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Category Archive245 Park Avenue

Brains & Braun: SL Green’s David Schonbraun on His New York Lending Strategy

David Schonbraun may be competing for deals like everyone else, but the 40-year-old father of three is no stranger to competition. When he was a high school senior, he nursed dreams of being a professional tennis player.

Now, unlike the majority of lenders out there scrambling to deploy capital, he has an advantage: Schonbraun is charged with keeping real estate investment trust SL Green Realty Corp.’s debt business to a tidy 10 percent of its assets.

As a result, Schonbraun, the co-chief investment officer for Gotham’s largest office landlord, and his team cherry-pick the lending opportunities that are the best fit for the company, selling positions along the way to keep the book balanced. Weighing in at No. 27 on Commercial Observer’s Power 50 list (see page 42), Schonbraun had quite the year in 2017, running SL Green’s side of its and RXR’s purchase of a 49 percent stake in Worldwide Plaza. And like a lot of athletes, he has the stamina to keep going. He gave CO the low-down on which transactions have piqued his team’s interest lately.

Commercial Observer: Congratulations on being on the Power 50 list! How was 2017 for you, overall?

David Schonbraun: Our main focus is always to work to optimize our book…We maximize profit by limiting risk and, with that, run a $200-plus-million revenue business. Last year, we picked good spots for us to invest in—so projects that we really liked with very good sponsors. And one of the trademarks of our business is that we were one of the first groups to have the strategy of taking down the whole loan—or the larger piece of a loan—and then syndicating it out to enhance our yields. It’s very important for us to constantly be evolving our strategies as the market changes, especially in the debt business.


How has your strategy evolved since joining SL Green in 2002?

When we started this business within the REIT, our focus was really on buying subordinate debt. As we grew and the markets changed, we began co-originating, then originating by ourselves and syndicating. Now we’re holding whole loans more and financing them through repo facilities. We’re always trying to evolve the business to stay one step ahead because there are so many more competitors in the market now. We look to where the inefficiency is in the market, and that’s where we think we’ll make the most money.

Where do you see that inefficiency right now?

This is the most efficient market we’ve seen, unfortunately [laughs]. There’s so much capital. We’re focusing on using our relationships and being quick to get deals. We still have a big advantage with transitional assets, given our real estate background. A lot of sponsors—and it may be counterintuitive—prefer us to be in the more complicated deals with some redevelopment and leasing because as their business plans change they know they can come to us and say, “Look, we know this wasn’t on the initial plan, but as we’re looking at the market, we’ve re-evaluated, here’s how we think we should change it.” From a real estate perspective, we can understand those assets quickly and say, “That wasn’t the original plan, maybe it’s more expensive, but we think it makes sense,” or, “We understand you may have to sign a lease to less than underwriting to get the momentum in your leasing and you’ll make it up on the back end,” whereas a lot of pure lenders don’t understand that and are stuck in their model. So, I think in any real value-add real estate, I think we have a big advantage in working with clients. We view ourselves as partners with our borrowers on that.

The transitional space is extremely competitive right now.

Yes, but we’ve always been in that space. Some of the foreign capital is doing the cheap, 10-year fixed-rate [mezzanine lending], and that’s not a space we want to play in as much. Sometimes we’ll take down a mezz loan, sell pieces and lever up that way to get a yield that works for us, but otherwise we’re really looking for better yields for ourselves, and the transitional space tends to be a good fit us.

You provided a $110 million mezzanine loan on 245 Park Avenue and sold part of it. Are you looking at 245 Park again as a potential acquisition now that it’s back on the market?

We look at every asset that’s on the market, and we’re always looking to invest in a way that makes money. We always have conversations. But, for now, we’re a lender and we’re very happy being a lender.

That deal is a perfect example in terms of how we tried to buy [the property], and [HNA] paid a higher price than we were willing to. But when they lined up their financing—because we’d already done all the underwriting—we could quickly commit to doing the bottom mezzanine loan. So, early on that guaranteed us a position in the capital stack. The banks like it because they’re able to sell their bonds and their senior mezz at a lower rate with us as the anchor in the capital stack. And then, to enhance our yield, we sold a piece of our loan off. So it’s kind of a win-win for everyone; the bank that originated the loan gets a better execution with us anchoring and selling the pieces, and we were able to hold what we want, syndicate off a piece and get an above-market return.

Has barbell lending been a consistent strategy for SL Green? 

We’ve always kind of looked to run the business that way. For us, we try to have a blended yield, and in doing that we can do some higher-yielding stuff and some lower-yielding. It allows us to play where we want in each capital stack and at the right risk point. So there are a lot of deals where lenders are junior to us in the transaction, and a lot of people will view us as a first loss, and a lot of times we are. But there are a significant number of other deals where we take a more senior piece of the stack because, for us, that’s the better risk-adjusted return.

How are you choosing the “good spots” in the market and identifying potential opportunities?

Right now, we’re not growing the size of our book significantly. What that enables us to do is seek out transactions where we like the sponsor, the real estate and the basis. We do those deals and then look within our own portfolio and start selling off some other assets we’ve originated. If we can originate a loan on a new vintage at a little higher yield than something we’re selling, it makes the company a little bit more incremental money. Hopefully, we like the credit on the loans we’re [adding] a little more than those we’re selling, or they’re higher yielding but the same credit. We’re always looking to optimize the book.

Tell us about 888 Broadway. Why were you attracted to that particular financing opportunity?

