The Real Deal New York

The players likely to open their wallets on NYC real estate this year

From investment firms to Russian oligarchs, who is preparing to spend big

April 01, 2014
By Hiten Samtani

From left:

From left: Marc Holliday, Mikhail Prokhorov and Alexander Rovt

Just days after American Realty Capital’s New York Recovery REIT acquired an office building at 1440 Broadway in October for $529 million, the company’s chief investment officer made a bold proclamation. Michael Happel said his company had a “loose target” to spend another $1 billion on commercial real estate in Manhattan over the next year.

While not everyone has a cool $1 billion to drop, there are plenty of deep-pocketed investors on both the residential and commercial fronts hungry for New York assets.

“I’ve never seen the marketplace so liquid and so deep,” said Dan Fasulo, the managing director of Real Capital Analytics.

While investors like Jeff Sutton and Thor Equities’ Joseph Sitt continue to rack up mega-acquisitions (and headlines) in a flurry of deals, a bunch of other players, from real estate investment trusts to Russian oligarchs, are also searching for assets with investment potential.

This month, The Real Deal identified some of the noteworthy companies and individuals likely to open their wallets in the coming months, whether it be for office buildings, multi-family properties, retail condos or pricey residential pads.

American Realty Capital

American Realty Capital’s New York Recovery REIT, which stunned the market with one eye-popping buy after another in 2013, is poised for another big year. It recently raised $1.7 billion from investors in preparation for a stock exchange listing later in 2014.

Nicholas Schorsch, CEO of the REIT’s parent company American Realty Capital, told TRD that the funds will primarily be used to purchase more commercial real estate assets in New York City.

“We’re nowhere near the peak,” Schorsch said during a phone interview last month. “There’s still some leasing upside in the market.”

Formed in 2010, the New York Recovery REIT quickly exploded into one of the city’s most aggressive players. It acquired about $1.8 billion worth of New York City real estate in 2013, mostly Manhattan core office and retail properties.

Schorsch said that 80 percent of the REIT’s upcoming investments would be in Manhattan, primarily in office and retail properties with significant upside. The REIT is eyeing the Garment District, Midtown South and the Far West Side for those acquisitions.

“The trophy buildings tend to bring sovereign money — you get the whale hunters,” Schorsch said. “That’s not necessarily for us. Do you really want to be on Park Avenue buying a 4-cap building when you can buy a 6-cap building somewhere else?”

The company’s biggest deal was in November, when it outmaneuvered RXR Realty to snag a 48.9 percent stake in the 59-story, 1.8 million-square-foot Worldwide Plaza, with a right to buy the office tower outright for a total of roughly $1.45 billion.

It has raised more funds than any other non-traded REIT, according to news reports.

The initial public offering, Schorsch said, will “allow us to lower the cost of capital” and lead to a broader availability of money to spend.

RXR Realty

Scott Rechler’s RXR Realty shows no signs of putting the brakes on its ultra-aggressive run.

“We’re going to continue to build on our successful strategy,” said Seth Pinsky, who recently joined the company after leading the city Economic Development Corporation under former Mayor Michael Bloomberg. That echoed a comment Rechler made to TRD last year that “we think this is the time to be active.”

The company has made good on that promise, building an enviable portfolio of New York properties. It’s closed on over $2.44 billion in acquisitions since 2012, either through joint ventures or as the sole buyer, according to Real Capital Analytics data. The priciest was the 1.2 million-square-foot 237 Park Avenue, which it bought with Walton Street Capital for $800 million in October. And shortly before TRD went to press, it went into contract to buy 61 Broadway, a Financial District office building, for $330 million.

Pinsky, who heads up RXR’s investments in emerging neighborhoods in the New York City area, said the overwhelming competition from global investors in Manhattan is forcing many real estate players to look outside the borough for viable acquisitions.

RXR, for one, is allocating $1 billion to buying properties in the outer boroughs, including industrial buildings in the South Bronx, office buildings and development sites in Long Island City and retail and residential properties on Staten Island.

And it’s already gotten started on deploying that cash. In January, it struck a $195 million joint-venture deal with American Landmark Properties to buy the long-term lease of a large office building at 470 Vanderbilt Avenue, near the Barclays Center (see “Anatomy of a deal: 470 Vanderbilt Avenue”).

Pinsky declined to comment on specific acquisitions RXR is considering, but said, “We’re in active discussions on a number of different fronts” and “we’re looking at the full mix of uses.”

The firm will have little trouble replenishing its funds if need be. Rechler has connections to “big sovereign wealth money,” said a source familiar with RXR. Plus, he’s got a track record of convincing deep-pocketed investment firms to open their wallets for him.

In December, NorthStar Realty Finance Corp. announced that it was investing $340 million in RXR in exchange for a 30 percent stake in the company.

Mikhail Prokhorov

The Russian businessman, best known in New York as the majority owner of the Brooklyn Nets, has a net worth of $12 billion, according to Bloomberg.

