The so-called “flight-to-quality” has trophy buildings commanding high prices again, because they are low-risk—New York City is one of few places on the globe that continually shows real rent growth, according to the report. The volume of commercial investment property sales was 163 percent higher than in 2010, according to numbers for the first three quarters.

Nat Rockett, of Cushman’s capital markets group, said this is a good sign for the market as a whole—“If one asset category is rising, it will tend to bring the others with it … All boats tend to rise,” he said. Meaning those pushed out of investing in Class-A space will naturally gravitate to Class-B, and so on. Not everyone is sure that will work, however. “While the trophy sales make the aggregate figures look promising, the lower-quality assets aren’t necessarily benefiting from the increased demand … Sales may actually be dampening the market for lower-quality assets, as the high-priced sales inflate the pricing expectations,” said Ben Carlos Thypin, director of market analysis at Real Capital Analytics.

In addition, a number of recapitalizations accounted for the rise in transaction volume, and many of those were with foreign investors, such as the recent high-profile recapitalization at 230 Park, where an unnamed Korean pension fund joined Invesco in purchasing a 95 percent interest in the building. Whether or not and how much foreign capital we want flowing into our real estate market is, of course, a perennial debate.

But the “startling turnaround in sales volume and in valuation,” as Mr. Rockett called it, is good news for at least one quadrant of the city’s real estate industry. “There is always worry that fear distorts the market, but what is a distorted market?” he asked. With interest rates so low, investing in trophy real estate simply makes sense, according to Mr. Rockett. “Yields are low, but if you compare the yields that buyers are getting to Treasuries, the spreads are within historical norms,” he said.

The Observer: You’re doing an enormous number of residential and mixed-use deals in Harlem. What’s drawing you to that particular neighborhood?

Mr. Shkury: In general, we’ve been doing a lot of work in our backyard, which is Upper Manhattan and the Bronx, in the multifamily arena mostly, but development as well. We’ve seen some uptick in activity in the past year, clearly in 2010 and the first half of this year.

One of the things we did see is that activity for development sites has increased somewhat, and pricing as well, mostly for the small-to-midsize development sites. In the apartment building arena, the demand has increased. Transaction volume has stayed somewhat the same throughout this year; but we feel that the bidding activity has come up, and that could be a leading indicator of an increase in value by the end of the year—but by all means we haven’t seen that yet.

But there’s definitely a very strong demand for properties up there compared to 2009. We’ve definitely seen that there’s an increase for demand up in Harlem.

With Harlem, it seems like the neighborhood experiences a so-called renaissance every five years. Will that excitement die down? What’s with the ebb and flow?

One of the things that happened in the past few years that we’ve seen is that the volume of transactions has been the highest compared to other parts of the city throughout the downturn. So there were more transactions in that area compared to other parts of the city or in Brooklyn, for example.

We’ve also seen that prices have declined the most between 2007 and 2008 to 2009 and 2010—and, if anything, we feel that prices are going to go back up.

From a development perspective, I think that most of the units that have been built there are being absorbed or have been absorbed, so there has been a lot less distress in that arena compared to other areas in the city. I think the reason it’s always up-and-coming is because there has been a boom in the market between 2004 and 2007, say, and there have also been two rezonings that took place in the area, one on Third Avenue and one on Frederick Douglass.

But what we’ve seen in the decline is that, yes, there has been a decline; but there hasn’t been a decline in the amount of people who still want to buy properties in the area. I think once we complete this economic cycle we’ll see another improvement in that area because a lot of people have purchased residences below 125th Street, mostly.

It’s surprising to hear you say you’re involved with development projects, which are still rare throughout the city. Can you describe the nature of those developments?

We’re in contract to sell a few development sites. One of them is actually closer to Columbia Presbyterian on 167th Street; we’re in contract to sell that property to a developer. We’re in contract to sell another property on St. Nicholas on 135th Street; that’s a mixed-use property. We did have a bidding war on that, and the reason we had so much demand is because of the location, which allows for both commercial and residential; this is a smaller, 25-foot property. We’re in contract to sell three specific projects in lower East Harlem: one at 75 East 110th Street; another, 1642 Madison Avenue; and another at 166 East 100th Street. All of those together are sold to two different buyers; they were sold by one seller. Those are projects that have some affordable component to them.

