The commercial building sales market is facing a perfect storm of challenges: from inflation and the new work-from-home normal, to interest rate hikes and a dearth of financing.
Financing issues recently tanked an $ 855 million deal for the HSBC building at 452 Fifth Ave., across from Bryant Park, which was being marketed by Eastdil Secured.
The buyer, Innovo Property Group, failed to secure backing because the building’s anchor tenant, HSBC, is moving out. Now, the Israeli sellers, PBC USA, may pocket the $ 35 million deposit.
The disaster of a deal will likely give pause to anyone else putting down a deposit for a building without cash in hand.
“Anything that needs capital or pro-forma work on vacant space, or renewals or needs financing at today’s higher rates – those deals are being re-priced,” said Douglas Harmon, chairman of capital markets at Cushman & Wakefield. “Very high quality, newer assets that are well-leased are still very sought after.”
Harmon is offering a 500,000-square-foot office condominium at 575 Fifth Ave. at pricing expected north of $ 400 million.
And while investors are still making bullish bids – banking on the long-term recovery of the office market – deal-making has become expensive, despite plenty of cash on the sidelines.
“We’ve been coddled with low interest rates for a long time and if you go from 2% to 3%, or 3% to 5% in mortgage rates, that’s a 60% increase in your payment,” said Andrew Scandalios, co -head of JLL Capital Markets. “A lot of people don’t have that, and it will affect their deals and portfolios.”
Scandalios predicted that both work from home and the migration to better quality space around transit nodes “will change the nature of the office markets.”
Earlier this year, 475 Fifth Ave. at 41st Street opposite the Public Library and Bryant Park, was sold through Darcy Stacom, chairman and head of capital markets at CBRE, to RFR for $ 291 million with half the equity contributed by current tenant Penske Media.
Stacom says “Grand Central is hot again” thanks to the opening of One Vanderbilt and the excitement surrounding the upcoming 1,575-foot-high 175 Park Ave. that will flank Grand Central Terminal’s eastern side with a Hyatt Hotel perched on top.
“[For] leasing brokers, it’s very positive, ”Stacom said.
She also marketed the 139,000 square feet of office space above the Puma store at 609 Fifth Ave. for SL Green. It is now in contract for $ 100.5 million, or $ 723 per foot.
The newest office building to hit the market, 1330 Sixth Ave., is a bit farther north between West 53rd and 54th streets. Blackstone and RXR have given the sales assignment to Eastdil Secured with a target of $ 350 million or $ 658 per foot. Seller RXR spent $ 400 million in 2010 for the building that had been seized when Harry Macklowe defaulted on debt after paying $ 498 million in 2007.
Requesting anonymity, one broker said pricing for office buildings is generally spread from $ 600 to $ 1,000 per foot depending on the needed leasing and capital improvements.
Due to much lower rents for the retail area negotiated during the pandemic with new tenants Bank United and Aston Martin, 450 Park Ave. is being sold through Stacom to SL Green Realty Corp. for $ 445 million – compared to sellers Oxford and Crown’s price of $ 545 million paid in 2014.
In March, the 25,693-square-foot retail space at the base of 1600 Broadway in Times Square – occupied on a long lease by the M & M’s store and two signs (each of which brought in over $ 1.1 million in rent) – was sold through Harmon from Sherwood Properties to Paramount for $ 191.5 million.
Diagonally across the street at 30 Times Square, aka 719 Seventh Ave., Eric Anton, senior managing director at Marcus & Millichap, is marketing SL Green’s smaller but vacant newly built 10,040-square-foot retail building. Much of its approximately $ 60 million value is for the 5.2 million pixels glowing on six signs covering 5,800 square feet of its façade.
All of those deals serve as proof that, despite the mounting challenges in the market, any ripple or pause is seen as an opportunity by those who want an entrée or expansion in the Big Apple at some of the lowest price points in years.
Adelaide Polsinelli, a vice chairman at Compass, is selling a property at 230 W. 72nd St., that she has shown to 20 to 30 smaller developers.
