to lose US$47.2 billion in 2008 and further shortfalls are expected in 2009, Mayor Michael Bloomberg said last week.
Budget officials assume the city will lose 294,000 jobs from mid-2008 through 2010, including 46,000 in financial industries. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.
The firings mirror the national recession that has driven unemployment in January to the highest since 1992 and pushed home prices down the most since the Great Depression.
The securities industry accounted for 51 per cent of the growth in wages in Manhattan's private sector from 2003 to 2007, according to the US Bureau of Labor Statistics. 'Prices have to drop,' Dottie Herman, chief executive officer of Prudential Douglas Elliman, said in an interview. 'They have to, have to, have to - and they have.'
In Manhattan, the number of sales declined 23 per cent last year from 2007, Miller Samuel and Prudential said. Falling sales and rising inventory preceded lower home prices nationwide.
The increase in inventory in Manhattan was largely driven by a slowdown in transactions in the second half, said Jonathan Miller president of Miller Samuel.
The median sales price for the entire year rose 11 per cent to a record US$955,000, according to the report. The gain mostly reflects deals from the first half of the year, before the collapse of Lehman Brothers Holdings Inc, and closings from new condominium developments.
The Miller Samuel-Prudential report also shows the heights that Manhattan's real estate market achieved over the last decade, a period of easy credit.
In 1999, the median sales price of all Manhattan apartments was just US$310,000.
By 2004, it almost doubled to US$605,000. The average price per square foot rose from about US$400 in 1999 to US$1,251 last year, the report said.
The median price of two-bedroom apartments rose 178 per cent since 1999 to US$1.6 million last year. One bedrooms rose by 200 per cent over that time, to a median of US$750,000 last year. Three-bedrooms sold at a median price of US$3.79 million, a 161 per cent increase from 1999.
Prices have also skyrocketed for Manhattan townhouses. In the past decade, the median has risen 156 per cent to US$4.995 million.
They jumped even higher for the category known as 'luxury townhouses', which Mr Miller defines as the top 10 per cent of all sales. The median jumped last year to US$31.8 million, up from US$6.5 million a decade ago.
Now the market is making an about face. Prices for luxury apartments in Manhattan, defined by Ms Herman as units selling at US$3.5 million and above, are now selling at discounts of about 25 per cent off the asking price, she said.
A three-bedroom, three-bathroom condominium on Tribeca's Hudson Street is now selling for US$4.6 million after being lowered almost US$1.3 million since August, according to Streeteasy.com, a property data service. A condo in Trump Tower on Fifth Avenue in midtown was cut 16 per cent to US$4.95 million since it was first listed in November.
The Financial District, which saw the largest year over year price increase for co-ops in 2007, was the neighbourhood with the largest price per square foot decline in 2008, according the report.
The price per square foot for co-ops there declined by almost 19 per cent to US$857 in 2008, the result of lowered demand spurred by Wall Street layoffs, the report said.
'You're going to see stronger, less attractive numbers' in the first quarter, said Ms Herman.
The reported available inventory tally does not include new developments where units have yet to go on sale, Mr Miller said. 'That is definitely an undercount,' he said. 'There's a lot of shadow inventory in the background.'
The trend is likely to continue, said Damon Liss, an interior designer who is now trying to sell a three-bedroom cottage in East Hampton with a swimming pool for more than US$1 million.
'There's a big disconnect between buyers and sellers,' Mr Liss said. 'Buyers want 50 per cent discounts and sellers don't want to reduce the price at all. That's why transactions are down. Both buyers and sellers are being equally unrealistic.' - 2009 March 5 Bloomberg
When it comes to property prices, that strip of rock just south of the Bronx is often perceived as invincible.
Across the U.S., house prices have fallen 19% from their peak, according to the S&P/Case-Shiller Home Price index. New York City, as a whole, is down 10%.
Meanwhile, on planet Manhattan, the median price of an apartment rose above $1 million for the first time in the second quarter of 2008, according to Miller Samuel, a real-estate appraiser.
Even in Gotham, reality bites eventually. Three big problems are likely to hit in 2009.
