Blackstone bullish on Midtown – despite Hudson Yards

“Residential crowd-out” to drive up office prices: COO of firm's RE arm
By Konrad Putzier | September 25, 2015 03:05PM

With 6 million square feet of office space in the works at Hudson Yards alone, more and more investors are ringing the alarm bells over an oversupply that could bring down office prices across Manhattan. But not Blackstone.

“One thing we see in cities like New York or San Francisco is that companies that have been in the suburbs are moving back downtown,” Kathleen McCarthy, chief operating officer of Blackstone Group’s real estate division, said at a conference hosted by the Yale Alumni Real Estate Association in New Haven, Conn., Friday.

She added that this demand is not met by enough new construction, largely because developers prefer the returns from residential projects.

McCarthy pointed to Midtown Manhattan, where several condo towers are being built and new office buildings are not.

“So you kind of have this residential crowd-out at a time when there’s tremendous office demand,” she said.

Midtown and Lower Manhattan, traditionally office districts, have seen a flurry of condo construction and conversions over the past few years. For example, CIM Group and Harry Macklowe are developing a luxury condo tower at 432 Park Avenue, and Macklowe is also converting the former Bank of New York building at One Wall Street into condos.

McCarthy isn’t worried the mixed-use developments around Hudson Yards will negatively impact Midtown office prices.

“While certainly that’s a lot of new supply, it’s catering to a particular type of tenant that needs a lot of space, and we don’t feel that it’s an overall threat to the core of Midtown, for example,” she said.

Although Blackstone sold three trophy office properties in Manhattan this year for a total of more than $3 billion – 3 Bryant Park, 717 Fifth Avenue and the old New York Times Building at 229 West 43rd Street – the private equity giant has continued to invest as well. In November, the firm bought 1740 Broadway from Vornado for $605 million. This year, it paid $2 billion for a 50 percent stake in RXR Realty’s New York office portfolio – including the Starrett-Lehigh Building – and snapped up a minority stake in the Helmsley Building at 230 Park Avenue.

Blackstone’s real estate group made it through the downturn better than most of its peers and is now the largest U.S. private landlord, contributing to its reputation as a savvy spotter of market trends. The group’s CEO Jonathan Gray, in particular, has become an almost cult-like figure whose market views are frequently cited in business media coverage.