The Real Deal New York

SL Green grabs Midtown South building for $135M

By David Jones | May 31, 2012 11:45AM

[Updated at 3:51 p.m. with comment from Berley and SL Green] SL Green, the largest commercial office landlord in New York City, said it agreed to buy 304 Park Avenue South for $135 million, or $628 a square foot, from a partnership led by David Berley, chairman of Walter & Samuels Inc.

SL Green said the 215,000 square foot office and retail complex, located on the corner of 23rd Street across from the landlord’s One Madison Avenue tower, will be acquired with 50 percent cash and 50 percent “operating partnership units.”

IMG Models, the world’s largest modeling agency, is the lead tenant, occupying 95 percent of the building, while the retail space is occupied by H&R Block, Time Warner Entertainment and Bed & Body Works.

Andrew Mathias, president of SL Green, said that the company has been monitoring the Midtown South submarket carefully for deals, but noted that the tightening vacancy rates and substantial leasing activity in the area have generally driven cap rates “below our target investment thresholds,” in the announcement released Thursday.

“The transaction reinforces what everybody knows, Midtown South is the hottest market in the country,” said Ben Thypin, director of market analysis from Real Capital Analytics. “By being able to offer the seller a tax-efficient transaction, SL Green was able to source an off-market deal that met their investment criteria, which is rarity in a market as hot [as this].”

Berley said the building, which was not up for sale, was in the final year of generating capital gains and when approached on the deal the partners decided, “why not cash out?

“I saw this as an opportunity to get a tax beneficial way of selling,” he told The Real Deal.

Steve Durels, executive vice president and director of leasing at SL Green, said the Midtown South submarket has transitioned from a lower cost option for midtown companies to a desired location for employees.

“As the neighborhoods have evolved it’s now a neighborhood of first choice,” he told The Real Deal.

Durels said a deal is in place with a “national retailer” to lease a 3,300 square foot ground floor retail space, which has an asking price of $275 a square foot.

About 25 percent of the building’s office space, which has an asking price of $65 a square foot, is scheduled to roll over in the next two years, he said.

In the company’s first-quarter conference call on April 26, Mathias said there was a “standoff between buyers and sellers” as lots of capital is looking for deals, but buyers’ expectations are high, given that higher interest rates and tightening cap rates are “on the horizon.”

According to a recent report by Cushman & Wakefield, Midtown South is the tightest leasing market in the nation, as the vacancy rate has fallen, between the first quarter of 2011 and the first quarter of 2012, from 8 percent to 5.9 percent.

Class A rents in the Midtown South market jumped 33 percent in the first quarter to $68.79 from the year-ago quarter, according to Cushman & Wakefield.

Doug Harmon of Eastdil Secured advised on the off-market transaction, while Walter & Samuels represented itself in the deal.