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Category ArchiveHNA Group

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

The Construction Industry Should Brace Itself for a Rollercoaster 2018: Experts

Coming off a few booming years, New York City’s real estate industry—including the construction sector—has been suffering a bit of a setback this year.

The New York Building Congress forecasts at year end, $45.3 billion will have been spent on construction in 2017, the second-highest-ever total dollar amount committed to construction in the city’s history, according to the organization.

But it would mark a 13 percent decline from last year’s record $52.2 billion. At the same time, the number of jobs in the industry increased to 149,800 in 2017 from 146,200 in 2016. And the organization expects it to rise to 151,200 jobs next year.

Construction permits, which indicate the level of future work in the city, meanwhile are up slightly this year, although the pace is slowing. The New York City Department of Buildings issued 109,724 permits in fiscal year 2017, ending in July, a 0.4 percent increase from 109,277 in 2016, according to the city’s annual Mayor’s Management Report released in September.

What does all of this mean for the construction business in 2018?

Commercial Observer spoke with five experts about what to watch for. Overall, they forecast a decline in housing construction, but an increase in work in the public sector and the office market. The jury is out on construction costs. And then there is the elephant in the room: tax reform, which has been passed by the Senate but not the House of Representatives. Republicans cheer it as a win for jobs (and big Wall Street businesses are chomping at the bit as it would cut the corporate tax rate by nearly a half). Democrats are against it, claiming it serves wealthy individuals and corporations. As for New York City construction experts, they are split on the impact to their segment of the industry.

Housing

Over the past few years, there has been a surge in housing development, which many experts say has led to an oversupply. And in turn, construction of new homes slowed down this year by 41.2 percent and that is expected to continue for the foreseeable future. There were 37,700 new housing units added in 2016, just 26,700 this year, and the Building Congress expects 24,000 new housing units in 2018.

In terms of dollars and cents, $11 billion will be spent on residential construction this year, the Building Congress forecasts, a 31.3 percent drop from $16 billion last year. In 2018, the figure will rise to $11.6 billion.

“I think on the residential end—apartment complexes and condominiums—I think that it’s is a little overheated,” said Richard Lambeck, the chair of the construction management program at New York University’s Schack Institute of Real Estate. “There will be a slow down. The products that have been produced have surpassed the absorption rate. The amount of apartments that are going to be purchased is going to be slowed and it will have an impact on the industry.”

In addition to the oversupply problem, there are a lot of people crying “Not in my backyard,” a.k.a. NIMBY. Community organizations are rallying against large skyscrapers such as SJP Properties’ 200 Amsterdam Avenue on the Upper West Side, Gamma Real Estate’s planned 67-story building at East 58th Street between First Avenue and Sutton Place, and Extell Development Company’s 69-story tower at 50 West 66th Street.

The fear is that these projects could be forced to scale back or canceled altogether due to community opposition, which will lead to less work for construction companies and subcontractors.

“I worry about community to reaction to projects,” Louis Coletti, the president and chief executive officer of contractor association umbrella Building Trades Employers’ Association. “We are going to go back into the 1990s where NIMBYism just takes over and stops the city. You see this opposition to as-of-right projects, that’s crazy. You see the general direction of the city becoming progressive. You just wonder if it is the natural course of things as people become more politically active.”

Public works

Government spending for public infrastructure projects climbed this year for projects of note around the five boroughs, such as the redevelopment of LaGuardia Airport and the expansion of the Jacob K. Javits Convention Center and the new Kosciuszko Bridge.

Spending on similar projects is expected to reach about $16.9 billion in 2017, according to the Building Congress report—a 16 percent increase from 2016’s $14.6 billion. And the organization expects a further increase to $18.8 billion next year.

“Our infrastructure and transportation systems are the key,” Coletti said. “They are the real foundation to continued growth in the city. Those systems have lacked appropriate level of investment for many, many years. That’s the reason why the governor has to move billions of dollars for the [John F. Kennedy International Airport] and LaGuardia [Airport] [redevelopment projects].”

He added: “There is going to be a real focus on how to finance and really build our infrastructure to allow New York City to have continued growth.”

On the horizon, major infrastructure projects such as the redevelopment of JFK, the next phase of the Second Avenue subway and the Gateway Tunnel project—which would build another tunnel to New Jersey—lay in wait.

And some are questioning the viability of the next phase of Second Avenue subway project in the short term, as the calls to repair and fix the existing subways grow louder, meaning dollars would go to maintenance. While that could be great for commuters, maintenance produces less construction work than new projects.

“I don’t know if the [Metropolitan Transportation Authority] has sufficient funds to start that early,” Lambeck said. “At least from the MTA psperspective, they have been getting a lot of pressure, primarily in maintenance.”

