"They all laughed at Rockefeller Center, now they're fighting to get in / They all laughed at Whitney and his cotton gin"
(Frank Sinatra — "They All Laughed," lyrics, George Gershwin and Ira Gershwin)
When Harry Macklowe, the scion of one of New York's most prominent real estate families, paid $1.4 billion in September 2003 for the General Motors Building on Fifth Avenue between 58th and 59th streets, people laughed at what seemed like an outrageous price.
While just three years ago the idea that a New York City office building could be worth more than $1 billion seemed preposterous, today real estate experts say the very same building could be worth more than $3 billion.
Last week's announcement that Tishman Speyer's office building at 666 Fifth Ave. would sell to the Kushner Companies for a record-setting $1.8 billion, or roughly $1,200 a square foot, is the latest symbol of New York's dynamic real estate market, and provides further evidence that Mr. Macklowe's big gamble on the GM Building has paid off.
The 50-story trophy property lies in the center of Midtown Manhattan, overlooking the Plaza Hotel building and Central Park. Built in 1968, the GM Building is considered to be one of the members of the city's exclusive "country club," a group of upscale office buildings with desirable addresses that attract the richest tenants, such as hedge funds, and charge the highest rents. On the top floors of the GM Building, office space is being marketed for a rent of $175 a square foot a year, according to a source. Mr. Macklowe purchased the property from the insurance company Conseco and the developer Donald Trump.
Real estate sources say Macklowe Properties could soon be recapitalizing the GM Building; as part of that process, the building's value would be appraised at close to $3 billion. There are rumblings that Mr. Macklowe is moving to buy out his remaining partners on the deal.
The global chairman of CB Richard Ellis, Stephen Siegel, said the value of the GM Building has increased at least $1 billion in the last three years.
"Harry was a little earlier and had a little more vision than most," Mr. Siegel said. "The market had just begun to pick up momentum, but there hadn't been any rent growth yet. There were people out there — other bidders included — who thought the number was high."
Mr. Siegel said he could not recall another time where as much appreciation occurred in such a short timeframe. He said the boom is being driven by low interest rates, an influx of capital into the New York real estate market, and soaring rents, which he said could rise between 6% and 18% next year.
"All the fundamentals say this will be a healthy market for a long time to come, and people are putting their money in it," Mr. Siegel said.
The chairman of Massey Knakal, a top real estate firm specializing in building sales, Robert Knakal, called Mr. Macklowe's purchase of the GM building a "grand slam."
"The overwhelming majority of people thought the price was off the charts, and didn't make any sense," Mr. Knakal said. "The office leasing market had not yet started to take off and strengthen the way it has since then."
"If you look at any building that anyone purchased in 1993 through last year, all deals have been grand slams. If the property was worked properly, the values have gone up significantly," Mr. Knakal said.
He called Mr. Macklowe a "genius."
"He sees value where other people don't. Even if the market hadn't taken off the way it did, Harry still would have created tremendous value," Mr. Knakal said.
With rising retail rents along Fifth Avenue, Mr. Macklowe generated increased value by adding a lucrative new retail space, an Apple Store, under a glass cube in the middle of the building's public plaza. It received this year's award for the year's most creative retail deal from the Real Estate Board of New York.
The chairman of GVA Williams, one of New York's largest commercial property managers, Michael Cohen, said that when Mr. Macklowe bought the GM Building at a record-setting price, many questioned whether the cash flow generated from rents would justify it.
"People were dead wrong," Mr. Cohen said. "The purchase turned out to be inspired, if not prescient."
Now commercial rents in Midtown are soaring towards all-time highs on top of falling vacancy rates. More and more deals are topping the once seemingly insurmountable barrier of $100 a square foot a year.
A perceived shortage of new development sites in Midtown and the high cost of construction are also limiting the new supply of comparable office space. Experts say this augurs a further tightening of the real estate market and even higher rents.
An imperfect but reasonable public proxy of the New York real estate market, analysts say, is the real estate investment trust, Vornado. The company, controlled by billionaire Steve Roth, now controls 18.3 million square feet of office space in 42 office buildings in New York. In September 2003, Vornado's stock was trading at $48 a share. At close this past Friday, it was trading at $131.35, for a gain of more than 170%. The stock is up about 51% this year alone.
Part of the explanation of rising real estate prices, experts say, is due to a paradigm shift in the way that investment capital is allocated. Capital, including money from overseas, is increasingly liquid and finding its way into the city's real estate market, and Wall Street is paying more attention to the real estate industry. At a recent real estate conference sponsored by NYU, several participants noted that the panels were dominated by investment bankers, not real estate guys.
The president and CEO of Cushman Wakefield, Bruce Mosler, said recently that real estate is now considered a "respectable asset class."
Large pension funds and other institutional investors are now partnering up with local operators, property managers and developers, and driving big deals. An arm of the Black Rock Group, which has more than $1 trillion under management, partnered with Tishman Speyer in the recent $5.4 billion purchase of Stuyvesant Town and Peter Cooper Village from Met Life. A California state pension fund has partnered twice recently with Silverstein Properties.
A director for Real Capital Analytics, Daniel Fasulo, said the supply of capital for real estate investment in the New York is contributing to the boom.
"There are investors from all over the world trying to get their money into this high priced area of Manhattan," Mr. Fasulo said. "When you have more capital than available property, it is common sense that prices would be driven up."
As the New York real estate market continues to perform as an asset class, investors are shifting funds from other traditional investments, like the debt and equity markets.
Mr. Fasulo added, "There is so much money floating around, and the other assets classes haven't been blowing it out, which would make real estate less attractive."
Looking ahead, experts expect the skyward trajectory to continue. Sources speculated on the possible sale of Sheldon Solow's 9 West 57th Street, another building that belongs to the "country club" of office buildings. Industry leaders expect that the 1.4 million square foot building would fetch more than $1.8 billion. Mr. Solow, who built the tower in 1971, would stand to walk away with a fortune.
Mr. Knakal, of Massey Knakal, said he expects rising building values to spark more blockbuster deals.
"Four years ago, if your property was worth $600 million and now it's worth $1.8 billion, it is very difficult to leave that kind of money on the table," Mr. Knakal said.
"To put the New York market in perspective, relative to London, Paris and Tokyo, New York is still pretty cheap," Mr. Knakal said.
Mr. Cohen, of GVA Williams, said rents of more than $100 a foot a year have persisted in London for some time, proof that the trend is sustainable.
Mr. Cohen said the jury is still out on the $1.8 billion that the Kushner Companies paid for 666 Fifth Avenue.
"The $64,000 question is do we have the same situation here as with the GM Building — is this an inspired and prescient purchase, or is this a purchase made at the top of the market on expectations that will not be met," Mr. Cohen said.
To justify the purchase price of about $1,200 a foot, he said the Kushner Companies would need to achieve office rents north of $100 a foot.
"While that seemed outlandish a year ago, today it doesn't seem outlandish," Mr. Cohen said. "If you are to be a buyer in this market, you need to believe in double-digit rental growth in the next couple of years."