The Real Deal New York

Witkoff expects new Times Square project will net $50M annually: PHOTOS

Dealmaker suggests Google, Amazon, Samsung would be good fit

October 23, 2012 01:30PM
By Adam Pincus

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Real estate developer Steven Witkoff said the retail portion of 701 Seventh Avenue would bring in about $50 million a year in rent and signage.

“I believe the rental numbers in Times Square will far outstrip rents on Fifth Avenue,” Witkoff said during a speech at the Schulte Roth & Zabel Bridging the Gap commercial lending forum, held today at the New York City Bar Association in Midtown.

Upper Fifth Avenue rents are generally considered to be more expensive than Times Square, but Times Square rents have been growing quickly. The commercial firm CBRE Group puts average asking rents on Upper Fifth Avenue at $2,500 per square foot, and central Times Square rents at $1,800 per foot, figures from the second quarter, the most recent available, show.

Witkoff, CEO of the Midtown-based Witkoff Group, was part of a large group including Howard Lorber’s Vector Group and Michael Ashner’s real estate investment trust Winthrop Realty Trust that purchased the site and additional air rights for $430 million (note: correction appended). The buyers plan to develop the site with retail on the lower levels and a hotel above. Barry Sternlicht’s Starwood Capital Group and Starwood Property Trust provided up to $475 million in financing.

“We believe that deal will return a 35 percent [annual rate of return] over a three year period [even] if we never built a hotel,” he said of the property, located at 701 Seventh Avenue a 47th Street.

Witkoff said he anticipated it would cost about $200 million to develop the hotel, or less than $500,000 for each of the estimated 475 hotel rooms. But he said hotel rooms were worth about double that, today, in Times Square. “The market is at least $1 million a key,” he said, using an industry term referring to each individual room.

In addition, he said that Mark Siffon, of Maefield Development, who assembled much of the site over the past several years, will earn a part of the upside once the property is sold, Witkoff said.

He said he had to defend the decision to give Siffon a partnership slice to a potential private equity investor, who balked at giving up some of the profit. Witkoff said it saved paying out a huge chunk of money right away. “Would you prefer I pay the guy a $100 million flip profit on the deal?” Witkoff said he asked them. “To me, I like downside protection.”

He said annual rental income from the retail would be less than the blended price retailer Express was paying at 1552 Broadway, a Times Square project at the corner of 46th Street developed by frequent partners Jeff Sutton and SL Green Realty.

Witkoff said Sutton and SL Green were receiving about $620 per foot for their space with signage included, and that Witkoff expected to earn about 20 percent less, or $500 per foot. But one retail critic believed he would not be able to reach $50 million.

Sutton and SL Green were taking in about $1,500 per foot on the ground floor, and if Witkoff earned 20 percent less, that would give him about $1,200 per foot, which would yield about $17 million for the 14,000 square feet on the ground floor. (Uniqlo is paying about $17 million for 90,000 square feet on 666 Fifth Avenue at 53rd Street.) That would require the tenant to pay an additional $33 million through upper and lower floors, and signage.

The critic said that would be difficult, both because Times Square signage is not that valuable, and because Witkoff’s project is just outside the Bowtie.

Worse, if they can’t find a single tenant to pay the rent and the space were cut up into multiple units, that would drive down the value of the mid-block stores, which would pay much less in rent.

Witkoff said he anticipated the retail space being leased by either a group of several tenants, or possibly one large company taking the whole retail space. “We could wind up with that one very special tenant, an Amazon, a Google or a Samsung. That says this is an amazing branding opportunity,” he said.

Other speakers at the day-long commercial lending forum included Robert Knakal, chairman of Massey Knakal Realty Services; Norman Sturner, CEO of Murray Hill Properties; Edward Kalikow, CEO of the Kalikow Group; Jeffrey Lenobel, partner at law firm Schulte Roth & Zabel, and Douglas Durst, chairman of the Durst Organization.

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