The Chrysler Building: What Happens Next?

In commercial real estate today, “distress” is the word most often attached to office properties. But there’s another kind of distress that goes beyond capital stacks and debt coverage levels. 

The distress that comes with age. 

SEE ALSO: As CMBS Office Distress Takes Longer to Resolve, Focus Turns to the Pain Points

For nearly 100 years, since opening in May 1930, the Chrysler Building has been an indelible icon of the New York City skyline. Its distinct Art Deco architecture — defined by modern ornamental gargoyles and stainless steel eagles, abstract reliefs across numerous setbacks, and a terraced crown whose spire rises 1,046 feet in the air — conjures up the Jazz Age, even as it attracts cameos in modern Hollywood blockbusters. At 77 stories, the Chrysler Building remains one of the tallest buildings in the United States. 

And, until recently, the building generated as much interest for its utility as it did for its appearance. Merely 16 years ago, the Abu Dhabi Investment Council, a sovereign wealth fund, purchased a 90 percent stake in the Chrysler Building from Tishman Speyer for $800 million. 

Sadly, it appears this national landmark is worth a fraction of that price as it ages into the post-COVID era. 

“The Chrysler Building is the grande dame of New York City real estate, but the infrastructure, the aesthetics seem a bit dated,” said Ruth Colp-Haber, president and CEO of Wharton Property Advisors, a brokerage. “And it’s also become victim to the blight going on around 42nd Street and Lexington Avenue with the boarded-up stores, hotels and retail.” 

With lower rents, higher vacancies, soaring costs and increasingly fragile debt structures, office sponsors across America are being forced to recalibrate their visions of what it means to own a potentially obsolete asset class. Chrysler Building owner RFR Holding is just one of many sponsors to learn the bitter lesson that even the most recognized properties are not immune from underwater economics. 

Since purchasing the Chrysler Building from Tishman Speyer and the Abu Dhabi Investment Council for $151 million in June 2019, RFR, run by lifelong friends Aby Rosen and Michael Fuchs, has discovered that owning an aging icon isn’t all it’s cracked up to be. Even after spending more than $100 million to improve the property — and following a failed plan to update the building’s underground retail corridor just prior to COVID — RFR has repeatedly sought financial relief from the onerous ground lease imposed by Cooper Union, a local college and the owner of the land beneath the Chrysler Building, which requires lease payments exceeding $32 million per year. 

Last month the bottom finally dropped out. Cooper Union announced Sept. 27 that RFR hadn’t paid rent since May and has missed $21 million in ground-rent payments thus far. 

The school terminated the ground lease and took control of the Chrysler Building from RFR, which promptly filed a lawsuit seeking to halt the action. RFR accused Cooper Union of “acting in bad faith” by refusing to consider potential modifications in an amended ground lease that would allow for lower monthly payments. 

“While RFR prefers to resolve this matter amicably, and privately, if possible, it is also prepared for the alternative, if necessary,” the firm’s attorneys said in a statement to CO. 

How the lawsuit shakes out — and what comes next — is anybody’s guess, but the stakes couldn’t be higher for the future of one of New York’s most beloved buildings. 

“It’s clearly an iconic building, and for many, it’s the most iconic building in all of New York, and perhaps the world,” said Jay Neveloff, chair of the real estate practice at Kramer Levin. “But there’s a lot of issues. It needs to be fixed. The city needs there to be a deal.”

From ageless to unaffordable

The Chrysler Building’s swift fall from grace is a cautionary tale of what happens when market forces meet boardroom intransigence, and how cruel time waits for no man, woman or skyscraper. 

The tower first rose in the late 1920s, during the golden age of skyscraper construction in New York City. Following the emergence of the modern electric traction elevator and innovative architecture techniques that used steel and concrete to reinforce tall skeletal frames, the modern skyscraper arrived in 1913 with the opening of the neo-gothic Woolworth Building in Lower Manhattan, whose 55 stories helped it remain the city’s tallest tower until 1930. 

Then a veritable building boom erupted between 1929 and 1932, one that saw the birth of the Chanin Building, the Chrysler Building, 40 Wall Street, the Empire State Building, 20 Exchange Place and 70 Pine Street. Each new Art Deco spire attempted to shade the other in terms of size, form and function.  

Through it all, the Chrysler Building carved out a unique reputation at 405 Lexington Avenue.

