One thing is certain: the current pricing for commercial real estate assets have reached an all-time high. Few real estate leaders who have experienced the ups and downs of recessions and cycles have ever seen these record levels for all forms of real estate properties. In my conversations with real estate leaders, many are embracing the former television commercial pitch of radio DJ Jerry Carroll, when he represented the Crazy Eddie electronic stores, stating "these prices are insane". Surprisingly while these prices may be insane, few real estate leaders believe that pricing will drop in the foreseeable future.
Prices for every asset class have reached record levels in the metropolitan region. With a pent-up demand for residential rental and condominiums throughout the city, developers are in a feeding frenzy for land. Additionally, real estate leaders who have sold properties for significant profits, who prefer not to pay capital gains taxes, are re-investing in other assets for a 1031 like kind exchange. With more than 54 million visitors to New York City, hospitality and retail assets are also experiencing the highest levels in pricing.
Land for residential and commercial development
With a limitation of land for residential and commercial development investment sales, executives expect the price for prime asset to reach as high as $1,300 a developable feet in Manhattan. Robert Knakal, Chairman of Massey Knakal Realty Services and one of the most active investment professionals, feels that sites in Downtown Brooklyn might fetch as much as $400 a developable foot. It was only five years ago when David Kramer, principal at the Hudson Companies, told me that sites in this thriving market might fetch $100 a developable foot. Today, industry leaders are expecting the current site of the flagship Junior’s restaurant at the corner of Flatbush Avenue Extension and DeKalb Avenue to fetch as much as $400 a developable foot. As reported in Crain’s, JP Morgan Chase, the owner of the landmarked Dime Savings Bank of Brooklyn (which the bank acquired when it purchased Washington Mutual in September 2008), is weighing the sale of air rights on its landmarked bank branch at 9 DeKalb Avenue. The purchase of the air rights over the bank would allow the purchaser of the Junior’s site to construct a tower with as many as 50 stories.
A prime example is the recent announcement that developer Michael Shvo is in contract to buy a development site at 22 Thames for $180 million from developers Fisher Brothers and The Witkoff Group. The joint venture purchased the site in September, 2012 for $87.5 million. The purchase also included 86 Trinity Place, the former American Stock Exchange. The total purchase price for the two assets was $150 million. The joint venture purchased the site from Michael Steinhardt and Allan Fried, who purchased the two properties in February 2011. They paid $17 million for the vacant American Stock Exchange building and $48 million for 22 Thames Street. In a period of less than three and half years, the price of 22 Thames increased by a whopping 375%.
According Real Deal Magazine, the highest price paid per square foot for residential development site over the past twelve months took place at 225 West 58th Street when Vornado Realty Trust paid $194 million, for $1,400 per square foot. The REIT purchased the 137,000 square foot site which was needed to expand the size of the 920 square foot residential development which they are in the process of constructing at 220 Central Park South.
Investment sales professionals have told me that they expect the American Bible Society, 12 story building at 1865 Broadway to possible reach as high as $1,300 a developable foot. The building located on the corner of West 61st Street is in close proximity to 15 Central Park West, Time Warner Center, Central Park and Columbus Circle.
As I mentioned earlier, sellers of commercial real estate are also very interested in purchasing property. Whenever you sell business or investment property and have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like kind exchange. The gain is deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax free.
An excellent example of an investor who plans to defer his gain is Frank Ring, who last year sold his real estate interests in a number of Manhattan office buildings to Gary Barnett’s Extell Development for $330 million. It has been reported in the New York Post, that Mr. Ring purchased the 235,000 square foot office building at 80 West End Avenue paying $195 million. The seller was a joint venture of Extell Development and the Kushner Companies who purchased the former industrial building in August 2013 for $84 million.
Another real estate investor utilizing the 1031 exchange is Broad Street Development who earlier this year sold their office buildings at 55 Broadway and 61 Broadway. In April, they sold the 358,637 square foot at 55 Broadway for $157 million, and in May sold the 33 story, building at 61 Broadway for $330 million. In July, Broad Street entered a contract to purchase the 36 story, 430,000 square foot, office building at 80 Broad Street, from Savana Investment Fund for $175 million.
It was only a few years ago when class A office buildings in Manhattan traded for a price of $1,000 per square foot. Fast forward to this year when the owners of the 334,000 square foot building at 450 Park Avenue sold to a joint venture of Canadian Pension Fund, Oxford Properties and Crown Acquisitions for $545,000 or $1,632 per square foot. The seller was Somerset Partners and a family trust of British investor Michael Tabor. They bought the building in October 2007 for $504 million, at a record price per foot of about $1,583.
In June, 5 Times Square, the headquarters for Ernst & Young, sold for $1.55 billion or $1,348 per square foot in the biggest transaction for an entire building in the city since 2010. A partnership led by real estate investor David Werner bought the tower from AVR Realty Co. The price is 17 percent more than what AVR paid in 2007, when it bought the building from Boston Properties.
Office buildings owned by financial service firms in Lower Manhattan continue to trade record prices. In the spring, The Bank of New York Mellon entered a contract to sell its 1.1 million square foot office building at One Wall Street for $585 million, or $532 per square foot to a group led by Harry Macklowe of Macklowe Properties. Industry leaders expect the property to be converted for residential. Late last year, JP Morgan Chase & Co sold the 60 story, 2.2 million, 1 Chase Manhattan Plaza for $725 million, to Shanghai based Fosum, representing the largest purchase of a New York building by a Chinese buyer.