First up: Job losses on Wall Street. In 2006, the most recent full year of New York State Department of Labor data, finance and insurance companies employed 15.7% of Manhattan's workers. They earned an average of $269,000, more than 2.5 times the average private-sector wage. Property prices will suffer from slashed bonuses and submarine stock options, not to mention the pink slips.
Wall Street's woes also mean tighter credit. The Federal Reserve's latest "beige book" survey of financial conditions says this of a softening Manhattan condominium and co-op market: "A growing number of deals are said to be falling through, due to difficulty in getting financing -- largely at the middle of the market."
The third headwind is a stronger dollar. Jonathan Miller, Miller Samuel's president, estimates one in three new apartments are sold to foreigners, primarily Western Europeans. - 2008 September 22 WALL ST JOURNAL
Real estate market girds for Lehman fallout
Manhattan vacancy rates to rise as building prices fall The fallout from Lehman Brothers’ bankruptcy could push Manhattan’s commercial real estate vacancy rate up to nearly 10% by the first quarter of next year, according to a report Monday from real estate brokers Jones Lang LaSalle.
The impact will likely fall hardest on Class A midtown buildings, where the vacancy rate could skyrocket to 12% if the bank disposes all of its space, according to the report, based on its estimate of Lehman holding 2.7 million square feet of space. Currently, vacancy rates for midtown Class A properties as well as in Manhattan overall are running at 8%.
Lehman Brothers owns its 1 million square foot headquarters at 745 7th Ave. while leasing acres of space at other locations including 399 Park Ave.
“The effect is going to be pretty dramatic,” says Peter Riguardi, president of Jones Lang LaSalle’s New York Market.
Those estimates don’t include the fallout from Bank of America’s sudden acquisition of Merrill Lynch or American International Group’s enormous problems. Bank of America executives on Monday said they aim to cut $7 billion in costs from Merrill, which will almost surely mean shedding staff and space. Merrill leases 4.2 million square feet at the World Financial Center but only occupies about 2.6 million feet of it. It also leases an additional 850,000 square feet in various locations in Manhattan.
Mr. Riguardi notes that AIG occupies about 3 million square feet of space downtown. AIG owns its 775,000 square foot headquarters at 70 Pine Street and in June signed a lease for 800,000 square feet nearby at 180 Maiden Lane, where it planned to consolidate office it has scattered around downtown.
Real estate executives say the turmoil could drive rents down between 15% and 20% by next year. Until now, asking rents have remained strong, jumping 21% to $71.59 per square foot in the second quarter from the same period in 2007, according to Cushman & Wakefield.
The tumult on Wall Street was already hurting Manhattan's office market. The vacancy rate climbed to 7.1% in the second quarter, up nearly 2 percentage points from the year-ago period, according to Cushman & Wakefield Inc. In addition, brokers say that tenants are taking longer to sign leases. That sluggishness comes at a time when troubled financial firms are retrenching, adding more space to a market that now has 20 million square feet available—up 35% from a year ago.
The problems will also further depress the market for commercial office towers. ast year, Manhattan office buildings fetched an average of $972 per square foot, according to Cushman & Wakefield. At that rate Lehman’s HQ would fetch nearly $1 billion. Experts say that sum is now highly unlikely.
AIG’s headquarters would be considered less attractive than Lehman’s because it is older and located downtown. Typically, midtown towers fetch higher prices than their counterparts in the financial district. - 2008 September 15 CRAINS NY
Who Needs a Mortgage Anyway?
While the mortgage markets have been convulsing, Wall Streeters have been completing one big-ticket deal after another, buying condos, co-ops and town houses at some of New York's most prestigious addresses.
In January, Lloyd C. Blankfein, chief executive of Goldman Sachs, closed on a $26 million duplex at 15 Central Park West, one of Manhattan’s hottest new buildings. Scott A. Bommer, a hedge fund manager, bought a Fifth Avenue co-op for $46 million. And Edgar Bronfman Jr., part of a private equity consortium that owns the Warner Music Group, spent $19.5 million for his own Fifth Avenue co-op.