William H. Reynolds, founder of Coney Island’s now-defunct Dreamland amusement park, conceived the original project. But after Walter Chrysler, founder of the namesake car company, purchased the site from Reynolds following a mortgage default, Chrysler worked with William Van Alen to design a skyscraper that would stand alone against the other Art Deco towers through its use of steel, chromium and nickel. It would be a building whose bright metal would shine across the building’s legally mandated setbacks and create a distinct exterior.

“The Chrysler Building was really something special,” said Gail Fenske, professor at the Cummings School of Architecture at Roger Williams University in Rhode Island. “It did get criticized [at the time] for being too theatrical, but, on the other hand, it’s architecture theater, and New York is a theatrical environment. People like that, people responded to it, and it was immediately popular.

“People thought it was the city’s crowning skyscraper,” she added.  

For the next 70 years, things went pretty well at 405 Lexington. Office patrons and tourists frequented its famous lobby, swathed in layers of red Moroccan granite, dimmed by vertical bars of fluorescent light, and covered by striking ceiling murals by Edward Trumbull that recall German Expressionism. Even the Cloud Club, a Prohibition-era speakeasy on the 66th to 68th floors, stayed popular until it closed in 1979.  

By the mid-1990s, the Chrysler Building remained in demand: Tishman Speyer and Traveler’s Insurance Group purchased the tower for $220 million in 1997, negotiated a 150-year ground lease with Cooper Union, and began a $100 million renovation the next year. Between 1998 and 2005, Tishman increased the building’s occupancy from 75 percent to 95 percent, according to The New York Times. 

But even Tishman recognized the issues inherent in a complex ground lease — a contractual agreement between building owners and landowners which typically lasts between 50 and 99 years. The developer sold off a 90 percent stake in the property in 2008, but kept a 10 percent interest and continued managing the building until 2019. 

The land the Chrysler Building sits on has been owned by the Cooper Union school since 1902, when the private college received it as a donation from the descendents of Peter Cooper, a 19th century New York City industrialist who built the first American steam locomotive. 

Jeffrey Gural, chairman of GFP Real Estate, sat on the board of the Cooper Union at the time the ground lease was last renegotiated in 2006, mainly to amend its lack of revenue. The rents from Tishman had previously been high enough to allow Cooper Union to provide free tuition to its students, an act of philanthropy the college could no longer support in a modern economy. 

“What Peter Cooper did was he arranged a deal with the city where he would donate the land to be owned by Cooper Union, and the city would allow them to keep the real estate taxes [paid out] and collect the rent,” explained Gural. “It was a way of providing a free education to people, and it was working fine until it wasn’t.”  

From 2006 until 2018, Tishman Speyer paid a fixed rent of $7.5 million a year to the school, plus a share of the building’s income. In 2018, the ground lease rent jumped to $32.5 million and will stay there until 2028, when it will increase again to $41 million, before it increases to $55 million in 2038. The ground lease terms will last for another 109 years after that. 

Part of the reason Cooper Union found itself motivated to amend a previously unprofitable ground lease came out of another real estate project. The school spent $164 million to open a new academic building with a futuristic, metallic design at 41 Cooper Square in 2009. 

Perhaps shortsightedly, the school mortgaged its valuable land beneath the Chrysler Building for $175 million to secure the loan to build this academic center, leaving its balance sheet in dire straits when donors couldn’t cover the cost. The 30-year mortgage comes with an $81 million prepayment penalty, while annual principal and interest payments reach $5.5 million and $10.3 million, respectively. 

“The original [ground lease deal] came at the worst possible time of all the euphoria that surrounded the surge in office prices ahead of the 2008 financial crisis,” said Jim Costello, executive director at MSCI Research. “Then, just ahead of COVID, they sold off the structure and it received lower pricing than many folks ever expected.”  

Holding the bag 

By 2019, the Abu Dhabi Investment Council wanted out of its $800 million deal. 

Superbroker Darcy Stacom, formerly of CBRE (CBRE) and now the head of her own firm, was tasked by Tishman and the Council to get as much value out of the Chrysler Building as she could. By holding a bidding war first among individual billionaires, and then between two real estate giants, Stacom eventually sold the building for $151 million in 2019 — an 81 percent drop in value from its previous sales price. 

“We definitely exceeded, by a fair amount, what the client expected us to be able to recoup on the leasehold,” Stacom told CO. “It’s the Chrysler Building, so, at the end of the day, people do want to own it. They understand its global iconic value.” 

None more so than the new owners, Aby Rosen and Michael Fuchs of RFR Holding. 