It’s a great location and a great piece of real estate with two very good sponsors. We have a great relationship with Normandy [Real Estate]. They’re great guys and very good operators. We really believed in their business plan for the asset and think it’s going to be an incredibly successful project. It’s a typical transaction where there’s going to be redevelopment and a lot of lease-up, and if they have to come back and change their plans, they know that we’ll be very flexible with them.

Are there any examples of that flexibility you can give us?

For RFR on 285 Madison Avenue, as they got into the project, the scope of the project changed. We thought it was the right thing for the property, so not only did we say, “We agree with what you’re doing, but we’re also happy to upsize our loan to allow it and help fund it because we think it’s right for the project,” and we gave them additional capital to do that.

RXR has been upping its lending activities, joint venturing recently with a Canadian pension fund to do so. What’s the draw is in increasing that activity for New York City owners?

I think it’s driven by the strong desire for institutional capital to be investing in real estate right now. There’s not as much sales activity and so they use the debt space to get real estate exposure and returns.

Is the bid-ask spread still buoying sales?

I don’t think it’s so much that bid-ask spread is so wide, as much as over half the stock of New York City office buildings are owned by a handful of well-capitalized institutions. If they don’t see opportunity to reinvest their capital somewhere else, they’re not going to sell for the sake of selling and then sit on cash. We’ve sold assets to buy back stock and if we didn’t see that opportunity maybe we wouldn’t be as aggressive in selling assets. You’re also seeing some joint ventures because some people want to sell a little bit and have some need for reinvestment. I think a lot of it is driven by a lack of reinvestment opportunity.

That’s good news for the debt side, in terms of increased recapitalizations?

It is, and it isn’t. It’s good in terms of you’ll see a lot more recaps like you saw on 237 Park [Avenue] last year. One of the partners wanted to sell, but they got such attractive financing they said, “You know what, there’s really no reason to sell because this financing is so attractive it’s really not worth exiting.” We were in that loan but got paid off. So, it’s good from that perspective. But part of the spread compression is there’s so much money chasing not as many deals, and if the sales market had a little more transaction volume, you’d probably have a little more easing just because there’d be more financing.

It seems like last year was truly the year of competition.

Yes, and I think it’s even more competitive now. We’ve seen spreads come in significantly, and there are more people raising money to compete in the spaces, so it’s maybe even oversaturated right now. The pricing has come down and we have to work a little bit harder through syndications to get the yields we want.

How has the syndication side of the market evolved?

I just think the capital is much cheaper, so it used to be that you could take down a loan and there was a significant amount of room in the spread you were getting to syndicate out and get a good deal for yourself. Now, the capital stack and the pricing is so much tighter, you have to be right on top of the pricing when you’re going to sell more inventory or a mezz piece. There’s much less room for error in judging exactly where the capital markets are.

Are you seeing discipline slide anywhere in the lending market?

The only place we see a little less discipline is on refinancings on new acquisitions. When market value is pegged, I think it’s a lot clearer with refinancings when certain nondomestic or newer lenders are looking at appraised values but lending at a higher value. But, it’s still a very controlled market, and you haven’t seen as many financings where borrowers are looking to get very high leverage.

And borrowers are also being pretty disciplined, correct?

It’s a much more equitized market, which is good, as people are really stretching out financings. It leads to a few less mezz opportunities, but for a market as a whole it’s much healthier.

SL Green’s big acquisition last year was Worldwide Plaza. What appealed there?

It’s a Class-A building and we wanted a little more exposure on the West Side. We got in at a very good basis, a very good cap rate. If you look at our returns on a fee-enhanced basis, they were extremely attractive versus anything else we were seeing in the market. So, [it was] a Class-A building at a low basis and [in] an area on West Side [where] we wanted to be, with a great tenant roster. [And the fact that] we thought it was kind of an above-market attractive yield was great for us. It was also good to team up with RXR, with whom we have a great relationship.

Any specific strategy you’re working on for 2018?

We look every year to sell a couple of assets and then find the best way to redeploy that capital from a lending standpoint. We try to manage that to about 10 percent of the company’s assets but always optimizing, working on risk-adjustment return, duration and then finding the best projects and the best borrowers. So, I think that strategy stays throughout the cycle for us.

How many opportunities would you say come to your desk every year?

I would say hundreds of opportunities come across. You don’t dig deep on a lot of them. We really quickly kind of weed out the ones we think are right for us and then focus on them. One of the reasons is that we’ve underwritten almost every asset in New York already, know it and have a view. We generally already have a value on the building, so we can quickly look at it. We know exactly what we’re looking for.

Has SL Green’s debt business always been 10 percent of the company? Do you see it increasing at some point?

It’s been pretty steady for the past decade or so, so I think as a public equity REIT that’s the right level to keep it at. And, in some ways, it doesn’t force us to do transactions the way it does for other people. We have the ability to really just choose the transactions we think are best, and we aren’t forced to put out capital.

Given how busy you are, do you still have time to play tennis?

I do [laughs]. I’ve started playing much more frequently. My kids play, so I’ve started getting more into it.

So they take after you?

They do. The oldest one [9] is playing tournaments, and she’s doing really well. My little guy loves it—and is excellent for a 6-year-old—my 3-year-old has not gotten into it. Yet. What’s interesting is [Fried Frank’s] John Mechanic hosts a lot of tennis games. I’ve played with him a lot. He introduced me to a lot of people in the industry when I was just starting out, and through him, I was fortunate enough to meet a lot of people.

Do you have any career mentors?