Office   

All across the city there has been an abundance of construction on office projects in 2017. Just along the Far West Side alone there is Related Companies and Oxford Property Group’s Hudson Yards, Brookfield Property Partner’s Manhattan West and Moinian Group’s 3 Hudson Boulevard.  

In Brooklyn, Two Trees Management Company is building an 380,000-square-foot office tower at 292 Kent Avenue in Williamsburg; Rubenstein Partners and Heritage Equity Partners is working on the 500,000-square-foot 25 Kent Avenue in Williamsburg; Tishman Speyer and HNA Group is converting the upper floors of the Macy’s at 422 Fulton Street into 620,000 square feet of office space in Downtown Brooklyn; JEMB Realty and Forest City New York are building a 500,000-square-foot building at 1 Willoughby Square; and Thor Equities is working on Red Hoek Point in Red Hook, a nearly 800,000-square-foot office development. And in Queens, Tishman Speyer is building a 1.2-million-square-foot two-building office and retail project called The Jacx in Long Island City.

Construction work on all of these projects, as well as others, will continue into next year, keeping contractors busy.

“You have a lot happening with Midtown West products. You have a lot of activity in Lower Manhattan and upgrades to office buildings [across Manhattan],” said Carlo Scissura, the president and CEO of the Building Congress. “Office is a strong part of the market. And you are seeing [large office developments] happen in Brooklyn and in Queens.”  

Looking forward, the demand for office space in Manhattan is high (as CO recently reported), and there is a need to renovate a crumbling older stock of buildings. Redevelopments of towers and expansions are an area that could see growth next year. Midtown East—thanks to its new rezoning—will allow for larger projects and developers could look to redevelopment projects in the area, which would create more work for construction companies.

“Hudson Yards has proven that there is a tremendous need for new space and much of the city’s current product needs to be replaced,” said Kenneth Colao, the founder and CEO of CNY Group. “If you had another large sector of town that was wide open for development, I think it would be in play. The [Midtown East] rezoning I think will support more redevelopment.”

Construction costs

In May, Turner & Townsend released its annual construction market survey that pegged New York City as the world’s most expensive city for construction. The average cost of a building was at $354 per square foot, surpassing Zurich, Switzerland which came in at $328 per square foot.

Rising costs has become a problem in the industry due to a variety of factors, including the cost of labor. Construction companies have blamed union’s high hourly wages and an abundance of regulations.

On the latter point, unions have been making compromises in contract negotiations and lowering hourly wages as more developers demand general contractors take bids from nonunion companies in order to increase profit margins. Some construction leaders expect this trend to continue as the competition between organized labor and other subcontractors heats up further.

“I think the unions have to recognize that in order to be viable they need to work with their development clients and figure out ways to reduce costs,” said Richard Wood, the CEO of Plaza Construction.

Another reason for inflated construction costs is high insurance rates. New York is the only state with a law that allows a worker injured on a construction site to sue everyone—construction companies and individual superiors. This increased liability raises insurance premiums.

But regulations for the industry have increased towards the end of the year, as the City Council tried to improve safety on construction sites. The council passed a number of bills this year targeting construction safety, including one polarizing one: Intro-1447-C. The legislation will require workers to have at least 40 hours of safety training. Opponents to the bill claimed that it will force contractors to fund courses for their workers, increasing the bottom line. And the council also passed yesterday Intro-1399, which gives most industry employees, including construction workers, the right to “flextime” or two days off from their regular schedules.  

One construction watchdog said losing workers could disrupt work flow on projects.

“This isn’t a store or a restaurant—this is a construction site,” Coletti said. “We have schedules and budgets we have to make.”

Tax reform

As of publication, Congress’ tax reform bill had not been signed into law. But it looks extremely likely that it will as Republicans in the Senate passed a final version of the bill early today and their counterparts in the House of Representatives will re-vote on the legislation today after approving it yesterday with some errors.

The legislation will cut the corporate tax rate to 21 percent next year from 35 percent, which could mean a boon for companies. With extra money on their balance sheets, companies could reinvest in their offices. And real estate developers may use those funds to upgrade facilities in their assets. This will lead to more construction projects.

“I think indications are that it will be good for the construction industry,” Colao said. “If in fact the tax reform results in corporate tax reductions, corporations may start sprucing up facilities, then there would be an uptick in activity. Corporations—and entities that are tenants in office buildings—if they are looking at an improved bottom line at the same revenue—they might look to increase their capital expenditures.”   

However, as a part of the regulation, individuals will be limited in deducting state and local income taxes, sales taxes and property taxes to $10,000. Homeowners will be able to deduct mortgage interest on debt up to $750,000, down from $1 million. These segments of the bill don’t bode well for real estate interests in New York City, which has an average home sales price at $987,000 as of the third quarter, according to the Real Estate Board of New York. If people can’t reduce their taxes it will add to Gotham’s living expenses and could mean less people wanting to relocate to the city—lowering demand for more housing and impacting construction.  

