The Real Deal New York

Buying trophies with smaller checks

Appraisers say value of iconic properties dropping sharply

March 31, 2009
By Christopher Faherty

Three record-shattering deals epitomized Manhattan real estate’s recent boom: Tishman Speyer’s $5.4 billion purchase of Stuyvesant Town, Kushner Companies’ $1.8 billion acquisition of 666 Fifth Avenue and Mort Zuckerman’s purchase of the GM Building for $2.8 billion.

At the time, each of these billion-dollar-plus transactions was deemed a triumph of sorts for its respective investor. But today, with both commercial and residential values plummeting in Manhattan, these trophy deals aren’t looking quite as sweet.

“Overall, office values have got to be down on average by at least 30 percent due to three things: market rent has come down, vacancy rates have risen and cap rates have risen,” said Joel Leitner, principal of the Leitner Group, a commercial appraisal services company.

And even trophy properties, which have historically outperformed the real estate market in New York City, can’t stave off the effects of the credit crunch.

“I have no reason to believe that the values of trophy properties are impacted any differently than the values of the other properties,” said John Cicero, president and CEO of the commercial appraisal firm Miller Cicero.

But determining just how valuable these properties are is a very difficult task today. Many appraisers say that since no comparable properties have traded hands in 2009, it is nearly impossible to define just how far the values of trophy properties have fallen. The closest deal has been the sale of the condominium portion of 1540 Broadway, which fallen developer Harry Macklowe bought for $967 million in 2007 and which sold to CB Richard Ellis Investors for a reported $355 million last month.

“The market is in a re-evaluation mode right now, and there have been very few trophy sales at the new pricing paradigm,” said Dan Fasulo, managing director of Real Capital Analytics. “That is causing some confusion and, in turn, is really causing transactions to crawl to a halt.”

The General Motors Building sold last summer, just after the height of the market, for roughly $1,400 a square foot. The two most recent transactions of high-quality Plaza District properties that could even be considered comparable took place last fall: Tower 56, which sold for $920 per square foot in September, and 527 Madison, which sold for $1,175 per square foot in November, said Craig Evans, senior managing director of Colliers ABR.

“Prices have, of course, dropped since then,” he said.

The steep decrease in rental asking prices at trophy properties is a major factor in why values have declined, appraisers said.

As of February, average rents at trophy office buildings in Midtown were about $98.55 per square foot, according to research provided to The Real Deal by Jones Lang LaSalle. That number is down from $117.46 per square foot in fall 2008 and $122.93 per square foot in spring 2008, according to the Skyline Review, the firm’s seasonal report on trophy office properties.

As for Stuyvesant Town, many say that Tishman Speyer overpaid while banking on deregulating apartments and getting more market-rate tenants. That issue, of course, is now tied up in court after a judge initially sided with tenants, saying that the owners could not deregulate apartments and continue receiving state tax breaks.

Meanwhile, residential appraisers say the value of that deal has undoubtedly dropped since the record transaction was made in 2006. Both residential property values and rents are down in Manhattan by between 20 and 25 percent compared to the height of the market, according to Jonathan Miller, president of appraisal firm Miller Samuel, the residential counterpart of Miller Cicero.

Despite the overall decline in the value of trophy buildings like the GM Building and 666 Fifth Avenue, they could prove to be resilient investments, said Nat Rockett, a managing director with Jones Lang LaSalle’s capital markets group.

“Trophy buildings will probably fare better than the overall average,” he said. “They’re still the most desirable asset.”

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