Marc Holliday’s Brand New Midtown

If you’re Marc Holliday, the answer is an unmistakable yes.

Holliday, the CEO of SL Green Realty Corp., has since the early 2000s, been planning a colossus—something to rival its great skyscraper neighbors, like the Empire State Building and the Chrysler Building—called One Vanderbilt in a part of Manhattan that didn’t seem to entirely welcome a 1,401-foot-tall, 1.6-million-square-foot super tower. One Vandy seemed better suited for the Far West Side, or the Financial District.

Moreover, as the largest private landlord of office space in the most populous city in the country with ownership interests in 29.5 million square feet, it’s not like SL Green has to prove anything. But One Vanderbilt—with its sleek Kohn Pedersen Fox design, the hundreds of millions of dollars in transit improvements SL Green has pledged, an 11,000-square-foot restaurant headlined by Daniel Boulud, and already hundreds of thousands of square feet of leases with Greenberg Traurig and TD Bank—promises to be the most change in Midtown in a very long time.

It paved the way for last year’s Midtown East rezoning and J.P. Morgan Chase’s announcement earlier this year that it will demolish and rebuild its 52-story tower at 270 Park Avenue.

“I think J.P. Morgan’s announcement flatters One Vanderbilt,” Holliday said from his office at 420 Lexington Avenue, a block away from all the action, sitting with Andrew Mathias, the president of SL Green (who joined part of the conversation).

The 52-year-old son of a mortgage broker who lives in Westchester with his wife, Holliday has real estate in the blood (his oldest son, out of three children, will start at Wells Fargo next month) and his first interaction with the company’s founder and current chairman of the board, Stephen Green, came in the late 1990s when Green wanted to bring his company public.

“Steve at the time owned the moniker, ‘King of the Bs,’ ” Holliday remembered. Green had “an older building portfolio, but in good locations with a great brand name, and I took on that challenge of working with Steve and financing his team for the better part of two years, which culminated in the IPO of SL Green in 1997.”

With Green “we worked out a sort of vision, which was fairly modest: to become the biggest, best and most profitable real estate company in New York City, and hopefully we’re on our way to achieving that.”

It’s been an interesting year for SL Green; as One Vanderbilt has risen, the real estate investment trust shed a 43 percent stake in 1515 Broadway to Allianz; the company sold 600 Lexington Avenue for $305 million to an insurance company; and sold 16 Court Street in Downtown Brooklyn to CIM Group for $171 million. And with RXR Realty it purchased a 49 percent stake in the $1.7 billion Worldwide Plaza.

We talked about this and more, and for more with Holliday check out the video that will be appearing on Commercial Observer’s website next month.

Commercial Observer: How is leasing going in Midtown?

Marc Holliday: In Midtown Manhattan there’s 20 million feet within about a mile radius of where we sit, so we’re very in tune to the Midtown marketplace and the leasing that’s going on. I feel like there’s been decent leasing—certainly in our portfolio. [Our] pipeline’s over a million feet. Any time we’re over a million that’s very good—either the lease is out, the lease is in negotiation, or there are credible intentions. You have to remember, we don’t have space. We’re like 96 percent leased. I think we just put the base of 10 East 53rd Street to bed, and that was one of our more recent redevelopment projects. I’m going to guess we are up over 500,000 feet of leasing, year to date. The goal was 1.6 million for the full year, so I’d say we’re almost a third towards the goal, and we’re not quite a third of the year over.

Do you think Midtown is competing well with the Far West Side and Downtown?

Holliday: The allure of the West Side is not rooted in location or preference. It’s really about new construction. Even with the passage of East Midtown rezoning it’s still fairly difficult to develop in East Midtown proper. We have our project obviously and J.P. Morgan announced theirs, but short of that, there’s not a lot of new construction opportunities in East Midtown, so tenants are forced to look elsewhere. In total, over the past few years, the activity has been about 10 million square feet, maybe less. We’re in a market that does 30 million a year roughly. So, over the last three years, 90 million square feet have leased, only 10 of which are on the West Side. The most dominant market in terms of preference activity and rents continued to be Midtown. I’ve seen tenants that will migrate to new construction—and that’s fine. The market is solid enough so it can accommodate that and still stay under 10 percent vacant.

Andrew Mathias: Office employment continues to grow in the city. Last year was another year of positive office [growth] using employment, so you need space to accommodate the growing job base. The West Side [is] a good pressure relief valve.

Is Midtown East rezoning going to change the game?

Holliday: It has. There are two major new projects, neither of which would have been possible without those efforts… To get an important new project every few years that’s a noticeable sea change in Midtown. So, yeah, it was a great piece of zoning, and over time it will have a big impact.

Are you guys looking at any development sites specifically?