Almost immediately, Rosen and Fuchs moved to reimagine the Chrysler Building for the 21st century. They spoke broadly about bringing back a long-defunct observation deck, hinted at turning part of the tower into a luxury hotel, and moved quickly to vacate several long-term, mom-and-pop tenants from the building’s underground arcade, with visions of transforming that subterranean area into a “destination [for] dining and entertainment.”

But COVID-19 had other plans for RFR and its 90-year-old tower once the 2020s arrived. 

“The landlord, RFR, was put in a terrible predicament,” said Colp-Haber, speaking broadly about office as an asset class. “Look at the forces you have to deal with: On the income side the rents are down 30 percent from 2019, demand for product is down 40 percent; then your expenses are all up dramatically, you’ve got loans coming due that were at 3.5 percent when you made them, now you might not even get any refinancing. Your bank is not returning your call, and you used to borrow 80 percent loan-to-value, and now you’ll be getting 50 percent if you’re lucky.

“Much of it is not of the landlord’s own making,” she added. “Like so many landlords in New York, RFR has fallen victim to the circumstances that surround these buildings from both a financial and a logistical standpoint.”  

Almost all of the underground retail RFR vacated five years ago remains empty today. The company also discarded plans for a hotel conversion. An observation deck is still a fantasy. 

Making matters more difficult are the aging bones of this “grande dame,” sitting as she does on the high-class corner of Lexington Avenue and 42nd Street, which is the equivalent of Pacific Avenue on a Monopoly Board. 

“If you had to say what is the center of New York City, I’d say, it’s Grand Central, not Times Square, and the Chrysler Building is right on top of it. It’s nearby and within easy walking distance,” said Kenneth T. Jackson, the former chair of the history department at Columbia University and the editor of The Encyclopedia of New York City.  

Despite its triple-A location — steps from Grand Central Terminal and near the residential corridor of East Midtown — the Chrysler Building’s interior lacks large windows and open floor plans favored by contemporary office tenants. Its antiquated layout features low ceilings, and the closed nature of its elevator lines blocks many corners from receiving natural sunlight. Several news outlets have reported tenant complaints ranging from rodent infestations to faulty elevators and a lack of cellphone service. 

“Let’s think about the building itself: It’s beautiful, it’s iconic, but you need to think about space usage,” said MSCI’s Costello. “If you ever walk through the building and the floors, you have internal columns blocking floor plates. The construction methods from the 1930s versus today have changed quite a lot, and the needs of tenants have changed quite a bit, as well.”   

Adding to these economic pressures are the terms of the ground lease, which seemed risky enough before the work-from-home era of 2020, but is absolutely devastating to deal with in the hybrid times of 2024. 

“They weren’t thinking about the ground lease in place,” Costello said of RFR. “That ground lease just captures so much of the rent in the location that it’s hard to make a go with what’s happening now with the income of the building. The income of the building just won’t be as functional as modern space, and it’s just a challenge in that regard.” 

To make matters worse, RFR’s initial 50 percent equity partner on the 2019 purchase, Innsbruck, Austria-based Signa Holding, was ordered by an Austrian judge in December 2023 to sell its stake in the Chrysler Building as part of an insolvency restructuring. Signa and RFR had been in talks with Cooper Union to restructure the ground lease prior to the judge’s ruling. 

Perhaps most concerning to Cooper Union, the issues for RFR at the Chrysler Building are part of a discouraging pattern of distress for the company amid a rapidly evolving New York City CRE marketplace. 

CO reported earlier this year that Blackstone and Rialto Capital have launched foreclosure proceedings against RFR for two retail properties: One Jackson Square and 219 East 67th Street, which defaulted on loans worth $22.4 million and $20.3 million, respectively. RFR is also facing foreclosure at 522 Fifth Avenue after it defaulted on $224 million of debt in December 2023, and at $475 Fifth Avenue following default on a $180 million loan in August.  

In a statement, John Ruth, vice president of finance at Cooper Union, said, “We are engaging a world-class property management firm, Cushman & Wakefield, to ensure a smooth transition for our tenants.” 

Even though Cooper Union has no legal obligation to modify the rent structure of the ground lease, Neveloff said that, if he were advising Cooper Union as the owner, he’d tell them, in so many words: If you like your operator, if the current ownership is doing a good job, then try to reach a deal. 

“You put this in the post-COVID context of office space, and the biggest challenge is money, cash, revenue,” Neveloff said. “On one hand, it’s hard to be sympathetic to a tenant who knew the terms of the ground lease when they bought it, but it’s hard to be sympathetic to Cooper Union. They have to recognize, if they haven’t already, the challenges of running the building.