As the mortgage mess deepened, the deals rolled on. In February, Raymond C. Mikulich, until recently the head of the real estate private equity group at Lehman Brothers, paid $17.9 million for a four-bedroom apartment at 15 Central Park West. Then Philip A. Falcone, a senior managing director at Harbinger Capital Partners, a hedge fund, closed on a deal to buy the Upper East Side mansion that once belonged to Robert C. Guccione, founder of Penthouse magazine, for $49 million.
James E. Cayne’s $28 million purchase of two units in the Plaza was not the biggest deal, but it was among the most awkwardly timed. A few weeks after the second deal closed, the Wall Street firm where he is chairman, Bear Stearns, collapsed. - 2008 April 2 NEW YORK TIMES
NEWS
In a sign of how commercial real estate values in Manhattan have deteriorated, a 21-story building there, one of the last to sell before the credit crisis, is under contract to sell again at a loss of $41 million. - 2008 July The New York Times
US retail malls' Q2 results worst in 30 years
Strip malls seeing average vacancy rates spike sharply
US store closings and cutbacks turned the second quarter into the worst for strip mall owners in 30 years, as increasingly budget-conscious consumers flocked to low-cost warehouse-style grocery centres, according to a report by real estate research firm Reis.
Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 per cent, a level unseen since 1995, according to the report released yesterday.
Vacancies at regional malls rose 0.4 percentage points to 6.3 per cent, the highest level since the first quarter of 2002, according to the preliminary results.
'They definitely came up weaker than our expectations and we've been pretty bearish on our outlook for retail for some time,' Reis chief economist Sam Chandan said.
'In the market in general there have been a lot of store closings.'
A growing list of retailers shuttered stores ahead of lease expirations or chose not to renew leases, and as newly completed space hit the market without signed tenants.
Starbucks Corp recently said it would close 600 stores by March.
GAP Inc is looking to give up some of the 40 million square feet of retail space its leases.
That's in addition to the growing list of retailers, such as Linen 'n Things and Goody's Family Clothing, which filed for bankruptcy protection.
Consumers are constrained by increases in food and energy costs, as well as the cost of servicing debt run up during the housing boom.
In addition to cutting back on clothing, jewellery and non-essentials, they have turned to lower-price grocers such as Wal-Mart at the expense of the upper end usually found at strip malls, such as Whole Foods Market Inc, Reis said.
For the first time since 1980, more space became available to rent at strip malls than was rented out - about 3.2 million square feet more.
Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter.
The extra space translated into falling rents at strip malls, down 0.1 per cent to an average of US$17.60 per square foot.
'The downward pressure on rent is coming from landlords being very nervous about the idea of losing a tenant when they know that there's a paucity of replacements for that tenant in the current market environment,' Mr Chandan said.
Preliminary figures show that regional malls were barely able to raise rents, with just an anaemic 0.2 per cent rise excluding concessions, its weakest gain since the second quarter. - 2008 July 8 REUTERS
Taking Manhattan
A new record price for an office building defies the recession talk
It is said that nobody ever made money by owning the General Motors building, only by selling it. And yet again the Manhattan landmark building by the south-eastern corner of Central Park is about to change hands for a price that seems justified only by the greater-fool theory that one day someone will be willing to pay even more. In the first round of bidding, there were several offers of $3 billion, which would be a new record for a single building in America beating the $1.8 billion paid last year for nearby 666 Fifth Avenue. Hopes are high that the final price will be well above that.
No one hopes so more fervently than the owner, Harry Macklowe, who needs it to fetch at least $3.4 billion in order to repay a loan, for which the building is collateral, from the publicly traded hedge-fund group, Fortress. Mr Macklowe is in trouble because he paid too much for properties offloaded by the private-equity giant, Blackstone, from the portfolio of Equity Office Properties, a property firm it bought for a record last year, in the final gung-ho days before credit dried up. Reportedly, the rents on the GM building barely cover the interest on the mortgage.
Mr Macklowe bought the skyscraper for $1.4 billion in 2003, from owners such as Donald Trump, who regrets selling. One of the defeated bidders then, Sheldon Solow, is still contesting in court the decision to sell to Mr Macklowe, whose improvements to the building include introducing a super cool Apple Store in front of the famous FAO Schwarz toy shop.