These are some of the projects we’re working on right now and are in contract. The buyers are developers, and so what we can anticipate—assuming these close, and there’s no reason for them not to—we can anticipate some construction starts later this year or in the first quarter of next year.

You’re primarily known for your multifamily properties, but you also deal in office and mixed-use assets. Give me an idea of what you’re doing in those arenas.

It’s very rare. Most of our product is in the multifamily arena. Right now, for example, we’re marketing several packages in Upper Manhattan, the Bronx and a few in Brooklyn. We have 371 units in the South Bronx; we have 100 units on 116th Street; we have 129 units on 135th Street. So these are the types of properties we sell.

Do you have plans to immerse yourself in more commercial office properties later?

We do commercial uptown. I think that the multifamily market has been fascinating to us because we find that the buyers for the multifamily market … But the answer is yes, we will eventually do more commercial, but right now the multifamily is our focus, and it’s what we’re good at. We understand that market a lot better than we understand any other market, and that’s another reason why we’ve focused on that.

Where are you seeing the financing coming from these days?

For the multifamily asset class, it’s coming from balance-sheet lenders and from community banks. We’ve seen that consistently, even throughout the downturn, our balance sheet lenders are interested in financing residential income-producing properties, and the interest rates today are pretty low.

For construction, we haven’t seen much construction lending yet. The people who are coming in and building today have to come in with the majority of the equity. If they do get some loans, the loan-to-values are relatively low, so we haven’t seen an opening in that arena.

But balance sheet lenders are lending with relatively nice loan-to-values for multifamily.

You left Massey Knakal earlier this year. Why did you decide to leave when you did?

It was a great place for us—for my team and I—at the time, and we just outgrew the platform. We just felt that our opportunities were to grow outside of that platform, and that’s why we made our decision. Most of us here at Ariel Property Advisors have worked together for years and felt compelled to build a platform of our own.

jsederstrom@observer.com

As I have written for some time, we fully expected the Manhattan market to lead the entire marketplace out of the downturn and are indeed seeing this happen. Sales volume picked up in Manhattan before it did in other submarkets, and we are starting to see value appreciation in Manhattan.

In the outer boroughs (including northern Manhattan), sales volume has been lagging and, in some cases, has only recently started to recover. Value in these areas remains uneven with some product types experiencing continued slides in the price-per-square-foot metric.

A detailed look at each of these submarkets will highlight how each is performing.

Manhattan

In the Manhattan submarket (defined as south of 96th Street on the East Side and south of 110th Street on the West Side), there was approximately $11 billion worth of investment sales in 1H11. This activity reflects a 124 percent increase over the same period last year, when $4.9 billion traded. In 2Q11 alone, there was $7.9 billion in sales volume, the highest quarterly total going back to 4Q07.

If 1H11 activity is annualized, the Manhattan submarket should experience a near doubling of last year’s $12 billion sales volume. This year’s total will likely be five times the $4.2 billion in 2009. At the peak of the market in 2007, there was $52.5 billion in sales volume.

Regarding the number of properties sold in the Manhattan submarket, 277 properties traded in 1H11, which, if annualized, is up 17 percent from the 473 properties sold in 2010. At the peak of the market in 2007, 999 properties sold. Clearly, we still have a long way to go before hitting the activity levels seen at the peak.

Value in Manhattan is trending upward in almost all property segments. There is still some downward pressure exerted on development-site sales, but this has less to do with actual value and more to do with the number of transactions. Value of land on a price-per-buildable-square-foot basis is improving, notwithstanding what comparable sales data indicate. With the number of sales increasing significantly, it is not surprising to have averages fall as we come off periods during which only those sites obtaining top values were trading. All other property types are experiencing nice appreciation.

Overall, value is up almost 11 percent, on a price-per-square-foot basis, in 2011 versus 2010. Hindsight will show us that 2010 was the bottom of the Manhattan submarket in terms of value.

Northern Manhattan

In the northern Manhattan submarket, in 1H11 there was $167.4 million in sales, significantly less than the $335 million in 1H10. If we annualize the dollar volume in 1H11, the market is running about 34 percent below the $509 million in sales in 2010. At the peak of the market in 2007, there was about $1.5 billion in dollar volume in this submarket.

