A Man About Midtown South: William Macklowe on the Tech Influx

William Macklowe of William Macklowe Company never misses a daily breakfast meeting with his 6-year-old daughter. Her life-size headshot hung high next to the desk in Mr. Macklowe’s well lit corner office last week when he chatted with The Commercial Observer about his other baby, 386 Park Avenue South, the rest of Midtown South, its exorbitant rents, his familial obligations—and how they changed with the break from his father Harry Macklowe’s firm in 2010. “I just wanted to invest differently, and at the end of the day we wanted different companies,” Mr. Macklowe said. “We’re focused now on more creative, different types of real estate, [not] Midtown, Class A glass and steal.” That’s evident in Mr. Macklowe’s venture into Midtown South, most recently at 386, purchased one year ago for $111.5 million and where MoPub (owned by Twitter), Profero, Impact Republic and Blink Fitness have all signed leases since April. Mr. Macklowe wears jeans and a button-down shirt. It looks like casual Friday, but it’s not. Executives at Midtown South companies “don’t want to meet with someone in a suit,” he said.

IMG_0100How did you approach the recap of 386 Park Avenue South?

Before we got to the prebuilds, we had to make the building appealing to the younger generation—the younger tech, new media, creative tenancy that’s out there. The building in its preexisting, legacy form at acquisition was not it. The building was nice, predecessor ownership had done a nice job, but they didn’t go all the way, so we decided to really tackle it the right way. We brought the entrance out to the street line; we created a new facade at the base of the building, changing the color and changing the image of the building, created a double-width piece of the lobby, brought in a great desk and a really terrific aesthetic environment. When you walk in, you say, “Wow, this feels new, this feels modern, this feels creative.”

We’re also doing full elevator modernizations, all new mechanical systems on each floor, tenant-controlled AC by their hand 24/7. And we’re getting the building to a full LEED certification. When you have the asset to give to the tenant in an appealing form, the next step is to give them the office space. We said that if we could de-risk the construction for tenants it would really accelerate both absorption and rental achievement. So at acquisition we prebuilt three floors right out of the gate, and sure enough they rented right away.

What lessons did you learn about Midtown South from your work at 636 Avenue of the Americas, which you recapitalized and still manage?

It helped to focus our interest in that submarket. We learned a lot about what appeals to tenants in that market, how to create space and how to target it toward the tenants who are driving demand in that sector. We had a lot of fun with 636. It was not a huge building, but there were a lot of complexities to the deal.

We built on top of the roof, we created a penthouse, with a big glass pop-up, there. We were in a landmarked district; we had air rights. Our building wasn’t landmarked, but we still had to go through landmarks. It was everything—windows, elevators, facade, new lobby full mechanical systems, variance courtesy of landmarks to build on the roof [and] even just to remove the fire escape from the building. [We created] a new entrance, making the lobby double-wide, creating a great marquee and really sort of putting our print on the building.

Can you talk about the importance of the prebuilt program at 386 Park Avenue South? 

The concept of the prebuilt has been around forever, but I think it’s really manifested itself more in a sort of 2,000- to 5,000-square-foot size, so we decided to take that concept but apply it to full floors. Our typical floor plate at 386 is about 13,000 and change, so we said, “Hey let’s just build the whole thing.” I think we have enough of an understanding, from 20 or 25 years of building office space, on how to deliver that product to that market, and, again, there were certainly lessons learned from 636.

What’s happening on the roof? 

We’re creating a 3,000-square-foot roof terrace, and that will be in conjunction with a tenant who rents the 20th floor. Light and views are spectacular. Starting around 10:30 or 11:00 in the morning, you get the sun coming over, and it goes all day long for a great sunset. You’ll have a huge terrace to the south, a big terrace to the north and this great glass box that will sit in the middle.

How has the work paid off?

It has really differentiated the building in the market. The quality of the work is fantastic, and the end product we’re delivering to the tenants has been very, very well-received by the community. We’re on plan, and we have concluded five deals thus far.

The building kind of looked—I don’t mean this in a disparaging way – it kind of felt like an old Helmsley building. That might be appealing to my grandfather, [but it’s] not appealing to the kids today.

Any surprises so far in terms of the type of tenants showing interest? 

Impact Republic is not really a tech company. They’re a private equity firm that’s a marriage of Hollywood and finance—so they have a big creative team that focuses on celebrity, and they use their finance team to invest and do deals. They love the build, and they wanted to be there, because they understand that this is where the energy is right now. I like that deal, because it was done with an old friend from my uptown real estate days, and I think it’s great that there’s a tenant who comes was a traditional Midtown occupant. We’re also starting to get traffic from a lot of VC [venture capital] and private equity firms that invest in these [tech] companies, because they want to be appealing [and] be in their backyard. But they’re all great. Everybody loves all their children.

When will Midtown South pricing plateau? 

It’s hard to say. It’s gotten very expensive, and, when you really look at the tech companies, there’s a limit to what they’ll pay in rent. There is a glass ceiling, and it’s a question of where you think that falls. I don’t know. I don’t know.

We’re renting ahead of plan, and we’re very comfortable with our pricing [between mid-$50s to mid-$60s per foot, penthouse excluded]. But there are a lot of other people who bought a lot of buildings at a much higher basis, and they therefore need to achieve a higher rent. At a certain point, there is resistance to rents with 7s and 8s in front of them.

What are your thoughts on Downtown? Is it the next tech haven? 

For years, Midtown South was the pricey alternative to Midtown, and we see where those rents have risen, have arrived. There are a lot of positive factors as everything comes to fruition, the realization of the west side and the trade centers opening, with different types of tenants, and the Condé Nast tenancy moving downtown is positively impacting the submarket’s dynamics. Any revitalization of DT is good for New York as a whole.

If you go a little bit to the east side, you still see the vintage buildings that appeal to the tech tenancy, and it’s really the last place where you can get rents in the low- to mid-$30s. There’s different bifurcations to the tech tenancy: There’s the younger companies that might be in a series A or B round (of funding), and then there’s the more mature companies that get to that $10 million to $15 million. They need bigger space, more permanent space, and they come back to Midtown South.

What’s next—for you and the market?

We’re very active investors, and we still have a lot of money to put out, so were looking, whether it’s Times Square South, Midtown South, Downtown or Brooklyn. We like to invest with very strong conviction.

Downtown is a very interesting spot, because you see the ease of proximity to Brooklyn, and you see what’s happened in New York residentially, where rents have risen. It’s crazy. So a lot of younger kids are priced out of those studio and one-bedroom apartments. And you see what’s happening in Brooklyn. Brooklyn is starting to take from New York. I think the Brooklyn office market is going to start to develop and grow quickly.

You have a six-year-old. What else do you like to do in your free time? 

My mornings are always reserved for my daughter. I love to have breakfast with her in the mornings. That’s a special time for us. I recently started kite-boarding, and I’m spending a lot of time on that in my spare time. I’ve always been a water kid. I grew up with surfing, and it just seemed like the next logical step.

What do you think looking back at your split from your father’s firm? 

As difficult a decision as it was, we’ve come a long way. My dad was a great instructor of real estate. He’s a great real estate mind, and a lot of the skills that I have—and the skills that the team has here and how we look at real estate—were taken from the privilege of the 10 years I had to be with him.

I just wanted to invest differently, and, at the end of the day, we wanted different companies. We’re focused now on more creative, different types of real estate, [not] Midtown, Class A glass and steal. And we’re having a lot of fun.

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