My father was in the real estate business—he had an accounting and consulting business—so from a young age I got to learn from him. I grew up listening to his phone calls with people talking about real estate deals and how to structure things. At my first job at Credit Suisse I worked with David Genovese, who—lucky for me—took a big interest in my wellbeing. He would allow me to sit in when we were working on selling properties. I came [to SL Green] in my mid-20s and have been beyond fortunate to work for Andrew [Mathias] and Marc [Holliday]. They’re the best in the industry, and the amount they have taught me is invaluable.

Is your dad happy with your career choices?

He is. I’ve been very fortunate. I’ve worked hard but was at the right companies with the right guys, and it’s worked out pretty well.

Source: commercial

Northwood in the Running to Acquire HNA’s 245 Park Avenue

A number of firms, including Northwood Investors, are in the running to acquire HNA Group’s 245 Park Avenue, several sources with knowledge of the situation told Commercial Observer.

One Chinese bank official who spoke to CO said that while there are many potential suitors for 245 Park, it’s unclear whether HNA is willing to accept a price at the current market value—which many expect will be significantly below that which the conglomerate paid for it in 2017.

HNA purchased the 1.8-million-square-foot office tower at 245 Park Avenue for a whopping $2.2 billion from Brookfield Property Partners in May 2017 and is now on the verge of unloading the asset less than a year later.

This deal would come on the heels of Northwood scooping up HNA’s 386,921-square-foot 1180 Avenue of the Americas for $305 million on Feb. 15, financing the bulk of the transaction with a $237 million loan from the Royal Bank of Canada. HNA acquired the property in 2011 for $259 million from the Carlyle Group, according to property records.

In June 2017, HNA, the former airline-turned-conglomerate, was one of four major Chinese investment arms identified by the Chinese government to have borrowed too aggressively for offshore transactions. A month later, Chinese President Xi Jinping and China’s State Council levied restrictions on any future investment in overseas real estate and ordered those conglomerates to begin liquidating some of the major real estate assets they acquired.

An executive of a prominent New York-based landlord previously told CO that “the Chinese have had the outlier bid for a few years, and that’s what’s upped bid prices. Now that it’s removed itself from the market, it has to settle itself with price discovery.” The movement of 245 Park may be the start of that discovery.

Officials at Northwood were not immediately available for comment.

With additional reporting provided by Cathy Cunningham.

Source: commercial

‘Everything is on the Table’ in China Real Estate Sell Off

“Everything is on the table.”

That is how one executive from a prominent New York-based landlord described the current position of the Chinese government’s freshly imposed, forced liquidation of its top conglomerates’ most valuable trophy real estate assets.

In June 2017, Beijing singled out HNA Group, Anbang Insurance Group, Fosun International and Dalian Wanda—its four largest private conglomerates—as having borrowed too aggressively for offshore transactions. And in August 2017, China’s State Council formalized restrictions on foreign acquisitions.

“I think those firms that have been identified are trying to aggressively unwind what they did,” the New York-based landlord executive, who’s firm is a potential bidder on major Chinese assets that have hit the market, said on the condition of anonymity. “You’ll see transactions from those companies to recapitalize or release the assets in order to get relief and repatriate capital back into China.

“They’re all acting with a degree of urgency as they’ve been told that they need to manage through these [assets] quickly,” the executive added. “I think Fosun’s purchases were made earlier in the process so they’re in better shape.”

Chinese conglomerates and private companies have been a seemingly unstoppable investment force over the last few years, pouring hundreds of billions of dollars into real estate, sports and entertainment ventures.

“The Chinese view real estate like having gold stashed in your mattress,” said Adams Lee, an international trade lawyer for Seattle-based law firm Harris-Bricken.

But those mattresses are now overstuffed because Chinese dealmakers have overreached, according to Chinese government regulators. The government’s solution was a clampdown on the superabundance of risky, debt-fueled offshore investment and a forced liquidation of assets in order to bring cash back to China and insulate the country’s slowing economy.

And it shows. Chinese investment in U.S. commercial real estate fell roughly 65 percent to $5.5 billion in 2017 from approximately $16.1 billion the previous year, according to a January 2018 report from Los Angeles-based asset manager TCW Group.

This has put some of China’s highest-profile U.S. trophy assets, held by its richest entities, on the market, leaving many local industry players in gateway markets in limbo, waiting on the first sales to take place. Which domino will fall first, however, is unclear.

“We’re looking at the New York-area properties [that could be sold],” the anonymous landlord said. “I think for those [major conglomerates], it’s probably their entire portfolio [is on the table]…Will [Anbang Insurance Group] keep the Waldorf? Is Anbang going to sell the [Strategic Hotels] hotel portfolio? They’re looking closely at these assets, but I don’t think they’ll fire sale them.

“They’re looking for ways to create liquidity and a reduction of debt, and the problem is they overpaid for a bunch of these assets, so that’s going to make it harder,” the landlord added. “What we’ll see is more structured transactions to help them liquidate a substantial portion of the asset but that keeps them in [a deal] so they can play in recovery and long term growth over time.”

HNA Group—which owns roughly $14 billion of real estate across the globe, according to information from Real Capital Analytics—set its target at $16 billion in assets it’s looking to sell in the first half of this year as it deals with a $29 billion debt shortfall over the next few quarters, according to Bloomberg. It has been marketing some of its commercial properties in New York, Chicago, San Francisco and Minneapolis—valued at $4 billion, according to a marketing document seen and reported first by Bloomberg in early February. Its New York assets include 245 Park Avenue, a 1.8-million-square-foot office tower purchased for $2.2 billion in May 2017, 850 Third Avenue and 1180 Avenue of the Americas. The latter was sold to Northwood Investors for $305 million on Feb. 15—HNA nabbed the 327,766-square-foot building for $259 million from the Carlyle Group in May 2011, according to records filed with the New York City Department of Finance.