Last month, the Moscow-based Prokhorov, who also owns a 45 percent stake in the Barclays Center, said he’s trying to relocate the Nets’ parent company, Onexim Sports & Entertainment, to Russia because of growing tensions between the United States and his native country. Prokhorov, who made his fortune in precious metals, is also thought to be close to Russian President Vladimir Putin.

But the potential tax consequences of relocation may force him to reconsider his decision, according to real estate lawyer Edward Mermelstein, who is unconnected to Prokhorov but works with many wealthy Russian buyers.

“For him it makes more sense to continue with his investment policy in the U.S.,” Mermelstein said, as opposed to many of the other oligarchs. “The fact is that’s he’s vetted by both the government and the NBA, and has full access to the banking system at this point.”

When in New York, Prokhorov is known to stay at the Four Seasons. So if he decides to continue investing here, it might make sense for him to invest in a pied-à-terre. A trophy buy would put him in the ranks of other oligarchs, such as Dmitry Rybolovlev and Len Blavatnik, who’ve taken a fancy to the Manhattan market.

Another Russian billionaire may hold off on spending for the time being. Roman Abramovich, the owner of British soccer powerhouse Chelsea Football Club, went into contract in January to buy a mansion at 828 Fifth Avenue for $75 million. That deal is currently in dispute, and sources said that Abramovich, a Putin crony, may want to keep a low profile for now.

“It would be politically unwise [for Abramovich] to buy now,” a source said. “There’s no reason for him to spend what’s going to be reported as Russian national funds. He would have unfavorable press very quickly.”

Vornado Realty Trust

While Vornado, the second-biggest office landlord in the city, made some big-ticket buys in the last few years, it’s largely been in selling mode.

That may be starting to change. The REIT, headed by Steven Roth, is reportedly considering spinning off its suburban shopping centers into a separate company. Those who follow the firm said if that happens, it could free up resources and manpower for Vornado to focus more on acquiring core office and retail assets in urban markets.

“The idea behind Vornado’s divesting strategy is to eventually focus [its] resources on the underlying property portfolio in profitable areas” such as New York and Washington, according to a February report cited on the investment website Seeking Alpha.

The firm has cash to spend. At the end of 2013, the company’s cash and cash equivalents stood at $583 million, according to regulatory filings.

In addition, in June, it lost out on its bid for the office and retail tower 650 Madison Avenue. (Vornado ultimately got in on the deal with a minor $12.5 million investment after a partnership led by Crown Acquisitions and Highgate Holdings paid $1.3 billion for the 27-story building.) Nonetheless, the fact that Vornado initially vied for a bigger stake in the mega-building signals its intent to be a player in this market.

In October, it paid $300.3 million for the 57,500-square-foot 655 Fifth Avenue, which has about 20,000 square feet of retail space. It also bought a $171.2 million development site from Extell at 225 West 58th Street, where it’s planning to develop the 41-story condo 220 Central Park South.

Vornado has struggled through a rough patch in recent years, culminating with the resignation of CEO Michael Fascitelli last year. But in the past two quarters, its stock price has rebounded (see “A REIT rundown for 2014″).

Vornado made good on its promise to streamline its business and Roth “regenerated a lot of goodwill in the past two years,” said Alexander Goldfarb, an analyst with Midtown-based investment banking firm Sandler O’Neill + Partners.

HFZ Capital Group

On the residential side, Ziel Feldman’s HFZ Capital Group has been among the most active investors (see “NYC’s most active developers”). And he shows no signs of letting up. Indeed, Feldman told TRD that he will soon announce the acquisition of up to six more residential projects.

HFZ is also in the market for trophy mixed-use properties, such as 650 Madison, which it bid on but lost to the Crown-Highgate partnership in June. Sources said Feldman teamed up with wealthy Middle Eastern investors on that bid.

HFZ’s track record over the past year certainly suggests an abundance of funds.

In December, the company — which according to Real Capital Analytics, spent almost $1 billion on multi-family properties since 2012 — paid $610 million for a 743-unit, four-property rental portfolio in Manhattan. The move followed several big buys in 2012, including the $150 million purchase of the 147-unit Chatsworth Building at 344 West 72nd Street in a joint venture with BSG Real Estate.

Investment sales brokers said Feldman was actively scouting for more buys.

“We’re looking for circumstances [for deals],” Feldman told the New York Times last year. “Churches, nonprofits, synagogues, they’re starting to realize the untapped financial resources that they have in real estate.”

Alexander Rovt

In 2012, Ukraine-born fertilizer tycoon Alexander Rovt paid more than $300 million for a 1 million-square-foot office building at 14 Wall Street. What shook the market, however, was the audacious manner in which he bought the building — all in cash.

Rovt is now looking to spend up to $200 million to buy another New York commercial property, he said at a Baruch College event in February. And the current political turmoil in Rovt’s native country is unlikely to affect his financial situation here. A source familiar with Rovt said he cashed out his investments in Ukraine a few years ago.

