Gary Barnett and rendering of 50 West 47th Street
Despite rising slowly in fits and starts on West 47th Street in the Diamond District, Gary Barnett’s 34-story International Gem Tower is set to spark the most profound real estate changes in a generation along the famously insular strip.
The planned tower at 50 West 47th Street has just three basement floors constructed and a projected completion date in 2012, but it has contracts or purchase commitments for a total of about 150,000 of the 200,000 square feet Barnett’s Extell Development Company needs to secure construction financing.
Backers say it will be an anchor for the Diamond District and revitalize the strip that could easily be dissolved by the same market forces that hit the furrier and garment districts. But critics say there’s a simple description for Extell’s marketing effort: poaching.
A large number of those new buyers are longtime occupants of nearby buildings, leading one landlord to charge that the entire Diamond District strip could collapse as Barnett “vacuums” dozens of tenants into his tower. Kenneth Kahn, executive manager of 580 Fifth Avenue, said the tenant reshuffling would destabilize the delicate symbiosis between ground-floor retail and upper-floor wholesale and manufacturing.
“Once you break that relationship and everyone is sucked into one building, you no longer have a block. It is no longer a district. [Extell’s] idea here is to go from building to building” to poach tenants, Kahn said.
He said there was not sufficient demand in the shrinking diamond industry to warrant Extell’s modern commercial condo tower, which is benefitting from federal and state programs. (Situated at the corner of 47th Street, 580 Fifth Avenue has 373,000 square feet.)
“It is more than unfair. It is hurting the industry,” Kahn said. State support should go directly to industry firms to provide incentives to their businesses, not for real estate projects, he said.
Barnett, president of Extell, disputed that the tower would hurt diamond merchants, noting that the project has already prompted a small price war that’s benefiting tenants.
“Now some landlords are doing some very good deals at very low rent because they are afraid or they are trying to kill us,” he said.
Of the nine committed buyers, Extell signed four tenants from 580 Fifth Avenue, including the Gemological Institute of America (which agreed to buy an entire floor in the new tower) and a diamond courier firm called Malca-Amit, which has agreed to buy 6,000 square feet. Meanwhile, 580 Fifth snagged a tenant from 20 West 47th Street, a building in which Extell has partial ownership.
The new Extell tower will stand out in a dowdy strip that includes an estimated 1.3 million square feet of mostly Class B and C buildings in the heart of Midtown one block south of Rockefeller Center. Most of the estimated 2,600 businesses on the block lease small spaces, from 400 to 1,000 square feet, negotiated directly with the landlords.
Extell’s 748,000-square-foot tower had an estimated cost last fall of about $780 million, but Barnett said that has fallen by about 10 percent to $700 million because of declining construction prices. Currently about 322,000 square feet of the tower is being marketed to the jewelry industry as a first phase of sales, and the balance will be marketed later either as rental or condo space. None of that remaining space has been sold or leased, Barnett said.
Last year, Barnett told the New York Times that he expected to sell or lease the top floors to corporate or financial firms that would have their own entrance on 46th Street. But he told The Real Deal last month that his intention was to fill the entire building with industry tenants.
Brokers say rents in the Diamond District range from the mid-$20s per square foot into the $50s. To attract tenants in the downturn, Extell has dropped its sale prices from over $1,320 per square foot filed in the offering plan to about $900 per foot, Barnett said.
“Right now we are selling below cost” on the lower floors, he said.
The 30 percent drop in sales prices at the Gem Tower is steeper than the 13 percent decline in Manhattan office building values compared with a year earlier. And it is in sharp contrast with average prices for office condos, which remained virtually unchanged at $834 per foot compared with last year, a report released last month by investment sales brokerage Massey Knakal shows.
One other commercial condo building on the block, a Class C building at 62 West 47th Street, sold a 2,526-square-foot unit for about $500 per foot in February, according to real estate data firm PropertyShark. But that unit was a short sale and it is far below the expected quality of Extell’s Class A tower, an insider said.
Extell requires a down payment of 15 percent on contract signing and another 10 percent in six months.
Michael Rudder — director of office leasing and sales at developer Time Equities, who is not involved in the Extell project — estimated that buying in the Gem Tower for about $900 per foot will cost the buyer (in mortgage payments, taxes and common charges) roughly $66 per square foot a month. That’s higher than current rental rates, but with tax benefits and potential appreciation, buying may be compelling, he said.
“In theory it would pull tenants who would ordinarily be tenants in other buildings into this building,” Rudder said, but added that the shift could also draw more firms to the street. “It may strengthen the area.”
Barnett — a former executive with a Belgium-based diamond-polishing firm (he left in the early 1990s) — has assembled additional properties on the block, like his partial interest in 20 West 47th Street. Since he began assembling properties for the site in 2006, competing building owners howled that he would poach tenants. Initially, the 47th Street Business Improvement District opposed the tower, but now it is reportedly neutral.
In another coup, in May, the Gem Tower won approval from the U.S. Department of Commerce to become the only active Foreign Trade Zone in Manhattan, a spokesperson for the city’s Economic Development Corporation said. The designation allows firms to import merchandise produced overseas without paying customs until the items are sold in the U.S. In addition, the Bloomberg administration agreed in 2006 to provide up to $49.6 million in tax breaks if Extell can reach a target of filling 85 percent of the tower with diamond industry firms that are new or expanding.
But opponents are not deterred.
The owners of 580 Fifth hired lobbyists Reiter/Begun Associates and Davidoff Malito & Hutcher to argue for a repeal of the state’s recent commitment to provide up to $100 million in first-position loans through bonds for diamond-industry Extell condo buyers, with a maximum of $5 million to any one buyer.
Barnett said the state bond money did not come from taxpayers, and would actually net the government money as it’s repaid. (That is, of course, if there are no defaults, but each loan comes with a required personal guaranty from a principal.)
“Owners of buildings that complain that they will lose tenants should modernize their facilities, upgrade their facilities, or turn them into some other use,” he told The Real Deal, accusing them of being “shortsighted.”
Kahn, meanwhile, said because of the proposed tower he sped up completion of a decade-old, $50 million rehabilitation project at 580 Fifth by about a year.
Some brokers downplayed the impact of the Extell project. Kalman Censor, president of brokerage Rock York and recognized as one of the few brokers who focuses on the strip, praised the building, saying it would attract international tenants and that he did not believe it would cause a major upheaval.
But it remains unclear what will happen to the hundreds of smaller diamond wholesalers and traders who populate the district. Brokers estimated that those tenants paid a small premium of a few dollars per foot to Be On 47th Street.
Ira Rovitz, senior director at Grubb & Ellis who also has experience in the neighborhood, said many Diamond District tenants are cutting their costs and leaving the block, but are remaining nearby on Fifth Avenue or on the side streets.
Marco Delano, owner of a jewelry polishing business of the same name, who has been on the street for 35 years, said Extell’s brokers had not pitched him. He is now renting about 1,200 square feet at $45 per foot at 71 West 47th Street. Although his rent is far below what he would have to pay in the new tower, he wanted to take a look at it.
“I would [buy] if it was reasonable,” Delano said, but left open what he meant by “reasonable.”