“The sheer sizes of these transactions will limit the players [who can compete for them], but there will be enough players to create a competitive environment—it just depends on what the deals look like and what they’re willing to do,” the landlord said. “Like 245 Park Avenue, [HNA] paid way above the market, so they’ll have a hard time selling it outright, but if they want to engage in a structured transaction, they may find success where they subordinate some of their position.

“I think right now that’s kind of where things are,” the source added. “They’re definitely out there, trying to transact, so I think you’ll see a flurry of activity over the next few months, and we’ll start to see what the deals look like. The Chinese have had the outlier bid for a few years, and that’s what’s upped bid prices. Now that it’s removed itself from the market, it has to settle itself with price discovery.”

HNA is currently weighed down by $90 billion in debt, Bloomberg reported in late January. That month, the conglomerate told creditors in a meeting in the Hainan province—where it’s based—that it was facing $2.4 billion in maturing debt in the first quarter. HNA said at the meeting that it expects this to be offset as 2018 progresses and as it ramps up the offloading of its assets.

But Chinese regulators are waiting to get a full lay of the land as it relates to potential offers for its trophy assets, one New York-based real estate lawyer close to the dealings told Commercial Observer. “I’d be very surprised to see if there’s an auction,” one official at a Chinese investment bank told CO. “They could be sold off if they like the price, but there’s not any hurry on their part.”

Anbang and Fosun International thrust themselves into the public eye with a couple of high-profile deals a few years ago. Anbang purchased the Waldorf Astoria for a whopping $1.95 billion in February 2015—a record for a single hotel asset—and Fosun helped bolster the initial investment surge with its $725 million purchase of Chase Manhattan Plaza—now 28 Liberty Street—in October 2013, which Deutsche Bank and HSBC refinanced for $800 million in November 2017, as CO first reported.

Anbang didn’t stop there, though. It then bought the Strategic Hotels & Resorts portfolio from Blackstone Group for $5.4 billion in March 2016, just before abruptly abandoning its $14 billion offer in a bidding war with Marriott International for Starwood Hotels & Resorts at the end of the month. Anbang also scooped up 717 Fifth Avenue—a 26-story, roughly 350,000-square-foot office tower and home to its U.S. headquarters—from Blackstone in February 2015. Anbang and Blackstone have been in talks recently for the private equity giant to reacquire the Waldorf and the 16-property Strategic Hotels & Resorts portfolio, The Real Deal reported. A source close to  the proceedings recently told CO that Blackstone is unlikely to pursue the Waldorf.

“A joke we’ve had here is that Blackstone is going to end up buying back the properties they sold,” the Chinese bank official said. “We’ve been expecting this for a year. We knew about Anbang for a while now. There’s going to be a lot of interest in Anbang’s assets.”

In March 2017, on a high from previous record-setting acquisitions, the insurance giant backed out of discussions to buy a stake in Jared Kushner’s 666 Fifth Avenue office tower, as part of a $7.5 billion plan to redevelop the property into a condo and retail building.

“[The negative press] on 666 Fifth didn’t help [Anbang’s case, leading up to the crackdown,] at all,” the Chinese bank official said. “I think it’s more that the regulators gave warnings to the Anbang chairman, and they felt he wasn’t paying attention. I think [President Xi Jinping] felt [Anbang Chairman Wu Xiaohui] was trying to sneak by with whatever he could while he could.”

In January, Bloomberg reported that Dalian Wanda was looking for a buyer for its stake in a roughly $1 billion project called Vista Tower, a 98-story skyscraper in Chicago. In November 2017, Wanda’s partner in the project, Magellan Development disputed claims that Wanda was looking to sell its stake in the project. Vista Tower is one of two of Wanda’s roughly $5 billion in remaining overseas holdings, including a $1.2 billion hotel and condominium complex in Beverly Hills, Calif.

Wanda’s wave of activity came in the wake of its founder Wang Jianlin’s March 31 deadline to pay $510 million in bank loans used to finance the firm’s decade-long offshore expansion.

“President [Xi Jinping] looks like he’s trying to consolidate power on his side and trying to rein in the big mega-conglomerates in China that have gotten out of control in terms of their acquisitions, which were very random and haphazard,” Lee said. “I guess the question now is, Is it going to happen to Fosun next? Is it Alibaba on the chopping block, or Tencent? It’s not like those companies haven’t been purchasing assets, but it seems those companies have had more of a strategic plan in purchasing, and maybe that’s why they haven’t been targeted. Some of the others [like HNA and Anbang] seem to be buying randomly.”

Some Chinese entities may be safer than others, one executive from a private equity firm who works with Chinese investors said.

“The Chinese government will allow their favorites to go out and do business,” the executive said. “What they don’t like is Anbang’s drawing attention, showing wealth and power. Wealth and power in China is the Communist Party. I’m amazed how we get approval sometimes; they’re scared to take it to their bosses. It has to be perfect. They are sensitive.”

HNA Group Chairman Chen Feng told Reuters in January that a liquidity problem exists because the conglomerate engaged in a number of mergers, even as the external environment became more troublesome and China’s economy “transitioned from rapid to moderate growth,” which impacted the group’s access to new financing.

“Rate hikes by the Federal Reserve and deleveraging in China caused a liquidity shortage at the end of the year for many Chinese enterprises,” Chen told Reuters. And, in a surprise showing of optimism, he added, “we’re confident we’ll move past these difficulties and maintain sustained, healthy and stable development.”

