The Real Deal New York

Macklowe’s mess

How developer who personified boom may eventually epitomize the bust
By Adam Piore | October 08, 2007 12:37PM
Harry Macklowe, surrounded by his empire

Harry Macklowe, surrounded by his empire

The fate of New York City’s most valuable office building — and the man who owns it — has real estate insiders on the edge of their seats.

The General Motors Building is just one of the many gleaming skyscrapers real estate mogul Harry Macklowe put up as collateral when he borrowed billions to finance his purchase of seven Class A properties from the Blackstone Group last February.

Now, with the credit markets roiling from the subprime fallout, with as much as $3.5 billion in short-term debt coming due in just four months, and a portfolio of some of New York City’s top office assets at risk, the storyline of the 70-year-old titan is the best the industry has seen in years.

“It’s like a soap opera, it’s all I hear from anyone anymore: ‘What’s happening with Harry,'” said one real estate industry insider, who did not want to be identified.

Like any good yarn, this drama is about more than just a man with bushy eyebrows, nice suits and a buccaneering persona — it’s about what his story represents: Suddenly, the developer who personified the intoxicating real estate boom could come to epitomize its dizzying bust.

Macklowe declined to comment for this article.

Many have suggested that Macklowe’s purchase of the $7 billion portfolio (that’s three times the GDP of Belize) from Blackstone after the latter purchased Equity Office Properties may eventually prove to have been the pinnacle of the current real estate cycle.

Certainly before his current troubles, Macklowe was gazing down from a lofty perch. Just three months after snaring the most expensive portfolio of real estate on the market in the city’s most expensive district (by putting up as collateral the most expensive office tower in the city — the GM Building is worth more than $4 billion, according to brokers), Macklowe quietly snapped up what is likely the city’s most expensive apartment. In June, he shelled out $60 million for seven contiguous condominiums at the Plaza Hotel, comprising a total of about 13,000 square feet, according to property records pieced together by the New York Times.

In September, he cracked the list of Forbes 400 richest Americans, checking in at number 239, placing his worth at $2 billion (tied with another local real estate titan, Jerry Speyer, among others). Yet Macklowe made his ascent on a mountain of short-term debt.

And he was not the only one. Should he go under, it certainly would not bode well for the industry as a whole.

The Equity Office deal came at the end of a procession of increasingly frenzied and record-breaking deals, as developers cashed in on loose lending standards and low interest rates, bidding up buildings in a growing number of negative arbitrage situations.

“That deal represented the high-water mark in terms of [low] cap rates,” said Barry Hersh, associate director of the Steven L. Newman Real Estate Institute at Baruch College. “And we’re talking [a sum that equals] the economy of a small nation.”

First of many to fall?

Certainly the buy — and the easy loans to support it, backed with just around 5 percent in cash — were emblematic of a hubris and risk-taking of many playing the game. If the negative lending situation persists and property values fall and lease rates go south with them, a Macklowe fall would be just the first of many.

Still, even in an era of mega-deals and big risk, Macklowe’s bet on the Equity Office portfolio surpasses all the rest in size and the sheer audacity and daring it took to pull it off.

And in that respect it may be impossible to separate the deal from the man who made it. Throughout his career, Macklowe has made a name for himself by moving aggressively to get what he wants, even when it has meant taking risks others might shun.

To finance the Equity Office deal, Macklowe ponied up just $50 million of his own money; he borrowed the balance, including $900 million from hedge fund Fortress Investment Group, with the rest supplied by Deutsche Bank, and wagered most of his other assets, including the prized GM Building at 767 Fifth Avenue between 58th and 59th streets.

“The vast majority of people do not have the risk tolerance to sleep with the kind of debt overhanging him,” said one real estate insider. “It’s unimaginable to most people.”

Portrait of a ‘brilliant’ man

So who is this figure at the center of the storm?

His admirers say he’s a “brilliant” man with an uncanny sense of the market and a creativity he uses to transform properties once he acquires them.

“Harry has foresight better than any developer I’ve ever met,” said Mitchell Konsker, a vice chairman at Cushman & Wakefield. “Probably Harry is one of the most creative individuals you’ll ever meet — in deals, in architecture and in vision.”

His detractors see an arrogant, even reckless individual whose hard-charging style has drawn criticism and brought him notoriety that borders on infamy. At least once, he’s traveled to the brink of ruin, only to bounce back bigger than ever.

“When you have this kind of buccaneering sensibility, those personality types can sometimes be arrogant and dismissive of other people,” said one real estate insider. “A lot of people are rooting for Macklowe to fail — he’s a controversial guy.”

Most who know him have seen this plot before, but while the stakes have changed, few are counting him out.

“This could be ruinous to Harry,” said Robert Freedman, president and CEO of GVA Williams. “But I don’t think it’s going to happen.”

Taking risks from the beginning

The son of a garment executive, Macklowe got his start as a broker at Julian Studley Inc. in 1959. In just a few years, he was doing his own deals and trading up to bigger and better properties.

