KPG Funds’ Gregory Kraut thought he had an answer for New York’s ailing office market.
The firm set about turning small buildings in cool neighborhoods into Class A office space. The thinking was, the sector might have pain, but there are still tenants who see Midtown South and Hudson Yards as cultureless wastelands and yearn to be in Soho or Tribeca.
KPG’s contrarian take has had success. By the summer of 2023, about 86 percent of its portfolio was leased, Kraut said at the time.
But like just about everyone, KPG couldn’t escape the pain of higher interest rates. KPG just sold one of its prized assets, a five-story building at 446 Broadway, for a likely loss.
The firm bought the building for $45 million in 2018 and spent more than $10 million on renovations, according to the Commercial Observer. Kraus and his team built out the lobby, replaced the elevators and refurbished the facade. The building was 100 percent leased by early 2023, according to KPG.
KPG sold the property for $52 million to San Francisco-based Spear Street Capital, records show. That was only $1 million more than the loan KPG got from Ladder Capital to refinance the property in 2022, according to records.
But KPG’s total financing package was reportedly $64 million, apparently including mezzanine debt not recorded in city records.
KPG did not return a request for comment.
The Soho property is the second that KPG has sold to Spear Street in the past 12 months. In October, Spear Street paid $48.1 million for an office and retail building at 30-32 Howard Street owned by KPG and Intercontinental Real Estate.
That sale was only about $2 million more than what KPG and Intercontinental paid for two buildings 30-32 Howard Street, which it later combined into a Class A, mixed-use property. KPG also put some money into renovations.
The issue does not appear to be demand from tenants; 446 Broadway, known as L’Atelier, lists only one floor of vacant office space on its website.
Rather, it seems that the building is a victim of the rise in interest rates since March 2022, which has driven down the values of office and other properties across the country.
Even buildings perceived to be attractive are suffering drops. Brookfield’s 1 Liberty Plaza saw its valuation fall to $1 billion from $1.5 billion when Brookfield bought Blackstone’s stake in the 2.3-million-square-foot skyscraper.
KPG bet on the NYC office market as other landlords began defaulting and handing over keys. Kraut, formerly a managing director of Avison Young’s New York City office, and Rod Kritsberg, sought to convert aging Class B and Class C buildings into high-end boutique offices. Their firm focused on areas such as Soho, Tribeca and Greenwich Village where office supply is limited.
KPG took on some ambitious projects. It plans to convert a seven-story building at 32 West 14th Street into a Class A office and retail building. Kritsberg once called the formerly dilapidated property, “the world’s ugliest building.”
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The company largely turned to non-bank lenders such as Ladder Capital and Thorofare Capital for project financing.
“Everybody wants to be in New York City,” Kraut told TRD in 2023. “Everyone needs an office in New York City.”
That could be true, but it does not guarantee a profit anymore.