In the tight quarters of Manhattan real estate, cobbling together space by assembling blocks of adjacent land has long been one of the go-to strategies to make room for something bigger.
Now there’s good indication that, after a recession hiatus, developers are again turning their attention back to assembling properties.
Real estate firms such as the CIM Group, the Rockefeller Group and Extell Development are betting that as the economy improves, the investments made in these sites will pay off in the same one-plus-one-equals-three way they have for other companies in the past (see the Durst Organization’s One Bryant Park, for example).
In addition, brokers say that increased activity has happened faster than many expected.
“There are many assemblages being looked at now that the market is getting better, whereas two years ago there would be zero to none,” said Eric Anton, executive managing director at Eastern Consolidated. “So the market has really improved.”
Development attorney Jeremiah Candreva, a partner with Troutman Sanders, also said that since the credit markets have eased up, there are more assemblages happening.
“The leverage that occurs when lenders are willing to provide financing fuels the vehicle pursuant to which assemblage transactions occur,” he said.
But assembling multiple adjacent parcels is still one of the most complicated and secretive kinds of transactions in the New York City real estate world. In the hush-hush universe of assembling Manhattan land, negotiations to buy buildings, air rights and leases are conducted even more quietly than they are in single-property deals.
Developers obviously need to keep their activity quiet to acquire the properties at the lowest possible price. That’s because once a property owner gets wind of the fact that a developer is planning a project, the property owner’s leverage to get more money almost always goes up.
Robert Knakal, chairman of Massey Knakal Realty Services, said some buyers even seek out properties that they know a developer is looking to acquire as part of an assemblage because of that added negotiating leverage.
Of course, one of the biggest risks for developers when it comes to pursuing assemblages is that one of the targeted property owners declines to sell.
Dov Hertz, head of acquisitions at commercial and residential builder Extell, said the company has been blocked by unwilling sellers at times.
“There is also a risk that you get stuck. It has happened to us,” Hertz said.
Property owner George Papoutsis, who owns two buildings, including a five-story corner apartment building at 1565 York Avenue, is one landlord who does not want to sell, even though his 25-foot-wide property has 11,000 square feet of valuable unused air rights.
The need to overcome that reluctance and acquire a group of adjacent properties to create a larger lot to build on can make developers more flexible than they would otherwise be. If a firm were pursuing a single property, for example, it could easily walk away and find something else to buy.
Hertz recalled one instance when a seller in his 90s agreed to a price for a parcel and shook on it. But before closing, he said he needed more money. The seller did that once again before finally agreeing to a price. However, Extell made the deal.
“We come to the closing,” Hertz said, “and he needs something else. I said to him, ‘You shook my hands two times!’ He says, ‘What, three handshakes in a deal is too much to ask?'”
In addition, the uncertainty surrounding these kinds of deals makes it harder to borrow money. Hertz said lenders today generally only provide loans for the in-place income of a property, not the expected income once the building is completed.
Investment firm CIM Group skirted that issue by paying all cash to expand its development, which Macklowe Properties is building at Park Avenue and 56th Street.
In December, CIM paid $42.5 million for 46 East 57th Street, and transferred the air rights from that building to the larger site Harry Macklowe began acquiring in 2006, with the purchase of the Drake Hotel. Macklowe lost control of the site to CIM in 2010, although he remains a participant in the deal, sources say.
On the west side and a bit to the south, Rockefeller Group Development has two sites that sources say it has been assembling for decades. Both are near Seventh Avenue, between 47th and 49th streets. Their most recent acquisition was in 2008, city records show.
While those examples involve what will likely be large-scale developments, not all assemblages are for monster projects.
Craig Nassi, head of BCN Development, told The Real Deal that he’s looking to assemble a parcel on the Upper East Side for a more modest-size residential project, but he would not disclose the address.
And he said he’s taking advantage of today’s stable but lower prices to collect the land.
“The benefit of putting it together today is that the basis will be low,” he said. “Our basis will be $300 [per square foot], whereas it was $600 [per square foot] in 2006.”
Ronald Sernau, co-chair of the real estate department at law firm Proskauer Rose, pointed to the large development Related Companies is building over open railroad tracks west of 10th Avenue, between 30th and 33rd streets, as another example of a neighborhood where builders would likely plan to go after assemblages.
Here’s more detail on some of the assemblages already underway:
When Harry Macklowe dreamed of developing the former Drake Hotel on Park Avenue, his plans included 150 feet of frontage on 57th Street occupied by low- and mid-rise commercial properties.
He wanted an entrance that would face the Four Seasons Hotel and provide him a strong retail presence.
But after buying the Drake site for $418 million in 2006, he was only able to buy four of the seven buildings he had eyed — 38, 40, 44 and 50 East 57th Street. He could not gain control of 42, 46 and 48 East 57th Street. The owner of 42 East 57th Street sold to one of the building’s tenants, high-end clothing retailer Turnbull & Asser — which blocked Macklowe from creating a continuous retail presence on 57th Street.
However, in December CIM took another stab at enlarging the development’s footprint, paying $42.5 million, or about $1,575 per buildable foot, for 46 East 57th Street. At the same time, the firm inked a deal to unify all the properties into a single zoning lot, which will allow it to erect a building cantilevered over properties it doesn’t own. One of those is the Turnbull & Asser building at 42 East 57th Street; the other is 48 East 57th Street, owned by the jewelry retailer Jacob & Company.
Development in Times Square
Near Times Square, Rockefeller controls six properties with a total of 343,742 square feet east of Seventh Avenue between 47th and 48th streets. The firm’s most recent acquisition on the parcel was more than two years ago.
The firm — which is best known for developing Rockefeller Center, but more recently, in 2001, built the 1 million-square-foot 745 Seventh Avenue — made a series of acquisitions in 2008, including when it paid $62.5 million for a garage with six stories.
But limitations to the site include landlords like Richard Halpern, who owns the corner at 719 Seventh Avenue, where insiders say he earns millions per year from signage rights.
According to an analysis by one broker who has studied the area, the block has just short of 1 million square feet of development rights. But much of that is tied up in the 40,000-square-foot 701 Seventh Avenue, owned by Suzanne Bronfman, which according to PropertyShark has 224,924 square feet of development rights.
Development in Times Square (one block north)
On the block just to the north, Rockefeller Group owns four parcels or buildings with a total of 206,614 square feet of development rights.
However, it has not made an acquisition on the block since 2003, when it acquired 147 West 49th Street. The other three parcels were bought between 1981 and 1983. And the group still needs several more properties to create a plot big enough to build on.
At 142 West 49th Street, owner Jay Wartski has a hotel, and at 153 West 48th Street, the estate of Sol Goldman owns a parking garage. However, Goldman’s estate rarely sells properties.
And there are other owners out there like the Goldman estate that are not interested in selling. Papoutsis, talking about his York Avenue building, said he gets calls from brokers every few months. The last time was in January, when someone asked if he wanted to sell. But he said no.
“I say, ‘I am not interested,'” he said. “I need to pass my time [managing the building] because I am 74 years old and I have to have something to do.”