1540 Broadway Sale: The Gift of a Comp

Twenty feet, nine inches from the southeast corner of Broadway and 46th Street rises a building known as 1540 Broadway, 1.1 million square feet of pure, honest-to-goodness office space in one of Manhattan’s most coveted commercial markets: Times Square.

Deutsche Bank sold the office condo portion of the building last week to CB Richard Ellis Investors for $355 million, marking the first important building transaction in 2009, and giving a market made murky by instability some sense of perspective. To use industry jargon, it gave the market a “comp.”

“We were lacking references, we were lacking comparables, so certainly this is going to be one,” said Borja Sierra, executive managing director of Savills.

“I’m sure people will take it as a reference,” agreed Tom Fink, the senior vice president of Trepp.

In other words, real estate professionals will parse the details of the transaction like a teenage girl parsing a text message from her high-school crush.

Here’s what is known: Deutsche Bank, the seller that acquired the building last year from Harry Macklowe after he could no longer pay his mortgage, financed the transaction at a loan-to-value of less than 68 percent.

“It says to me that to sell a building today of that scale you need a seller financing,” said Peter Riguardi, the president of New York operations for Jones Lang LaSalle. “And I think that without that, the deal probably doesn’t happen.”

Meanwhile, the $355 million sale price puts the value per office square foot at about $392. “People will take those $350 or $400 a square foot as the new pricing for this type of properties,” Mr. Sierra said. “This is virtually half of what they would have cost a year ago.”

The last time prices for midtown space were in the mid-$300s was 2004, according to Real Capital Analytics’ Pete Culliney.

And the vacant office space in the building, which is only 78 percent leased, was valued at around zero.

It’s instructive. Or is it? There’s a bit of a conflict in the industry right now over whether 1540 should be used as a lesson on the real estate market, or whether it should be treated as a one-off, regarded in much the same way as the sale-leasebacks at Sotheby’s and The New York Times headquarters.

Nat Rockett, a senior vice president at Jones Lang LaSalle, is in the one-off faction. “It’s indicative, but there’s the danger that we try to make too general of a statement on the market as a result of one transaction,” Mr. Rockett said. “There are all sorts of specific realities of 1540 that make it what it is.”

A real estate executive, who would only speak anonymously, described some of those realities. In addition to the quality of the building, which he described as “A minus minus minus,” or maybe a “B,” he said that the most important metric to note was the returns.

“It traded at our view at a 12 percent levered return, and 9.5 unlevered return,” he said. “The price per foot is deceptive.”

So maybe what we have is a faulty barometer? Either way, in the industry’s present state of bewilderment, one has to expect that industry members will latch on to every new data point.

It’s not so different in the under $100 million commercial real estate market, where Massey Knakal chairman Bob Knakal has taken to using signed contracts—rather than closed transactions—as comps in determining pricing for some building types.

“Since the markets are moving so rapidly, and the sentiment and psychology are moving so rapidly, we’re looking at the closings and the contract signings in the past three weeks,” Mr. Knakal said.

But back to 1540. Good barometer or bad, at the very least, the transaction, brokered by an Eastdil Secured team that included senior managing director Douglas Harmon, represents some semblance of long-term faith in the market.

“The good news is that there are still buyers across the country who want to own in Manhattan,” said Eric Michael Anton, executive managing director at Eastern Consolidated. “Things were so bleak over the last month or two, it’s good that a deal of this size closed.”

There are even those optimists, like Mr. Fink, who see the sale as a harbinger of a strengthening market. “What we’re seeing now is the beginnings of a thaw,” he said. “It’s not like things will go back to how they were two years ago. But when I have clients telling me that they are amassing capital to put to work as soon as they think prices come to a low enough level, and you see buildings sell to a sophisticated seller like CBRE, it begins to show we’re nearing a bottom.”


1540 Broadway Sale: The Gift of a Comp