In development, sometimes it pays to sit tight.
Just ask Howard and Edward Milstein. Last July the Milsteins sold a 40,000-square-foot plot at the southeast corner of 42nd Street and Eighth Avenue to SJP Properties for $305 million. The family had spent $5 million to acquire the parcel 23 years earlier.
It was supposed to be one of the first properties developed in Times Square’s revitalization. The Milsteins’ lengthy battles with state and local officials and subsequent failure to win approval for various development proposals ultimately proved a boon. Times Square, the former locus of sleaze, has morphed into a gentrified and tourist-friendly district where office rents can go as high as $100 a square foot. The former Milstein parcel will now be the last vacant site to be developed in the 13-acre Times Square redevelopment district.
Many Manhattan developers have benefited from long-term ownership of sites in once-derelict neighborhoods now being revitalized. Three years ago, Douglas Durst capped off an effort begun by his father Seymour Durst more than three decades earlier, buying the last of 32 sites on Sixth Avenue between 42nd and 43rd streets. The Durst Organization is now constructing the 54-story, 2.1-million-square-foot Bank of America Tower on the site.
Sitting tight on a site makes sense if a developer acquired land cheaply before the neighborhood became hot. Sometimes developers must also spend years assembling adjacent parcels and obtaining government approvals. Brookfield Properties, for example, has owned land on Ninth Avenue between 31st and 33rd streets for two decades, and recently shelled out more than $100 million for an adjacent site. The developer can build up to 4.6 million square feet of office space on the combined parcels.
When property was cheap, decades ago, a parking garage could generate enough income to cover the carrying costs of the site if building an upscale office or residential property did not make sense at the time. The time to build, it seems, is now, thanks to a scarcity of office space since Sept. 11, a still-strong residential market and a threefold increase in land prices during the last four years.
“What may have been a parking lot as a highest and best use 15 years ago [has] become extremely valuable,” says Craig Evans, senior managing director at Colliers ABR.
Another example of well-rewarded patience is the westerly block front on Sixth Avenue between 30th and 31st streets, including 106-108 West 31st Street, which sold this spring for $117 million. Public records show that Ned Bernstein signed a $1 million mortgage on 106-108 West 31st Street in 1959.
Holding on like this for decades only makes sense if the property is not highly leveraged. Massey Knakal chairman Robert Knakal estimates that a site must generate a 3 to 4 percent return to make it worth holding. That percentage must be increased to offset the cost of servicing the debt, of course, if the property is mortgaged.
Stuart Saft, real estate chair of law firm Wolf Haldenstein Adler Freeman & Herz, who works with many of Manhattan’s major developers, says the trend now is to buy residential properties to hold for five to 10 years until their rent-stabilized leases run out. Saft says that since the $5.4 billion sale of Stuyvesant Town and Peter Cooper Village, developers are seeking nearby buildings. They expect gritty areas such as the one at 14th Street and First Avenue to benefit from improvements made to Stuyvesant Town.
“That’s how you make your money — by going into not the greatest area and waiting until it turns around,” says Saft.