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Midtown’s Biggest Fans May Be Foreign Buyers
FOR many of New York’s real estate players, Labor Day weekend was not the usual end-of-summer respite. The subprime mortgage woes had spread from the residential market to other areas, freezing credit, prompting layoffs at financial companies and threatening to derail the highflying Manhattan commercial market.
The extent of the damage — which stemmed from years of easy credit extended to high-risk, or subprime, borrowers — will become clearer as the market shakes out in coming months. But there is some reason for optimism: The credit crunch is likely to bring a much-needed break for an overheated market. What’s more, it paves the way for a new class of deep-pocketed investors who have, until recently, watched the action from the sidelines.
In particular, foreign investors who, buoyed by the strong economies and currencies in their own countries, now see an opportunity to scoop up coveted Manhattan real estate.
“The global capital markets are flush with strong currency buyers who see our shores as a relative bargain,” said Douglas Harmon, the senior managing director at Eastdil Secured, a real estate investment bank based in New York.
Foreign investors, according to Mr. Harmon and others in the industry, are generally more conservative in their financing, putting up more cash and relying less on debt. They also tend to be longer-term investors. By contrast, big domestic buyers, including the Blackstone Group, Tishman Speyer and Harry Macklowe, have used heavy levels of debt — up to 95 percent of the purchase price, in some cases — and relied on a steep increase in real estate prices and rents to justify the deals.
Foreign investment has picked up sharply. In May, there was the $1.18 billion sale of the Deutsche Bank building at 60 Wall Street to the Paramount Group of Germany.
In June, the Italian real estate investor Luigi Zunino made a foray into the New York market with the purchase of 660 Madison Avenue, the stylish office tower atop Barneys New York, for $375 million. At $1,488 a square foot, according to Mr. Harmon, it set a record for Manhattan commercial real estate. The deal, which closed on Aug. 30, was leveraged at a more modest 70 percent, with Deutsche Bank providing the financing, according to Mr. Harmon, who was the exclusive adviser for the transaction. That record was broken just four weeks later, when Somerset Partners, backed by European investors, paid $510 million — or just under $1,600 a square foot — for a 33-story office tower at 450 Park Avenue, according to Mr. Harmon, who also advised that deal. Somerset Partners assumed an existing commercial mortgage-backed security loan of $175 million, and used its own equity for the balance.
Israeli investors were also active. An Israeli-led investor group paid $648 million for a 70 percent stake in the Lipstick Building, Philip Johnson's landmark at 885 Third Avenue near 53rd Street. And Africa Israel USA, a subsidiary of an Israel-based international holding and investment company, bought the former headquarters of The New York Times Company on West 43rd Street from Tishman Speyer for $525 million, three times the $175 million that Tishman Speyer paid in November 2004. Africa Israel also bought the Clock Tower building in Madison Square Park for $200 million and a portion of the Apthorp Apartments on the Upper West Side for $426 million.
In late August, the Dubai investment company Istithmar beat out the Fast Retailing Company, the Asian apparel retailer, with a $942.3 million bid for Barneys New York, being sold by Jones New York.
All told, there were 46 transactions totaling $5.27 billion by foreign buyers of commercial real estate in Manhattan through August, up from 28 for all of 2006, according to Real Capital Analytics in New York. “The global economic expansion is creating a tremendous amount of surplus capital,” said Dan Fasulo, a managing director of Real Capital Analytics, which tracks real estate deals. Much of that capital, he said, “wants and needs to be here.”
The United States is considered one of the most transparent and stable markets in the world, even given the current credit shakeup, with Midtown Manhattan, in particular, long an attraction for foreign buyers.
“People want a core, stable place to put their money,” said Stephen Collins, the managing director of Jones Lang LaSalle’s international capital group in the company’s Washington office.
Real estate professionals agree that the underlying fundamentals of the New York commercial market are still strong. Vacancy rates are near historic lows, at 5.3 percent, according to Cushman & Wakefield, with limited supply and development potential in prime locations. And while Manhattan rents have become painfully high for many businesses, they still lag behind those of several of the world’s major cities, like London, Tokyo and Hong Kong. In London, for example, office space downtown can rent for as much as £140 a square foot, or roughly $270. The average price per square foot in the West End of London by the end of the second quarter was $243, versus $79.85 a square foot for Midtown Manhattan, according to CB Richard Ellis.
“Foreign investors continue to view New York as a prime investment site, credit crunch or no credit crunch,” said Bruce S. Schonbraun, the managing partner of the Schonbraun McCann Group, a real estate consulting firm based in New York.
Then there is the psychological element of owning a storied property. “It’s the Monopoly board,” said R. Stuart Gross, the executive managing director at Eastern Consolidated, a real estate investment services company in New York. “Some of that mentality prevails.”
Real estate professionals expect continuing increases in the most desirable New York City neighborhoods, especially Midtown Manhattan, though there is increased concern that a credit-related downturn in the financial sector could hurt the New York economy. Layoffs at financial services companies spiked nationwide in August, with more than 10,000 job cuts announced in the New York and New Jersey region alone, according to Challenger, Gray & Christmas, the executive employment firm.
Still, foreign investors are gearing up for their New York moment. Mr. Collins of Jones Lang LaSalle said that he and his colleagues spent much of August fielding calls from Irish, German and Japanese investors interested in American real estate. “At the end of the day, it’s still New York, the financial capital of the world,” he said. “With supply constrained, we will see some continued run-up” of prices.
Matt M. Bronfman, a managing director at Jamestown Properties, a real estate company based in Atlanta that raises money from German investors, said he also saw “more opportunities for guys like us who are going to put plenty of cash into deals and weren’t relying on 95 percent debt.”
“We still love the New York story,” he said.
Source URL: www.nytimes.com
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