Last month, the Chinese government and President Xi Jinping seized temporary control over the debt-burdened Anbang Insurance Group, after first detaining its founder, Wu Xiaohui, last summer, charging him with fraud and embezzlement in Shanghai, according to Bloomberg. It was the first public sign of the government’s crackdown on its overly aggressive conglomerates. By the end of February, it was reported that Chinese government officials had pivoted their position on HNA and had been encouraging state-owned banks to keep lending to the conglomerate, people familiar with the matter told The Wall Street Journal.

“The window was not going to last forever to invest out of China,” the Chinese bank official said. “[Wu] invested as much as he could. Around this time, Chinese currency was depreciating, and in his currency, he’s got a profit. So, he didn’t care what people were bidding but wanted to get in quickly and in a hurry. As a result people think he overpaid.

“The way to think about it is that in China, [Wu] was drawing attention to himself while all the attention was going to one leader recently,” the Chinese bank official added. “Meanwhile, several of the big private real estate names were being told to stop drawing attention to yourselves. [Wu] was not fitting with the country’s policy, which was that capital was meant to be invested externally, but only if beneficial for the government.”

After the Anbang seizure, the government instituted rules—like a 36-point investment code of conduct for its private companies—significantly restricting some forms of investment, including real estate acquisitions, and outright prohibiting others.

“Commercial real estate is restricted. It’s not prohibited,” said Jerome Sanzo, the head of real estate finance at the Industrial and Commercial Bank of China (ICBC). “It’s not going to completely dry up, so the net effect is that you’re not likely to see another acquisition like the Waldorf or 245 Park. Those days are over, but real estate investment overseas is not completely prohibited. I would say generally, there will still be investment, but it will be a much less speculative play. I don’t think you’ll see the large, splashy investments.”

This may open up a flurry of competition in the near term. The expectation is that high-profile funds and local players in gateway markets will come to the fore now that the Chinese have  been ejected.

“The funds that raised these billions over the last several years, like Blackstone, Blackrock, Apollo, the companies with serious available cash that they can deploy when they see a good opportunity and there’s so much local cash on the sidelines—they’re all just waiting,” one New York-based real estate lawyer who represents Chinese buyers said.

While it remains to be seen how these trophy assets unfold on the market, many industry players expect strong Chinese outbound real estate investment to return to the fold in the very near future, once the country’s economy stabilizes.

“[The Chinese] are still in the mix of things, and they want to know what’s going on,” the New York-based landlord executive said. “They’re still interested in opportunities, shifting into more demographically right areas like assisted living and student housing, and they’re looking for potential opportunities on the retail side.”

The real estate attorney who represents Chinese buyers told CO that Chinese investment arms are planning a purchasing comeback, but that they aren’t expecting to be comfortable until late 2019 at the earliest.

Source: commercial

Coworking Company Spaces Establishing NYC Flagship in 100K SF at Manhattan West

Brookfield Property Partners six-building Manhattan West megaproject is getting a major coworking tenant.

Amsterdam-based workspace provider Spaces has leased 103,000 square feet across seven floors in a building known as The Lofts at 424-434 West 33rd Street, the landlord told Commercial Observer. The coworking company will take the seventh through 13th floors in the top half of the former printing loft building between Ninth and 10th Avenues.

The asking rent in the 10-year deal was in the high $70s per square foot, according to David Cheikin, an executive vice president at Brookfield. Spaces will get its own private entrance and lobby, as well as a 2,000-square-foot rooftop and multiple terraces. The building has 15,000-square-foot floor plates, exposed steel beams, and high ceilings, plus newly revamped elevators, lobbies and mechanicals.

“Our average tenant size at Manhattan West is 200,000 square feet,” Cheikin said to CO. “We wanted to provide those tenants with the ability to grow and shrink a bit and provide them WITH the resources for conferencing and flexible work environments.”

He also explained that the loft building will connect to Manhattan West’s 250,000 square feet of retail, anchored by a 60,000-square-foot Whole Foods.

Brookfield had originally planned to knock down 424-434 West 34th Street in order to amass a larger site that would allow for a big retail and hotel project, Cheikin said. “But when we actually got into the building, we realized it was a really good turn-of the century printing loft building that added some authenticity to our site of what the neighborhood used to be.”

Spaces is planning to make The Lofts its flagship outpost in the five boroughs, where it already has 44 locations and 1.3 million square feet of offices, according to Michael Beretta, the vice president of network development in Spaces’ Americas division. This will also be its largest space in the city, where typical Spaces locations average 30,000 to 50,000 square feet apiece.

JLL’s Jim Wenk, Brannan Moss and Kirill Azovtesv represented Spaces. Cushman & Wakefield’s Bruce Mosler, Josh Kuriloff, Robert Lowe, Ethan Silverstein, Matthias Li and Whitney Anderson worked on behalf of Brookfield.

Mosler declined to comment on the deal, and a spokesman for JLL didn’t immediately respond to a request for comment.

The seven floors will be constructed with movable walls, prebuilt suites, large coworking areas, conference rooms and event spaces. The interiors are going to be renovated with a “cool and contemporary design that’s European in nature and a mix of casual and interesting while still remaining a very professional place where companies can do business,” Beretta said. He added that the company chose The Lofts because it’s a building with “character” but the project will offer all the amenities of new construction, including a significant retail component.

Spaces already rents at a few other Brookfield properties, including 245 Park Avenue, 1 Liberty Plaza and Brookfield Place. It expects to open at Manhattan West in late 2018.

