Investment sales in Manhattan set a record last year as $14.5 billion worth of property traded hands, but the market may break its own record in 2005. After three major deals were completed inside of one month, it’s not an outlandish prediction, despite concerns of a commercial real estate bubble.
The $1.72 billion sale of the MetLife Building to Tishman Speyer set an all-time record. The second biggest deal, SL Green’s purchase of One Madison Avenue, for $918 million, also dwarfed last year’s biggest deal. And Equity Office Properties’ acquisition of Verizon’s headquarters marked the expansion of the nation’s biggest REIT in New York.
Preliminary reports suggest that building sales volume for the first quarter of 2005 in Manhattan was almost $9 billion, which puts it on pace to reach $36 billion, more than double last year’s results, according to Cushman & Wakefield. Here’s what the experts say about the blockbuster deals:
Tishman now Tops
Tishman Speyer’s purchase of the MetLife Building at 200 Park Avenue last month for $1.72 billion makes it the biggest office building owner in Manhattan. The record price topped Harry Macklowe’s $1.4 billion purchase of the GM Building in 2003, the previous record.
Brokers say it was a good move on the part of Tishman Speyer because it’s rare for such large class A commercial space to become available in the Big Apple.
But all may not be rosy going forward for the new owner because of a silent threat hanging over Tishman Speyer’s portfolio with the purchase of the MetLife Building, according to broker Woody Heller, executive managing director at Studley. Tishman also owns Rockefeller Center and the Chrysler Building.
“Terrorism risk and whether insurance companies are likely to issue terrorism coverage could be a challenge because it’s one of the better known buildings in the city and sits on top of Grand Central Station,” says Heller. “Although the building has been fully occupied since Sept. 11, it has had a hard time attracting outside tenants.”
The largest tenants in the 100 percent occupied building include financial companies Dreyfus and Barclays.
On a positive note, Tishman Speyer is “a cost-effective manager that is good at saving money in the operations of buildings,” according to Craig Evans, senior managing director of investment sales at Colliers ABR. “Tishman will increase MetLife’s value by aggressively managing the building and offering higher services at lower costs, which will allow them to increase the rent,” says Evans.
Although the MetLife Building sold for more than the GM Building, Evans points out that on a per square foot basis, the MetLife Building sold for less, and that the GM Building is worth a lot more than the 200 Park Avenue building.
“Macklowe paid $838 per square foot for 1.67 million square feet of the GM Building compared to the $614 per square foot that Tishman paid for 2.8 million square feet of 200 Park Avenue, which reflects the income that is generated by the buildings,” says Evans. “Rents for offices are higher in the GM Building because it has the valuable retail component of Fifth and Madison avenues that doesn’t exist for 200 Park,” he said.
MetLife bought the 58-story property in 1981, and will maintain offices in the building, as well as retaining signage rights for the property.
Green to Residential Conversions
When SL Green snapped up One Madison Avenue despite having little experience with residential properties, observers called the acquisition an asset, not a hindrance.
Although the Manhattan real estate investment trust made its initial mark in the residential conversion market during the 1980s, its focus in recent years has been only on office properties.
SL Green purchased the 41- story building last month for $918 million. Even though it is the second priciest building buy of this year, it would have dwarfed last year’s biggest buy, which was Jamestown’s $576 million purchase of a 75 percent stake in 111 Eighth Avenue.
The group’s main challenge going forward is finding a developer partner that has converted towers in the past. It won’t be hard to do, according to Chris Wilson, director of project marketing for Stribling & Associates.
“I think Robert Levine of the RAL Company would be a good fit. The firm has hands-on experience converting towers to luxury residential and commercial office space,” says Wilson. RAL renovated 270 Broadway, also known as Tower 270, with retail, some commercial office space and residential condos.
One Madison Avenue has been home to the Metropolitan Life Insurance Company for about 100 years, but regardless of which developer SL Green partners with, the tower renovation won’t be difficult, according to Heller.
“There’s no challenge because the tenant is in the base of the building not in the tower,” he says. “The delicate part will be construction in the tower.”
