Bidding for the General Motors Building in Manhattan gets under way.
The bidding has begun for New York City’s most prized trophy office tower.
Bids for the General Motors Building, a gleaming 50-story building across the street from the Plaza Hotel and home to a number of hedge funds, were due on Friday and were evaluated over the holiday weekend. The building boasts the highest rents per square foot of any office tower in the city.
“The G.M. Building clearly is one of the best pieces of commercial real estate in the country,” says Robert Knakal, chairman of Massey Knakal Realty Services. “And I’m sure that all of the investors with the capability of owning such a building would have interest in it.”
The owner of the building, Harry Macklowe, has said that it is worth $3.5 billion, or $1,700 per square foot. Whatever the price is, it will certainly exceed the $1.4 billion he paid for the building back in 2003.
Since then, the innovative real estate tycoon has increased the value of the property dramatically by renting an underground space to the Apple store, sprucing up the plaza, and inking lucrative deals with scores of hedge funds and corporate titans.
But the credit woes are sure to depress the price beyond what it could have been just a few months ago.
Macklowe’s “timing is terrible,” says Barry Hersh, associate director of the Steven L. Newman Real Estate Institute at Baruch College. “Let’s just say the luster is off the U.S. real estate market.”
To be sure, the timing is not of Macklowe’s choosing. In February 2007, Macklowe put just $50 million of his own cash and borrowed roughly $5.8 billion to finance the purchase of seven other Manhattan skyscrapers from the Blackstone Group. He also took out a $1.2 billion bridge loan from the hedge fund Fortress Investment Group. He had planned to refinance, but the credit crisis has made that impossible and the debt is now coming due. On Friday, Macklowe won extensions from his lenders.
The sale of the General Motors Building is central to Macklowe’s plan to pay back his lenders.
Darcy Stacom of the real estate firm CB Richard Ellis is handling the sale. But neither she nor anyone at her firm would comment on the process. A number of possible bidders also declined to comment on the record.
But several people close to the deal said the process would probably proceed like previous high-stakes building sales.
“It’s not likely to be decided all of a sudden; quite possible there will be several rounds of bidding,” said one person associated with the bidding process. “One has to assume that given all of the problems not only with Macklowe’s financing, but all complication with respect to that deal, there will be more rounds, and it will be more drawn out.”
Robert L. Freedman, chief executive of the New York firm GVA Williams, says that the logical buyer would be a pension fund, partnered with an entrepreneur, real estate investment trust, or management company, that would operate the property.
European funds, with the advantage of the strong euro and pound, “would be the logical buyers, as would Arab money,” he says. “You’re dealing in a very rarefied sphere here.”
Another logical buyer is the real estate investment trust Vornado, which might have the edge on access to information about Macklowe’s complicated debt dealings and the property’s possible revenue streams, because it has invested in the short-term debt of the General Motors Building, as well as the mezzanine debt in Macklowe’s deal with Equity Office Properties. That knowledge could allow Vornado to identify additional revenue streams not seen by other bidders and come in with a higher bid, Freedman says.
But many insiders believe the winning bid may come from a joint venture between Silverstein Properties and the California State Teachers’ Retirement System, or Calstrs, which is flush with assets totaling an estimated $173.7 billion. Silverstein manages a multibillion fund for Calstrs, and bought 1177 Fifth Avenue last December for just over $1 billion. He is known to be in the market for big properties. Other names mentioned as possible buyers include: SL Green, Boston Properties, Paramount Group, Tishman Speyer, and Shorenstein Properties, among others.
Whoever wins, the sale will have implications that will resonate far beyond the small pool of firms bidding on the deal. Real estate insiders are anxiously watching developments to see what impact the credit woes will have on the trophy-office market as a whole.
“We’re at a unique time in the marketplace given where the credit markets are,” Knakal says. “So I think it will be very interesting to see what the pricing of the building is. It will be a good indicator of what value is in today’s market.”
A year ago, Freedman says, “In the era of irrational exuberance, I’d guess this asset would have pierced $4 billion, and traded over $2,000 per square foot.”
“It probably would have traded 10 to 15 percent higher for this kind of asset. But this is still going to establish the upper limit of value for a trophy property in that part of town.”
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