Born in the Great Depression, Reborn in the Great Recession
Lysandra Ohrstrom Oct. 6, 2009, 1:36 p.m.
He is known as one of the most prolific Beaux-Arts architects of the Jazz Age by critics, as well as the designer of the Chrysler Building. Some may even remember him as a “Doctor of Altitude,” a title he was awarded by The Architect magazine in 1929, before the Great Depression pushed Art Deco skyscrapers out of vogue. But William Van Alen is not often remembered as a real estate investor, even though he bought properties across Manhattan’s East Side during the mid-1920s.
One of the wisest, most recession-proof acquisitions Van Alen made might be the four plots of land on the southeast corner of Lexington Avenue and 41st Street, now occupied by a 27-story office building designed by Moore and Landsiedel.
Artbilt Realty Corp., the real estate company Van Alen shared with Charles L. Frasier, leased a pair of three-story residential buildings at 370 and 372 Lexington Avenue for $25,000, The New York Times reported on Feb. 26, 1925. Maurice Wertheim, who brokered at least five deals for Van Alen between 1924 and 1927, according to The Times, announced that Artbilt planned to combine the two new lots with two adjacent parcels it already owned and build an office building.
While the 301,000-square-foot building was under construction, Wertheim brokered several other transactions for Van Alen in midtown. Meanwhile, his nearly 20-year marriage to the daughter of Henry Morgenthau, the former Turkish ambassador and later Franklin Roosevelt’s Treasury secretary, was unraveling. Alma Wertheim filed for divorce in Reno, Nev., on Dec. 22, 1929, on the grounds that her “artistic temperament” and her husband’s financial desires were “incompatible,” according to dozens of stories published in newspapers then. “Mrs. Wertheim charged her husband with mental cruelty,” the Associated Press reported on Dec. 26. “She said he showed no appreciation of her feelings but was absorbed entirely in his business. … He sought to dominate her, she said, and at times gave way to outbursts of temper.”
The Wertheims finalized their divorce just over two months after the stock market crash that triggered the Great Depression. The following spring, in 1930, 370 Lexington opened for occupancy.
Within one month, Cushman & Wakefield announced that the building was 66 percent occupied, according to the May 10, 1930, Wall Street Journal. The Delano and Aldrich architecture firm leased 4,500 square feet on the 11th floor, joining tenants like the Blaker Advertising Agency and the Department of Justice, which left its federal office building in Lower Manhattan.
THE ECONOMY IN 1930 was not so different than the climate in September 2008, when Sherwood Equities took over management and leasing of 370 Lexington.
Sherwood and the SBC Master Pension Trust managed by JP Morgan bought 370 Lexington from Broad Street Development for $155 million and refinanced seven different loans dating back to 1996, with an $80 million mortgage from the Connecticut General Life Insurance Corp.
A joint venture between Broad Street Development and the Dallas-based private-equity fund Crow Holdings Realty bought the building from Jones LaSalle in April 2006 for $97.2 million, in what was its fifth acquisition in less than two years.
Though Sherwood Equities was not impervious to the slump, CEO Jeffrey Katz believes that 370 Lexington is more resistant to economic fluctuations because it caters to an underserved market of tenants.
“Whether you were renting 5,000 square feet or 500 square feet, even if people needed to move, they were waiting for the market to hit bottom,” he told The Commercial Observer. “But we found that the demand for high-quality small space in the Grand Central district is stronger than what you’re hearing about for the rest of the market … When you are looking for a [220- to 300-square-foot] space, you’re really relegated to what’s left over.
“One reason we’ve bought it,” Mr. Katz added, “is because it is impossible to make more buildings like this. The break-even number [to build a new office building in midtown] is $100 per square foot. We are dealing with a commodity, the supply of which cannot be increased at that price.”
Under Broad Street’s management, occupancy rose from 75 percent to 92 percent. In 2007, rental income was $10,760,648, according to PropertyShark. Despite the stagnant leasing market, Sherwood invested $24 million in capital improvements to woo new tenants in the underserved 3,000- to 1,000-square-foot market. Sherwood upgraded the building’s retail signage; polished the limestone facade; installed a new ventilation system on the ground floor to eradicate the smell of baking bread that wafted from Zaro’s Breadbasket and Subway into the lobby; and successfully campaigned to have an unsightly pay phone outside the main entrance moved around the block.
THE CHANGES HAVE ALREADY paid dividends.
“I think because we cater to the smaller user, we’re actually benefiting from all the downsizing that’s occurring out there in the marketplace,” said Jill Burrowes, 370 Lexington’s on-site broker. She was sitting in the conference room of a 1,600-square-foot unit that was recently vacated, ahead of schedule, by a defunct advertising agency. “All these large firms that are downsizing or are paying $90-per-square-foot rent with views overlooking Central Park and are now more concentrated on self-preservation, when they see a quality building and we’re charging $45 or $50, it’s just a more logical process.”
Sherwood has leased a total of 46,000 square feet, the majority of which are new leases, since buying the property in September 2008. The asking rents are in the mid-$50s, but Ms. Burrowes said deals are closing in the mid-$40s.
On Sept. 28, they closed their 22nd lease of the past 12 months. The Zacchia Law Group P.C. will in December relocate from 441 Lexington Avenue to a 1,327-square-foot unit on, oddly enough, the 22nd floor. Other new leases signed since last September include the legal department of Napster—yes, that one—for 1,800 square feet on the 19th floor in December; Heineken Americas on the 24th floor; and the hedge fund service provider Meridian Fund Services, which renewed and nearly doubled its size by expanding into an additional 1,542 square feet of prebuilt space, for a total of 4,890 square feet.
The occupancy rate is currently 93 percent, but Mr. Katz, Sherwood’s CEO, has noticed that tenants who waited on the sidelines for the leasing market to bottom out last year have become increasingly anxious to close long-term deals before prices rebound.
“Brokers are telling their clients we’ve hit bottom and now there is a sense that you’ve got to move now because things might be much more expensive a year from now,” he said. “The way that deals are happening now are a little more favorable to the landlord. I hate to get ahead of things and say it’s a landlord’s market, but things are shifting that way.”