Michael Stoler – What happened to Eighth Avenue?

<i>Development all but stalls along this once-bustling Midtown strip</i>

The stretch of Eighth Avenue between 40th and 56th streets just 18 months ago was a mecca of residential and commercial activity, fetching prices of $400 to $450 per buildable square foot. Today, a large majority of developments have been put on hold, and sites are lucky to fetch $100 to $150 per square foot.

Lower rents have led developers to swipe up distressed assets, rather than pay for the labor costs required to develop new infrastructure.

A prime example is the 750,000-square-foot New York Times Building, which in November 2007 had its grand opening ceremony. At the time, tenants were paying rents of $80 to $90 per square foot to have an office in the brand new tower, at 40th and Eighth, across from the Port Authority Bus Terminal.

Fast forward a year and a half: The New York Times sells the space it occupies in its Manhattan headquarters for $225 million to W. P. Carey to pay off debt. It is hard to imagine that the office condominium portion of the building, which probably cost close to $1,000 per square foot to acquire and develop, sold for a mere $300 per square foot.

Directly across the street, rents are not being realized at the 800,000-square-foot office tower at 11 Times Square. Although construction is progressing on the joint venture of SJP Properties and the Prudential Insurance Company and the tower is expected to be completed in 2010, the initial prospects of office rents over $100 per square foot have yet to be fulfilled. To date, no lease has been signed for the office or retail component of the property.

Industry leaders expect financial service companies and users who are seeking the latest and most innovative Class A office space to evaluate leasing space in the tower. In today’s environment, members of the brokerage community feel that the property could fetch between $75 and $85 per square foot for the office space. However, the site’s greatest profitability prospect lies in its excellent retail location and fantastic opportunities for signage.

Not only are rents lower, but construction is all but stalled along this once-bustling Midtown strip. One of the numerous halted developments on Eighth Avenue includes the joint venture between the Related Companies and Boston Properties for a mixed-use development site of a Champion Parking garage between 45th and 46th streets. The joint venture was in contract with Champion Parking to acquire the site and to purchase the theatrical art rights from the Shubert Organization. But with little need for additional new office space, the project has been placed on hold indefinitely.

Similarly, a joint venture of Vornado Realty Trust and the Lawrence Ruben Company had announced plans to erect a 40-story office tower over the north wing of the Port Authority West Side bus terminal, located on West 41st Street. But with financing at a standstill for new buildings without any signed leases, this project has been put on hold indefinitely.

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On the west side of 42nd and 43rd streets the story is the same. The 1199 SEIU United Healthcare Workers were in negotiations to select a developer to build a tower on its site, but it will be many years before that project ever rises — without financing the project was put on hold.

And in February, Boston Properties, an owner and operator of Class A office buildings, suspended construction on its $980 million, 1 million-square-foot office tower at 250 West 55th Street at Eighth Avenue. According to financial filings of Boston Properties, it had invested $401.7 million in the project as of Sept. 30, 2008.

Boston had signed a lease with the law firm of Gibson Dunn & Crutcher LLP for about 22 percent of the tower. In the official press release by the company, it announced that it suspended construction as a result of its inability to conclude a lease transaction with a major law firm (which according to sources was the firm of Proskauer Rose) with which it had been negotiating over the last year. Agreement on the financial terms had been reached with the firm within the last year, but recently the law firm informed the company that it could not proceed on those terms, thereby rendering the project economically infeasible in today’s environment.

A prominent owner of office buildings in Manhattan said on condition of anonymity, “With the increasing supply of office space coming to the market, combined with limited or no financing available for new development, it will be at least three to five years before Boston Properties resumes construction on its Eighth Avenue development [on] 55th Street.”

The wait is expected to be somewhat shorter for TriBeach Holdings on the northwest corner of 46th Street, the latest casualty on Eighth Avenue. The site is approved for a large-scale hotel development with luxury residential condominiums, street-level retail and below-grade parking. Yet with little or no financing for hotels or condominium towers, industry leaders expect the developers to sit on the project until 2010 or 2011.

Down the street, Local 6 of the Hotel Employees workers owns nearly the entire block between 44th and 45th streets. In 2006 the union had retained an adviser to sell the property to a developer for either an office or residential tower. Unfortunately, negotiations were never completed and the union will continue to maintain their office at the site without selling the asset to beef up its funds.

Last month, a joint venture of DRA Advisors, George Comfort & Sons and RCG Longview closed on the purchase of the 1.75 million-square-foot Worldwide Plaza at 825 Eighth Avenue at roughly one-third of the original purchase cost. The joint venture is paying $605 million, or $345 per square foot. It was only two years ago when Macklowe Properties paid $1.74 billion for the property.

There is, however, some movement for development on Eighth, although in a different form than originally planned. On the southwest corner of West 44th Street and Eighth Avenue, Steve Witkoff and Harwood Properties owned a site where they were planning to construct a 250,000-square-residential tower at 693-699 Eighth Avenue and 307-321 West 43rd Street. But in the fall of 2007, Tishman Asset Corporation purchased the site and assembled it, paying about $128 million. Construction is under way on the site for the 22-story, 600-room InterContinental Times Square, the second InterContinental Hotel in Manhattan, with a scheduled opening of fall 2010.

With limited prospects for capital for new office and residential developments, the future is bleak for developments on Eighth Avenue.