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May 2010

May 2010 » Market Analysis » NY New Developments

May 2010 New York New Developments

New Developments

Of the many players featured in the high-stakes drama unfolding at Stuyvesant Town and Peter Cooper Village, David Tepper, who has bought more than $800 million worth of controlling bonds at the property over the last 18 months, is proving to be one of the most volatile and polarizing. Tepper took legal action to guide the distressed property to his liking. But his attitude toward Stuyvesant Town, one of the biggest commercial-deals-gone-sour, is one of optimism. Tepper sees an opportunity for bankruptcy and restructuring, a move he believes would save millions.

The city's Economic Development Corp. issued two requests for proposals for the pavilion and outdoor spaces along the planned Downtown East River waterfront. Three pavilions are up for grabs in the Pier 15 commercial and Maiden Lane pavilion and in the Pier 15 maritime pavilion and could be used as recreation or market space, or as a food and beverage stand. The Pier 15 commercial pavilion will be a 3,500-square-foot space at the intersection of South Street and Maiden Lane, below the FDR Drive, and the 1,000-square-foot Maiden Lane pavilion is already under construction. The Pier 15 maritime pavilion will contain 2,250 square feet.

The Brooklyn Bridge is to undergo a $500 million renovation project, including a lead paint removal. The effort is set to take about four years and will begin around late May or early June.

Two new public school buildings between 56th and 57th streets are to be constructed with the help of $53 million in city-backed bonds. However, the Department of Environmental Protection's plans to build a secondary water main under East 56th Street, from Sutton Place to Third Avenue, and have neighbors panicking about the potential that could come of two simultaneous megaprojects on the block. World Wide Group's is planning a 350-unit luxury apartment tower at 250 East 57th Street and a Whole Foods store in addition to the two schools. The plans for the water main are not final and work would not begin until 2013.

New York University has plans to start expansion projects on two sites as part of its goal to add 2 million square feet of space to its campus in Washington Square. The plans include a plan to build on Governors Island, adding around 240,000 square feet of development. The two sites would be between West 3rd and Houston streets, and Mercer Street and La Guardia Place. The plans include more student housing, as the school aims to up the percentage of students in housing.

The Macy's flagship store at 151 West 34th Street on Seventh Avenue is considering a major overhaul, including a renovation of the sales floors and the 34th Street entrance. The cosmetic update for the 108-year-old Herald Square mainstay had been in the works for a long time, but the recession put the effort on hold.

Japanese retailer Uniqlo has snagged 89,000 square feet at 666 Fifth Avenue's former Brooks Brothers space for $300 million over 15 years. Uniqlo is Japan's largest clothier, and also has a location in Soho, will pay roughly $20 million per year for the lease on what will be its New York flagship.

Lehman Brothers plans to recover $12 billion from its real estate assets, as it liquidates much of its holdings in bankruptcy. The failed investment bank will hold on to certain illiquid assets with plans to sell them within the next five years. Lehman will also recover approximately $17 billion in private equity assets during the same time period.

There will not be a hotel at Bellevue, after officials put the kibosh on plans to transform the one-time psychiatric facility at 462 First Avenue between 26th and 28th streets into a hotel and conference center. The homeless shelter at the Bellevue site has been described by community advocates as sub-standard.

St. Vincent's Hospital, the struggling Greenwich Village institution that for the past several months has been fighting to stay open despite $700 million in debt and $10 million in monthly operating losses. Elective procedures will stop and other services, save an urgent care center, will be phased out over the next few weeks. The vote clears the way for a Chapter 11 filing. If a partner can be found during the bankruptcy process, the urgent care center could remain open.

Mayor Bloomberg is seeking to take over Battery Park City from the state. The city has long had the option to acquire Battery Park City for $1, but after recently gobbling up Governors Island and Brooklyn Bridge Park, Bloomberg has begun to seriously consider pulling a similar coup at the Downtown landfill. It still remains to be seen whether the acquisition would make financial sense for the city.