It also remains to be seen whether the market will be as strong when the space hits the open market in a year, according to broker Glenn Markman of Cushman & Wakefield.
“We’re living in an interest rate-driven climate, which is a minor obstacle for SL Green as long as the interest rates don’t spike,” says Markman.
The advent of residential space to the area isn’t expected to disturb existing commercial tenants, according to Wilson.
“It’s great for retailers and office tenants,” he says. “They’ll have customers during the day from business clients that are commercial tenants and customers at night from the residential tenants. Mixed-use buildings like the Time Warner building are one way to make things viable for everyone.”
In the next five to 10 years, the building could become the crown jewel of the area because of its views of Madison Square Park. There are other buildings being converted to residential in the area, including the Gift Building at 225 Fifth Avenue and the International Toy Center at 200 Fifth Avenue and 1107 Broadway. As a result, the neighborhood is experiencing a renaissance.
“The building is large-scale, high profile and has magnificent physical attributes,” says Heller. “It will benefit the most because it has the best park views of Madison Square Park. It’s a beautiful way for SL Green to enter the residential market.”
Madison Square Park, which was revamped about five years ago, has a lot to do with the cachet of the area.
“People didn’t want to live there because the park was bedraggled and down and out,” says Wilson. “But now that it’s cleaned up, it’s a draw.”
In addition to the park, there is a plethora of restaurants in the 23rd Street and Madison Avenue vicinity that add to the area’s vibrancy.
“It has good energy and is the ultimate live-work area,” says Markman. “I don’t think SL Green overpaid because these units are going to sell for top dollar, which will make their investment seem like a bargain once the units are sold.”
Will Zell renovation sell?
Now that Sam Zell’s Chicago- based Equity Office Properties Trust has entered into a deal to purchase the Verizon building at 1095 Sixth Avenue and 42nd Street for $505 million, it faces the arduous task of renovating the property while its current tenant vacates.
“It’s going to require a massive renovation,” says Shobi Khan, senior vice president of investments with Equity Office in Chicago. “We’re renovating the lobby, installing new elevators, revamping the retail space within and redeveloping the plaza.” Zell’s firm is taking an owner-occupied building and converting it into a multitenant building, which leaves a million square feet of empty space to lease.
Finding tenants won’t be difficult, according to some market observers. “There’s very little new construction in the market and a lot of demand and the location of the Verizon building makes it very attractive,” says Heller. “The Verizon building overlooks Bryant Park and is one of the few remaining large blocks of space in the city.”
In a bidding war for the property, Zell’s firm beat out Brookfield Properties, Reckson Associates Realty and Trizec Properties. As a result of this acquisition, Zell’s REIT now owns 685 office buildings, though only seven are in Manhattan. Zell is Verizon’s landlord in 16 other locations around the country, which helped his firm acquire the property.
The only obstacle could be the Verizon building’s location, across the street from competing commercial office developer Douglas Durst’s Bank of America Tower.
But Equity Office will do well despite the fact that the building is located across the street from the Bank of America Tower if Verizon staffers move out in the next year, according to Markman of C& .
“If Equity Office times its marketing efforts properly, there won’t be an overlap with the Bank of America Tower’s leasing initiatives,” Markman said. “By the time the Durst building is finished, the former Verizon building will already be leased out.”
Equity Office bought the space for $490 per square foot and plans to lease it for at least $75 per square foot, if not more, if the market picks up.
“We will begin leasing in 2006. The Durst building is not going to be available until 2008. We’ll be done before them,” says Khan. “We’ve already started talking to tenants that include financial services firms, law firms, blue-chip companies, and there have been inquiries by banks.”
Verizon will keep its telecommunications operations as well as its retail store within the building as part of its continued 20 percent ownership in the basement and on floors 6 through 12. The skyscraper will have vacancies on floors 2 through 5 and 13 through 41.
“Verizon will move its employees out in stages between now and next year,” says Khan. “Ideally, we’ll get one or two big tenants that have good credit, profitability and a long-term contract so that we don’t have to market.”