Some pinpoint his first major splash in the commercial property market with a deal he pulled off in the early 1980s, when he acquired a nine-story warehouse and converted it into office space. Though some considered it a gamble, Macklowe scored big when he signed New York Telephone to a 10-year, $50 million lease.

Soon after, he built Grand Central Tower on 45th Street between Lexington and Third avenues, defying conventional wisdom at the time by building on a side street. It was a bet that some real estate insiders thought would fail — until Macklowe once again surprised them, by signing a deal with Hanover Trust to take half the floors.

“When I started in the business in 1981, he was in the same place in the business as 2,000 other guys,” recalled Michael Cohen of GVA Williams. “What distinguished him from everybody else was his ability to take risks. On more than one occasion, he has placed really big bets that raised a lot of eyebrows and came out with a huge success.”

He’s done so by finding ways to transform the properties he acquires. Mary Ann Tighe, CEO of the New York tri-state region for CB Richard Ellis, has known Macklowe for 15 years. (Tighe, as well as Cohen, spoke about Macklowe before the credit crunch hit this summer.) Last spring, she described him as “a classic re-creator of properties.

“Harry is not an owner who goes in and does financial engineering,” she added. “He takes a property and makes it better. He’s enormously visual, and he’s done a lot of construction. He has a creative eye.”

Robert Knakal, chairman of Massey Knakal Real Estate Services, said, “Harry is one of the most brilliant real estate guys in the city. He’s always figured out a way to look at properties from a perspective that is different from most people, and that’s how he’s been able to create such tremendous value in a property.”

There are plenty of recent examples to prove that point. At 540 Madison in Midtown, Macklowe pushed out the retail space to the property line, creating a new enclosed space, considerably upping the amount of rentable area. He put windows in the elevator bank, breaking up a rather depressing solid brick wall.

“He reconstructed the building so when he was done, it felt like a completely different property,” said Scott Latham, an executive director at Cushman & Wakefield.

Cushman’s Konsker points to 610 Broadway, at Houston Street in Soho, as another example of Macklowe’s creative vision. Macklowe put up a glass tower, priced it as an alternative for financial tenants and attracted Adidas to the ground and second floors.

“He leased the entire property in nine months at rents above $60 a foot, when the rest of the market was at $35 a foot,” said Konsker. “Because he put up a brand-new tower where nobody else would. He had vision that tenants would be able to spend that kind of rent on Houston and Broadway.”

Biggest challenge yet

Certainly, Macklowe’s creativity has been crucial to his biggest success so far: the 50-story GM Building. After acquiring the property in August 2003, Macklowe was able to double its worth in part by pushing out the plaza, constructing the Apple “cube” on top of it, and renting the space underneath it to the Apple store.

“The plaza area of the GM Building was blighted for years; nobody could figure out what to do with it,” said Latham. “He made it feel closer to the sidewalk, and he put in the glass cube, opened it up in a signature way, and made it retail. There’s plenty of traffic going by, but it wasn’t viewed as retail space; it was viewed as basement space.

“If you walk into the lobby now and compared to when it was in Donald Trump’s hands [the previous owner], the building has a much nicer aesthetic,” Latham said. “It’s an almost gallery-like, white, clean, minimalist aesthetic.”

The glass cube had previously been used by the Louvre to similar effect. But only Macklowe thought to use it in New York.

“Harry is someone everybody talks about as being very aesthetic,” Latham said. “Instead of feeling like it’s an obvious change, he makes the kind of changes that make people think, ‘Gee, I wish I had thought of that.’ Harry is unique in his attention to detail, and that often means the difference between a good developer and a great developer.”

Playing to win

Still, it was Macklowe’s aggressive bid for the trophy property that made those renovations possible. And it’s the wager he made to do so — he put up all he had to bid a record $1.4 billion for the property — that made the biggest impression on many. That the property is now worth nearly three times what he paid for it is, of course, a sign the bet paid off.

“We were bidding on it, and he paid considerably more than what we thought it was worth,” Douglas Durst, a fellow developer, said last spring in an interview. “I understand he put up all his other assets; if it turned against him, he would have lost everything. It was a terrific bet. Rents have gone up substantially over what anybody thought he would be getting. He’s making a lot of money; that took a lot of courage.”

In some ways, the deal wasn’t so different from some of his early projects in terms of risk, albeit on a much larger scale.

Yet Macklowe’s risks have not always paid off. And where some see calculated risk and genius, others see recklessness, even ruthlessness.

Certainly, the mogul has shown a streak for aggressiveness during his career. For years, few articles in the New York press mentioned Macklowe without referring to a notorious incident in 1985 dubbed the “midnight demolition.”

The story goes as follows: During the height of New York City’s homeless crisis, the city enacted a moratorium on the demolition of single-room occupancy buildings. Late one night before the new policy took effect, Macklowe’s contractors demolished two SROs on a site where he planned to build the Hotel Macklowe. They had no building permits and did not turn off the gas, which could have caused an explosion.

