Top executives of the biggest publicly-traded real estate companies operating in New York were bullish during recent investor conference calls as they reflected on the first quarter of 2006 and the market realities to come.
From talk about Cendant spinning off a new publicly-traded real estate company, to Boston Properties execs like Mort Zuckerman talking off-the-cuff about the $100-per-square-foot rents achieved for the first time in their Midtown buildings,
The Real Deal heard a lot of juicy tidbits in last month’s calls. Here are some of the choicer assessments:
SL Green talked about teaming up with hip hotelier Ian Schrager for the conversion of One Madison Avenue’s tower to condos and how they will profit from the deal.
“In March, we announced the closing of our joint venture with the development team of Ian Schrager and RFR Holdings… Ian has a spectacular vision for the Clock Tower at One Madison, and we feel exceedingly confident he’s the best individual to transform this property.
“From a financial standpoint we feel it’s a home run… leaving SL Green with a modest remaining cash investment in the form of a $6 million senior preferred equity position and a very substantial 30 percent stake in the project’s profits… Also, the venture leaves SL Green and Credit Suisse with 100 percent of the air rights to further explore development on the balance of the property.” Andrew Mathias, Chief Investment Officer
SL Green also talked about how the high prices being paid for Manhattan office buildings today makes sense if one assumes rents will grow considerably.
“We have studied this very closely and believe that buyers today are basically underwriting a 25 to 30 percent growth in rental rates over the next three to four years…When viewed in this light, the prices being paid for assets today are not without support if you have a fundamental belief in [that] substantial rental growth.” Marc Holliday, President and CEO
“Even people paying a 4 to 6 percent cap rate, if they have the view that a $33 rent is going to be $40 to $42 in three to five years…that’s what you see people betting on. Betting on the rental rate increase and the continued relatively low interest rate environment. But you need both elements [to be successful with a building purchase], and I think that’s what a lot of people are banking on in the city now.” Andrew Mathias, Chief Investment Officer
Despite the office market heating up, SL Green also said it isn’t seeing tenants relocate out of New York yet because of high rents.
“Even though the leasing fundamentals are pretty strong…the rental increases that I figure it would take in order to see that kind of push back, I don’t think we’re close to those levels yet. You have to remember, rents have gone down upwards of 25 percent from 2001 to 2004.” Marc Holliday, President and CEO
Cendant, corporate parent of brokerages like the Corcoran Group and Sotheby’s International Realty, defended its real estate business, which is in the process of being split off into a separate company called Realogy.
“Let me make a point that I think investors may be missing and that is, there’s a reason why we are so heavily concentrated on both coasts and the high-end markets [in real estate]. The demographics are unbelievably compelling…You want to be in Florida, California, New York and Boston if you’re going to have a successful real estate franchise and brokerage business.
“As previously announced, we filed the Form 10 for the Realogy spin-off earlier this month… So, assuming a normal process at the SEC, our expectation remains that Realogy will be spun off in June.” Henry Silverman, Chairman and CEO
Cendant also pointed out that, because of its broad reach in real estate, it has a better take on the market than the National Association of Realtors.
“As [we] have discussed in the past, I’m not sure the National Association of Realtors data is terribly relevant. They typically sample, and I repeat the word sample, only 20 percent of the MLSs and then they adjust those numbers with a number of variables. I think that with 30 percent of the market, as we believe we have…in terms of dollar volume, that statistically you could argue we are the market.” Henry Silverman, Chairman and CEO
Chicago-based firm Equity Residential, headed by real estate mogul Sam Zell, revealed it has at least four developments planned for the New York metro area.
“On the development side of the business, we currently have $515 million of projects under development. In addition, we hope to start another $350 million to $450 million dollars this year, which will bring starts for the year to $500 million.
“We have got…four deals in the New York City area. I won’t provide locations. [But] it is unlikely that the Manhattan deals would start this year.” David Neithercut, President and CEO
AvalonBay Communities, a national REIT whose first New York projects have been in Long Island City and on the Lower East Side, revealed it has more development in the works here.
“AvalonBay has two new development rights in New York: in Manhattan, located off Central Park North [and] in Downtown Brooklyn, located directly across from MetroTech Center, the largest concentration of office space in Downtown Brooklyn.” Tim Naughton, President
Brookfield Properties is mostly known in Manhattan for owning the World Financial Center, but it also has a number of properties in Midtown, and is seeing $100-persquare-foot rents in at least one of its buildings.
“Midtown Manhattan remains very strong. Although the vacancy rate remained flat quarter to quarter at 7.8 percent, we are seeing very strong demand and increasing rental rates…We are aware of 15 transactions that were completed in the first quarter with rental rates in excess of $100 a foot. Now, this compares to 10 in all of last year.
“We similarly have been sending proposals out for our space at 245 Park Avenue, which reached $100 rental rates. Our Midtown occupancy ended the quarter at 99.7 percent. Obviously, we don’t have a huge vacancy to take advantage of this. But, we have been very active working our portfolio, looking for opportunities.” Ric Clark, CEO and President
Brookfield also said vacancy in the overall Lower Manhattan market could reach into the single digits in the next two months and that space in its properties is getting tighter.
“The landscape in Lower Manhattan has changed quite dramatically since the beginning of the year…So far this year, we’ve leased 72,000 square feet of our space there. We have leases out currently on 635,000 square feet. Assuming that these leases are all completed — which you can never be certain about, but we have a high ratio of completion once we draw leases — our Lower Manhattan occupancy will be 97.7 percent versus 92.6 as it is today.
“Although the vacancy rate in Lower Manhattan increased by 100 basis points to 11.6 percent for the quarter, the stats now include 7 World Trade Center, which they didn’t the quarter before. Barring that, the vacancy rate would have actually declined by 70 basis points.
“We think vacancies Downtown will be in the single digits, possibly within 60 days.” Ric Clark, CEO and President
Boston Properties is also seeing $100-per-square-foot rents, the first in some of its Midtown buildings.
“Let’s start in New York City. We have signed our first $100-square-foot rents at both 399 Park Avenue and the Citigroup Center for space towards the top of those buildings.
“Over the past 18 months we have signed three separate single-floor deals within a block of four floors at Citigroup Center. The first floor was done in 2004 in the fall, and it had a starting rent of $59 a square foot. In October of last year, we signed a floor adjacent to it at $75 a square foot. And we are finalizing the lease now with a starting rent of $81 a square foot. In addition, we’re offering less free rent and modestly lower tenant improvement contributions.” Doug Linde, Chief Financial Officer
Boston Properties, which just sold 280 Park Avenue for $1.2 billion — a profit of around $750 million — is also looking at selling Five Times Square. A deal was in the works for the building, but fell through.
“So I will tell you that we are still contemplating the possibility of the sale of Five Times Square. We are digesting 280 Park at this point… [The planned price for Five Times Square] was on a per square foot basis similar to what it was with 280 Park.” Mort Zuckerman, Chairman
Reckson Associates, which has office properties in New York’s suburbs as well as in Manhattan, said it’s already seeing companies leave the city because of high rents.
“It is definitely happening. Citibank has taken 1,100 jobs out of New York City — bringing them to Long Island in our building; as part of that strategy they’re looking at expanding in Long Island City, expanding in New Jersey, they’re expanding in Westchester and in that mix.
“You have seen expanding in other markets as well, and as part of that strategy you’ve seen Morgan Stanley do it, seen RBS doing it, and we’ve seen a number of tenants — but more than the number that actually signed deals is the level of activity we’re having on our development sites as these tenants have looked at making those moves.” Scott Rechler, Chairman and CEO