At the very least, this high-priced bidding war suggests that New York's commercial real-estate business is in better shape than some of the city's banks. Yet, as a trophy property, the price offered for the GM building may say more about the continuing robust financial health of wealthy buyers than incremental changes in demand for office space in New York.
There is also the falling dollar. A report from Cushman & Wakefield, a property adviser, reckons that with average rents of $100 a square foot, New York ranks only the tenth-most-expensive among global cities in which companies like to put their headquarters. One bidder reportedly has strong backing from Arab investors. This is a sign that the weak dollar is making American assets attractive to foreign shoppers with cash to splash. - 2008 February 21 THE ECONOMIST
Office rents drop as space hits market
Manhattan's once red-hot commercial real estate market is developing a chill
Vacancy rates are edging higher. The pace of new lease signings is flagging, and the volume of sublease space hitting the market is soaring.
More important, for the first time in six years, effective rents have begun to fall.
"There's no question that rents are lower than they were last year," says David Falk, an executive vice president and principal at Newmark Knight Frank.
That trend is all but certain to accelerate as financial firms, which account for roughly a third of Manhattan's rented space, shed staff and space amid the credit crisis.
GVA Williams Vice Chairman Mark Friedman reckons that effective rents, which include the cost of concessions offered by landlords, have already fallen by about 7%. GVA found that in the first quarter of the year, midtown landlords typically gave tenants three to six months of free rent, up from zero to six months in the year-ago period. Similarly, they upped the amount they were willing to give to tenants for improvements to $40 to $50 a square foot, from $35 to $45 a square foot.
Mr. Friedman predicts rents will eventually drop 15%.
The downward pressure stems from two factors: sagging demand for space caused by the weakening economy and an avalanche of sublease space expected to hit the market in coming months.
Just starting
Financial firms, battered by billions of dollars of losses from write-downs of the value of subprime mortgages and a growing list of other products, are just beginning to shed space. In the last year they've laid off 22,000 people, according to a Crain's estimate. Experts forecast that 33,300 Wall Street jobs will disappear by next year.
Mr. Falk estimates that 4 million square feet of sublease space will be unleashed in midtown alone as financial firms and others unload space amid a slowing economy. Just last week, drug giant Pfizer quietly laid plans to unload 750,000 square feet of space in midtown.
J.P. Morgan Chase is expected to be one of the largest space shedders. It could eventually unload 1 million square feet of space as it digests its purchase of Bear Stearns. Sources say Lehman Brothers is looking to unload roughly 600,000 square feet of space, while Citibank is believed to be freeing up nearly 240,000 feet at two locations.
In the last five months, 5.3 million square feet of sublease space has landed on the market, a jump of 51%. That space now accounts for 19% of the 27.5 million square feet available. Experts say that when sublease space reaches 35% to 40% of the total, it begins to pull all prices down. If Mr. Falk is correct, that tipping point could be reached in just a few months.
The problem is that sublease space is typically less expensive than space rented directly from a landlord. In May, Cushman & Wakefield Inc. reported that sublease space was nearly $14 a square foot—or about 15%—cheaper than direct space.
Bleak outlook
With oil prices rising and the economy softening, the outlook on the demand side is also bleak.
"The bottom line is that I don't think that corporate America is about to come in and gobble up space," says Mr. Friedman.
As a result, brokers expect that the gap between landlords' posted prices for space and what tenants actually pay will continue to widen. Mr. Falk says that, on average, tenants are signing leases that are $5 to $10 a square foot below the asking rent, up from $3 to $5 a square foot last year. The average asking rent in Manhattan is $85 a square foot.
The good news is that even with all the space that has been added to the market in recent months, the vacancy rate in Manhattan stands at a puny 6.8%, which is low by historical standards and gives landlords the edge. The question is, for how long? The vacancy rate has already risen 1.3 percentage points this year.
"It's clearly a more balanced market," says Brian Gell, a vice chairman at CB Richard Ellis Inc. "Tenants are more cautious, but those who are prepared to act will benefit."
SALES HARDER TO FINANCE
The good news for buyers of Manhattan office buildings is that prices are down. The bad news is that financing such deals remains dicey.