Pioneering, Luxembourg-based coworking provider IWG Plc (formerly Regus) owns Spaces, which has tried to pitch in urban markets as a trendy competitor to WeWork

The lower half of 424-434 West 34th Street is currently home to several small office tenants. All of them will be vacated by 2021, when Brookfield plans to put the building’s remaining 100,000 square feet of office space on the market.


Source: commercial

What’s Happening With Chinese Investment in New York City Commercial Real Estate?

There was a lot of nail-biting from the New York real estate community heading into this year after hearing that the biggest whale in terms of investment might not be allowed to swim in our waters. We’re talking, of course, about China.

With China’s capital controls in place, the country was expected to tamp down outbound investment in 2017. While the number of New York City investment sales deals involving the country has dwindled significantly this year, China still represents the biggest cross-border player, according to Cushman & Wakefield.

Chinese investments dropped to 16 percent, or six, of the 38 foreign capital deals (excluding debt deals) in New York City in the first three quarters of the year, versus 28 percent, or 16, of 58 acquisitions at the same time last year, C&W data indicates.

Francis Greenburger, the chairman and chief executive officer of Time Equities, explained the issue in Commercial Observer’s survey for this year’s Owners Magazine: “Although there are exceptions, Chinese investors are subject to government restraints in arranging to transfer funds out of China. This has caused a reduction in transactions by one of the most active group of New York City buyers.”

But in terms of dollar volume the dip in Chinese investment in New York City hasn’t been dramatic, and the country still has spent more than its competitors. Chinese investments made up 11 percent of the $24.51 billion spent on commercial real estate in New York City this year through September compared with last year’s 13 percent of $45.87 billion.

Despite a slowdown in deal flow and a reduction in investment sums, the Chinese have been going for big deals in New York City.

“Starting in 2016 through the first half of 2017, China surpassed Canada as the largest foreign investor in New York City,” said investment sales broker Douglas Harmon of C&W. “Capital controls caused Chinese buyers to participate in less transactions, but the capital was consolidated into the larger deals.”

Harmon and colleague Adam Spies are representing SL Green Realty Corp. in the sale of a 49 percent stake in a 54-story office tower at 1515 Broadway between West 44th and West 45th Streets to China Investment Corporation (CIC), a Chinese sovereign wealth fund. It is a property valued at $2 billion. A spokesman for SL Green said the deal has not closed.

In the priciest foreign property acquisition of the 12 months ending in October, Chinese conglomerate HNA Group paid $2.21 billion for 245 Park Avenue between East 46th and East 47th Streets. The sellers were Canada-based Brookfield Property Partners and the New York State Teachers’ Retirement System. The deal represents one of the highest prices ever paid for a Manhattan office property. (HNA also bought a mansion at 19-21 East 64th Street for $79.5 million this year.)

At the end of last year, CIC bought a 45 percent interest in the former McGraw-Hill Building at 1221 Avenue of the Americas between West 48th and West 49th Streets from Canada Pension Plan Investment Board. The property was valued at $2.29 billion.

Two other large Chinese acquisitions in the last year include WanXin Media’s $68 million buy of an office building and vacant lot at 7-15 West 44th Street and office developer Soho China picking up the landmarked John Pierce Residence at 11 East 51st Street for $30 million.

Alex Foshay, a senior managing director in Newmark Knight Frank’s capital markets division, said the Chinese government’s restrictions have “really strangled all major investment out of mainland China.”

Foshay cited as an example, China’s Anbang Insurance Group’s pulling out of an investment in 666 Fifth Avenue. Kushner Companies was planning to redevelop its flagship New York office tower with Anbang but talks terminated in March.

Terrence Oved, the head of the real estate department and a partner in the law firm Oved & Oved, said he has seen the drop off in acquisitions generally, and those that are closing are taking longer to complete.

“That rapid-fire tennis-match-like quality that we saw in 2016 [between players] is glaringly absent in the foreign transactions in 2017,” Oved said. “The perception of foreign money is that New York is in the later stage of the cycle.”

Also, Oved said, New York City is facing global competition from other world cities that weren’t as competitive the last few years. He pointed to Silicon Valley’s appeal to the tech company likes of Amazon, Facebook and Microsoft.

HFF’s Andrew Scandalios said that deal flow is down this year because properties are overpriced.

“Buyers are less enthusiastic to pay 2015 prices, and the sellers aren’t going to move [them],” he said. “We haven’t seen the offshore capital abate. It’s just they’re waiting for better pricing opportunities.”

Scandalios worked on the deal in which Singaporean sovereign wealth fund GIC picked up a 95 percent stake in the 50-story office tower at 60 Wall Street from Paramount Group and Morgan Stanley with a $1.1 billion valuation. (He also helped secure GIC’s $550 million acquisition loan from German bank Aareal Capital.)

In the summer, Germany-headquartered Allianz SE contributed the 18-story, 352,000-square-foot office building at 114 Fifth Avenue (which it acquired in 2015 with L&L Holding Company) into a then-new joint venture with Columbia Property Trust to buy and manage U.S. trophy properties. Columbia contributed a Palo Alto and San Francisco property to the venture. The three properties were valued at $1.3 billion and HFF negotiated the deal.

Commercial real estate deal volume is down this year for all foreign buyers in New York City as of the third quarter to 28 percent of all investment sales, C&W found, from 34 percent a year prior. (A look at foreign investment in New York City is limited to investment sales deals because debt and equity transactions are harder to track.) The findings parallel the nationwide trend. As of mid-2017, foreign investors represented 13 percent of all U.S. transactions by volume versus 16 at the same point in 2016, Real Capital Analytics data indicate.

