New York Times - Square Feet

New York Times
Square Feet

Manhattan Market Dips, but Parts Remain Rarefied

By Terry Pristin

Ruth Colp-Haber, a partner at Wharton Properties Advisors, which represents small- to medium-size tenants, is currently negotiating a lease in the West 30’s and said she is "pleasantly surprised" to get free rent and an allowance to improve the space. "A year ago, we wouldn't have gotten any of those things."

The Milk Studios Building at 450 East [sic] 15th Street, top, sold for $160 million. The complex at 388 Greenwich Street, left, is being sold for $1.57 billion, and 1177 Avenues of the Americas, right, for more than $1 billion.

Once part of the sprawling Nabisco cookie complex, the eight-story redbrick building at 450 East [sic] 15th Street, just east of 10th Avenue in the meatpacking district of Manhattan, is the epitome of understated warehouse chic, with polished concrete floors and century-old brick walls and frosted windows.

Known as the Milk Studios Building – after its largest tenant, a photography studio where covers of Vanity Fair and Vogue are shot – the building is fully leased to companies in the fashion and related industries.

Last week, Stellar Management, a New York real estate company, and its financial partner, the Rockpoint Group, agreed to buy the building for more than $160 million, or about $540 a square foot, said the sellers' broker, Douglas L. Harmon, a managing director at Eastdil Secured. The deal represented a handsome profit for his clients: Angelo, Gordon & Company and Belvedere Capital. They acquired the building in 2004 for $55 million and spent $15 million to upgrade it.

But the terms also underscore how the credit squeeze has affected the office market, even in red-hot Manhattan. A few months ago, the Milk Studios Building would have commanded $190 million, Mr. Harmon said.

These days, prices have declined because loans are not being made as freely. An earlier buyer would probably have put in only $10 million or so of equity, but now Stellar and Rockpoint have to contribute $90 million or more, he said.

"The market is still strong for quality properties," said Mr. Harmon, who has sold $35 billion worth of property in the last three years. "However, the debt-equity ratios required to make a purchase have radically changed." Debt is no longer as widely available because of the decline in the secondary market where loans were pooled, sliced up according to varying degrees of risk and then sold as bonds to investors.

Until last summer, there seemed to be no limit to what a New York office building could command. Each month brought a new deal of $1,000 a square foot or more in Manhattan, the nation's priciest real estate market. One record after another was shattered as values continued to soar, ultimately approaching $1,600 a square foot in the fanciest part of Midtown.

But these days, fewer big buildings are changing hands, and prices are no longer escalating at a dizzying pace. Since last summer, only one major new $1,000-a-foot deal has been struck, with Larry A. Silverstein, the New York developer, and his cash-rich partner, the California State Teachers’ Retirement System, agreeing to pay more than $1 billion for 1177 Avenue of the Americas, a 50-story tower between 45th and 46th Streets.

Even though the frenzy has abated, Manhattan continues to lead the nation. Last month, contracts were signed for $6.5 billion worth of office buildings around the country, said Robert M. White Jr., the president of Real Capital Analytics. Of those, $4.5 billion involved Manhattans buildings, he said. Real estate specialists say investment capital is still plentiful- from foreign buyers attracted by the cheap dollar as well as pension funds and insurance companies. Real estate investment trusts, - which use less leverage than private investors and were shut out from much of the recent feverish competition for buildings, are also expected to become more active buyers.

SL Green, a New York real estate investment trust, recently agreed to buy Citigroup's office complex at 388 Greenwich Street in TriBeCa, which has 2.6 million square feet, for $1.57 billion. Citigroup will lease the space from the new owner. Since SL Green is a seller, as well as a buyer, the disappearance of highly leveraged investors, cuts both ways, said the president, Andrew W. Mathias.

"On the sale side, I regret not having the hot money in our auctions," Mr. Mathias said. "On the buy side, it’s certainly been nice to be able to compete for large transactions."

In contract to the weakening leasing market in other cities, office space in Manhattan remains scarce, with a current vacancy rate of only 5.7 percent, according to the brokerage firm Cushman& Wakefield. Rents remain quite high but are no longer skyrocketing.

Like investment sales, the once-frantic leasing market has slowed somewhat, as some tenants wait to see what happens to the city's economy. Studley, a brokerage company that represents tenants, has tracked leases for 6.7 million square feet this quarter, a slight increase from the last quarter, when 6.5 million square feet were taken, but less than the 7.6 million square feet leased during the fourth quarter of 2006.

Some real estate specialists say landlords are sweetening the concessions they offer tenants – a sign that the owners are trying to stave off a decline in rents.

Concessions – months of free rent and allowances to tenants for renovating or creating their space – began diminishing at the end of last year and reached their lowest point during the second quarter of this year, said Steven E. Coutts, who directs national research at Studley. For leases in which the annual rent was $100 a square foot or more, concessions in the second quarter represented an average of 4.5 percent of the cost of the lease transaction; they have now climbed to 6.2 percent of the cost, he said.

Ruth Colp-Haber, a partner at Wharton Properties Advisors, which represents small- to medium-sized tenants, is currently negotiating a lease in the West 30's and said she was "pleasantly surprised" to get free rent and an allowance to improve the space. "A year ago, we wouldn’t have gotten any of those things."

Real estate professionals have not noticed an appreciable increase in sublease space since the subprime mortgage crisis began. So far, Wall Street firms have announced a total of 13,000 to 15,000 layoffs, but not all are in New York, said Marisa DiNatale, a senior economist at Moody’s economy.com a research company in West Chester, PA. She estimated that the city has lost 7,000 to 10,000 jobs.

Like Citigroup, HSBC Holdings is seeking to use its real estate to free up capital. It is seeking tenants for 18 floors of its company-owned headquarters building at 452 Fifth Avenue. Citigroup also plans to give up 75,000 square feet in 666 Fifth Avenue, The New York Observer reported last week. Jared Kushner an owner of 666 Fifth as well as the owner of The Observer, declined to comment.

Many real estate specialists are bracing for the financial services industry to give up more space through sublets. "As a landlord, my biggest concern right now is sublet space," Mr. Mathias said. "That's what killed the market in 2002." He said that landlords were willing to wait until a tenant meets their asking price, while tenants seeking to sublease tend to be less patient, driving rents down.

But Mitchell Konsker, a vice chairman at Cushman & Wakefield, said financial services tenants were too quick give up space during the last downturn and found themselves paying much higher rents when they needed to ramp up again. "Most of the financial tenants are not just dumping space on the marketplace," Mr. Konsker said. "They're being very cautious."