Two weeks ago, three properties that lenders had taken back from Harry Macklowe for failing to repay a loan were sold at prices 20% to 30% lower than what he had paid a year earlier.
But with lenders now demanding that buyers lay out 30% to 50% of the deal value in cash-up from 10% to 30% a year ago-volume has shriveled. In the first five months of this year, 33 office towers were sold, a drop of 63% from a year ago, according to Real Capital Analytics.
Scott Latham, an executive vice president at Cushman & Wakefield Inc., notes that worries about a weakening economy have put buyers on the sidelines.
"They are waiting to see what happens," he says. - 2008 June 21 CRAINS
Manhattan office demand strong
Demand for Manhattan office space remains strong and will dip only slightly in the new year, according to a third quarter report by Marcus & Millichap Real Estate Investment Services. By year's end, Manhattan employers were expected to have created 36,000 jobs for a 1.5 percent gain, the report said. A limit of new supply and strong demand were expected to lower the vacancy rate in 2007 by 100 basis points to 6.3 percent. But turbulence in the global financial markets' could lead to job cuts in the Manhattan financial services sector, which could tamp down demand for office space.
A total of 708,000 square feet of for-lease office space was expected to be built in Manhattan in 2007. Asking rents jumped by 18 percent this year to $60.71 per square foot, the report said, while effective rents were expected to increase 20.8 percent to $54.15 per square foot. - 2007 December 12
Midtown Manhattan Office Rents Exceeds Dot-Com Peak
Average effective rental rates for Class-A office space in Midtown Manhattan have surpassed the all-time high rental rates reached during the dot-com peak at the end of 2000. According to the Studley Effective Rent Index (SERI) covering Midtown and Downtown, Midtown's spike in rental rates is due to a number of real estate components impacting pricing, namely higher real estate taxes, operating expenses, and electricity costs, not to mention supply and demand.
The national SERI report indicates rental rates are steadily increasing in markets throughout the United States, and Midtown Manhattan follows suit, although its effective rental rates are markedly higher than in most other major tier-one markets.
Midtown New York's average rent of $75.42 per sq. ft. is 1.2% higher than 2001's peak rate. Downtown New York's average effective rent of $40.95 per sq. ft., however, is 18.2% lower than the peak value, not even close to the levels achieved during the dot-com heyday.
"The entire business landscape has changed since 2000," says Steven Coutts, senior vice president of Studley's National Research Services. "Prime office buildings have been trading for amazingly high prices for several years with landlords garnering higher rents as a result of the dearth of product in Midtown. It's a domino effect ? the increase in building revenue escalates the building's value leading to higher property taxes thereby increasing the total rent even more."
Operating expenses have also increased over the last five years, says Coutts, who attributes some of this to the added security in buildings post 9/11. From 1995 to 2000, average operating expenses increased from $6.75 per sq. ft. to $7.82 per sq. ft., a 16% increase, but operating expenses increased by 30% in the succeeding five-year period between 2000 and 2005.
"Interestingly, average increases in electricity costs over the past 10 years have been moderate, averaging 3.1% annually," adds Coutts. "But in the last year, average costs jumped by 13.5% as the nation grapples with the current energy crisis." - 29 June 2006
RESIDENTIAL
In a Hot Market, All the City Is a Condominium
East Side, West Side, all around town, every form of real estate, no matter the tenancy, is being sold to investors for conversion into residential condominiums. They range from four-story buildings in TriBeCa that are selling for more than $550 a developable square foot to tennis facilities in Queens to factories in Long Island City to parking garages and vacant lots. Over the last decade, a number of office buildings in Lower Manhattan have been converted into residential towers. Last week, Kent Swig, president of Swig Equities, signed a contract to buy a 103-year-old, landmarked, 21-story, 540,000-square-foot building at 25 Broad St. It was bought in 1994 for $5 million by Crescent Heights. Crescent spent $55 million in 1997 to redevelop it into 347 apartments, 21,400 square feet of retail and commercial space, and 6,800 square feet of office space. Industry sources said the property sold for $260 million. Also last week, a joint venture of Worldwide Holdings and Lubert-Adler entered into a contract to sell an office building at 88 Greenwich St. to Thorwood Real Estate, a partnership of Joseph Sitt and Andrew Heiberger, for $195 million. The 365,000-square-foot, 72-year-old building was converted into 458 apartments in 2000.
