12/02/08

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Macklowe tower rises under radar

The current construction site for 510 Madison.

As the real estate world waits to see if Harry Macklowe can save his real estate empire, a smaller contingent is anxiously watching to see if he can pull off a minor miracle by completing his speculative office tower at 510 Madison Avenue.

Originally envisioned as a condo-hotel, the 350,000-square-foot spec tower is under construction as a boutique office tower for the private equity and hedge fund market.

"What's working against him, at this time, is the timing," said attorney Jonathan Adelsberg, co-chair of the commercial leasing practice at Herrick Feinstein. "It's not the asset."

He added, "This is going to be a unique building. It's going to be an edifice that will stand on its own and have a prestigious address."

While a spec tower of this size would normally generate a gush of attention during an economic slowdown like this one, the project has managed to remain under the radar, largely because it's been overshadowed by Macklowe's other financial troubles. Macklowe, of course, has been struggling to unload the General Motors Building and restructure more than $7 billion in debt.

Macklowe originally envisioned the project as a 50-story condo-hotel that would operate under the flag of Singapore-based Amanresorts.

However, in 2007, he scaled it down and settled on a 350,000-square-foot, 30-story luxury office tower that would retain some of the finer elements of a residential hotel, including a private gym, swimming pool for tenants and business lounge.

"It's like Lever House for the 21st century," said Mary Ann Tighe, chief executive of the New York tri-state region for CB Richard Ellis, which is marketing the property. "Because of the shared amenities, there is a club-like feeling to this building."

After defaulting on a $510 million loan connected to a project at the Drake Hotel at Park Avenue and 56th Street, in February, Macklowe managed to secure a $329 million construction loan for 510 Madison Avenue that was backed by Deutsche Bank and Union Labor Life Insurance Co.

The Madison Avenue structure, which has asking rents of $125 a square foot, leaves a very limited footprint on the East 53rd Street site. The maximum floorplates measure only 16,500 square feet on floors two through five, while floorplates for a large portion of the rest of the building are no bigger than 11,500 square feet.

The latter is considered too small for an investment bank and even for any of the city's larger law firms.

Indeed, Macklowe has struggled to find tenants for 510 Madison since he announced his plans for it. Talks fell apart last summer with Enso Capital Management to lease one floor for $150 to $175 per square foot, according to published reports.

In December, CB Richard Ellis reached agreement on its first tenant, hedge fund Jay Goldman & Co., on a 10-year lease for $125 per square foot.

Tighe told The Real Deal that the building is negotiating leases with a major technology company and two financial companies, which will occupy four floors. She declined to name the firms, but said one of the private equity executives is personal friends with Macklowe.

Macklowe owns three luxury rentals — River Tower at 420 East 54th Street, Longacre House at 305 West 50th Street and 777 Sixth Avenue — as well as a new condo residence at 310 East 53rd Street.

But friendships and personal relationships aside, it may be tough for Macklowe to fill the remaining 250,000 square feet of space given the turmoil on Wall Street and, more significantly, the uncertainty about his real estate empire.

"The climate is definitely cautious," said Wharton Properties broker Ruth Colp-Haber. "The people with leases coming due that have to do something are doing something. However, companies in expansion mode are scaling back."

With all of the sublet space expected to come on the market, and potential options outside the city, companies are becoming far more selective when it comes to long-term leases.

"What you have is a holding pattern right now," said Adelsberg of Herrick Feinstein. "If you're O.K. where you are and you don't have a gun to your head to move, you're going to be a little bit selective."

The development comes at a time when very few commercial developments are being built on spec. The one high-profile exception to that is 11 Times Square, a $1.2 billion project from SJP Properties that has 1.1 million square feet of Class A office space.

Attorney Barry LePatner said that he does not believe New York is facing a glut of office space due to overbuilding. Still, LePatner didn't rule out the possibility that Macklowe would unload the Madison Avenue building if his financial troubles continue.

"From a cash-flow standpoint, Macklowe may not be able to carry it," he said. "He may have to unload it to someone else."

Meanwhile, the hedge-fund community will have a number of options to choose from within the Plaza District.

Across the street from 510 Madison, a rival boutique office building is scheduled to debut this summer at 545 Madison. That building has undergone a stripped-to-the-bone renovation by developer LCOR, the company behind the $1.4 billion Terminal 4 expansion at John F. Kennedy International Airport.

LCOR, along with joint-venture partner BlackRock, financed the renovation with a $60.7 million loan from Key Bank, which also supplied an $11 million letter of credit that secures the building's 75-year ground lease, which is held by LCOR.

The 17-story glass tower will have even smaller floor plates than Macklowe's building, ranging from 6,200 to 9,300 square feet, and average asking prices of $110 per square foot at the base to $150 per square foot above.

While 510 and its competitors are aiming for the top of the market, average Midtown asking rents for Class A office space reached a record high of $96.55 per square foot in March, a 2 percent increase from February rents, according to Colliers ABR. A first-quarter market report by Cushman & Wakefield found that average overall asking rent in Midtown jumped about $2.50, to $78.85 per square foot, from $76.26 per square foot last quarter.

The report also found that the vacancy rate in Midtown increased to 6.0 percent from 5.8 percent the previous quarter.

Certainly, other top-shelf buildings show how high prices can climb. In September, investor Michael Price signed a lease at developer Leonard Stern's iconic 667 Madison Avenue office tower for a record $225 per square foot, according to published reports.

Still, there is concern that the current fallout on Wall Street could drive down rents as well as push up occupancy levels even more.

LePatner noted that while 510 Madison Avenue is a spec building for Macklowe, it is a smart project. "A building on a major grade-A location is never going to look like anything but an asset on someone's portfolio," said LePatner. "If he's going to sell it, he's going to sell it at a blue-chip price."