On the residential front, Rovt is renovating the Henry T. Sloane mansion at 18 East 68th Street, which he bought in 2011 for about $33 million. He’s also looking to unload a townhouse at 232 East 63rd Street; he recently tossed in a Rolls-Royce Phantom to sweeten that deal, but not before jacking the asking price up by $3 million. Forbes recently pegged his net worth at $1.1 billion, noting that he “has been pouring his money into real estate and owns more than 30 investment properties, mostly apartment buildings in New York City.”

Frank McCourt

When it comes to individual players on the development scene, the former owner of the Los Angeles Dodgers is making a name for himself in New York.

McCourt, a one-time Boston developer, made a splash when he paid $167 million, or more than $640 per square foot, for a development site at 358 10th Avenue across the street from Hudson Yards, in September.

McCourt Partners, a joint venture between McCourt Global and financial services firm Guggenheim Partners, is planning to build a 730,000-square-foot mixed-use building at the 10th Avenue site. In December, McCourt told TRD the deal would be the first of many.

Peter Wilhelm, a senior managing director at the firm, said at the time that McCourt preferred development sites over existing buildings. “Frank kept coming back to sexy development deals and the idea of building important buildings.” Wilhelm said.

He’s certainly got the cash. McCourt made a net profit of roughly $1.28 billion from his 2012 sale of the Dodgers, according to the Los Angeles Times. In September, he gave his alma mater Georgetown University $100 million to start a public policy school.

McCourt Partners is armed with more than $550 million in assets and capital, and plans to spend a large chunk of it in Manhattan. McCourt said that his company was already negotiating on another Manhattan development site.

Benchmark Real Estate Group

The competition in the mid-sized multi-family investment market is also fierce, with players such as Stone Street Properties, Silverstone Property Group and others competing for assets.

Among them, Benchmark Real Estate Group made a number of significant buys since its launch in 2009, including a $57 million December deal for a mixed-use apartment and retail building at 55 Third Avenue in the East Village.

But after losing out on a few multi-family deals recently, the company now has a new pile of cash to tap into. Last month, the firm, which was founded by Aaron Feldman and Jordan Vogel, raised a $95 million fund that will allow it to close on at least $300 million of Manhattan real estate in the next 12 months.

Vogel told TRD that Benchmark is targeting deals priced between $10 million and $150 million. And, he said, the company is already in contract on two mixed-use properties Downtown — both in the $10 million-range.

Qatari Royal Family

The ruling family of the wealthy Middle Eastern nation has been on something of a buying tear in New York — and it has hit on several different asset classes along the way.

Qatar’s sovereign wealth fund certainly has money on hand: about $170 billion in assets under management, according to the Sovereign Wealth Fund Institute.

In March 2013, it partnered with Aby Rosen’s RFR Realty to buy the nearly 400,000-square-foot 350 Madison Avenue for $261.5 million. The previous year, Qatari Prime Minister Sheikh Hamad bin Jassim bin Jaber Al-Thani paid Rosen $47 million for his 22 East 71st Street townhouse.

And, last June, Al-Thani paid $35 million for the Ellen Biddle Shipman Residence, a six-bedroom townhouse at Beekman Place.

In December, the nation of Qatar went into contract on the purchase of an 80 percent stake in the $300 million InterContinental Barclay Hotel at 111 East 48th Street.

And in January, Qatar, represented by Douglas Elliman brokers Oren and Tal Alexander, agreed to pay $100 million for 19 East 64th Street, a 20,500-square-foot townhouse. It plans to convert the building, which was being as an art gallery, into its consulate.

The ruling family is likely to continue its buying spree, sources said.

SL Green Realty

With the exception of the $800 million it agreed to plunk down last month to buy the remaining stake in the Citigroup headquarters at 388-390 Greenwich Street, Manhattan’s largest office landlord has been uncharacteristically quiet about acquiring trophy office properties for the last couple of years. In fact, the REIT hasn’t bought a $200 million-plus Manhattan office tower since January 2012, when it paid $252.5 million for 10 East 53rd Street.

The lack of purchases can probably be attributed to the frothy office market, which is prompting buyers to pay hefty cash to snap up trophy towers. The resulting low yields are not enough to satisfy REITs’ hungry shareholders, who, by law, are entitled to 90 percent of the taxable income that REITs rake in.

Instead, SL Green is looking to make other investments.

It’s pressing for a net growth in its retail and residential portfolio of around $750 million this year, company executives said at the firm’s annual investor conference in December.

While mostly quiet on the office front, the company made some serious acquisitions recently on the retail side. It partnered with Sutton to buy the long-term retail leasehold at 650 Fifth Avenue for $326 million, and paid $146 million in a series of deals for retail space along Fifth Avenue. On the residential side, meanwhile, it acquired the Olivia, a 36-story tower at 315 West 33rd Street with 333 luxury rentals for $386.8 million, and partnered with Ben Shaoul on a three-property, 84-unit multi-family portfolio in Williamsburg for $54.9 million.

In the next few years, however, it plans to expand its residential portfolio to 5,000 units from the roughly 1,500 it currently holds, executives said at the investor conference.

“Management seems to prefer the durability of rental apartments versus the volatility of the condo market,” analysts from Sandler O’Neill said in a recent report.

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