The Real Deal New York

NYC’s new benchmark is the billion-dollar listing

July 01, 2013
By Adam Pincus

650 Madison Avenue and Haim Chera

650 Madison Avenue and Haim Chera

Records are set — and broken — all the time, for all sorts of things. Temperatures. Speed. Distances. It’s no different in real estate. Usually, it’s prices that topple, a key sign of a hot market. And that certainly has been the case this year in New York City.

On the residential side, $100 million is now the yardstick. Every few weeks, it seems, another extravagant apartment is listed for nine figures. The commercial world is hoeing new ground, too — with a string of $1 billion–plus deals. They’ve come roaring back with a voracity that is surprising even insiders.

Both these trends merit an in-depth look at what’s behind them and what might be ahead. First, a breakdown of the billion-dollar sales. Then, a comparison of how Manhattan stacks up against the world in luxury-home prices.

We call them the new benchmarks. The question we’re asking ourselves: new for how long?

After a two-year hiatus, the Manhattan investment sales market is seeing a flurry of $1 billion deals. While 2011 and 2012 saw several partial-interest sales that valued Manhattan towers at more than $1 billion, there hadn’t been a billion-dollar New York City building sale since search giant Google acquired the 2 million-square-foot office building at 111 Eighth Avenue for $1.8 billion in December 2010.

Then in January of this year, the market thawed. Sony announced it had signed a contract to sell its United States headquarters building for $1.1 billion. That deal, the first of the new season of billion-dollar transactions, closed on March 15.

Since then, New York City has seen three closed sales — and one contract signed — for a total value of $5.1 billion. In addition, two mixed-use office buildings hit the market, and each is expected to fetch more than $1.3 billion.

The first Manhattan single-building sale to break the billion-dollar barrier happened in 2002, when Boston Properties acquired Citigroup’s headquarters at 399 Park Avenue for $1.05 billion.

Today’s conditions still pale in comparison to 2007 — by June of that year, more than $10 billion of deals had closed, including Kushner Companies setting a single-building price record with its purchase of 666 Fifth Avenue for $1.8 billion, and Macklowe Properties snapping up Worldwide Plaza at 825 Eighth Avenue for $1.7 billion, according to data from research firm Real Capital Analytics.

Still, it’s a turnaround.

Industry insiders attributed the spate of deals to a number of factors. One is the sharp rise in retail pricing over the past several years, which affected the sales of 650 Madison Avenue and 550 Madison Avenue, and probably will influence the pricing of 7 Times Square. In addition, sky-high prices buyers are reportedly paying for condominiums at luxury towers like CIM Group and Macklowe Properties’ 432 Park Avenue and Extell Development’s One57 have encouraged building buyers to underwrite at high numbers.

To Dan Fasulo, managing director at Real Capital Analytics, the availability of capital in the debt and equity markets is what’s fueling the movement — along with an expectation that the economy is on a solid footing.
“Billion-dollar deals don’t happen unless your buyer is confident the market will support those valuations, and you will get a nice return going forward,” he said.

Eric Anton, managing partner at Brookfield Financial, attributes the uptick in activity specifically to the debt market. “Lenders are more comfortable with larger loans,” over the past year, he said.

The rash of deals demonstrates the intense competition between two powerhouse brokerage teams: Eastdil Secured’s Doug Harmon and Adam Spies, and Darcy Stacom and William Shanahan of CBRE Group. They have long been rivals, but Eastdil has the leg up so far this year — four of the $1 billion deals and mega-partial interest sales at 1211 Sixth Avenue and Worldwide Plaza.

“In terms of the assignments, it kind of snowballs: The more you do, the more you get,” said one industry insider of Eastdil’s current market dominance. Plus, “people think they have better access to the ultimate decision makers.”

But Shanahan and Stacom, who handled two of this year’s mammoth deals, are not to be underestimated. They represented the sale of Forest City Ratner’s 49 percent interest in the flashy Downtown residential tower 8 Spruce Street to the pension fund TIAA-CREF, which valued the tower at $1.05 billion.

General Motors Building
767 Fifth Avenue
Transaction value: $1.4 billion

From left: Darcy Stacom, William Shanahan and the GM Building

From left: Darcy Stacom, William Shanahan and the GM Building

Taking up the block between 59th and 60th Streets, the General Motors Building is famous on the outside for the distinctive glass cube on its plaza that belongs to Apple’s flagship store below ground, and on the inside for its high-powered office tenants.