The recent wave of bank consolidations was to spark mass branch closures throughout the Manhattan market. However, two years later it seems that prediction have not come to pass, despite Chase acquiring Washington Mutual, Wells Fargo acquiring Wachovia and TD taking over Commerce Bank. While banks have halted their expansion, a couple of banks are talking about expanding again, at a more cautious pace. The number of branches in Manhattan rose slightly from 2008 to 2009, up 5 percent to 699.

The stretch of 57th Street between Broadway and Eighth Avenue is to become a haven for discount fashion with the arrival of TJ Maxx. The retail chain has leased 28,000 square feet at 250 West 57th Street, the entire ground floor, second floor and part of the basement for its third Manhattan location. TJ Maxx joins the Gap, which also recently signed a lease renewal on the block.

There are 37 hotels under construction in Manhattan, 32 of which will open this year and five of which are to open next year. A potential oversupply, up from 21 properties in 2009 and 12 in 2008. Two hotels set to open this year are the Mondrian Soho at 150 Lafayette Street and the Nolitan at 30 Kenmare Street. There are seven additional projects that are in the early planning stages, including a hotel at the Hudson Yards West site near the Javits Center.

Japanese retailer Takashimaya is selling the building that houses the department store, 693 Fifth Avenue between 54th and 55th streets. The store is to close in June. It is a 100,000-square-foot, 20-floor building, in which Takashimaya occupies eight floors for its retail operation and offices, offers retail and office space.

The U.S. hotel industry has continued to suffer, despite gains in the luxury sector and in select submarkets. Hotels saw an overall occupancy drop of 3.6 percent to 54.1 percent, and the average daily rate was down 4.4 percent to $94.45. Revenue per available room dropped 7.9 percent to $51.05. Meanwhile, luxury hotels saw improvements: occupancy rose 2.2 percent to 62.8 percent, the average daily rate reached $254.52, up 1.7 percent, and revpar was up 4 percent to $159.78. The New York City market posted the largest occupancy increase, reaching 87 percent. It also had the largest revpar increase, up 26.8 percent to $179.61.

With credit tight and the market on shaky ground, more commercial real estate investors are opting to improve existing properties before diving into new projects. These upgrades can range from retrofitting to repurposing and have cropped up on prominent buildings, including 200 Fifth Avenue, the International Toy Center, and 475 Park Avenue, which is getting a $25 million renovation. The projects can have long-term benefits for investors.

The Macy's Thanksgiving Day Parade will be on Seventh Avenue this year. The parade's future may be further east, and the shift has Times Square hotel and restaurant owners nervous. Large hotels are hesitant to take advance Thanksgiving reservations without the promise of a parade view, and the companies that own Times Square signs cannot set their rates without knowing whether the space will be televised on that day. Last year, the parade moved from Broadway to Seventh Avenue to accommodate the city's new pedestrian plazas, which, at the time, were temporary. The 2009 parade traveled down Seventh Avenue from 59th to 42nd streets, hitting Times Square before veering onto Sixth Avenue and making its way to Herald Square. The Hotel Association of New York City believes moving the parade to Sixth Avenue would mean a projected loss of $40 million in hotel room revenues, given that there are more than twice as many hotels on Seventh Avenue as on Sixth.

Developer Aby Rosen is facing a lawsuit over an alleged breached agreement at 520 Fifth Avenue, the six-story office building he once planned to redevelop along with the two adjoining properties he also owns at 516 and 518 Fifth Avenue. In 2007, Rosen entered a partnership with 520 Fifth Avenue and acquired an $80 million loan for the project. The partners have since defaulted. Now, Tahl-Propp is accusing Rosen of hiding financial information and of breaking his word to terminate leases on the three buildings so that the development project could move forward. Rosen then tried to buy out Tahl-Propp's one-third stake in the project for just $25,278.