“New York and especially the New York City area is one of the highest areas for state and local taxes,” Wood said. “I think there is going to be a tendency for people to want to move to states that don’t have high state taxes, and with that, many corporations may think in order to get a good labor pool they’ll want to move their offices to those low-tax states.”

He added: “I personally think that people are going to have to stay focused on solutions to that problem, because it could have long-term adverse effects on the real estate industry and the construction industry in New York.”


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

Under Construction: How Tishman Speyer Is Building an Office Tower Over Macy’s in BK

Tishman Speyer and partner HNA Group are trying to blur the lines between Art Deco architecture and contemporary glass with their new office project in Downtown Brooklyn called The Wheeler.

The project involves adding a new 10-story, office building above the existing four-story French Mansard building at 422 Fulton Street, constructed by Brooklyn developer by Andrew Wheeler in 1870 (where it gets its name). The new structure will be tied to the two adjacent 10-story Art Deco buildings. Macy’s—which owned the three buildings in their entirety—will continue to occupy the first four floors of the project; the upper floors will be a mixture of old and new and comprise 620,000 square feet. (The building will also have an entrance at 181 Livingston Street).

“We have been trying to create [a seamless] footprint so you won’t know that you are on an amalgamation of different floors,” Chris Shehadeh, a Tishman Speyer senior managing director who oversees New York, told Commercial Observer. “We are putting in a new core that will thread the three different buildings, and then we will go back and take out the old cores. What we will be left with is a new core and wide-open floor plates where you don’t have a reminisce of each of the individual buildings.”

To preserve the historical pedigree, JRM Construction has removed cast iron from the facade, which will be repaired and replaced. Moreover, construction workers will also renovate the masonry to the main Macy’s brick buildings.

A gut renovation is currently underway with demolition teams clearing the interiors of the existing buildings. Workers will then join those properties to the new building.

The first four office floors will have 90,000-square-foot floor plates with loft-like 16-foot high ceilings. The remaining six floors will range in size from 34,000 square feet to 60,000 square feet. The project is expected to be completed in mid-2019.

Tishman Speyer declined to disclose the construction costs to CO, but the developer took a $194 million construction loan from Bank of the Ozarks in January. And it paid $170 million to Macy’s for the top six floors of its properties. Macy’s still owns the bottom four floors. (Tishman Speyer also will give Macy’s another $100 million to renovate the retail space.)

The developer is also hoping to blend East Coast and West Coast vibes.

The developer brought in Los Angeles-based architect Joey Shimoda of the namesake Shimoda Design Group, which Tishman Speyer worked with for an office complex at Playa Vista in Los Angeles. This will be Shimoda’s first project in New York City. (Perkins Eastman is the architect of record.)

Shimoda’s design puts an emphasis on modern, open-plan spaces with loads of glass so light can flood the floors. And each floor will be open plan, which will attract a mix of companies to the office tower. He also crafted 11 terraces via setbacks and a roof with a lawn and seating. In total, the property will feature an acre of outdoor space.

The rooftop space will be open to all tenants for events as well as common space to relax and enjoy the views 276 feet off the ground, such as the Statue of Liberty, the Manhattan skyline and the Brooklyn Bridge.

“We are trying to stay first and foremost true to the Brooklyn neighborhood feel and vibe while introducing modern and contemporary office amenities and design,” Shehadeh said. “I think the goal is to marry those two, and Joey is the perfect architect to do that.”


Source: commercial

Is the Chinese Government Turning Off NYC’s Flow of Overseas Real Estate Cash?

When Chinese officials detained Wu Xiaohui, the chairman of Chinese insurance giant Anbang, in June, investors saw the writing on the wall: The Chinese government was no longer going to tolerate splashy overseas real estate purchases and risky investments.

Anbang suspended Xiaohui a few days later, after the The Wall Street Journal and Financial Times reported that the high-flying dealmaker was being investigated for money laundering, bribery and other financial crimes.

The company is just the latest target of President Xi Jinping’s anti-corruption campaign, which swept up billionaire tycoon Xiao Jianhua and Xiang Junbo, the chairman of the China Insurance Regulatory Commission, earlier this year.

The corruption investigations arrived as Chinese banking regulators began scrutinizing the activities of HNA Group, Dalian Wanda Group, Fosun International and Anbang. All four have made their mark on New York City with massive, debt-funded purchases of high-profile hotel and office buildings.

Fosun led the way by buying Chase Manhattan Plaza—now 28 Liberty Street—for $725 million in October 2013.

Anbang smashed sales records when it shelled out $1.95 billion for the Waldorf Astoria hotel in February 2015. Then over a few days in March 2016, it bought the Strategic Hotels & Resorts portfolio from Blackstone Group for $5.4 billion and made a $14 billion bid for Starwood Hotels & Resorts.

