Even before the Blackstone Group won a contentious bidding war for 1140 Avenue of the Americas, the prewar office building was in the midst of a multimillion-dollar restoration project in early 2011.
Nearly 30 firms were fighting for the right to own the $116 million nonperforming note held by Laurence Gluck’s Stellar Management and partner Rockpoint Group, which bought 1140 Avenue of the Americas from SL Green Realty Corp. for $97.5 million in 2006.
In the end, it was not a REIT but a private equity group that muscled its way past the competition to purchase the note.
The Blackstone Group, a private equity firm co-founded by chief executive Stephen Schwarzman, paid around $100 million for the note, thus giving it control of the leasehold for the 22-story, 231,000-square-foot building. The firm had predicted a recovery in the commercial real estate market and set out an aggressive investment strategy, picking up firms like Centro Properties Group, an owner of shopping centers across the United States, for billions of dollars.
By purchasing the note on 1140 Avenue of the Americas, Blackstone inherited a partially completed (but still modernized) office tower that came complete with new features: a new glass curtain wall and storefront; a brand new lobby, new elevator cabs and mechanicals, new generators. Everything was new … and largely empty.
The building was roughly 75 percent vacant by the time Blackstone assumed its leasehold, said those familiar with the property. Add in that the building was only half-finished, it was in the precise state that the private equity giant wanted it to be in when it took over.
“We essentially took control of a project that was in a partial state of completion in terms of a major renovation, and we completed it within four or five months of taking the keys,” said Josh Glick, vice president of leasing for Equity Office, a real estate firm that was purchased by Blackstone for $39 billion in 2007.
This is hardly a new tactic by Blackstone. The firm had assumed ownership of 1095 Avenue of the Americas when it was halfway through its renovation. Blackstone then completed the building’s remodeling, turning the building into a Class A office tower.
The firm hired MKDA, an architectural firm, to embark upon a comprehensive prebuilt program to accompany 1095 Avenue of the America’s exterior refurbishment. The prebuilts ranged in size from 3,500 to 12,000 square feet and offered open space with abundant sunlight and windows. It is now completely leased, save for a 4,000-square-foot office space in the building’s office tower currently on the market.
But with 1140 Avenue of the Americas, there was a lot of raw space on Blackstone’s hands. The vacant floors in the building had yet to be demolished. The building’s previous owners had started to remodel the vacant floors with their own prebuilt style in mind. Blackstone used its newfound ownership to scrap those prebuilts, demolishing most floors and building new prebuilts to “reflect what we thought the positives were of the building,” Mr. Glick said.
Among the positives the team listed was the renovation itself. The prewar building, which had been built in 1926, received a $45 million renovation in 2010. Designed by Iu+Bibliowicz architects, its facade was stripped bare of a concrete exterior, transforming it into a new glass and aluminum curtain wall on the west and south sides of 44th Street and the Avenue of the Americas.
Blackstone decided that the best way to represent the kind of prebuilt it wanted to offer was to build up an entire floor. By the end of November, the firm worked with designer Tom Vecchione and again with architectural firm MKDA to transform the entire 12th floor, sized at 12,750 square feet, to its preferred style of prebuilt: high ceilings, ample natural light and efficient floor plates. In other words, it emulated the sleek, clean design of an Apple retail space, Mr. Glick said.
“We wanted people to get off the elevator, step off the elevator, and say ‘I can see from end to end of the floor,’” he said.
The prebuilts were redesigned as “boutique floorplates.” Having the space built as such could give a boutique financial firm its own floor, along with all the attendant amenities. The floors were also designed in a “super efficient” manner, so that whether a hedge fund or a law firm wants to take the space, each new tenant could fit more people on the floors than they could in other buildings.
“Unlike all of its neighbors, where you have 30,000 square feet plus or minus up and down Sixth Avenue from both parks, a 12,000-square-foot tenant that wants its own identity can have its own floor to itself,” Mr. Glick said.
Each prospective tenant brought to the building got the sense of the style of space that could be theirs for the next 10 years, hopefully catching a glimpse of the cleanness of the design and the understated, classy tone to its look.
“Without that, we felt that people would be relying on renderings and that kind of stuff, and not necessarily knowing how it’s going to turn out,” Mr. Glick said.
This is not to suggest that each tenant was forbidden from custom-tailoring its office space to its own liking.
“Ownership has been very flexible in designing and allowing these tenants to design that work for them specifically,” said Douglas Neye, a senior vice president at Jones Lang LaSalle who represented Blackstone in the lease transaction.
In order to feel more at home, Blackstone and Equity Office moved its New York asset management office to the 12th floor for a short-term lease. Blackstone regularly moves one of its branches to the buildings it owns: It had at least two offices apiece in 1095 Avenue of the Americas and 1065 Avenue of the Americas.
“We know a building best when we live in it,” Mr. Glick said. “We’ll re-sign a lease for [the 12th floor] tomorrow, or even today, and move ourselves again.”
This is nothing new for Blackstone. The firm had moved out of its 1065 Avenue of the Americas space when investment research firm Morningstar took a fancy to it.
“They showed up and said, ‘We really like your offices—will you move?’” Mr. Glick recalled. “We said, ‘Sure, as soon as you sign a lease.’” The firm moved out of its space within three days after Morningstar signed its lease.
Although Waterfall Asset Management wasn’t exactly kicking Blackstone and Equity Office out of its 12th-floor workspace, the firm was intrigued by the boutique feel of the building and the prebuilt office.
Waterfall Asset Management is an investment firm that was founded in 2005 by Tom Capasse and Jack Ross, two Merrill Lynch alumni who had launched the bank’s Asset Backed Securities desk in the 1980s, according to the firm’s Web site.
Waterfall was looking to move out of its current office, of about 6,500 square feet, on 1185 Avenue of the Americas, where it was sharing space with another firm. Waterfall was growing in head count and needed more room quickly.
Chris Kraus and Ryan Masiello, both of Jones Lang LaSalle, took their client to 1140 Avenue of the Americas to scope out the prebuilt space and the new renovations to the building. Right off the bat, Waterfall noticed what Blackstone wanted their eyes to catch: the cleanness of the new lobby and the facade, the simplicity of the prebuilt and the possibility of having its own floor—something that is hard for a 13,000-square-foot tenant to find in the Midtown office market.
“They were looking to establish a presence and an image, and having a full floor with the right finishes that are consistent with the image that they were looking to establish, it all fit well for them,” said Mr. Neye, who worked alongside Jones Lang LaSalle colleagues Michael Shenot and Ryan Masiello in representing ownership in the lease transaction.
There were 12,750 square feet of raw office space on the seventh floor of the building that could be transformed into turnkey space for Waterfall.
The average rents range from the $70s in the lower portion of the building to the $80s for offices on the higher floors. Waterfall saw good value and high quality, which eventually led the group to sign a 10-year lease for the entire seventh floor. The firm is expected to move into turnkey space inside the building sometime in August.
“It allowed them to focus on their business while the landlord took responsibility for building a space for them,” Mr. Kraus said.
Should Waterfall ever need more space in the building, the Blackstone and Equity Office team would be more than happy to give them their own office.
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