In April 2007, during those blindered days of economic bluster, The Observer published an article naming New York’s 10 most expensive towers, according to prominent real estate professionals. They agreed on the most valuable single building: the GM Building. That rocket of marble and black glass, considered then and now the most coveted skyscraper in Manhattan, if not the country, was, said one, “worth $4 billion–plus.”
Sure! Why not? The building sits at that delicious juncture of midtown and the Upper East Side, at the southeast corner of Central Park, above the Apple Store, and across from the Plaza and Peter Schjeldahl’s favorite piece of New York public art: Augustus Saint-Gaudens’ statue of William Tecumseh Sherman astride a horse.
At the time, the shimmering mirage of wealth was owned by one Harry Macklowe, a developer who was being lauded as a genius for once again rising to the acme of New York’s real estate firmament.
Reality could use some manners. Less than a year later, Mr. Macklowe, in hock to Fortress Investment Group, sold his most beloved asset to Mort Zuckerman and Ed Linde’s Boston Properties.
For his part, Mr. Zuckerman seemed to think he’d made the score of the century. “I got great sleep last night,” he told The Observer on June 10, 2008, the day after his firm and junior partners officially closed a deal for the tower valued at $2.8 billion, the most ever paid for an office building in recorded history.
Had Mr. Zuckerman known how values would decline, he might have gotten tangled in his bedsheets.
The GM Building, based upon its reported income, is today worth between $1.9 billion and $2.6 billion, according to Dan Fasulo, managing director of Real Capital Analytics. Such is the economic reality for Manhattan’s top office trophies.
Since the peak years of 2007, the trophies’ values have fallen by somewhere between 25 and 60 percent. Emphasis on modifying words like “somewhere between,” “probably” and “about.”
SO WHAT ARE THE other nine buildings included in our 2007 survey now worth?
The 2007 most expensive list included, along with the GM Building: 9 West 57th Street; Rockefeller Center; 200 Park Avenue; the Seagram Building; 4 Times Square; One Bryant Park; 245 Park Avenue; 277 Park Avenue; and the one non-midtown entry, 7 World Trade Center. Based on interviews with real estate professionals, their values have declined anywhere between 25 and 60 percent. So, Rockefeller Center, guesstimated to be worth $8 billion in 2007, might be worth between $6 billion and $3.2 billion. 277 Park, then valued at about $2 billion, would sell for between $800 million and $1.5 billion. And The Seagram Building, in 2007 valued at around $1.6 billion, might today sell for between $640 million and $1.2 billion.
Upon what are we basing these wildly irresponsible estimations? That, we’re afraid, entails a discussion of what the pros refer to as “price discovery,” a process that involves broadly comparing the prices of recently sold buildings (of which there are, frankly, very few, given the economy and the ongoing dearth of credit).
As one analytically minded investment broker noted, the major New York building transactions in recent months have fallen into one of two categories. Category one: sales of buildings like Worldwide Plaza, with huge vacancies, which traded in the high $300s a square foot, according to a source familiar with the transaction. These days, huge vacancies equal dodgy cash flow. And dodgy cash flow equals lower valuations, toward the 60-percent-off end of the pricing spectrum. The other category of building sales involves those with stable rent rolls, like SL Green’s sale of a 49.5 percent stake in 485 Lexington Avenue earlier this month, at a price of $547 a square foot.
(That vacancies are considered unhealthy is an exact reversal of the way the market used to work in 2007. “It’s very hard to finance vacant space today, because banks don’t want to give you credit,” said Jeff Gural, Newmark Knight Frank chairman and owner of at least 6 million square feet of real estate. “In the go-go days, someone would say, ‘We’ll rent the vacant space for $85, $100 a square foot.’ Today, even if you could get $85 a square foot, banks will not give you credit for vacant space.”)
Vacancy-ridden or not, the math remains.
“You’re like the grim reaper,” chided Howard Michaels, chairman of the Carlton Group, before acknowledging, “All the buildings that were bought were bought on the expectation of increasing rents and that hasn’t happened. You combine that with higher cost of capital on financing, and buildings are worth less.”
“The big picture is that most properties that transferred in the last five years are worth less than the debt,” wrote Cushman & Wakefield sales guru Yoron Cohen in an email. “The markets provided huge leverage to buyers which were based on extremely optimistic future growth of rents. It was out of control. Buildings like 885 Third (the Lipstick Building) were sold for $1,000 per square foot, and it is worth about a third of that number.”
Woody Heller, head of Studley’s capital transactions group, came to a similar conclusion.
“If we’re talking about better-quality buildings, we’re seeing price ranges in $350 to $600 a square foot,” he said. “And the super-premium buildings, such as 9 West [57th], the GM Building, 450 Park, etc., that handful or two of buildings, none of them have traded. So what they’re worth is pure conjecture. Based upon the rental premiums they achieve, they’re probably worth $800 a foot, but given their scarcity value, who’s to say what someone wouldn’t pay for them?”
Peter Hauspurg, Eastern Consolidated’s chairman and CEO, put it thusly: The recent trends indicate between 40 and 60 percent off peak value, peak being August to September 2007 (incidentally, roughly a year before Lehman Brothers’ collapse).
Mr. Gural? His estimations were more modest. “I think most people would tell you 25 percent. I don’t think anyone would disagree with that number. There are probably other people who would use higher numbers, depending on vacancy.”
Perhaps Sam Chandan, president and chief economist of Real Estate Econometrics, put it best: “The overarching point is that we’re in the midst of the process of price discovery.”