HNA Group began grabbing New York City headlines in May with its $2.2 billion purchase of 245 Park Avenue, a 1.8 million-square-foot office tower between East 46th and East 47th Streets that ultimately traded for $1,227 a square foot.

In the first half of 2017, Chinese firms pumped $2.6 billion worth of investment into New York City, according to CBRE. That means HNA’s Park Avenue gamble makes up the bulk of Chinese investment sales in New York City for this year so far.

Last month, China’s State Council formalized restrictions on foreign investments. Most real estate purchases abroad are “restricted,” which means the Chinese government will have to approve and vet them thoroughly. A restricted foreign property purchase for more than $1 million is going to require additional scrutiny from the country’s regulators, said Samantha Ahuja, an attorney and partner at law firm Morris, Manning & Martin.

“The essence behind this decision was to curb irrational acquisitions in real estate and entertainment,” Ahuja explained, noting that some Chinese cash will now flow into “permitted” overseas investment categories, including agriculture, industrial property, mining, energy, oil and gas exploration and fisheries.

“[Beijing] was concerned that these Chinese entities were just buying for the sake of buying and that they weren’t considering economics, that they were overpaying, and that it was giving Chinese investment a bad name,” a source familiar with the new rules told CO.

But the Chinese government first began cracking down on major overseas purchases sometime in the summer of 2016, according to real estate and finance sources interviewed for this article. Beijing, concerned about the country’s depleted foreign exchange reserves, began issuing formal limits on cash transfers at the end of last year. Banks now have to report all domestic and overseas cash transactions of more than 50,000 yuan ($7,201) or, if in U.S. dollars, $10,000. That reinforced an existing limit, which prevents Chinese citizens from sending more than $50,000 abroad in a year.

Suddenly, flush firms like Anbang began to get cold feet about New York City real estate.

In March, the insurance conglomerate pulled out of talks to invest $400 million to redevelop Jared Kushner’s 666 Fifth Avenue office tower, as part of an ambitious $4 billion plan to construct a new condo and retail building on the site.

Similarly, in July sources told the Journal that HNA Group, which spent $6.5 billion acquiring a 25 percent stake in Hilton Worldwide Holdings last October, was “drastically slowing down its deal-making.”

That suggestion might be a little overblown. A real estate player close to the airline and hotel conglomerate claims the company is playing a little safer, but it hasn’t stopped looking for investments in the U.S.

“They haven’t told us anything other than business as usual,” said MHP Real Estate Services’ Principal and Chief Operating Officer David Sturner, whose company partnered with HNA on deals to acquire 850 Third Avenue and 1180 Avenue of the Americas. “No one’s come to us and said, ‘Slow down,’ or ‘Don’t slow down.’ I think if they see a good deal, they’ll try to execute.”

In general, experts predict that the flow of Chinese capital may slow, but it won’t completely dry up.

“We see a material fall in Chinese capital coming to the United States for the immediate future,” explained Spencer Levy, CBRE’s head of Americas research. “China is really trying to stabilize its currency and will be able to loosen the reins, so to speak, once it increases the amount of foreign currency reserves in the country.”

Levy expects that “there’s going to be some transaction flow, but less of it and smaller.”

Chinese cash could end up flowing to cheaper markets in the U.S., where companies can scoop up big sites without putting down a billion dollars, Levy predicted. Last November, HNA purchased a 51-story office and retail complex known as City Center in downtown Minneapolis for $315 million. More purchases like City Center could be in the works, he said.

Jerome Sanzo, the head of real estate finance at the Industrial and Commercial Bank of China, said we might not see big trophy purchases, but some Chinese firms—particularly ones with U.S. subsidiaries who already have cash flow here—will continue to scour America for deals.

“You’re not likely to see another major investment or purchase of a large hotel for $2 billion or purchase of a large Park Avenue tower for over $2 billion,” Sanzo said. “But in medium-sized amounts, you will see some continued investment here. That’s not just in New York; that’s all over the country.”

He noted that investors had already begun to pull back over the last year and a half, as the Chinese government introduced informal controls that hampered companies’ ability to pull cash out of the country.

And the new regulations will probably dampen New York City’s already softening commercial and high-end residential markets. Chinese buyers have already started retreating from New York City’s expensive condos, and that trend will continue as they face hurdles in pulling their money out of China and arranging financing in the U.S.

“Many foreign buyers are all-cash, and if they can’t use cash, they have to get a mortgage, which introduces all sorts of pressures in the commercial and residential markets,” Ahuja said. “I think you’re going to see prices stagnate. It’s going to feel like a major slowdown, but I don’t think it’s going to be anything like 2008.”


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