Mathias: We own lots of buildings within the zoning area, so, depending on lease roll, age of building, and how under-built that building is relative to the new zoning, there’s a lot of different sites under consideration.

You guys did some very prominent sales last year, like 1515 Broadway and 600 Lexington. Could you tell us just a little bit about some of the thinking behind those?

Holliday: We’re the largest owner in the city but we’re also probably the largest seller of assets in the city. I think that’s something that’s not quite as appreciated. We own 28 million feet—we owned and sold well in excess of 20 million square feet on top of that. So, our ownership extends to almost probably 50 million square feet of real estate. We’ve been doing that fairly aggressively since about 2005 … Starting around ‘05 you see us sell $1 billion-plus of assets. Last year was no different. 1515 Broadway was a partial disposition that was a 49 percent sale to Allianz, which is notable because the mark on that deal was [$1.7 billion]. We’ve also shown the attraction to foreign capital is still very deep. We had three bidders—all foreign capital—with Allianz stepping up at the end. I think it’s great for them, they love the asset, it’s great for us because it enables us to free up some capital for the other things we do. The asset will be a homerun for both of us in the long-run [given] there’s still that next level of appreciation because the rents Viacom is paying are still well below market, like under $60 a foot. There’s still some additional upside with the Times Square signage which we get back in a few years from The Lion King, and it’s another retail opportunity that we have deals we made 10 to 15 years ago that are very below market.

Mathias: We also sold 600 Lexington at the end of the year. That was a significant sale to a U.S. insurance company. Just a very high-quality building that we had redeveloped and re-tenanted most of the tenant base and showed there was still a very liquid market in the late stages of last year. When we went to contract with that deal in December [2017], closed in January, the buyer bought it all cash. We owned it without debt, and they bought it without debt. So, it just shows the fortress nature of Manhattan assets.

Holliday: And I think we had somewhat of a high-water market in Brooklyn at 16 Court Street. That was a whole building sale to CIM.

You guys made $70 million off that $171 million sale, right?

Holliday: We did okay.

Mathias: It was pretty good for Brooklyn.

Holliday: We work the asset hard. Everything we do, very little of it tends to be market momentum. We worked each of these assets very hard. Even at 16 Court, that was a lawyer/court-oriented tenant base when we took it over. We spent a lot of money—$10 million, something along those lines—completely re-engineered the building, we put bike storage rooms, we did the amenities, brought in new retailers, redid the lobby, and all of a sudden a $55-[a-foot]-building began kind of leading the market rents in Downtown Brooklyn. It’s very well-leased, and there’s still a lot of upside in that asset because we haven’t full turned those rents. The attraction to CIM was the ability to drive those rents further and we set it up in a way where, in the future, that tower could be converted for residential use.

Tell us why you guys liked Worldwide Plaza?

Holliday: It’s a prototypical asset: Midtown, great building, great tenants, great location, high cap rate, low-per-square-foot acquisition price, room to run on the bulk of the rents, and we had been in dialogue with NYRT [New York REIT] for over a year on that and other assets, so I think when the opportunity came up, knowing that the financing markets at that time were excellent, I think we timed it perfect. The rates have risen since then, so we locked in great 10-year long-term fixed-rate financing, we had the capital stack kind of preset with us, RXR, and NYRT, so there was no syndication, it was all done at closing. We had some 1031 [exchange] need. You know, we’re selling so much in order to minimize the amount of taxes we have to pay so we have to invest in something. I don’t know if that’s obvious or not, but that’s an important part of what we do. We try to mitigate taxes properly by reinvesting in like-kind assets. So what it was was—16 Court [turned] into Worldwide. We took the proceeds from 16 Court—a lot of which was profit—and plowed some of it into Worldwide Plaza. These opportunities come along every now and then. I’d say the last one that was kind of like that was 11 Madison, which we did back in 2015, with many similar attributes. [SL Green sold a 40 percent stake in the deal to PGIM for $480 million and assumed some of the property’s debt.]

Is foreign capital still active and steady?

Mathias: Sure. I think the locale has changed a bit, so as we’ve seen over the cycles, when one foreign buyer pools off in Manhattan, we see another buyer take the opportunity. I think you’re going to see European capital, like with Allianz, and in parts of Asia, as Chinese capital inflow starts to slow down a bit. You’ll see other parts of Asia and other traditional parts of New York investment step into fill that void.

Like Korea?

Mathias: Korea for sure. Japan and Singapore are also very active. Singapore in the last couple of years has bought 60 Wall Street [from the Paramount Group]…they’ve been stepping up their investment into the market. There are a lot of rumors about Saudi Arabia and what happens ultimately when Aramco goes public and where those proceeds get directed, so I think you’ll see foreign capital step in to fill the void that’s really left by China. You have most of the other guys who have been competing continuing to compete.