Savvy brokers finding opportunities abound.
Brokers identified trends in both areas including a sudden spurt of sales that reflect 1980 prices, and a surge of renewals and new leases which take into account larger work letters and months of free rent.
Bruce E. Mosler, chairman of Riverbank Realty Company, said because New York is now economically devalued, it represents opportunities in particular for foreign investors. Mosler also sees more creative deals in the future. "There are no black-and-white deals," he said. "Everyone is strapped for cash and looking for ways not to fund properties."
This is an ideal time for investors with the cash to obtain a piece of the development, Mosler said, by providing the capital for improvements that create value. Some of these improvements could simply finance work letters for new tenants since these have increased recently to the $40 to $60 per square foot range.
Peter Hauspurg, president of Eastern Consolidated Properties, which concentrates in sales, said, after nothing happening for three or four years, New York City is seeing a resurgence of large sales. During those years, he noted, 60 to 70 percent of brokers in the sales business have gone out of business because of the lack of transfers.
Recent Eastern contracts include a prime East side apartment complex of over 200 units, and a 110,000-square-foot foot office building in Midtown. Hauspurg said he knew of at least six buildings which will be transferred soon due to lender pressure and others which will be transferred within the next year. "The market has picked up markedly," he added.
"Prices are off a solid 50 to 60 percent from 18 months ago," Hauspurg observed, with exceptions for the best locations. One building will be selling shortly for $400 a square foot, he said. Recently, 29 West 57th Street, which has approximately 65,000 square feet, and Bolton's, a discounted dress merchant as a tenant, sold for $260 per foot to a German group. "The better locations are holding up," Hauspurg said, "and on the side streets the prices are off and still falling."
Some of these buildings have been around for a while, explained Daun Paris, vice president of Eastern Consolidated. She said either the banks have taken over or the previous owners had put them out at a higher price. A lot of these buildings are in court and the banks have to go through the process of taking them," she said. "Now we're negotiating with the lawyers."
Maurice H. Solomon, vice chairman of Julien J. Studley, Inc., said he sees a kind of a "vulture" trend. "As these buildings are being given back to the lender or the lender is foreclosing, you have the people circling around knowing they can get this building for a song," he said.
While there are a few American purchasers, most of the buyers are primarily foreigners from Hong Kong. "There is flight capital coming over," Hauspurg said because of the 997 deadline when China takes over the community. One Hong Kong financier, Li Kai Shing, invested in 60 Broad with the Reichmann (Olympia & York) family.
Paris said the conventional financing has dried up and they are locating alternative sources. "We are doing quite a bit with oversees buyers and pairing them with New York developers," she added. Eastern also brought in Joe Lesser to complete the Steven L. Green/Loeb Partners purchase of 16 East 34th Street late last year.
"There are 10 groups from Hong Kong actively looking for investment and a number from Britain," Hauspurg said, adding that the Japanese are notably absent. "They had such a horrible experience here with their purchases at the top of the market," he observed. "This should be the time for them to come in and pick up properties at rock bottom prices."
Solomon said he has not seen any Japanese buyers recently and also expects Hong Kong interest to rise as they pull their money out.
Prices are down to 1980 to '81 levels, Hauspurg said. "We had an offer of Park Avenue South for $70 a square foot in 1982," he said. "We had an offer of $160 a square foot in 1989 which was turned down, and now we are back selling the property for a bank, which took over the property after the owner had financial difficulty, for $90 a square foot. That's almost full circle." And a 45 percent drop in the market.
"I don't see anything in the sales area that would make me feel buoyant," Solomon admitted. There is still the possibility of one of the large new office buildings, 1540 Broadway, being purchased, possibly by Bertlesmann Music, the German recording distributor. "That is still brewing," Solomon said, predicting that the building will sell for around $100 per square foot.
Solomon identified as one "mini-trend" the non-profits purchasing parts of buildings as condominium. "First you have to find a non-profit that has the cash," he said. The Girl Scouts were able to pay $140 per square foot because they had sold their own building, he added. UNICEF, which has the money, has an RFP out but Solomon said it has a long time to go on its current lease.
The difference between the real estate problem now and the one in 1974 and 75, Solomon observed, was that the banks and insurance companies still had money and the sales market was off. "Now the sales are off and the leasing is up."
Since the market has become so reasonable, Maurice H. Solomon, vice chairman of Julien J. Studley, sees a lot of strange trends. "You have a move to Midtown South slowed down because tenants who would normally think of going there can renegotiate their lease in Midtown," he said. While there are fewer tenants looking, they can renegotiate in an office building and not have to move to a renovated loft building. "A tenant would probably not look West of Sixth Avenue so those buildings are suffering," he added.
Non-profits are perking up their heads to see if they can find better deals, Solomon said. "The rents are so cheap they can have time left on their old leases absorbed into the new lease." He said the health sector and hospitals are leasing and need more space, too. "It may not be for beds but for administration," he said. "We've made 100,000 square feet of hospital deals."
