In Lower Manhattan, big interest in small buildings

<i>Commercial, residential investors cash in on Downtown's resurgence</i>

That crashing noise this spring was the sound of records shattering as the sale of 60 Wall Street to the Paramount Group for $1.2 billion — or about $738 per square foot — marked the highest price ever paid for a Downtown office building.

It was an astonishing return on investment for Deutsche Bank, which bought the Class A 47-story building in 2001 for $610 million. And it was a clear vote of confidence that the Downtown office market was on the way back. In total, Downtown saw more than $2.3 billion worth of office building sales in the first half of 2007, up from $647 million in the first half of 2006, according to a report by Cushman & Wakefield.

The nosebleed-inducing price for 60 Wall drew attention, but investor interest in smaller commercial and residential buildings in Lower Manhattan is climbing too. Despite the focus on massive projects like the Ground Zero rebuilding, there are ways for small investors to cash in on Downtown’s resurgence.

The gains registered by small buildings Downtown haven’t been as stratospheric as those of Class A properties; since 2001, residential and commercial Class A properties Downtown have seen their values increase by around 100 percent.

Downtown Class A office space is going for $503 per square foot these days on average, according to research firm Real Capital Analytics. Yet small buildings — those under 50,000 square feet or $20 million, typically offering a mix of ground-floor retail space along with either commercial or residential space above — have nonetheless appreciated robustly. Indeed, according to the Downtown Alliance, since 2001 small buildings have spiked in value by 40 percent to 70 percent.

“There’s lots of enthusiasm for this type of building,” said Dan Fasulo, managing director of Real Capital Analytics.

Several reasons exist for this keen interest.

For starters, there aren’t many such properties left. Fewer than 300 similar small buildings are in the zone south of Chambers Street in Lower Manhattan, according to Massey Knakal, a real estate company that focuses on smaller properties.

A number of these are located in historic districts, and can’t be easily altered because of zoning laws and their landmark status. Lower Manhattan has four historic districts: The South Street Seaport, the city’s early-19th-century center of shipping; the Stone Street historic district, comprising a dozen buildings that survived New York’s Great Fire of 1835; the Tribeca South historic district, a collection of 28 buildings with Italianate-style architectural features; and the Fraunces Tavern block historic district, on Pearl Street.

Among New York City real estate analysts, there is debate about the profitability of historic buildings. Because they can’t be demolished to build towers, they are sometimes scorned. Yet a 2003 study by the New York City Independent Budget Office found that, in general, historic properties appreciated at a higher rate than non-historic properties.

“Despite some years when non-historic properties performed marginally better than historic ones, the overall price increase for the period 1975-2002 was higher inside the districts,” the report noted.

A declining number of small buildings Downtown — fewer than 80, according to some estimates — have untapped air rights or are zoned to accommodate far taller structures. And that number keeps shrinking. In the past year, two more of these small buildings, at 326 Grand Street and 98-100 Greenwich Street, have been demolished so their owners could build up.

In general, the more underdeveloped the site, brokers say, the higher the price for the air rights. “When investors look at small buildings, they’re not always just looking at the building that’s there,” said Peter DeCheser, senior director of sales at Massey Knakal. “They’re considering what the gross potential could be, based on current zoning.”

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That’s what has affected deals for several small buildings in the Financial District. Recently, 50-52 Trinity Place was bought by Metro Nine Hotels, a company owned by the McSam Hotel Group. The property, a three-story building with 11,250 square feet of space, sold for $22 million. In order to build a 35-story Holiday Inn on that site, Metro Nine also bought 15,000 square feet of air rights from 11 Rector Place, a four-story property immediately behind 50-52 Trinity Place, for $2 million.

“It was a very quick deal,” said David Kriss of Kriss Realty, which represented the owner in the sale of the property. “There are definite plans to tear the buildings down. It will be a hotel and condo tower, and it’s geared towards the Asian market.”

Because there are so few small buildings Downtown, the inventory of small buildings for sale is generally tight. Presently, 13 small buildings priced below $20 million are on the market.

In 2006, 18 buildings in Lower Manhattan sold for less than $20 million.

This year, through the end of May, seven small buildings have sold.

“Whatever comes on market goes very quickly,” said DeCheser. “Instead of taking six months to market and sell that kind of property, these days it takes three or four months.”

Finally, the low vacancy levels throughout Manhattan have spurred a hunt for residential properties where tenants pay rents below market rates. Some small buildings in Lower Manhattan offer buyers the opportunity to install upgrades, buy out tenants, or swiftly double rents. Converting residential space in those buildings into condos can also be a money-spinner.

That may be what prompted the recent sale of the connected buildings at 66-68 Pearl Street. The properties sold for $19 million to Bernstein Real Estate and investors Alan Schnurman and Ben Zalman. The 44,012-square-foot structure, made up of five contiguous buildings, has retail space at the ground level and four floors of apartments at the top. The price works out to $431 per square foot.

The five-story, 18th-century Federal-style building, which sits across the street from the 32-story Goldman Sachs headquarters, is a landmark building.

“It was a good deal all around,” said Bernstein Real Estate spokesperson Enid Hamelin. “It’s an opportunity to own and maintain a bit of New York’s early history.”

Renters presently occupy the residential apartments in the Pearl Street property. DeCheser, who was involved in the sale, indicated that the building’s rental units could soon be converted to condos.

That could be a lucrative option. Per square foot, the average price for condo space in small buildings in Downtown is $1,000 to $1,200, according to Andrew Gerringer, managing director of Prudential Douglas Elliman’s development marketing group. Newer residential buildings, like the Andre Balazs-designed William Beaver House, are asking between $1,200 and $1,400 per square foot.

The seven-story property at 44 Trinity Place could become another condo conversion in the neighborhood. That small building, a 14,250-square-foot property that has ground-floor retail and six residential units above, was bought in late December for $6 million, or $421 per square foot. The sale included 15,270 square feet of air rights, and the site is zoned for 15 floors of further vertical growth.

“That building was bought for investment purposes, but at the end, because the market’s so strong, you might see a condo conversion,” said DeCheser, whose firm brokered the 44 Trinity Place deal.