The New World of Assessing, Acquiring and Refinancing the Revered Trophy Property

Oxford, and the Canadian Pension Plan Investment Board, won against “all the likely candidates,” Shapiro said, with a $700 million bid.

“People want to develop if they think it makes sense,” Shapiro recently told Commercial Observer.

And they are not shy about doing so on a big scale. The January acquisition from Westbrook Partners and Atlas Capital Group was major news, giving Oxford a 52.5 percent interest in the project and control of the 1.3-million-square-foot commercial development project in Hudson Square, and Canada Pension the remaining stake.

One broker described it as “one of the sexiest pieces of property” and added that “the building is a real trophy.”

Trophies aren’t trading at quite the same velocity as they were in 2015 and 2016 when record-busting deals for properties like the Crown Building and Stuyvesant Town-Peter Cooper Village hit the books. But it still remains one of the quintessential elements of the New York real estate market—even if no two real estate professionals quite agree on what a trophy is.

Some people contacted by Commercial Observer insisted that St. John’s couldn’t be considered a honest-to-goodness trophy asset, because it’s still undeveloped. Others shrugged off the semantics and saw that the site was clearly going to be home to a desirable piece of Manhattan office property.

But however one defines “trophy,” what seems clear is that trophy assets are no longer just the large old Class-A towers concentrated in the Plaza District a la 9 West 57th Street and the GM Building. Today they range in size, price and location, but rank as best in class within their market segment—and are highly coveted.

Jonathan Kaufman Iger, the CEO of William Kaufman Organization and Sage Realty Corporation, said in our owners’ magazine survey that St. John’s Terminal and the Chelsea Market building sale to Google (GOOGL) “are terrific examples of what defines the ‘new’ trophy asset here in the city.”

In March, Alphabet Inc.’s Google closed on its $2.4 billion purchase of the Chelsea Market building at 75 Ninth Avenue between West 15th and West 16th Streets from Jamestown. The 1.2-million-square-foot building is home to the indoor marketplace, offices and a television production facility.

“The two things people are watching the most are cycle and interest rates,” said Darcy Stacom, the chairman and head of New York City capital markets at CBRE (CBRE), who handled the negotiations for Google.

Rising interest rates, a decline in foreign investments and uncertainty about how close we are to the end of the current real estate cycle have made some investors and other buyers hesitant to pull the trigger and explain why there haven’t been quite as many banner deals.

“The Koreans and the Germans have largely been out of the market,” Stacom said, “because of currency exchange rates” that have made it “really prohibitive” for them.

She added, “So when you add that to the Chinese withdrawal from the market it takes away about half of the foreign investor community.”

Still, trophy deals are getting done, with the bulk of them in the form of development sites, partial stakes, recapitalizations and restructurings.

“It feels like the sales market is resetting right now,” said Scott Rechler, the chairman and CEO of RXR Realty. “If you’re a seller who does not have to sell and you do not get an attractive bid, you are likely to take advantage of the attractive debt markets and just refinance.”

And that is what RXR has been doing.

RXR has underwritten over $60 billion of office buildings over the past two-plus years, and has not acquired anything except 1285 Avenue of the Americas and Worldwide Plaza. RXR and SL Green (SLG) Realty Corp. announced in October 2017 that they had signed an agreement to acquire a combined 48.7 percent interest—for $840.1 million—in Worldwide Plaza at 350 West 50th Street, a Class-A trophy asset. And in May 2016, RXR closed on its $1.65 billion purchase of 1285 Avenue of the Americas.

Rather than chase limited acquisition opportunities, other companies have focused on recapitalizing their assets.

In a recapitalization, Westbrook Partners paid $660 million to invest in The Belnord, at 2360 Broadway on the Upper West Side. Kushner Companies made a deal with Brookfield (BN) Properties for the latter to assume operations of 666 Fifth Avenue between West 53rd and West 54th Streets through a 99-year lease. The pricing was not made public. And Maefield Development paid $1.53 billion to buy out its partners at 20 Times Square.

There have been partial-interest deals this year like Allianz SE’s purchase of a 43 percent interest in 1515 Broadway from SL Green Realty Corp. for $838.5 million. The bulk of the deal closed in 2017, but a final, albeit small, piece closed in 2018.

And in addition to St. John’s Terminal, other significant sites have been picked up. L&L Holding Company purchased Terminal Stores complex at 271 11th Avenue for approximately $900 million, Savanna acquired 5 Bryant Park from Blackstone (BX) Group for $640 million and Walt Disney Company nabbed a massive development site at 4 Hudson Square from Trinity Church Real Estate for $650 million.

And there were deals for properties that fit with Stacom’s definition of a trophy. (“Either brand new or…comprehensively renovated from top to bottom with a strong focus on architecture and top building systems.”)

SL Green sold the 36-story office tower at 600 Lexington Avenue to W. R. Berkley Corporation for $305 million. The building was “renovated from top to bottom, it’s on the same super block as Seagram Building, and they paid $1,000 a foot,” said Stacom, who represented the seller in the January deal. 

And Columbia Property Trust sold its 25-story office tower—leased to the NYU Langone Medical Center—at 222 East 41st Street for $332.5 million to Commerz Real, the real assets investment manager of Germany’s Commerzbank (CRZBY). Stacom and CBRE’s Bill Shanahan brokered the deal on behalf of Columbia.

It’s a trophy, Stacom said, because of the “quality of the asset and the tenant.” (There have been other deals that are arguably trophy, simply because of the amounts of real estate and figures involved, like Brooksville Company and Rockpoint Group picking up Spring Creek Towers, the affordable housing complex in Brooklyn formerly called Starrett City, for $905 million from Starrett City Associates; and American Broadcasting Company selling its Upper West Side campus for more than $1 billion to Silverstein Properties.)

It’s not every day that a trophy is put on the market, even in the most certain of markets.

“It’s been a bit of a desert lately,” Shapiro said. “Financing rates are up so that depresses value. Maybe people believe that interest rates are going to drop and probably better to wait. But there’s precious little on the market.”

Trophy properties on the market today available for outright sale include 590 Madison Avenue, also known as the IBM Building; 412 West 15th Street; One Soho Square in Hudson Yards; and 0 Bond Street.

“That’s not too many,” Stacom said, “and the market should be able to clear it. The economy is strong. Yes, interest rates are up, but still they are lower than at other times.”