“These buyers come in with fresh eyes,” she said. “Ninety percent of the buyers I am working with are new and never bought in New York before and realize it is at a low point for pricing. Smart money is buying, and this is how families build their legacies. “
A Korean syndicate which was a first time US and New York City buyer, Eugene Asset Management, paid $ 267 million for the Lyric apartment tower at 255 W. 96th St., which was sold on behalf of Related by Harmon.
“It shows that global capital is still chasing New York City residential, and in this case, out dueling domestic buyers,” said Harmon.
A 49% stake in the new office tower at One Manhattan West was bought by Blackstone in a deal marketed by Harmon’s team on behalf of Brookfield and the Qatar Investment Authority, which revalued it to a whopping $ 2.85 billion.
Represented by Stacom, Google completed the $ 2.1 billion purchase of its still-under-construction 1.3 million-square-foot office building at 550 Washington St. in Tribeca near its other new offices on Pier 57.
Yet some properties have been floating in the sales market for much of the pandemic, waiting for pricing to improve or for the owner to refinance.
“We did a lot of valuations and have been advising clients on what to do and when to do it, and I believe that most of what was pulled [from the market] or not launched was because of what is going on in the credit market, ”said Scandalios.
Another broker who asked to remain anonymous noted, “Some guys who paid too much are shellshocked and worried more about hanging onto their portfolios and trying not to get swallowed by lenders and aren’t out buying.”
In March, a Court Square Queens development site slated for a 66-story tower was sold with plans and permits in place to Carmel Partners for $ 176 million through Woody Heller, founding partner of Branton Realty Services. The sellers, Stawski Partners, put footings in to qualify the future 900-plus units for the 421a exemption that ended June 15.
But the lack of a continuing 421a-type tax abatement program has now put the kibosh on outer borough land sales and the construction of rental apartments, said Bob Knakal, co-head of capital markets at JLL. Manhattan land is still trading, he said, but only for new build condominiums.
Although the conversion market that upgraded rentals to condominium or co-op apartments died with the 2019 state law requiring 51% of current tenants to buy their units, outdated office towers destined for residential use are starting to pop up downtown.
Rudin Management is in contract through Eastdil Secured to sell 55 Broad St. to a venture of Silverstein and Metro Loft Management, which has been downtown’s most active converter to rentals.
Similarly, in a direct deal, Metro Loft and Jeff Gural’s GFP Real Estate are in contract to buy 4 New York Plaza aka 25 Water St., a 1 million-square-foot tower that needs more windows to capture its harbor views. The seller, Edge Funds, bought it for $ 270 million in 2015 and has a $ 250 million mortgage. Its tenant and former owner, JPMorgan Chase, has been trying to sublease and is bailing when its lease expires in January 2025.
“You can’t just convert some of these to residential,” advised Polsinelli of some properties, pointing to issues including zoning and regulations that require more exits. “It’s not like a shoo-in where you just turn around and convert it.”
That’s another reason Gov. Hochul signed a law this month that makes it easier to convert hotels to affordable housing by loosening zoning and funding restrictions.
Residential building sales are also buoying the market.
In one of the largest residential sales of the year, the angular connected American Copper Buildings at 636 First Ave. at East 33rd Street were sold for Michael Stern’s JDS and the Baupost Group to Josh Gotlib’s Black Spruce Management for $ 837 million by Harmon.
Two other residential towers are being sold by Equity Residential. The former Trump Place rental at 140 Riverside Blvd., with 354 units, was sold through Stacom in April for $ 266 million to Douglas Eisenberg’s A&E Real Estate.
Sources said the ease of that transaction netted A&E, now one of the city’s largest rental owners, an approximately $ 400 million contract for Equity’s 455-unit 160 Riverside Blvd. Both towers were built by the Trump Organization as 80/20 buildings.
A&E also bought the 1,000-unit, 22-building Cunningham Heights complex in Queens Village for $ 130 million earlier this year.
Another 80/20 rental tower at 160 Madison Ave. is being offered by JLL for $ 400 million with the abatement and lower financing running for a few more years. A Bo Concept store is on a renegotiated pandemic rent that will be boosted in four years.
“These are interesting times as assets are getting rebranded, converted and repriced,” Harmon said. “I expect the second half of the year to have lower transaction volumes than we enjoyed over the same period in 2021.”