The Real Deal New York

Boston Properties could “expedite” FAO Schwarz’s exit from GM Building

REIT cites “euphoria” over Fifth Avenue retail rents

April 28, 2015 03:15PM
By Rey Mashayekhi

FAO Schwarz

From left: Owen Thomas and FAO Schwarz at 767 Fifth Avenue in Midtown

Boston Properties may work with FAO Schwarz to “expedite” the toy store’s transition out of the GM Building, the real estate investment trust said in its first-quarter earnings call Tuesday.

FAO Schwarz’s lease at the building, located at 767 Fifth Avenue, is set to expire at the end of 2016, but the Boston-based REIT “could work with FAO” to get them out sooner, Boston Properties’ president Doug Linde said.

Linde said the 61,000-square-foot space – located adjacent to the Apple store’s iconic glass cube in what is the country’s most valuable office tower – would “go through major renovation and downtime as part of any re-lease,” with company executives adding that there “seems to be a euphoria about what potential (retail) rents might be on Fifth Avenue.”

“On the one hand, the front door (of the FAO Schwarz space) is 125 feet off Fifth Avenue,” Linde said. “On the other, we’re told 4.6 million people visit the Apple store [annually].”

While FAO Schwarz renewed its lease at the property in 2011, the toy store placed its flagship retail space on the sublease market in late 2013. Boston Properties said it is looking at “a number of scenarios” for the space that would include multiple retail tenants.

Linde noted New York City as “the market with the most significant pickup in activity” for the REIT in the first quarter, with “lease discussions with 11 different tenants” for 145,000 square feet of space at the spec office tower at 250 West 55th Street, and agreeing renewals at both 599 Lexington Avenue and 601 Lexington Avenue.

The REIT also cited space constraints across its New York office properties, with “multiple tenants” looking to expand despite “limited opportunities in our portfolio,” Linde said. Executives said the company is “looking at ways” to expand that portfolio while dispelling concerns that tenants “under relatively long-term leases” would look elsewhere for space.

In evaluating economic conditions, CEO Owen Thomas pointed to “a very hospitable environment” and said that while the REIT expects the Federal Reserve to increase interest rates “later this year,” Boston Properties is “not convinced such a move would have a negative effect” on real estate investments.

Thomas also estimated the company “could move approximately $1 billion in predevelopment projects into our active development pipeline” this year, noting “a new development in New York City” that he declined to further elaborate on.

While describing the REIT’s pursuit of acquisitions as “challenging,” Thomas said the company is “taking advantage of private-market pricing” and looking to fund future activity “through private asset sales.”

Dispositions could total $750 million in 2015 and would consist of “mostly individual building sales rather than large-scale joint ventures,” Thomas added.

Boston Properties led all New York-focused REITs with total returns to shareholders of 9.67 percent in the first quarter of 2015, The Real Deal reported this month.