Earlier this year, Time Warner announced that it sold its 1.1 million square feet of office space, its corporate headquarters Time Warner Center at Columbus Circle for $1.3 billion, or $1,182,000 million. The media company is moving to 30 Hudson Yards. The purchaser was a joint venture of The Related Companies with GIC, the organization that manages Singapore’s foreign reserves and the Abu Dhabi Investment Authority, an investment arm of that government. The joint venture will lease the Columbus Circle space back to Time Warner until as late as early 2019.
Retail properties, especially on Fifth Avenue in the Plaza district and SoHo, are fetching record prices. In July, Vornado Realty Trust, in partnership with Crown Acquisitions, announced that they entered into an agreement to acquire the retail condominium of the St. Regis hotel at the corner of 55th Street and Fifth Avenue, and the adjacent retail townhouse. The property leased to the Gucci division of Kering (17,100 square feet) for its Bottega Veneta brand through January 2016 and to LVMH (7,600 square feet) for its DeBeers brand through January 2019. The purchase price is approximately $700 million or $28,340 per square foot, one of the highest prices paid per square foot for retail in New York City. Swiss luxury retailer Richemont had purchased the space in October 2012, for $380 million form a partnership that included Crown Acquisitions, the Feil Organization and Goldman Properties. This private investment group paid $117 million, or approximately $4,738,84 per square foot, purchasing the luxury retail from Starwood Hotels & Resorts Worldwide.
Retailers have a desire to have a location in SoHo, which is resulting in record prices for retail sites in this neighborhood. In May, Imperium Capital purchased the 650 square foot retail condominium at 123 Prince Street on the corner of Wooster Street. They paid $8 million, or $12,300 per square foot. Late last year, retail real estate investor Bobby Cayre of Aurora Capital paid one of the highest prices per square foot for retail in SoHo. He paid $42 million, or $15,336 per square foot for the 2,750 square foot ground floor retail property. Aurora purchased the property with the intention of finding a new tenant for the space, since the then current tenant Karen Millen vacated the building in April.
The combination of record low vacancy rates coupled with the availability of low cost financing as well as the possibility of converting rental to condominium residences continues to fuel the desire by investors to purchase multi-family residential throughout all boroughs of the city.
In 2005, O’Connor Capital, in a joint venture with Richard Kalikow, purchased the landmark residential tower Manhattan House at 200 East 66th Street, marking the largest single purchase of a residential building in New York history. Over the past nine years, they have been in the process of converting the rental building into condominium residences. In the spring, O’Connor Capital Partners paid $240 million, or $2,086,957 per apartment, for the 120 unit Wellington apartment building located at 200 East 62nd Street. Once again, they purchased the building with the plan to convert as residential luxury condominiums. Blackstone Group provided them a loan of $275 million for the property and the conversion.
In May, Gaia Real Estate purchased 144 rental apartments for $147 million or $1,020,833 per unit for a block of apartments in the Corinthian, a residential tower which was built by the family of former New York Governor Eliot Spitzer. The 54 story tower which has a total of 840 units, built in 1987 takes up the entire block between 38th and 39th streets on First Avenue.
A few blocks away from the Corinthian is a residential rental building named the Nash. In April, Lloyd Goldman, BLDG Management, paid $126 million, or $659,586 per unit for the 191 unit apartment building at 222 East 39th Street. The property was formerly known as the Eastgate Tower Hotel. The seller a joint venture of Atlas Capital Group, Rockpoint Group and Procaccianti Group purchased the debt on the building for $69 million. The joint venture secured financing of $50 million from a syndicate of banks led by Sovereign Bank to fund the property’s conversion to apartments. The property includes a 100 space parking which is leased to Champion Parking, as well as a roof deck, fitness center and outdoor plaza.
Apartments on the West Side of Manhattan are highly desired for rental and conversion to condominiums. Earlier this year Thor Equities in joint venture with GreenOak Real Estate purchased two residential rental properties on the Upper West Side. The buildings properties are located at 120 Riverside Drive at 84th Street and the adjacent 125 Riverside Drive, with a total of 97 apartment units. The sale price per each of the 97 units was $876,000 per square foot. In May, Thor along with Rockwood Capital purchased the 70 unit rental building at 838 West End Avenue, located at the corner of 101st Street, paying $67 million or $957,143 per unit.
Record number of visitors to New York City and the economy has resulted in hospitality assets to sell at record levels.
In February, the 330 room Standard High Line Hotel at 848 Washington Street in the Meatpacking District sold to Standard International for more than $400 million or about $1.2 million a room. The price is a record for the meatpacking district and close to the highest price ever paid for hotel room in the City of New York.
Another attractive market for hospitality is in SoHo. In June, Deutsche Bank sold the 270 room Mondrian Soho which the bank had foreclosed on which was part of the Morgan’s Hotel Group. The purchaser was a joint venture of Rotem Rosen, the Sapir Organization and Gerard Guez, paying $205 million of $759,259 per room.
The 34 story Novotel Times Square was built in1981 and underwent extensive renovations of all guest rooms, public spaces in 2013. Millennium & Copthorne Hotels PLC purchased the property from Blackstone for $273.6 million, or $570,000 per room.
While prices have reached all times high, a number of senior investment sales professionals which included Robert Knakal, Peter Hauspurg, Peter Von Der Ahe and Glen Tolchin, who joined me on my television show all agreed that during their professional careers they have never seen the pricing and record pace of sales. Nevertheless, I must concur with Tim King, Managing Partner and co-founder of CPEX Real Estate, when he said " History teaches us that gravity still works, in essence "what goes up must come down". There are no signs on the horizon of a slowing down for investment sales. Having seen several cycles, this one sets the record for the highest historical prices for all real estate asset classes.