Real Estate Deals to Flip Over
[NYTimes] 8/30/06
When word got out last spring that a 23-story building on Fifth Avenue and 44th Street in Midtown Manhattan was about to change hands for the second time in less than a year, some real estate specialists said that the $420 million price was too high.
Scott J. Lawlor paid $420 million for 522 Fifth Avenue last spring and hopes to sell it for $468 million or more.
The buyer of the property, Scott J. Lawlor, the chief executive of Broadway Partners of New York, has heard that kind of talk repeatedly during his company’s six-year existence.
After all, it was only last July when J. P. Morgan Chase, the longtime owner of the building, 522 Fifth Avenue, sold it for $165 million to Stellar Management, of New York, and the Rockpoint Group, the team that had bought the land under the building for $53 million from multiple owners the year before. J. P. Morgan Chase had occupied all 575,000 square feet of the building but was planning to move out.
Initially, the skepticism seemed justified, especially after a couple of financial institutions turned down the chance to take space in the building, which has a deep portico with large chandeliers. Then in June, just as the sale transaction was closing, Broadway Partners signed a long-term lease with Morgan Stanley for the entire building. According to brokers who did not participate in the deal, the rent is about $83 a square foot — more than enough to justify Broadway’s investment.
Now Broadway is selling the building again, most likely to Morgan Stanley, which has an option to buy it for about $468 million. Another potential buyer could be an institution or company looking for a safe investment with a steady income stream, brokers said.
That sort of risk-free investing has not been part of Mr. Lawlor’s business model. Rather he is typical of a breed of real estate investors who have profited handsomely in recent years by buying important buildings and holding them for only a short time. Since its inception, Broadway has sold or is in contract to sell 13 buildings it has held for an average of 2½ years, Mr. Lawlor said. Its annual returns have averaged more than 38 percent, he said.
“We have a very strict discipline we try to bring to bear about sales,” Mr. Lawlor said. Once the building’s income has increased, the company’s job is done, he explained. “We never track assets under management as a measurement of growth,” he said. “It’s, ‘How are we performing and are we continuing to find new assets?’ ”
Low interest rates and an unreliable stock market have resulted in a huge flood of capital to commercial real estate, stimulating competition for choice deals, driving up prices and making it possible for risk-takers to earn huge profits quickly. Until recently, building prices continued to rise because of a phenomenon known as cap rate compression. In part because capital was cheap, buyers were willing to accept an ever-declining initial rate of return, which is known as the capitalization rate.
Buyers have often been able to meet their investment objectives ahead of schedule without spending additional money to spruce up their buildings, said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm that tracks sales valued at $5 million or more.
In the past, Mr. White said, most buyers would evaluate the potential cash flow for a particular building over a 10-year period. Insurance companies often used 30-year projections, he said.
“Investors have greatly shortened their time horizons now,” Mr. White said.
Flipping, the practice of reselling real estate quickly, has been occurring in all commercial property sectors, but Mr. White said the trend was most pronounced among office buildings. Nationally, of those sold so far this year, 40 percent were acquired within the previous five years, and 13 percent were held for less than two years, he said.
When word got out last spring that a 23-story building on Fifth Avenue and 44th Street in Midtown Manhattan was about to change hands for the second time in less than a year, some real estate specialists said that the $420 million price was too high.
Scott J. Lawlor paid $420 million for 522 Fifth Avenue last spring and hopes to sell it for $468 million or more.
The buyer of the property, Scott J. Lawlor, the chief executive of Broadway Partners of New York, has heard that kind of talk repeatedly during his company’s six-year existence.
After all, it was only last July when J. P. Morgan Chase, the longtime owner of the building, 522 Fifth Avenue, sold it for $165 million to Stellar Management, of New York, and the Rockpoint Group, the team that had bought the land under the building for $53 million from multiple owners the year before. J. P. Morgan Chase had occupied all 575,000 square feet of the building but was planning to move out.
Initially, the skepticism seemed justified, especially after a couple of financial institutions turned down the chance to take space in the building, which has a deep portico with large chandeliers. Then in June, just as the sale transaction was closing, Broadway Partners signed a long-term lease with Morgan Stanley for the entire building. According to brokers who did not participate in the deal, the rent is about $83 a square foot — more than enough to justify Broadway’s investment.
Now Broadway is selling the building again, most likely to Morgan Stanley, which has an option to buy it for about $468 million. Another potential buyer could be an institution or company looking for a safe investment with a steady income stream, brokers said.
That sort of risk-free investing has not been part of Mr. Lawlor’s business model. Rather he is typical of a breed of real estate investors who have profited handsomely in recent years by buying important buildings and holding them for only a short time. Since its inception, Broadway has sold or is in contract to sell 13 buildings it has held for an average of 2½ years, Mr. Lawlor said. Its annual returns have averaged more than 38 percent, he said.
“We have a very strict discipline we try to bring to bear about sales,” Mr. Lawlor said. Once the building’s income has increased, the company’s job is done, he explained. “We never track assets under management as a measurement of growth,” he said. “It’s, ‘How are we performing and are we continuing to find new assets?’ ”
Low interest rates and an unreliable stock market have resulted in a huge flood of capital to commercial real estate, stimulating competition for choice deals, driving up prices and making it possible for risk-takers to earn huge profits quickly. Until recently, building prices continued to rise because of a phenomenon known as cap rate compression. In part because capital was cheap, buyers were willing to accept an ever-declining initial rate of return, which is known as the capitalization rate.
Buyers have often been able to meet their investment objectives ahead of schedule without spending additional money to spruce up their buildings, said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm that tracks sales valued at $5 million or more.
In the past, Mr. White said, most buyers would evaluate the potential cash flow for a particular building over a 10-year period. Insurance companies often used 30-year projections, he said.
“Investors have greatly shortened their time horizons now,” Mr. White said.
Flipping, the practice of reselling real estate quickly, has been occurring in all commercial property sectors, but Mr. White said the trend was most pronounced among office buildings. Nationally, of those sold so far this year, 40 percent were acquired within the previous five years, and 13 percent were held for less than two years, he said.
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