Those tenants pay some of the highest rents in the city. The building reported revenues of more than $300 million last year.

In March, word came down that Zhang Xin, CEO of Beijing-based real estate developer Soho China, had partnered with M. Safra & Co., run by the eponymous Brazilian banking dynasty, to buy a 40 percent stake, valued at $1.4 billion, in the 50-story white marble tower. Boston Properties kept its 60 percent stake.

The deal, closed by early June, valued the skyscraper at $3.4 billion, or $1,776 per square foot.

Insiders said the 47-year-old Zhang, who co-founded Soho China in 1995 with husband Pan Shiyi, was investing a portion of her family’s personal fortune in the tower as a safe haven, despite the low annual returns given the expense of the massive investment.

Savvy investors have been eyeing the 2 million-square-foot skyscraper for years as its value climbed. The tower broke the $1 billion mark in 2003, when Harry Macklowe and investors bought it for $1.4 billion from a joint venture of insurer Conseco and Donald Trump.

Then in 2008, Boston Properties acquired a 60 percent stake, in a joint venture with two real estate funds — Dubai-based Meraas Capital and Goldman Sachs U.S. Opportunities Fund, which bought the remaining 40 percent share for $2.8 billion from the struggling Macklowe.

While Eastdil represented the seller in the 2003 sale, the powerhouse CBRE team of Stacom and Shanahan represented Macklowe in the 2008 sale, which brought in Meraas and the Goldman investors. Stacom and Shanahan then represented Meraas and Goldman as they sought to sell their stake.

Finding a buyer was no easy task: The universe of players that can invest several hundred million dollars in one asset is limited to “a few dozen, max,” said Ronald Dickerman, president of Midtown-based investment firm Madison International Realty.

30 Rockefeller Center
Transaction value: $1.3 billion

Another billion-dollar announcement came in March: Media giant Comcast paid $1.3 billion for a large condominium stake in 30 Rockefeller Plaza, the 70-story tower at the center of the famed Art Deco office complex. The purchase coincided with the $16.7 billion acquisition by Comcast of the remaining portion of NBCUniversal that it did not own.

Stacom and Shanahan represented NBCUniversal in the sale; Comcast acquired 51 office condo units that included studio space comprising more than half of the 2.2 million-square-foot building. NBC both owned and occupied the units.

The sale equated to $946 per square foot, data from Real Capital Analytics shows. That’s a steep drop off from the $1,508 per foot that General Electric paid for condominiums on six floors totaling 147,290 square feet in July 2007.
Some real estate market watchers said Comcast may now be considering a sale-lease-back deal, in which it would sell the floors to a third party and then rent them back, to convert some of the equity into cash.

“That money can be invested back into Comcast’s business, which is not real estate,” Real Capital Analytics’ Fasulo said.

Sony Building
550 Madison Avenue
Transaction value: $1.1 billion

David Bistricer

David Bistricer

In 2005, the Japan-based Sony Corporation considered selling its 855,000-square-foot U.S. headquarters building for a reported $360 million. A sale would have brought a tidy profit, considering Sony paid $236 million for the tower in 2002.

Yet Sony held on and the delay paid off: A group of investors paid $1.1 billion for the 36-story skyscraper. The sale price worked out to $1,287 per square foot, not a record but high enough to help stoke the market.

Eastdil’s Harmon and Spies beat out firms such as CBRE, Jones Lang LaSalle, Cushman & Wakefield and Newmark Grubb Knight Frank to win the assignment, and the public marketing campaign began in October. At the time, estimates for the tower ranged from $700 million to $1 billion.

By December, as many as 20 companies had made first-round offers. And after less than four months on the market, the Chetrit Group, in partnership with David Bistricer’s Clipper Equity, purchased the building for $1.1 billion. SL Green, the real estate investment trust, arranged the financing.

Chetrit and Bistricer plan to convert the tower into residential condominiums and a hotel. Bistricer told The Real Deal that he doesn’t feel the partners overpaid.

“We feel very good about the values,” he said. “Some of the more recent trades are showing the value we paid was a little bit below what other deals are going for.”

