Three autumns ago, the collapse of Lehman Brothers knocked the wind out of New York’s real estate industry. Home sales flattened. Prices plunged. And, as layoffs mounted, office buildings emptied out. While there have been some spurts of activity, the industry has not gotten back to the highs of the boom. In fact, as the unemployment rate still hovers at an uncomfortably high level, and Wall Street (a once-reliable real estate engine) reports losses, it seems that a complete recovery might be years away.
All the same, there are signs of comebacks — whether they are from developers who once defaulted on mega-loans and seemed like pariahs, or stock prices that have bounced back from the doldrums at some public real estate companies. There are also geographic stretches of the city that had been pocked with empty retail spaces and empty condo buildings, but are now filling up with stores and residents. There are even some bankers who had been caught up in the subprime mess who are now back on the lending scene in a big way.
Of course, some of these phoenixes would say they were never down and out, following the lead of LL Cool J in “Mama Said Knock You Out”: “Don’t call it a comeback,” he sang. “I’ve been here for years.”
Read on for sketches of those whose fortunes have recently improved.
Comeback developers
In 2008, Harry Macklowe, of course, became the poster boy for overleveraging, when he famously lost all seven of the Midtown buildings he had purchased for $7 billion from Equity Office Properties Trust.
Now, though, just when many had written him off, there are signs of life. Last quarter, he closed on the purchase of 737 Park, a rental at East 71st Street that he’s converting to condos, for $250 million. According to news reports, he’s paid off the note for the site of the Drake Hotel, at Park and East 57th Street, with help from the CIM Group. In addition, he and Prudential Douglas Elliman chairman Howard Lorber have purchased the note on 953 First Avenue, an empty lot where the Oliver, a condo from Alexico, was supposed to rise.
It’s not clear how much equity Macklowe himself has in any of the deals; one person who has previously advised him said it appears that Macklowe has ripped a page from Donald Trump’s playbook and is essentially acting as a front man for groups of investors. But that source said that if a 1,000-foot tower were to go up at the Drake site, which has been empty since 2006, Macklowe might be rehabilitated.
“It would be his phoenix rising,” the source said, adding, “He picked the perfect profession. As long as you don’t kill anybody, you can live again.”
Macklowe’s not the only developer coming back.
Tishman Speyer — which also became a poster child of the bust when it bought the 110-building complex Stuyvesant Town/Peter Cooper Village for a record $5.4 billion and then lost it to lenders in January 2010 — is another survivor.
As The Real Deal has reported, in 2010, Tishman bought more than $1 billion of property worldwide, up from $99 million in 2009. The firm is on track for more of the same this year, in places like France, China and India.
Indeed, in Hyderabad, India, a project called Tellapur Integrated Township, which rivals Stuy Town in size, is making progress after years of delays. Last year, the first phase of construction on the planned $2 billion, 32 million-square-foot project (which has homes, shops and hotels over 400 acres) got underway.
Like Macklowe, who had only an estimated $50 million of personal equity in his failed blockbuster deal, Tishman’s financial exposure in the Stuy Town deal, in which it partnered with BlackRock, could have been as little as $50 million, said Daniel Alpert, of the Manhattan-based real estate investment bank Westwood Capital. That’s chump change for a firm of Tishman’s stature, Alpert said.
“While it was certainly a blow to ego and reputation, I can’t imagine they hit the canvas as an economic matter,” he said. “It was a classic case of other people’s money.”
Comeback stock prices
Even though Lehman went belly up in September 2008, the pain seemed to take a while to work its way through the public markets. Indeed, it wasn’t until late the next winter that the markets finally hit their low point.
Share prices have recovered nicely since then, sometimes by almost a factor of four, and, at least until recently, were outperforming typical blue-chip public companies by an almost two-to-one margin. Among the rebounders, analysts say, are the most influential, aggressive and most successful local real estate investment trusts: Boston Properties, Vornado Realty Trust and SL Green Realty.
The renewed confidence in the stocks is all the more remarkable considering that many REITs, which by law must distribute 90 percent of taxable income to investors, couldn’t even pay dividends during those gloomy days. And by extension, that meant that they had few financing options to buy and build real estate.
Now, though, they are in an enviable position because they have so much “dry powder” to deploy, said Ken Patton, a professor at NYU’s Shack Institute of Real Estate and the former COO of Helmsley Spear.
“The [companies that] were too dependent on debt are drilling dry holes because they don’t have those kind of resources,” said Patton, referring to private companies that can no longer readily secure financing.
Sure, decades ago, when REITs began appearing, some questioned whether or not the management that controlled them could do so scrupulously, in the spirit of publicly owned firms, Patton added, but they turned out to be fine: “These guys are winners in the game,” he said, referring to Boston Properties, Vornado and SL Green.
Of the local trio, Mort Zuckerman’s Boston Properties, which owns the General Motors Building and 510 Madison Avenue, seems to have fared the best.
Its share price cratered to $31.73 in March 2009, but hit a recent high of $112.36 in July of this year — a 260 percent spike. (Its boom-time high was $127.04 in February 2007.)