In terms of number of properties sold, 69 properties traded in 1H11 as compared to 66 in 1H10, an increase of 4.5 percent. Annualizing the 1H11 total would lead to an estimated 138 sales for the year, an anticipated increase of 9 percent for over 2010’s 127 sales. At the peak of the market, in 2007, 327 properties sold.

Values in northern Manhattan remain uneven, with some property types showing increases in value per square foot with others continuing to show decreases.

The Bronx

In the Bronx submarket, there was $282 million in sales volume in 1H11, a total significantly higher than the $194 million in 1H10. If we annualize the 1H11 totals, the $565 million result will show an increase of about 16.5 percent over the $485 million of sales last year. At the peak of the market in 2007, there was about $2.2 billion in sales in this submarket.

In terms of number of properties sold, there were 114 properties sold in 1H11, up 21 percent from the 94 in 1H10. Annualizing the 1H11 total would yield 228 sales, which would be up 19 percent from the 191 total last year. At the peak of the market in 2007, 701 properties sold.

Value in the Bronx remains very mixed, with half the product types seeing slight increases in value and the other half seeing values continuing to slide.

Brooklyn

In the Brooklyn submarket, there was $699 million in sales volume in 1H11, up 37 percent from the $509 million in 1H10. If we annualize the 1H11 totals, the $1.4 billion in activity would be up 45 percent from the $963 million 2010 total. At the peak of the market in 2007, Brooklyn saw $3.8 billion in sales.

In terms of number of properties sold, this submarket saw 336 sales, up 23 percent from the 274 in 1H10. On an annualized basis, the 672 sales would show an increase of 18 percent over the 569 properties in the borough last year. At the peak of the market in 2006, 1,916 properties were traded in this submarket.

As in other outer-borough submarkets, Brooklyn has been seeing mixed value performance with five product types showing continued reductions in average prices per square foot and three product types increasing in value.

Queens

Lastly, in the Queens submarket in 1H11, there was $452 million in sales volume, up 73 percent from the $260 million in 1H10. If we annualize the 1H11 totals, the $904 million worth of expected activity would be up 62 percent from the $558 million last year. At the peak of the market in 2006, there was $2.6 billion in sales activity in Queens.

In terms of number of sales, 164 properties sold in 1H11, down slightly from the 171 in 1H10. If we annualize the 1H11 totals, the 328 sales would be up 7 percent from the total of 307 sold in 2010. At the peak of the market in 2006, 1,191 properties sold in this submarket.

In the Queens submarket, most product types are still experiencing value reductions in average price per square foot. Within five product types here, values dipped in 1H11 from 2010 totals, while within three segments, values increased.

ALL OF THIS DATA lead to conclusions that are not necessarily unexpected. The Manhattan submarket is clearly leading the recovery and should help pull the other submarkets along with it. What is somewhat surprising is that value per square foot is not recovering as quickly outside Manhattan as we would have expected.

It appears that our real estate recovery is following the sluggish economic recovery that the nation is facing. We are lucky that we are in the New York City marketplace, which is doing relatively well compared with other locales. Notwithstanding how well we are doing here, things are still not all blue sky ahead. In June, the state unemployment rate rose to 8 percent from 7.8 percent in May. In New York City, the jobless rate increased from 8.6 percent to 8.7 percent. This is a troubling sign for the market given how impactful jobs are on our underlying fundamentals.

Even with a pace of activity that’s slower than we would like, and the outer boroughs on a difficult footing value-wise, we expect the second half of 2011 to firm up. We believe we are still on pace to see very healthy volume increases and values appreciating in Manhattan and stabilizing in the other submarkets.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,150 properties totaling over $7.4 billion in value.

While companies like Google are hungry to own commercial real estate in New York City, its competitor Verizon continues to sell off corporate real estate here.

435 West 50th Street.

Verizon's latest transaction was the $20.025 million sale of 101,000 of the 300,000 square feet at the mixed-use switching station at 435 West 50th Street. The buyer was 435 West 50th Street LLC, an entity controlled by Michael Stern of JDS Development and Kevin Mahoney’s Property Markets Group.  According to a report in Real Estate Weekly, sources said the new owners plan a residential conservision of the building's top floors. The joint venture purchased the 10th through the 16th floors, and portions of the penthouse, ground floor and lower level.