While it does not always assure a deal, the close relationship between Chetrit and Eastdil couldn’t have hurt, industry insiders said. The two have worked together on eight of the 11 New York City deals over $40 million that Chetrit has been involved in since 2010, according to Real Capital Analytics figures.

650 Madison Avenue
Estimated value: $1.29 billion

The sale of 650 Madison, an office and retail tower, will set a new record when it closes for $2,165 per square foot, or $1.29 billion, expected later this year. Industry insiders said the high price underscores the strength of the retail market in Manhattan. While Midtown office rents are largely static, store rents have soared over the past two years along prime shopping corridors such as Fifth Avenue, Madison Avenue and Times Square.

Haim Chera, a principal at his family firm, Crown Acquisitions, partnered with Highgate Holdings to buy the 600,000-square-foot tower, which occupies the full Madison Avenue frontage between 59th and 60th streets. Adding to its retail value, the 27-story building is at a pedestrian juncture leading from the top of the city’s priciest retail strip, Upper Fifth Avenue, to the base of Madison Avenue’s prime corridor, which runs from 57th Street to 72nd Street. Retail asking rents jumped 11 percent in that stretch over the past year, to $1,217 per foot, information from Cushman & Wakefield showed.

For Crown, the decision to buy the tower from Washington, D.C.-based private equity firm Carlyle Group “was heavily weighted on the fact that we think the retail is worth $1 billion,” Chera said.

Eastdil’s Harmon and Spies marketed the property, winning the listing, according to several insiders, in a so-called “hand-off,” meaning Carlyle gave it to them without a competitive process. It did so, according to the sources, because Eastdil had a long track record in the building, including advising Carlyle and Ashkenazy Acquisition in their $680 million purchase of the building in 2008 from Hiro Real Estate. Then two years later, Eastdil helped the owners refinance the tower, bringing in Wells Fargo, the firm’s parent company, as the new first mortgage lender.

Again later, in 2011, when Ashkenazy exited the deal and Century Plaza bought a 24.5 percent interest, Eastdil was the brokerage.

Time Warner Center
10 Columbus Circle
Estimated value: $1.3 billion

Eastdil’s Harmon and Spies beat out several other firms to represent Time Warner in the sale of its Columbus Circle headquarters. The 1.1 million-square-foot condominium interest hit the market in April, and is expected to fetch about $1.3 billion, a person familiar with the process said.

While the media firm may stay in its building, it is also considering consolidating its Manhattan locations and relocating, sources said.

A wide range of investors — including REITs, pension funds, sovereign wealth funds and even high-net-worth individuals — are expected to take a look at the Columbus Circle building, despite the fact that, because of zoning, it cannot be converted to residential use. (The rest of the 2.8 million-square-foot Time Warner Center complex, which is composed of 240 residential, hotel, retail and commercial condominiums, is not part of the sale.)

“Time Warner Center is one of those unique assets where everyone is going to come out of the woodwork,” Fasulo said, adding, “I think you will see a really diverse group.”

Industry insiders said a media tenant would be a likely tenant or buyer, because some of the space has been built out for television production. Shows such as CNN’s “Anderson Cooper 360” are broadcast from the building.

Times Square Tower
7 Times Square
Estimated value: $1.5 billion

Boston Properties is looking to unload 7 Times Square, the 1.2 million-square-foot tower it built in 2004. Eastdil has been hired to market the property, but has not put an asking price on the 47-story tower, although it’s expected to attract bids above $1,000 per square foot.

One insider familiar with the marketing campaign put the estimated sales price at $1.5 billion or more.

Boston Properties originally expected accounting firm Arthur Andersen to be its anchor tenant, but that was before the firm collapsed in the wake of the Enron scandal. Instead, the largest tenant is fashion designer Ann, the parent company of Ann Taylor, which leases about 300,000 square feet. CoStar Group shows the lease running to 2020.

It was something of an upset that Eastdil won the assignment, because CBRE Group agents were the leasing brokers, and often that relationship determines who wins the right to market a building for sale.

The likely buyer will be “somebody who wants to buy a trophy asset,” said Jonathan Mechanic, chairman of the real estate department at law firm Fried, Frank, Harris, Shriver & Jacobson. “That is not a value-add play. That is more of a core asset.”

“I think there is tremendous demand for money to be in New York, [where it is] viewed as both a safe haven and a center for growth,” Mechanic added.

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