Manhattan’s Property Boom Pushes Landlords to Sell EarlySarah Mulholland
Manhattan property owners are cashing out ahead of schedule.
With New York real estate values and rents surging, owners of commercial properties acquired as recently as a year ago are already seeking buyers. In the case of one Midtown site, the developer scrapped construction plans to sell an empty plot of land.
There’s so much buyer demand that in some situations it’s more opportune for landlords to sell rather than follow through on plans for redevelopment or filling buildings with new tenants. A record $29.4 billion of Manhattan property deals were completed in the first half of 2015, according to brokerage Jones Lang LaSalle Inc., part of a five-year real estate rally that’s pushed prices to new highs in big U.S. cities.
“For investors who were able to buy early in the cycle, prices have appreciated to a level where they were able to get the business plan started and get a good return without having to fully execute,” said Scott Rechler, chief executive officer of RXR Realty LLC, which has about $10 billion of real estate throughout New York, New Jersey and Connecticut, including the Helmsley Building on Manhattan’s Park Avenue.
Take Joe Sitt’s Thor Equities LLC, which acquired two pre-war buildings in midtown Manhattan in 2011 and demolished them with plans to build a 71-story tower. The company in June agreed to sell the vacant parcel at 520 Fifth Ave. for about double the $150 million acquisition price, without even starting a new foundation.
Thor originally was going to hold on to the property through 2018, according to a person with knowledge of the matter, who asked not to be identified because the details of the plans are confidential. A Sitt spokesman declined to comment.
Institutions from around the world are using Manhattan real estate as an investment haven. Demand “seems to be insatiable,” from new investors, and some developers are seizing on the opportunity to profit now rather than moving ahead with construction plans, said Robert Knakal, chairman of New York investment sales at brokerage Cushman & Wakefield Inc.
“There are a lot of new people coming into the market and a lot of people who have raised money to purchase development opportunities,” Knakal said.
The glut of capital is making good deals harder to find. For an office building in Manhattan, the average capitalization rate -- a measure of yield for a real estate investment -- has fallen to 4.1 percent, the lowest since December 2007, according to property-research firm Green Street Advisors LLC.
High-profile deals with record-setting price tags have sparked concern that the well of capital targeting U.S real estate is overinflating values, which have eclipsed 2007 peaks by 29 percent in major metropolitan areas, according to Moody’s Investors Service and Real Capital Analytics Inc. Federal Reserve Chair Janet Yellen flagged rapidly rising commercial-property prices as a cause for concern in a semiannual report to Congress last month.
Rising rents in Manhattan means buyers are willing to pay a premium for properties that require work with the aim of further boosting income, said Woody Heller, an executive managing director at real estate brokerage Savills Studley.
“Markets establish new highs all the time -- it’s part of the cycle,” Heller said. “It doesn’t mean we stop growing the moment we do that.”
The Brill Building, an Art Deco tower known as a hub for songwriters and music publishers in the 1960s, was sold for $295 million this month after a renovation. The previous owners, investors led by Allied Partners Inc., decided to sell with vacant space rather than find new tenants as originally planned, according to a person with knowledge of the matter.
The Allied group paid $185 million for the 175,000-square-foot (16,300-square-meter) property, three blocks north of Times Square, in 2013. Colony Records had left the ground floor in 2012 after 40 years, leaving an empty lobby in the building where music legends including Elvis Presley and Neil Diamond wrote and recorded.
Allied and its partners overhauled the third and fourth floors to accommodate additional retail space and got permission for future occupants to hang nine LED signs throughout. The group sold the building with about 125,000 square feet of vacant space, according to the person with knowledge of the matter.
Representatives for Allied and the buyers -- a group that includes B+B Capital, Israeli retailer Fox-Wizel Ltd., Conway Capital and Schottenstein Realty Co. -- declined to comment.
Retail rents in the neighborhood around Times Square have more than doubled in the past five years, to about $2,500 a square foot, New York-based Cushman & Wakefield said in a midyear Manhattan update.
“Prices on a per-square-foot basis are higher for every type of property for every neighborhood in the city,” Knakal said.
Demand for property in Manhattan is creating ripples in the outer boroughs. Savanna Investment Management, a New York-based real estate investor, is marketing a skyscraper in Queens just one year after purchasing it. The firm said in May that it hired Cushman to find a buyer for the 52-story office tower in Long Island City.
The building at One Court Square, crowned with the Citibank logo, is one of the most prominent features of the skyline across the East River from Manhattan. Savanna officials declined to comment on the reasons for the sale.
The wave of cash flooding Manhattan real estate shows no signs of abating, giving property owners seeking a speedy exit the advantage in negotiations with buyers, said Savills Studley’s Heller.
“It’s a marvelous moment to be long in the market,” he said.
(Adds gain in U.S. real estate values in 10th paragraph.)