William Cohen, executive vice president of Newmark Real Estate Services said he sees lots of positive signs. There are tenants whose leaning are expiring and are seizing this window of opportunity and exploiting it to their own benefit, he said. Then there is a slew of tenants with existing obligations. "You hear of a lot of takeover deals but they are not really being made," he added.
Cohen said there are aggressive deals where the move building needs the tenant. If you have a tenant occupying 5,000 square feet, and he needs 10,000 square feet, and has 18 months to go in the lease, he is likely to get 10 to 12 months of concession with maybe six to eight free months. "But built in is another six months to offset the tenant's exposure, amortized over the course of the lease and that can be accomplished with free months because of the cost of funds," he said.
In one proposed deal, which Cohen deemed "radical," Newmark represents a tenant with 45,000 square feet who needs 60,000 square feet. The present value of the remaining obligation is $8 million and Cohen said the tenant is prepared to pay half and the prospective building owner is willing to pay half. "Even faced with the ability to have all of the money (the current owner) may not be willing to take it," Cohen said.
One emerging trend that Cohen has been a proponent of is the marketing of buildings. "You have to have information and collate so it is retrievable," he advised. "If you don't utilize it you're operating in a vacuum and heading for trouble."
Cohen is also an advocate of the prebuilt space individual building. Newmark pre-built 70,000 square feet in Carnegie Hall Tower, while in 500 Fifth Avenue, 25,000 square feet is pre-built. "No one wants to move into a tired old space with a fresh coat of paint and new rugs," he said. For 500 Fifth, they found the most common inquiry was for 1,000 square feet plus or minus. They have leased over 20,000 square feet that way. The negative, he said, is that with each unit having their own air conditioning which can be modified to add a heating coil, they cost as much as $45 per square foot. But the tenant gets a high quality product with control of his own environment.
At Carnegie Hall Tower, the average size of pre-builts has been 2,500 to 3,500 square feet. "It's easier to chip away at a large building in large increments," Cohen said. That building is in the center of the recording world and Cohen put his marketing targets on that segment. "I went out with my team and we set our sights on the entertainment industry," Cohen said. "Capitol/EMI was the first tenant." Grubman Indursky Shindler, the high-powered entertainment attorneys, and Savage Records soon followed.
"It is important to realize that the business is a moving target and in order to remain competitive you have to change your marketing mix. Even the big, fat leases made in the Eighties don't go in the 90's. As one example, he said, the sublease clause is now a page and a half versus four pages in the past.
There is also movement by a group of tenants who would like to get out of their present quarters because they downsized or need a different type of space or have been in a space so long they need to reconfigure, it is not uncommon, Solomon said, for companies to be renegotiating their leases three years in advance."
Mosler also sees an increase in leasing activity and recently closed a deal with the Discovery Network for 30,000 square feet at 641 Lexington, a Rudin building.
Americas Tower at a little over $40, is a littlepricy, Solomon said. Tenants look at it and say they could be in a better located building at Rockefeller Center. The CBS building, which they Sony Music Corp. vacated when it moved to AT&T's former headquarters has space priced under $40 and Solomon, it is a terrific building with a large block of space that will soon be absorbed. "You have to scratch your head and wonder why you want to go to Americas Tower," he said. They'll rent is eventually, but will never come out. It has cost them so much money."
Eventually, Solomon feels it will be more and more difficult for a large tenant to find a large contiguous, bulk office space as time goes by. "Finally, people will have to look for that space and maybe it will be the Solomon building at 1585 Broadway or at 750 Seventh Avenue," he noted. "That's a half a million square foot building that's empty.
He said that building is now owned by a group of foreign banks that he does not think "could get together to decide a price that's low enough."
Solomon does not believe, however that the leasing activity will put a "dent" in the marketplace.
Brokers are getting involved with lease renewals, which, Mosler observed, is a recent trend as well as a new niche growth area for the brokers. "This was met with reluctance in the past, particularly by landlords," he said, "but that has changed. Tenants value hiring a broker and want to leverage the deal and want to know everything available in the current market."
On the other hand, he noted, the owners are recognizing the value of the broker's participation because they want the inside track. "The broker knows what the tenant is thinking," he said. "Brokers are also bringing the owner an opportunity to lock in a longer term while the lease still has time on it. Landlords are more concerned with shoring up their buildings and not as worried about cutting their costs."
One trend in the brokerage community has Mosler concerned. That is the commission cutting because of increased competition among brokers as well as more tenants trying to obtain a giveback from the broker. "99 percent know the broker is professional and savvy and commands a certain price, and that our work is worthy," he said. "Others lose sight of the value of the deal and are ready to underbid. But there is an aggressive environment where people are pursuing business."
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|Title Annotation:||commercial markets|
|Publication:||Real Estate Weekly|
|Date:||Feb 19, 1992|
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