Foshay said that a number of overseas buyers are “skeptical” about plunking down large sums of money (over $150 million) in the U.S., out of concern about “where we are in the cycle.”

This doesn’t mean, of course, that foreign investors aren’t seeking out deals nationwide. And Canada heads the procession.

Canada has sealed 255 U.S. commercial real estate acquisitions in the last year, followed relatively closely by China with 215 before dropping off significantly with Singapore and its 36 deals, RCA data show.

In the last year, Canadian entities have closed some notable purchases in New York City. Oxford contributed $65 million in a $130 million deal for 427 10th Avenue and Brookfield Property Partners input $185 million of $370 million for 1100 Avenue of the Americas. In addition, Canadian pension fund Ivanhoé Cambridge and Chicago-based Callahan Capital Properties paid $652 million for Goldman Sachs’ former headquarters at 85 Broad Street (Ivanhoé Cambridge invested $326 million in the deal).

Finally, Canada-based Oxford Properties Group is in the process of purchasing the St. John’s Terminal site at 550 Washington Street from Westbrook Partners and Atlas Capital for $700 million.

In New York City specifically, foreign investment has been dropping because of a dearth of trophy property on the market, according to a couple of brokers.

“There just wasn’t as much property available this year as there was last year,” said CBRE’s William Shanahan, who along with CBRE’s Darcy Stacom brokered the 245 Park Avenue deal.

The duo also sold the 31-story office building at 685 Third Avenue for TH Real Estate and Australian sovereign wealth fund the Future Fund, to Japanese real estate firm Unizo Holdings for $467.5 million.

Foshay concurred about the lack of inventory.

“I would say there has been a lack of trophy product to be purchased,” he said, but “there’s been quite a lot of availability in investment sales of non-trophy assets, meaning Class B product, and it is that trophy investment product that particularly appeals to overseas investors.”

Going forward, Shanahan expects to see “more participation” from Japanese investors.

Harmon said, “We think Chinese investment should pick back up in the first quarter of 2018. Additionally, South Korea, Japan, Norway, Saudi Arabia and Canada make for plenty of competition for domestic investors in 2018.”


Source: commercial

CMBS Issuance Volume Doubles to $21B in Second Quarter

CMBS issuance reached $21 billion in the second quarter of 2017, which is more than double the $10.5 billion in issuance in the first quarter, according to a report from Trepp.

The acceleration in issuance could signal that the cloud of economic and regulatory uncertainty that surrounded the CMBS market prior to, and immediately following, the implementation of risk retention may be waning.

Thirty deals were issued in the second quarter, 12 of which, totaling $8.43 billion, had a vertical risk retention structure, amounting to just under 40 percent of the issuance balance. Another 12 deals, totaling $7.41 billion, operated with the horizontal structure, and the remaining $5.32 billion from six securitizations adopted the the hybrid, “L-shape” strategy, Trepp data shows.

Boston Properties secured the largest CMBS loan in the second quarter for its iconic GM Building, with $1.55 billion of the property’s $2.3 billion refinancing ending up in the single-asset single-borrower Morgan Stanley-sponsored BXP 2017-GM securitization. The debt replaced a $1.6 billion loan on the trophy asset that was due to expire in October. In April, the Commercial Observer first reported the details of the refi.

The 50-story building, located at 767 Fifth Avenue, was valued at $4.8 billion in May, according to Trepp, and has been touted as one of the most valuable assets in the U.S. It was once owned by Donald Trump and is known for housing Apple’s flagship glass-cube store.

Another New York City address that turned to the CMBS market when it was time to refinance was HNA Group’s 245 Park Avenue.  Of the $1.2 billion in debt on the 81,336-square-foot, 47-story building, $771.8 million was contributed to CMBS deals; $500 million in the PRKAV 2017-245P single asset single seller deal and three separate conduit loans totaling $271.8 million. Of the three conduit loans, the $98 million loan contributed to JPMCC 2017-JP6 was the largest of the quarter.

“In addition to heightened lending on hotels, CMBS loans against trophy office towers in central business districts like New York have been the main drivers of year-to-date issuance,” Trepp analysts wrote.

The continued sluggishness of the retail sector, as well as a surge in sources of alternative lending have led to a “noticeable” shift in issuances by property type, according to the report. The share of retail loans in total issuance fell to just under 14 percent in the second quarter, down from just over 15 percent on the first quarter.

Although it’s just a small piece of the issuance pie at roughly 4 percent, multifamily loan purchases by government-sponsored agencies are set to hit another record high this year, the report states. Loans for office and lodging developments dominated the sphere with issuance levels of 27 percent and 20 percent, respectively.

As the year progresses, if spreads remain tight and are paralleled by a continued and gradual increase in interest rates, activity in the CMBS arena should remain strong—considering the steady supply of new offerings poised to hit the market, the Trepp report indicated.

But, don’t get too comfortable just yet. The report also warns that sluggish economic growth and uncertainty about the federal government’s ability to administer deregulation could present hurdles for the CMBS playing field.


Source: commercial

State of the Market Report: A Q&A With Eastern Consolidated’s Peter Hauspurg

A full-service commercial real estate firm established in 1981, Eastern Consolidated offers real estate investors an integrated platform of investment sales, retail leasing, and capital advisory services. Among the company’s most recent transactions, Eastern Consolidated arranged the sale of a prime residential development assemblage for close to $100 million, and arranged the sale of four contiguous multifamily buildings on the Upper East Side for $52 million–demonstrating the firm’s knack for making impactful deals in one of the world’s most trend-setting cities. We spoke with Chairman and CEO Peter Hauspurg for a market overview of the current investment sales and retail leasing and financing environment.