“This is one of the situations that just cries out for a business solution,” he added.  

The decades ahead 

Let’s make one thing clear: The Chrysler Building isn’t going anywhere. 

The building is registered as a United States, New York State and New York City historical landmark. It is essentially impossible to tear down, nor should it ever disappear. But the building must find some function into the future, lest it turn into an empty 77-story museum exhibit. 

Officially, the 1.35 million-square-foot tower has 90,000 square feet of space available for rent, a vacancy rate of 9 percent, according to CoStar data. But Colp-Haber called that vacancy number “optimistic” and said that “there’s a lot more space available than that.” 

GFP’s Gural noted the Chrysler Building has previously signed large tenants to long leases, so when one of them vacates it’s extremely difficult to fill that same amount of space in a timely manner. It requires spending many dollars on tenant improvements, broker commissions and rent concessions to attract new tenants. 

“The real issue is having the capital to entice tenants to come to the building,” Gural said. “You have to spend over $100 per square foot on tenant improvements alone.”

There’s also the threat of new regulations dramatically increasing maintenance costs. By 2030, most New York City buildings of at least 25,000 square feet must reduce their carbon emissions and meet specific energy efficiencies under Local Law 97. Failure to do so could result in fines of more than $1 million per year for a structure the size (and age) of the Chrysler Building. 

“You have to put a ton of capex into the building to make it net-zero, carbon efficient, and I’m not sure how you do that,” said Costello. “For an older building like that, the windows and heating systems will have challenges, so that’s a lot of money to spend to keep it up to date.” 

For all these problems, there are solutions, as well as opportunities, for the Chrysler Building. In fact, one needs to only look down the way at its sister skyscraper on 34th Street for some inspiration on how to innovate. 

Empire State Realty Trust turned the Empire State Building into an especially energy-efficient and sustainable building following a multiyear, $650 million renovation. Even though it opened in 1931, the Empire State Building has reduced its carbon emissions by 56 percent since 2009, and is expected to reduce them by a full 80 percent and achieve net-zero carbon emissions by 2030. 

There is also one other advantage the Chrysler Building has that money can’t buy: location. 

Citing the opening of One Vanderbilt’s Class A office complex one block away —a nd a revitalized Grand Central corridor adding commuters directly from Long Island thanks to the 2-year-old East Side Access train line — Stacom said the Chrysler Building’s prime locale could draw strong tenancy. 

“And, to the east, you’re definitely picking up lots of residential units from all the office conversions, there’s the whole Pfizer campus [that’s turning into 1,500 apartments], and, if Second Avenue and Third Avenue become more residential, that’s good for the Chrysler Building,” she said. “It just needs proper economics in place for both the landowner and the tenant, taking into account the current market conditions.”  

Besides, who’s to say the Chrysler Building itself can’t renovate some portions of its derelict office space into luxury apartments, leveraging its name and reputation to become a top residential destination in the heart of the Grand Central neighborhood? After all, several of its fellow Art Deco cousins like 70 Pine, the Woolworth Building, and 20 Exchange Place have all undergone similar gut renovations. 

“Putting zoning aside, maybe, just maybe, you can have residential, hotel and office in the same building,” mused Neveloff. “If somehow, through the City of Yes, they can find the solution, I happen to think it would be pretty awesome to convert that building into residential.” (City of Yes is Mayor Eric Adams’s plan to revamp 1960s-era zoning codes, and would allow for just such mixed uses more often.) 

Regardless of what the future holds in terms of potential usage, and even amid ownership mired in a messy lawsuit, there’s no denying that the Chrysler Building now teeters atop an important fulcrum as an admired modern marvel that no one hopes will fall into disrepair. 

“The great virtue today of the Chrysler Building today is its extraordinary identity, it has this inimitable image,” said Carol Willis, founder and director of the Skyscraper Museum. “And it’s mostly a function of its metal helmet top, and the zigzag style, and those triangle, illuminated windows that make it such an identifiable part of the skyline.”  

Reaching even beyond appearance is emotion. Professor Fenske argued that the Chrysler Building, like the Empire State Building, is “hugely important” to both architecture and the American identity. 

“It’s one of those buildings that’s got to be protected, because it’s just so much of what the city means, not only to New Yorkers, but to all of us across the country,” she said. “You have to take these buildings seriously. They bring dignity to our cities, and they create people’s memories when they think of our cities. I can only compare them to the Cathedral of Notre-Dame in Paris.” 

Brian Pascus can be reached at bpascus@commercialobserver.com.