Trophy Office Towers Changing Hands In New York Again As Market Goes UP

The New York commercial property market is heating up again in selected areas, with two important new transactions just announced.
In the first, the families of Chinese real estate developer Zhang Xin and Brazil’s Joseph Safra banking empire are reported to have purchased a 40 percent interest in the General Motors Building for a price reported to be $1.4 billion which would value the whole building therefore at around $3.4 billion.

Zhang is the billionaire founder and Chief Executive Officer of Soho China, which she co-founded in 1995 with her husband Pan Shiyi, who is Chairman of the firm. Soho is said to be the largest office developer in Beijing’s central business district. Her family and M. Safra & Co., the New York-based investment firm of the Brazilian Safra family, reportedly bought the stake through an entity called Sungate Trust which is controlled by Soho. The building last changed hands in 2008 for $2.8 million so there is a moderate 20% profit for the sellers after a five year hold period.
Also, in another deal, the private equity group Carlyle Group LP sold its nearby 600, 000 sq ft 650 Madison Avenue office and retail block, which was built in 1987, to a joint venture between investment firm Highgate Holdings, and retail developer Crown Acquisitions. The deal is reported to be priced at $1.3 billion. In 2008, the private equity firm had acquired the 27 story glass-fronted tower for $680 million so it appears to have cleared a tidy profit, and doubled the valuation with this deal.

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In addition to office space, both the GM Building and 650 Madison contain plenty of retail space and both are located in the prime mid-town retail core of the city. Rents for retail space can often be more than triple those for office space, especially when percentage rents kick in, giving both buildings plenty of potential for premium valuation. Down-town at the World Trade Centre, in contrast, vacancies for the new pure office towers going up there still remain substantial. Still, these deals underscore how the commercial property market is benefiting from foreign investors flocking again to U.S. real estate, attracted above all by stability, and also possible higher yields than in their home markets.
Prices of some of the top Manhattan office buildings are reported to have accordingly regained most, if not all, of what they lost in the financial crisis. Both buildings changed hands last time round after the onset of recession as owners sought liquidity.

Chinese investment in U.S. real estate, already on the rise over the past four years, could now increase further therefore, just as with the Japanese before them, and the Europeans before them. Historically after each business cycle implodes savvy Americans then buy them back again, often at lower prices, until the next round….

International style

The GM Building in New York is one of the most iconic landmark properties in New York City at the corner of 58th Street and Fifth Avenue. The tower opened in 1968 as the New York headquarters for General Motors until they retreated to Detroit in the nineteen nineties. The almost 2 million square foot 59 story office tower, which includes retail space on its pavilion and lower floor areas, is located at 767 Fifth Avenue and occupies a full city block beside the south east corner of Central Park, and just across the street from the Plaza Hotel.

The white marble and glass GM building, built approximately in the international style that was made de rigeur by the Seagram building before it, is today also home to the famous Apple Cube, which is the entrance to its sub-plaza level Apple Store. The ground floor is where the FAO Schwarz toy store is located in the lobby- a store that has delighted generations of young children since it opened in 1986. That lobby also used to be the New York showroom for GM’s cars. In May 2013 General Motors announced that their Corporate Treasurer’s department, which had clung stubbornly to its New York location in order to be close to the financial community, would also relocate to Detroit thus finally abandoning its administrative New York presence completely.

The building reflects the modern history of New York and has changed ownership several times since it was built. It was once even owned by Donald Trump, who was responsible for filling in its originally-sunken lower plaza after the previous owner started the process, which then became the Apple Store. It last sold in 2008 for an estimated $2.8 billion to a joint venture between Boston Properties, Goldman Sachs Real Estate Opportunities Fund (backed by funds from Kuwait and Qatar), and Meraas Capital (a Dubai based real estate private equity firm). The sale today of 40% therefore represents just a 21% increase in value after a 5 year hold period; steady but not speculative returns for what is thought to be perhaps new York’s best managed and most profitably rented office building (according to The Real Deal, a New York real estate blog).
Boston Properties continues to hold the remaining 60% of the property; Boston Properties is a self-administered and self-managed real estate investment trust (REIT), and is one of the largest owners, managers and developers of Class A office properties in the United States, with a significant presence in Boston, New York, Princeton, San Francisco and Washington, DC. The Company was founded in 1970 by Mort Zuckerman and Edward Linde in Boston, where it maintains its headquarters. Boston Properties became a public company in June 1997 and is traded on the New York Stock Exchange.

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About Mortimer B. Zuckerman