The demolition indeed caused an uproar. The district attorney eventually exonerated Macklowe for the actions of his contractors, but he was still forced to pony up $2 million in fines, and the incident tarnished his reputation.

The name Macklowe, the New York Daily News opined at the time, is “a watchword for everything furtive and underhanded in the real estate business.”

In the end, Macklowe built his hotel. But ironically, he lost it to lenders along with several other buildings during the real estate downturn of the early 1990s.

“He’s just an interesting guy,” Durst said. “He’s had a very interesting career, and he’s been very successful and very unsuccessful, and has come back and been very successful.”

Back in the media glare

By the mid-1990s, Macklowe had bounced back. But so too did the negative headlines. This time the stories came from a running feud with his celebrity neighbor in East Hampton, Martha Stewart.

For years, the two made headlines as they battled over the size of Macklowe’s hedge lighting fixtures and a fence at his vacation home that Stewart complained blocked her view of a pond. At one point, Macklowe’s 23-year-old handyman accused Stewart of pinning him against a gate control box with her Chevy Suburban.

It was embarrassing but entertaining tabloid fodder. But most of those stories faded into the background in 2003 with Macklowe’s victorious purchase of the GM Building.

Then came the purchase of the Equity Office buildings, which catapulted Macklowe to a different league altogether. Moving with lightning speed, Macklowe pulled together the deal in just 10 days, shelling out about $1,142 a square foot for 6.1 million square feet of prime office space.

It was a jaw-dropping transaction, and it evoked rueful headshakes from fellow real
estate moguls impressed at his bravado at the time.

The high-water mark for the whole market may actually have been the sale of 450 Park, which went for nearly $1,600 a square foot in July. In this deal, the Macklowes exercised rare restraint (they were among the 25 bidders, but reportedly balked at the hefty price tag). But no deal has come close in size and overall price to the Equity Office deal.

Now that Macklowe is facing potential problems, some are second-guessing his decision-making.

“It’s almost an irrational thing to do on some level,” said one. “What makes a gambler? What drives gamblers?”

“There’s a dark side to those kind of guys — anybody who has that kind of risk tolerance,” said one insider. “You got to have big, big balls. People like that who take big risks, obviously, there’s got to be some aspect of, ‘Look at me! This is the true measure of my greatness, for all the people in the world who are cowardly, who never seize life, I seize life!’

“Can it be informed by some self-esteem issues? Maybe.”

Still, few real estate insiders were willing to say a negative word on the record about the man who for now remains the reigning king of the Plaza District.

Cushman’s Latham said the EOP purchase made sense when Macklowe did it, and still does in many ways because the buildings he is working with play to his strengths.

“If he has time, there’s no question people will be looking back three to four years and saying, ‘He did it again,'” Latham said. “When he gets done with the property, I think you’re going to see a portfolio that was kind of lackluster under EOP turn into very special real estate, because that’s what Harry does.”

Many believe Macklowe will find a way to buy that time, but his ability to raise cash to pay off the loans on his new buildings has shrunk considerably. He could shed a major property, although his buildings may not be worth as much in the current market. Or he could borrow against his buildings, but with tighter lending standards, which have gone from 5 percent down to 20 percent, he’ll also get less today than he would in the past.

“He is one of those crafty New York veterans who I would never count out; he has a lot of contacts, a lot of credibility, a lot of wherewithal to put something together,” said Baruch’s Hersh. “I wouldn’t bet against him.”

“To some degree, anybody who buys real estate is a risk-taker,” Knakal said. “My feeling is that the credit situation currently is just a blip, and it will soon be forgotten. My feeling is that the market is going to continue to climb, maybe not as quickly as it has in the past, but will continue to climb based on the underlying fundamentals.”

Dan Fasulo, managing director at Real Capital Analytics, a real estate research and consulting firm, said, “I honestly believe too much has been made about the situation. I certainly believe that he can figure out an attractive way out of this situation.

“With the strength of the assets, there’s no question that he’ll be able to figure out a way out,” he said. “You can bring in additional equity partners; you could certainly sell one or two of the assets to raise cash; you could look to nontraditional sources of financing, like foreign investors who are flush with capital right now and are very enamored with New York real estate.”

Fasulo added, “Everyone wants to go negative, but at the end of the day, the capital is there for Manhattan real estate, and the fundamentals are strong, and those two factors will overwhelm what is going on with the debt side.”

Recently, Macklowe hired the firm hired Perella Weinberg Partners to raise a reported $3.5 billion in short-term debt due in February, and upped his mortgage on the GM Building by $500 million.

In the end, Macklowe’s biggest weakness may prove his greatest strength. With so much of their own capital at stake, most lenders would likely balk at repossessing such a huge portfolio. After all, to grow its value, they would need someone who knows the market and has a vision to fix it up. And who better to do that than Harry Macklowe?