The sale of the West 50th Street property is the second by Verizon of a portion of a switching and equipment building over the past year and half.  In December 2009, an entity called 210 West 18th LLC, purchased the top 10 floors of the 19-story building at 206 West 18th Street. The new owner paid $25 million for the top floors and a portion of the ground floor of the Chelsea building, which has entrances on 18th and 17th streets near Seventh Avenue. According  to the trade, the new owner planned to convert the floors to residential condominiums.

Earlier this year, the New York University Langone Medical Center purchased 14 commercial condominiums at Verizon’s building at 240 East 38th Street for $49.7 million. It plans to use the 14 floors, totaling 285,000 square feet, for short-term patient care, offices and research facilities.

On the West Side of Manhattan, the residential rental building Mercedes House, a development of Two Trees, stands on a former Verizon-owned parking lot. The 30-story building is also the home of the massive 330,000-square-foot U.S. headquarters and showroom of Mercedes Benz. In 2007, Two Trees paid $130 million for the 100,000-square-foot parking lot on 11th Avenue between 53rd and 54th streets.

A few years earlier, Verizon sold another parking lot between 11th and 12th avenues on 42nd Street to developer Joseph Moinian. The vacant lot at 553 11th Avenue was purchased for $24.6 million, next door to the Moinian Group's 478-unit Atelier condominium at 627 West 42nd Street.

One of Verizon’s largest sales took place in December 2007, when a joint venture of Taconic Investment Partners and Square Mile Capital purchased a 1.05 million-square-foot condominium interest in the 32-story office building  at 375 Pearl Street for $172.5 million. This past June data center owner and developer Sabey Data Center Properties acquired the property for $120 million from M & T Bank and Taconic.

In 2005, Verizon sold two major office properties, one in downtown Brooklyn and one in downtown Manhattan. In Manhattan, Sam Zell’s Equity Office Properties Trust purchased the condominium interest in Verizon’s 41-story headquarters building at 1095 Avenue of the Americas. The REIT purchased nearly 80 percent of the office tower, including 30,000 square feet of retail space for a price of $505 million.

In March of the same year, developer David Bistricer signed a contract to purchase 7 Metrotech Center from Verizon, for $74 million, or approximately $114 per square foot. The property consisted of 95 and 101 Willoughby Street with a total of 650,000 square feet of office space.

mstoler@madisonrealtycapital.com

Michael Stoler is a managing director at Madison Realty Capital and president of New York Real Estate TV LLC. He writes regularly for The Commercial Observer on investment.

Located between Hudson Street and Seventh Avenue, the 183-year-old building at 59 Morton Street could feature an owner’s triplex with future upside on the above floors, which now include a rent-controlled tenant on the fourth floor paying $127 per month and a rent-stabilized tenant on the fifth floor paying $615.

“Pricing for town homes in Greenwich Village has increased dramatically as of late,” said Massey Knakal’s James Nelson, who handled the transaction exclusively for the seller, and added that the sales price equated to about $1,059 per square foot. “This year alone there have been two finished townhouses in the Village which have traded for well over $3,000 per square foot. This shows the tremendous future potential for this house if vacated.”

jsederstrom@observer.com

At face value, this number leads to an extremely optimistic perspective regarding the market’s performance. However, it is important to take a much closer look at the data, and realize that the market, while trending positively, remains uneven.

In the first quarter of 2011 (1Q11), there was approximately $4 billion of investment sales activity. We were pleasantly surprised by this number, having expected it to be more muted given the extraordinary activity in the fourth quarter of 2010.

Transactions that normally would have closed in 1Q11 were accelerated into 4Q10 based on lenders wanting to clean up balance sheets by year-end and a significant number of discretionary sellers who pulled the trigger last year in anticipation of a rise in the capital gains tax.

In 2Q11, there was a whopping $8.6 billion worth of transactions closed. This was the best quarter in 15, going back to the fourth quarter of 2007. Annualizing the 1H11 total shows $25.22 billion of expected activity for the year, which, as stated earlier, would be up significantly from the $14.6 billion in 2010.

A sector that has had a significant impact on the market’s performance is the larger transaction segment and, specifically, the number of $100 million-and-larger sales.

