Catching Up With Hines
Gus Delaporte May 7, 2013, 9 a.m.
Hines has been busy on the investment and development side over the past few months. After breaking ground at 7 Bryant Park in February, officials at the 56-year-old firm announced in March that they would put up for sale its properties at 499 Park Avenue and 425 Lexington, both part of the Hines Core Fund. Tommy Craig, senior managing director in Hines’s New York office, spoke with The Commercial Observer about the firm’s plans to sell these New York office assets and its development of 7 Bryant Park, cautioning: “There is no way that my words could substitute for the work we have done.”
The Commercial Observer: Hines recently announced plans to put its properties at 499 Park Avenue and 425 Lexington Avenue up for sale. Will the capital generated be redeployed into the New York market?
Mr. Craig: The firm is not that formulaic, but certainly within Hines, the opportunity in New York is perceived to be an excellent one. Certainly Hines today is both a development firm and an investment management firm, and I would say our capital relationships clearly have shown that they understand the value and liquidity of a gateway market, New York being foremost among them. We have major projects under way in all of those gateway markets. Some would say that is a build-a-core strategy, and we can build a core on a risk-adjusted basis.
Certainly I would say that, given our target yield at 7 Bryant Park, I would say, real-time, we would expect that plan to be validated. But of course, until there is a sale and until we have leased 7 Bryant Park, the test for that reality is at a different point in time.
Where do you stand in the sales process?
We have seen strong interest. The first round of bids is due April 24, and I would be surprised if we didn’t select a firm or firms with a closing date in the summer, in the month of August. [This interview was conducted the week of April 15, more than a week before the due date.]
Was the decision to sell based at all on the 7 Bryant Park development?
They’re quite unrelated. The investors in the Hines Core Fund really are a distinct group of entities and they, of course, acquired these assets in 2003. They were looking at the significant appreciation since then, and those investors were participating in a commingled fund with other investors and were involved in core assets that we acquired rather than developed. They are very different than investors in a development.
They are unrelated but parallel activities. Both speak to New York as a strong market. We would tend to avoid selling assets unless we identified a strong market opportunity.
What was the motivation for developing 7 Bryant Park?
Pacolet Milliken has owned the site for over 50 years. Hines was selected by Milliken in April 2009 to move forward and create a development program. We were initially selected as a third-party development manager, and the family had identified the property as part of a larger strategy whereby they separated the industrial company from the real estate company. The partners then moved forward and began the demolition.
What’s extraordinary is we got selected at the very bottom of the real estate market and the very bottom of the financial market, and the family had enough of a long-term vision that the time to develop it at the bottom of the market. We got involved in April 2009, and in the summer of 2011 we mended our relationship so we were in a principal relationship and executed a ground lease in July to get definitive site control. We gave Milliken the opportunity to become a partner.
Approximately 12 months later, we completed financing with J.P. Morgan Asset Management. In that time, we made a fundamental judgment. Do we continue to try to prelease or move forward with a partner on the basis of speculative construction? At 7 Bryant Park, a large user is 250,000 square feet. Our judgment was that those users would respond strongest to a product when it was under way as opposed to putting the project where a major tenant controlled the timing and its fate.
We went out, competitively bid the work, and by year-end of 2012, we had secured a contract with Turner. And we are under construction, keeping in line with the construction plan we had with our partners. We are very pleased with the level of interest in the project. To be clear, we are at the end of the beginning, not the beginning of the end.
Could you elaborate on some of the architectural details of the building?
This is architect Pei Cobb’s second commercial building in Manhattan. The prior one was 200 West Street, the Goldman Sachs building. To be clear, we think there are many things that differentiate the building. The opportunity to be a major tenant, the opportunity to, in many ways, identify through branding with the signage opportunities.
It has the kind of infrastructure you would associate with trading operations or higher-density occupancy. Obviously, those floors will look directly out on Bryant Park, and 100 percent of the users on those floors will have visual connectivity with each other. The nature of the space is very much in keeping with the evolving requirements of the modern workplace: collaboration and higher density.
The ceilings are 10 feet high. The module on the exterior wall is also 10 feet. There is more light and deeper penetration of that light.
There will be an outdoor terrace on the 10th floor as well as a rooftop penthouse with outdoor space. We really took the infrastructure and combined it with aspects of residential projects that had the most appeal, the role of daylight and outdoor space.
We also have plans for a restaurant on the ground floor. We think a high-end destination restaurant is going to be very appealing facing Bryant Park.
What types of tenants are you targeting?
The tenants most interested are those interested in a new and better workplace. Users across the spectrum of technology, law, financial services and professional services—all those user types are speaking with us. We are not targeting by industry, I should be clear about that.
Users will recognize the appeal of Bryant Park for their work force. The location is equidistant from Penn Station and Grand Central and is well served by the subway system. The location also puts it right at the line where it’s convenient to the residential neighborhoods both south and north. It is also convenient to commuters. To many users the central location will appeal.
Central Park, for the most part, is dominated by residential buildings. Bryant Park now almost has a square around it. It is the open space that the Midtown market uses most intensively. I would think it would be a big recruiting advantage.
What is the status of the leasing process?
We are in active discussions with a number of prospects. We are hopeful, but that is all I can say. The product has been well received.
What is the timeline for construction and leasing?
We expect to get a certificate of occupancy in February of 2015, on budget. Most of this year will be dominated by work below grade, getting out of the hole and establishing the concrete core. We are expecting by year-end that the major trades, the work below grade, will be complete. The core will be well on its way, and by year-end we hope to start the structural steel erection. All the other trades, the installation of systems such as elevators, will follow shortly after. We have a very good sequence of work all through 2014.
What is your outlook for the New York market?
We have other projects in New York. Largely, we experience the world through the projects we are doing. At 56 Leonard, where we are the third-party developer, we have completed the contract, closed the loan and had an extraordinary level of sales activity, close to 50 percent. Obviously, we are very encouraged by high-end residential.
We are doing everything we can to finalize financing on the MoMa Tower so we can move that along as well. We expect high-end residential to continue to be a place we look for opportunity.
New York is a favored market. You look at the favored few and New York is at the head of that. Right now, we are more focused on development than acquisition, but I would expect, given the performance of assets, we will want to diversify and do more.