With 24 of the 50 floors vacant at 9 West 57th Street are empty, Solow has not reduced rents in the building even with plummeting commercial real estate prices across the city. Solo is asking around $200 per RSF for the highest floors, while nearby buildings are down 18 % from a year ago to $79 a foot. Also, there are Solow's legal tangles. Two years ago, Bank of America, his largest tenant, left its 14 floors at the building for its own new tower.

Istithmar World, the former owner of the W New York Union Square hotel, filed suit to challenge a series of bankruptcy filings by a Philadelphia-based private equity fund that acquired the property in a foreclosure auction. The suit comes after LEM Mezzanine threw the property ownership into Chapter 11 bankruptcy protection to block a senior mezzanine lender from holding another foreclosure auction.

March ushered in a sharp rise in delinquencies on commercial real estate loans in commercial mortgage-backed securities, dashing hopes that February's modest delinquency climb signaled the beginning of the end of the industry's troubles. The percentage of loans that were delinquent by 30 days or more jumped 89 basis points in March, which represents the highest month-over-month increase since the summer of 2009. That number was inflated by roughly 40 points because of the $3 billion Stuyvesant Town loan that is now in foreclosure, but even without the Stuyvesant Town loan, the delinquency rate rose by 0.49 percent in March, more than double the increase seen in February.

Market analysts aren't the only ones pessimistic about commercial property's outlook, which found that the majority of real estate executives expect rents to continue falling through the end of the year. Approximately 76 percent of respondents to the report, which surveyed 327 executives from real estate companies and corporate tenants, said they expect commercial properties to decline through 2010, while 73 percent said they predict asking rents to drop through the end of the year as well. On the upside, E.J. Huntley, a principal with Deliotte, said that the down market may spur some executives to invest. "A recovery of the commercial real estate market from its current contraction will be protracted," Huntley said. "As a result, many commercial real estate executives are contemplating opportunistic investments."

Even in bankruptcy, General Growth Properties is feeling pressure from New York City officials to pony up $500,000 in back rent it allegedly owes for South Street Seaport. The city has filed a court claim demanding payment, but General Growth is disputing the city's stance for as-of-yet unknown reasons and plans to file its response to bankruptcy court soon.

Commercial property sales volume ballooned to $2.35 billion last quarter, up from $1.4 billion in the fourth quarter of 2009. Multi-family property sales volume, in particular, more than doubled. Still, last quarter's dollar volume is a far cry from that of the peak of the market in the second quarter of 2007, when $20 billion in Manhattan commercial properties were sold. The first quarter also saw growth in the city's employment sector, with 2,400 real estate jobs added to the industry.

The top 50 biggest Manhattan commercial property purchases last year ranged in price from $10.6 million to $600 million. The $600 million deal was the purchase of Worldwide Plaza at 825 Eighth Avenue by an investment group led by George Comfort & Sons and RCG Longview from Deutsche Bank. The $10.6 million deal was the sale of a second-floor office condominium at 415 West 13th Street to luxury menswear designer Canali USA.

The first of St. Vincent's Medical Center's creditors has begun receiving payments, as the bankrupt facility begins to sell off portions of its property, according to Crain's. Sun Life Assurance has received around $2.5 million from the sale of 555 Sixth Avenue, better known as the hospital's "Staff House."

Central Park's Police Department precinct, the Gothic cottage that lies equidistant from the East and West sides at 86th Street, is getting a $50 million makeover, according to the Wall Street Journal. But because of firearms and contraband, police officials said, the restored stationhouse will be off-limits to the public once it is completed this fall.

The city is ramping up its efforts to increase public accessibility to its 578 miles of waterfront with a new Waterfront Vision and Enhancement Strategy, or WAVES initiative, announced by Mayor Bloomberg and City Council speaker Christine Quinn earlier this month. The program is aiming to establish a comprehensive plan for waterfront development over the next nine months, following legislation passed by the City Council requiring such a plan.

New York University's School of Continuing and Professional Studies is consolidating its classrooms and offices and moving into the 12-story Fairchild building at 7 East 12th Street, according to Crain's. NYU purchased the 122,000-square-foot property eight years ago for $5.8 million and has been using it for administrative offices since. The Fairchild is now undergoing a renovation and redesign in preparation for the move, which is unrelated to the university's recently-unveiled master expansion plans.