If you’re a frequent reader of Concrete Thoughts and you read my quarterly market overviews, you know that we look much more closely at the number of properties sold than to the dollar volume to get a true feel for market activity. This is due to the fact that the dollar volume of sales can be skewed very significantly by a few large transactions. If an asset like Stuyvesant Town/Peter Cooper Village sells for $5.4 billion, it can have a very significant impact on the marketplace. Similarly, last year’s $1.8 billion sale of 111 Eighth Avenue to Google represented over 12 percent of 2010’s annual city total.

If we consider the number of properties sold, we see that in 1H11, 960 properties were sold, which, if annualized, would yield only about a 15 percent increase over the 1,667 properties sold in 2010.

Comparing the two volume metrics, we see a projected increase of 73 percent in dollar volume, while on a number-of–properties-sold basis the increase is only 15 percent. Larger transactions account for this disparity.

If we look at the number of transactions that took place in excess of $100 million, we see that in 2009 there were only seven. In 2010, there were 29 of these sales and in the first two quarters of this year there have been 31, already eclipsing last year’s total. If we consider that these 31 transactions totaled $8.5 billion in sales activity, this represents about two-thirds of the $12.6 billion total of all 1H11 dollar volume.

Simultaneously, these 31 transactions, out of the 960 total, represent only about 3.2 percent of all properties sold. The activity in the over-$100 million market is also on pace to more than double last year’s total of $8.2 billion, as annualizing 1H11 activity results in a projection of approximately $17 billion for this year.

While the over-$100 million market is booming, with a projected increase in the number of sales on pace for a 114 percent annual increase, the under-$100 million market is not nearly keeping pace. In 1H11, the pace of sales under $100 million was set to produce an increase of just 13 percent and, if we look at the under-$50 million market, the contraction is even more severe.

Properties selling for less than $50 million saw 237 sales in 1H11 compared with 507 in 2010. Annualizing the 1H11 total, we extrapolate 474 sales for the year, a decrease of 7 percent from last year’s totals. This result was unforeseen and has been an eye-opener.

Additional data reinforce the trend of larger transactions gaining traction. In fact, in 1H11, the average property sold in New York City had a price of $13.125 million, shockingly exceeding the $12.4 million average in 2007, and setting a new all-time record for this statistic! (This average property price had dropped as low as $4.4 million in 2009.)

Clearly, dollar volume is increasing rapidly based upon the pace of mega-deals, while the number of properties sold is simply limping along, seemingly shadowing the molasseslike growth in our national economy. Notwithstanding the lackluster growth in properties sold, overall market activity, whether we look at dollar volume or number of properties sold, clearly demonstrates that 2Q09 was the bottom of the market in terms of the volume of sales.

If we turn our attention to property values, we see that the unevenness within the market remains, particularly in the outer boroughs and northern Manhattan.

In past articles, we have discussed the divergence between the fundamentals within the Manhattan submarket (south of 96th Street on the East Side and south of 110th Street on the West) and the other submarkets of New York City. These trends, while generally improving, continue.

In Manhattan, capitalization rates compressed for all product types in 1H11 versus 2010; however, if we look at average prices per square foot, we see that seven product types have experienced increases over 2010 levels and three product types have seen decreases. It seems counterintuitive to see cap rates falling and price per square foot falling simultaneously, but this dynamic can be explained by reductions in net operating incomes.

If rents are falling or stagnant (or even rising slightly as they are in some sectors) value per square foot can drop, especially with the increases in operating costs that we have seen on a year-over-year basis. These market conditions can easily produce these seemingly strange results.

In northern Manhattan and the outer boroughs, cap rates are mixed, compressing on some property types, while increasing on others. On a price-per-square-foot basis, cumulatively we see that 15 product types in the outer boroughs are up and 14 are down, demonstrating that these submarkets are still having difficulty finding a consistent recovery.

At the beginning of the year, we projected a 12 percent appreciation rate on a blended basis within the Manhattan submarket and expected to see values stabilize, i.e., to stop falling in the outer boroughs. We believe that what we are seeing from the market thus far in 2011 demonstrates that we remain on pace for these projections to hold.