Commercial Observer: Give us an overview of what you’re seeing in the investment sales marketplace.

Peter Hauspurg: Although year-over-year multifamily volume has declined citywide, the multifamily sector is still achieving strong pricing, cap rates are still historically low (around 3 percent), and financing is plentiful, with significant demand both from residents who want and need housing, and investors looking to capitalize on this demand. New York City’s economy grew at a 2.3 percent clip in the first quarter, resulting in 33,000 new jobs, an unemployment rate of 4.3 percent, and an influx of people looking for opportunities and housing. As a result, multifamily properties continue to be fantastic investments.

Manhattan office properties are continuing to attract foreign investors. Most recently in May, a Chinese conglomerate HNA Group closed on 245 Park Avenue for $2.21 billion. On the development side, large scale office projects–such as those in Lower Manhattan, the Hudson Yards District, and 1 Vanderbilt–are moving ahead and changing the landscape of the city.

What pricing are you seeing for land sales in Manhattan?

PH: Manhattan land prices have fallen 25 to 30 percent in the last year. As the market has shifted, we have had to be more creative to make deals. We just closed a 170,000-buildable-square-foot assemblage for a condo development on East 29th Street between Park Avenue South and Madison Avenue for close to $100 million, which averages to about $580 per buildable square foot. This deal started out as an assignment to sell one building with 50 feet of frontage and air rights that would allow a developer to build cantilevers over the neighboring buildings. Given the complexities of the parcel, market fluctuations, and location of the property, we saw the need—and an opportunity—to revise our strategy. We significantly expanded the original concept by engaging the two adjacent property owners on behalf of the buyer the Rockefeller Group. It required multiple rounds of negotiations—and renegotiations—but we were ultimately able to not just navigate but drive a complex, multi-party transaction that was contingent on the sale of all three buildings—including simultaneous contract signings and closings. This transaction was particularly complex, but it is indicative of the type of creative thinking, experience, patience, vision, institutional knowledge, and tenacity often required to transact land sales and development deals in the current environment.

Are developers still finding a market for condos?

Most definitely. Although land usually leads the rest of the market down, something unusual happened in the first quarter – the average condo unit price rose, year-over-year, citywide. Average condo prices increased by 19 percent to $1.9 million from $1.6 million, and the volume of sales increased 10 percent to 2,737 up from 2,488 the previous year.

What are you finding regarding deals in Brooklyn?

Land deals in Brooklyn have shown more strength than land deals in Manhattan. We just closed on condo development site with 40,000 buildable square feet in Bed Stuy for $285 per square foot. The borough has a resiliency we’ve never seen before.

What is your view of the new Affordable New York Housing Program?

At the end of 2015, when 421a expired, land sales for new rental developments in the city pretty much ground to a halt, because no one can afford to build when the city takes 30 percent of the taxes off the top – it just doesn’t pencil out. We hope that the Affordable New York Housing Program, which was approved in April to replace 421a, restores the creation of new affordable rental stock to its previous strong pace.

What about retail trends?

PH: Retail has been a tale of two markets. You have the high street retail – meaning Madison Avenue, 5th Avenue, and SoHo on Lower Broadway between Houston and Canal – where rents have ranged from $500 to over $2,000 per square foot, suddenly starting to show a tremendous softness in the last year. The softening rents can be explained for a few reasons. First, major retailers historically didn’t mind having a loss leader store on one of those key corridors because the high traffic visibility enhanced their brand around the world. That feeling is mostly gone. More importantly, you now have a number of retailers who, due to the challenge from e-retailing, might have had a 5,000-square-foot clothing store in SoHo, but have now downsized to 2,000 square feet, while keeping a 10,000- or 15,000-square-foot warehouse in Long Island City for $25 per square foot.

On the other hand, you have the neighborhood retail market, with a high volume of restaurants, coffee bars, and boutique concept offerings. New Yorkers have demonstrated an insatiable appetite for these kinds of dining and shopping experiences. Focusing on this niche, our retail leasing brokers arranged around 150 leases totaling 300,000 square feet of space in the last 12 months alone, at an average of under $200 per square foot, consistent with what you’re seeing in neighborhood stores.

What is the financing environment like today?

PH: Surprisingly, lending rates actually came down in the last quarter in spite of the Fed rate hikes. Spreads have narrowed, which means the banks are willing to take a lower amount over the LIBOR or Treasury rate. We recently arranged one multifamily financing deal with a life insurance company that was a 5-year interest-only loan at 3.3 percent.

What are you looking forward to in the next half of 2017?

PH: We continue to attract strong and talented brokers including Robin Abrams and her team who joined our Retail Leasing Division, bringing with them decades of experience representing international retailers such as The White Company of Britain, which just opened its first U.S. store in a space Robin arranged on 5th Avenue in the Flatiron District. We’re now uniquely positioned to execute retail leases on behalf of the complete range of landlords and tenants. Our Investment Sales brokers have continued to expand their reach beyond New York City and are scheduled to close on a 74,500-square-foot retail and office property in the heart of Boston, a market that has been attracting significant institutional investment in recent years. And our Capital Advisory Division is extremely active, having brokered in the last several months close to $600 million in financing for the acquisition, construction, and refinancing of multifamily properties, condo developments, and hotels.

 

 

 


Source: commercial