Meanwhile, in the third quarter, the company announced that rent increases in its offices had boosted building revenue by 26 percent in the last year, beating analysts’ expectations. In addition, after delays, the company is now building 250 West 55th Street, the first new office high-rise since the crash. (Perhaps taking advantage of the run-up, Zuckerman exercised $18 million in stock options this year.) The REIT had dropped to $92.64 at the end of last month — but that’s still 191 percent higher than its 2009 low.
At the same time, Vornado, headed by Steven Roth and Michael Fascitelli, saw its stock price sink to $29.31 in March 2009, but it, too, soared this past July, to $98.60, a 236 percent leap. In the middle of last month, it was at $76.72.
While the recent price dip could, of course, be making it harder to sell shares and raise money, it doesn’t bode badly for Vornado’s development plans, said Sheila McGrath, a managing director with Keefe, Bruyette & Woods in Manhattan. She cited the 2 million-square-foot high-rise, 15 Penn Plaza, that Vornado is planning for the Hotel Pennsylvania site across from Penn Station.
“As long as the returns pencil out” — that is, as long as it can get an anchor tenant — “they can make it work,” she said.
Meanwhile, SL Green, which is the city’s largest office landlord — with stakes in the Lipstick Building, 2 Herald Square and 292 Madison Avenue — saw its share price tank to $11.62 in February 2009. But it’s bounced back significantly since. Its 2011 high was $88.30 in May — a 660 percent jump over 2009.
Plus, in addition to raising money through public offerings, SL Green, which is headed by president Marc Holliday, has aggressively sold bonds through private offerings to the tune of about $675 million in the past two years.
However, its total rent revenue — a key indicator of an REIT’s health — plunged 44 percent from 2010’s third quarter to 2011’s third quarter, according to its recent earnings report.
Still, SL Green is plowing ahead: In September, it teamed up with Jeff Sutton’s Wharton Properties and Stonehenge Properties to buy a 10-building Midtown retail portfolio for $400 million. The firm is also close to signing a major ad firm as an office tenant for 3 Columbus Circle, a renovated office tower, according to people familiar with the deal.
Comeback projects
It was on, then it was off, and now the new Nets basketball arena is on again — albeit in a severely truncated form. Brooklyn residents have been buzzing about the fact that, after years of protracted legal battles, the arena is now quickly taking form at the intersection of Atlantic and Flatbush avenues.
Indeed, just when Atlantic Yards — the 22-acre combination housing development/basketball stadium — seemed dead, developer Bruce Ratner got the project back on track, partly by dropping starchitect Frank Gehry’s pricey design for a more prosaic one from SHoP Architects. Ratner, who runs Forest City Ratner Enterprises, also eliminated much of the previously planned housing from the site, won some key lawsuits and even paid his chief antagonist, Daniel Goldstein, founder of Develop Don’t Destroy Brooklyn, $3 million to relocate.
Much of the opposition was directed at plans to use eminent domain to remove homes and businesses that stood in the way of the project.
Critics might not be mollified by the changes at the project, which broke ground last year. To wit: The arena, promised as a model of urban integration, will be flanked by several parking lots, and might not look that much different from any suburban basketball arena. Still, it will have at least three apartment buildings, according to Forest City spokesman Joe DePlasco. He said construction on one of those building will begin this year. And, he said, the arena is on track to open in time for the 2012 NBA season.
“There was obviously extended litigation and a dramatic shift in the economy,” he added of the $4.5 billion project, “but interest in the project did not wane.”
The project, which took six years to launch, may be an act of saving face for Ratner, if nothing else.
Hudson Yards, the comparable LIRR rail site in Manhattan, also was on life support a few years ago. The site had been at the center of one of Mayor Bloomberg’s early big-picture ideas, to build a stadium for the New York Jets atop the yards. Community activists, however, put a nail in its coffin.
Then came the state’s attempt to put residential and commercial towers above the tracks leased from the Metropolitan Transportation Authority. That invitation drew five high-profile bidders.
In that effort, a joint venture between Tishman Speyer and Morgan Stanley, which was planning to relocate its headquarters there, emerged the winner. But the $1 billion deal collapsed in May 2008 after the developer attempted to renegotiate the terms.
Just days after the Tishman Speyer deal died, however, the Related Companies stepped in to fill the void. The firm, which is partnering with Canadian firm Oxford Properties, is promising a $15 billion development with 24 million square feet of office space, 13,500 apartments, and 2 million square feet of hotels. The Wall Street Journal reported last month that Related will likely begin construction on the project at the beginning of 2012. But it said it was unclear whether Related could get the financing it needs to proceed further.
In late October, though, Related was reportedly in talks with the luxury accessories company Coach to take 600,000 square feet in a high-rise at West 30th Street. That would be Related’s first office tenant.
At the same time, Credit Suisse-First Boston is sniffing around, with an eye toward taking almost 2 million square feet of office space when its existing Manhattan leases expire in a few years, according to news reports.
Comeback financiers
Rob Verrone claims that his nickname, “Large Loan,” stuck simply because it rhymes. But there’s no question that the former Wachovia banker was at the center of some major deals during the boom — working with Macklowe, SL Green, the Carlyle Group and other high-profile players to secure financing on projects like 650 Madison, the Chelsea Market and the Starrett-Lehigh Building.