In terms of number of properties sold, the Queens submarket demonstrated the most improvement in 1H11, with 164 properties sold, representing a 21 percent increase versus the 136 sales in 2H10. The northern Manhattan market improved the least, with 69 properties sold, representing just a 13 percent increase versus the 61 sales in 2H10.

By dollar volume, the Manhattan submarket improved the most, given the overwhelming number of $100 million-plus transactions here, with a 56 percent increase in activity in 1H11 versus 2H10 and a 124 percent increase versus 1H10. Northern Manhattan, again, improved the least, showing a 4 percent decrease in the dollar volume of sales in 1H11 versus 2H10 and a whopping 50 percent decrease versus 1H10.

As I have stated for several quarters now, the biggest potential land mine within the investment sales market is a potential increase in interest rates. The extraordinarily low interest-rate environment that has benefited us for quite some time has allowed for an orderly deleveraging of the market.

Properties that have significant negative equity positions have, in many cases, been able to maintain positive cash flow, thus treading water as owners and lenders hope for a viable exit strategy. Mortgage maturity is currently the biggest challenge for these assets as refinancing in today’s market cannot produce the same proceeds that were available in 2006 and 2007. Additionally, rates were so low at that time, mainly due to minuscule spreads over LIBOR, that extending these loans at anywhere near the old rate is not palatable for lenders today.

To the extent interest rates rise sharply, it could have a devastating impact on these properties, which are hanging on by a fingernail. We have seen distressed-asset sales continue but at a slower pace than last year. Through 1H11, in the note sale market, we estimate that there has been about $2.2 billion in activity, which would result, if annualized, in $4.4 billion for the year, well below the $6 to 7 billion that we believe occurred in New York City last year.

At the time of this writing, Congress has yet to approve a debt ceiling increase and the implications of a possible default on the country’s credit rating are significant. If interest rates are to remain at, or near, their historically low levels, it is important that Congress demonstrate leadership and an ability to control itself fiscally.

Now that the Fed has ended its QE2 asset-buying program, it will be very interesting to see the performance of upcoming Treasury auctions. At several of the last auctions, the Fed purchased as much as 70 percent of all Treasuries sold. If it doesn’t show up at the table, it could be mean significant reductions in the price of these bonds, which would exert significant upward pressure on rates.

We remain pessimistically hopeful that our interest-rate environment will stay low, buoying the marketplace for investment properties. If it doesn’t, it will create even more issues for those who took advantage of all the leverage the market had to offer.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,150 properties totaling over $7.4 billion in value.

“This building presents the new ownership with many future redevelopment opportunities, including conversion to condos,” said Mr. Von Der Ahe of the building, which also houses the restaurant Haru in a 2,650-square-foot retail space. “In this particular submarket, property owners have commanded north of $1,300-plus per square foot for newly constructed condominiums.”

jsederstrom@observer.com

1633 Broadway: This is what a trophy tower looks like.

Eastern Consolidated recently released a report noting that New York office property trades have more than doubled during the second quarter to $4.3 billion, leading us to wonder if the investment-sales market, at least for office properties, really has come back.

But then we noticed something: Major firms with major deals on massive office towers dominate the list, with individual buys valued at hundreds of millions of dollars (which would contribute heftily to that $4.3 billion total). Not surprising, but it makes us wonder how the rest of the market is doing.

The big guys like Paramount Group, with its $980 million purchase of the remaining stake at 1633 Broadway, top Eastern's list because they can afford it—they've earned the financing or they have enormous capital reserves via shareholders or stakeholders. Take away the five biggest deals in the report, in fact, and the $4.3 billion total turns into about $1.422 billion. Not a bad amount, but not 2007 good.

Another part of the report worth noting is a graphic that illustrates office property sales have overtaken sales for other commercial property (whereas the trend for the past two quarters has been just the opposite). Also, both categories have made significant gains compared to previous quarters this year and last.

pengel@observer.com

How the Lehman-ade gets made.

As expected (we noted last week this would likely happen and soon), Lehman Brothers has agreed to unload its majority stake in the old Toy Building at 200 Fifth Avenue in a deal that values it at about $700 million. It is one of the biggest building sales of 2011 so far, and one of the most significant moves by the croaked investment bank's holding company in its campaign to liquidate its real estate. The buyer is a wing of JPMorgan.