Progress is being made, with several office markets around the globe having shown improvement by the end of 2009. Manhattan office market hobbled through the end of the year, with Class A office space vacancy rates of 8.1 percent by the end of the fourth quarter.

There are at least four buyers trying to back out of their contracts at the Mark Hotel, the landmark property at 25 East 77th Street and Madison Avenue that reopened after a $200 million renovation. Developer Alexico Group had originally planned to finance the makeover by selling 42 suites in the high-end hotel and residences, but scaled back that offering to 10 units due to a lack of demand. Seven contracts have been signed, but only two have closed for a combined $15.7 million.

Lincoln Center is about a month away from unveiling its grass rooftop, which will sit atop the arts center's new high-end restaurant for public use, according to the Westside Independent. The $102.5 million structure will welcome gastronomic celebrity chef Jonathan Benno of Per Se fame when the eatery opens in September. The sod-covered roof, designed by Scofidio + Renfro, has spent the last year germinating, so that the grass will have a fighting chance once the public comes for a visit.

A week after fending off a foreclosure action at 510 Madison Avenue, developers Harry and William Macklowe and real estate investment trust SL Green Realty are facing a lawsuit from another industry heavyweight that wants a piece of a $65 million insurance payment. O'Connor North American Property Partnership, led by Jeremiah O'Connor, filed suit against Macklowe Properties, alleging breach of contract, and SL Green, alleging breach of contract and unjust enrichment for allegedly failing to share the insurance proceeds stemming from the massive 2009 fire at 510 Madison. The 510 Madison building has been embroiled in controversy for years. It was one of the last commercial buildings in the Macklowe Properties portfolio after the developer was forced to sell off the trophy General Motors building in 2008 help pay off billions of dollars in debt.

Stuyvesant Town and Peter Cooper Village might be split in two in a foreclosure sale if the price is right. In a court filing yesterday, Bank of America and special servicer CW Capital Asset Management asked for approval to put the property up for auction in either one or two pieces, Bloomberg reported. Tishman Speyer and BlackRock have been trying to turn over the complex to creditors since defaulting on a $3 billion mortgage in January. Proceeds from the foreclosure sale will go toward covering the senior mortgage -- on which debt has reached $3.66 billion, the filing says -- as well as the litigation costs and late charges.

The Bloomberg administration is advancing a proposal to turn the 34th Street corridor between Herald Square and the Empire State Building into a pedestrian plaza similar to that of Times Square, banning cars from one of the city's most congested areas. A public hearing on the plan was held. Officials from the Department of Transportation met to discuss the proposal, and the city is currently working on environmental and design reviews. The $30 million project could be completed by the end of 2012 with a final design expected in the fall of 2011.

Starwood Capital Group, best known for its W Hotels brand, is planning to up its bid for bankrupt hotel chain Extended Stay. Starwood had been previously outbid by a group of investors who offered $905 million for the 680-property chain. The offer is considered by the investors and by Extended Stay to be the stalking horse bid, meaning other offers would need to exceed it. Extended Stay filed the largest-ever bankruptcy in the hotel industry in June with $7.6 billion in debt. The deadline for proposals is May 17 and an auction is scheduled for May 27.

Third Avenue's Lipstick Building is nearing foreclosure. The Royal Bank of Canada has a $210 million mortgage it holds on the 34-story office tower at 885 Third Avenue, which was purchased by Israel-based Metropolitan Real Estate Investors for $648.5 million in 2007. Facing shortfalls in rent revenue in part because of the 16,000-square-foot trading floor still vacant after Madoff's departure, the owners have since depleted their loan reserves. Madoff had occupied three floors. One of those is now being paid for by the U.S. government; the other has been rented by Surge Trading, which bought Madoff's company. The building owners now pay $11 million per year in rent, which is slated for an increase in 2012.
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