He also put $2.9 billion of Wachovia’s money into the Stuy Town deal, though he sold the debt to investors, recouping the bank’s stake. Wachovia issued $69 billion in loans during the boom, according to a recent Bloomberg Businessweek profile of Verrone.
In many ways he was partly responsible for the risky, overleveraged lending practices that led to failed deals — or at least he was part of the process that led to problems in the banking system. And many of the developers he issued loans to got stuck with bills they couldn’t pay.
Verrone declined to comment for this story, but by his own public admission, he also helped inflate the bubble by making loans easy to come by (though he didn’t get stuck with them because he sold off the debt to hungry investors as bonds).
He left Wachovia in 2008, right before it nearly imploded, which could have hurt his career. But he was picked up by Wells Fargo and since then, something odd has occurred.
Some of the developers who purchased debt from him and got in trouble are asking him to come back and help them restructure those loans. His new firm, Iron Hound Management, which he founded in 2009, has issued more than $4.5 billion in loans.
Recently, Verrone’s firm helped refinance 666 Fifth Avenue, according to industry sources, and is working out troubled loans for three of Joe Moinian’s buildings: 180 Maiden Lane, 3 Columbus Circle and the Ocean. Two of them — 180 and the Ocean — were buildings he secured financing for in the first go-around.
Comeback industry
New York’s “Silicon Alley,” the collection of tech businesses in Manhattan, was dominant in the late 1990s. Until recently, though, the industry was resting in peace.
Unlike the other comeback kids being featured this month, NYC tech’s trajectory wasn’t tied to the 2008 financial meltdown. Nonetheless, it has roared back in recent years with a hunger for loft-style office space — just like in the old days.
As The Real Deal has reported, in addition to Google’s record purchase of 111 Eighth Avenue late last year, dozens of online businesses have been gobbling up Manhattan office space. For example, the wedding website TheKnot.com recently leased 64,000 square feet at 195 Broadway. Meanwhile, online retailer Gilt Groupe expanded to a two-floor, 98,000-square-foot berth at 2 Park Avenue. Also, last month, Twitter opened its first New York office at 340 Madison Avenue. And Tumblr, a blogging service, leased space on East 21st Street. Other tech start-ups to put down tent stakes here in 2011 include ZocDoc, which books doctor’s appointments; FreeWheel Media, an ad sales company; and consumer review site Yelp, which is at 104 Fifth Avenue, also home to Apple and to women’s online clothing company Net-a-Porter.
Part and parcel of that activity is the fact that venture capital money is flowing into the tech sector. In the third quarter, 86 start-ups in the state — the vast majority of them based in the city — raised $831 million, topping former frontrunner Boston’s 83 deals, worth $710 million, according to CB Insights, a research company.
“There is clearly something going on,” Ken McCarthy, senior economist and senior management director at Cushman & Wakefield, said.
Average rents for these companies are about $40 a square foot, higher than they were a decade ago, when tech start-ups could lock in $20, said Jennifer Falk, executive director of the Union Square Partnership, a business improvement district that covers a neighborhood where many of those tech companies are based.
Comeback streets
Retailers were an early casualty of the recession, closing up shop on Madison from the East 50s to the East 80s. The number of store vacancies along the stretch in 2009 was about 30, meaning about one in every seven stores was empty, a high in recent memory, an analysis by The Real Deal at the time found.
And those vendors were high-end retailers. French glass designer Lalique, linen company E. Braun & Co., and jeweler David Yurman, for example, all relocated.
At the same time, rents plunged, data shows, to about $700 a square foot from $1,800 pre-crash.
Now, though, Madison Avenue may be in the midst of a revival.
There were about 10 deals in the third quarter, mostly with high-end apparel companies, said Jeffrey Roseman, a retail broker with Newmark Knight Frank. They included spaces taken by Michael Kors at 677 Madison, Faberge Jewelers at 694 Madison, and Valentino at 821 Madison. And rents have spiked, up to $1,400 in some cases, Roseman said, adding that he was never worried about long-term ills for Madison.
“This is the true luxury street in New York City,” he said. “People want ‘Madison Avenue’ on their shopping bags.”
Meanwhile, Fourth Avenue in Brooklyn saw a slew of new construction condos go up during the boom, after the six-lane thoroughfare, which is lined with gas stations and auto-body shops, was rezoned in 2003 to allow for buildings up to 12 stories.
Those projects very publicly stalled when the market turned. But as The Real Deal reported in August, the stretch has started to find its footing as several condos, like the Arias, turned rental or chopped prices and began filling up.
In fact, the 95-unit Arias is 95 percent leased after only a few months on the market, a spokesman said.
Others doing well include the Argyle, at Seventh Street, which is now about 70 percent sold, brokers say, and 500 Fourth Avenue.
And some, like Novo, at Fourth Street; Crest, at Second Street; and C560, on nearby Carroll Street, are sold out, said Aroza Sanjana, a broker at Brooklyn’s Warren Lewis Realty. She also said a new condo called Jade 8 near the Gowanus Canal will start marketing its eight units soon.