Lehman and partner L&L Holding bought the building, the corporate home of Tiffany and of the Eataly restaurant and brewpub, from Joseph Chetrit for $480 million in mid-2007, at the real estate market's peak. But, as Eliot Brown of The Wall Street Journal notes, don't let the higher valuation on this latest deal fool you:

It's not clear, however, whether Lehman made or lost money on the investment because 200 Fifth's owners spent an enormous amount to upgrade the property to attract its high- profile tenants.

More here. L&L will remain as an owner and the building's manager.

A real asset: 200 Fifth Avenue.

When real estate executive David Sigman first walked into 25 Broad Street, about a year after Lehman collapsed, it was a funhouse of pre-2008 distractions: the lobby unfolded with yards of purple carpeting ringed by red circles into a would-be night club with dozens of crystal chandeliers and a mauve-color spa/yoga room. Most striking of all were the matching royal portraits of developer Kent Swig and his soon-to-be ex-wife, Liz Macklowe.

The Observer recently reported that the first 10 apartment tenants had signed at 25 Broad, bringing the failed condo conversion back to life as a rental—and Lehman Brothers, twitching, back with it.

Not even three years after the bank’s collapse took the economy with it, Lehman, through its holding company, lives on, a rosy zombie quietly looking to make a small fortune off prime New York properties, and maybe—just maybe—pay off some creditors.

While many banks held fire sales, Lehman mostly waited on a recovery. “Looking back on it, it was a smart thing to do because of pricing,” said Bill Elder of RXR Realty, a big player in buying up distressed assets.

When Lehman collapsed, an independent firm was charged with managing more than $240 billion of real estate nationwide, the estimated value of which plummeted to $15 billion. Now that portfolio is expected to deliver a respectable $60 million return. Had the bank immediately flooded the U.S. real estate market with all of those distressed assets, the Great Recession as we have known it would have seemed tame.

Lehman is set to update a bankruptcy court on its plans in a week, but industry sources say they’ve already seen a marked shift in how the ghostly landlord is managing its holdings of late: moving to sell its share of such prime assets as the old International Toy Center at 200 Fifth Avenue and 1107 Broadway, and quietly mulling a new development at 235 West Broadway in Soho. While many of its assets around the country remain worthless, in New York Lehman is sitting on a small gold mine. The irony, of course, is that it came two years too late for the bank.

“They were a large mortgage player, so they saw the opportunities in residential and commercial real estate,” said Brad Hintz, a former Lehman C.F.O. who is now an analyst at Sanford C. Bernstein. “Lehman began to understand what opportunities existed and began to invest its own money—‘Oh, there’s a pretty attractive little hotel!’—and built up a portfolio.”

Public records show that Lehman had purchased 50 properties around the city between 2004 and 2008. It was also a major lender on more than 60 city properties, according to data from Real Capital Analytics, including 100 Wall, the Chrysler Building, Twitter’s new H.Q. at 340 Madison and the Nobu Hotel. Most of those deals closed between March 2005 and October 2007—the market’s peak, in other words. By the time Lehman was in trouble a year later and needed to liquidate some of its assets, property prices were already in the crapper and no one wanted them at anything like what the bank had paid. That turned out to be a twist of good fortune, given the real estate recovery that began in 2010.

Lehman is selling its 95 percent stake in the old International Toy Center at 200 Fifth, marketed by Eastdil’s Doug Harmon and Adam Spies. The eventual price could set a “new benchmark for midtown south,” according to Real Capital Analytics’ Dan Fasulo. The building has a $750 million valuation, according to a source (it sold for $480 million in May 2007). Lehman’s borrowers have also received approval from a bankruptcy court to sell the other part of the Toy Center, 1107 Broadway, for $161.5 million, and there will be an auction at the end of June.

In other cases, Lehman is poised to stick it out a few more years. The garish former condo at 25 Broad is currently in receivership, but Lehman Holdings could take control as early as the fall. In a little-known plan, Lehman is in the final stages of foreclosing on a failed condo conversion at 325 West Broadway that it may renovate.

In the end, Lehman hopes to liquidate its New York assets by September 2013, though the effort has proved to be a struggle as creditors are busy fighting over the last valuable vestiges of the once-great investment bank. Said one source familiar with the liquidation: “It’s a shit show.”

editorial@observer.com