Thorwood is also buying a building at 158 Madison Ave. and will convert it into a 22-story loft condominium. A 95-year-old, 185,000-square-foot office building at 485 Fifth Ave. will be sold next month to a joint venture of Michael Belfonti, Adam Hochfelder, and the Carlyle Group. The partnership will pay $88 million to a group of investors including Jack Forgash, which purchased the former Rogers Peet building for $54 million earlier this year. The buyers plan to convert the property into condominiums.
Last month, Monday Properties entered into a contract to buy a 20-story, 210,000-square-foot office building at 386 Park Avenue South from Park South Control for $71 million. Industry insiders think it will be converted to condos.
The 143,000-square-foot Stuart Dean Building at 355-366 Tenth Ave. will be sold and converted into a residential tower. Insiders said Gary Barnett's Extell Development will pay $25 million for the site. Extell recently bought the one-story Ritz Furs shop on 57th Street between Sixth and Seventh avenues, as well as the transferable air rights. It plans to demolish the building and construct a 37-story condominium tower.
New York City is losing tennis courts. Two years ago, a tennis center atop a parking garage on 31st between Fifth Avenue and Broadway was sold and converted into a Con Ed substation. The 6-acre East River Tennis Club on the waterfront at 44-02 Vernon Blvd. in Long Island City has closed to make way for a major residential development: two condominium towers with a total of 1,080 units and two rental buildings with 1,100 units.
A few years ago, Eagle Electric moved its manufacturing operations to Mexico. Earlier this year, the Andalex Group bought one of its buildings at 45-31 Court Sq., near the 48-story Citigroup tower in Long Island City. It plans to renovate the property into 238 luxury condominiums. Another facility in Astoria at 21st Street and 24th Avenue is being converted into 188 condominiums.
A 12-story, 147,000-square-foot office building with possible air rights at 63 W. 38th St. is on the market for redevelopment as residential condominiums or a hotel. A few blocks away, a 14-story office and showroom building at 215 W. 40th St. is being marketed for $22.5 mil lion as a residential conversion. A zoning variance may be required.
In May, the City Council approved a zoning plan for Williamsburg and Greenpoint. Sites there are now selling for more than $175 a developable square foot. There are two developable Gabila's Knish Factory properties at 111-113 S. Eighth St. and 110-120 S. Eighth St. and Bedford Avenue, less than 10 blocks from the subway station at Hewes Street and Broadway. The sites are under contract for sale, and were listed for $7.5 million.
At least six other sites in Williamsburg and Greenpoint are on sale for residential conversion, with prices ranging from $100 to $225 a developable foot.
A five-story office building at 530-540 Atlantic Ave. in downtown Brooklyn is being marketed for $18.5 million as a residential conversion prospect. A 190,000-square-foot development site occupying the entire block of Myrtle Avenue between Gold and Prince streets, blocks from MetroTech and the Atlantic Terminal, is being marketed for $21 million.
A new stadium for the Mets and the Olympics is planned in Flushing. Muss Development plans a mixed-use complex on the corner of College Point Boulevard and Roosevelt Avenue on a site formerly occupied by Con Ed. It will have over 1,200 apartments, a Target, and a Home Depot. Shaya Boymelgreen is converting the former RKO Keith at 129-43 Northern Blvd. into a mixed-use facility that will have 250 condominiums, 25,000 square feet of retail, and a parking garage.
Everyone wants a piece of the real estate market. A prominent developer told me that a physician friend called him and told him he wants to join him and become a developer. The developer asked the physician if he would like him to assist him while he is performing surgery. Real estate prices have risen to records, and today is not the time for amateurs to try their luck as developers.
"I am astonished by the lack of differentiation in underwriting by the financial community when it comes to quality of sponsorship, capital structure, and location of a development," a vice president of real estate finance at HSH-Nordbank, James Fitzgerald, said. "We remain vigilant and cautiously optimistic on select developments. It is no longer the domain for amateurs." - by Michael Stohler NEW YORK SUN Real Estate, p. 12 23 June 2005