Retail properties

Carlyle Group sells prime office tower in Manhattan for US$1.3 billion

Carlyle's sale of office block in prime Manhattan district sets a record on a square-foot basis

PUBLISHED : Wednesday, 05 June, 2013, 12:00am
UPDATED : Wednesday, 05 June, 2013, 4:40am

Carlyle Group's US$1.3 billion deal to sell 650 Madison Avenue will set a record based on the per-sq-ft price for the office tower, driven by its retail space in the heart of midtown Manhattan's Plaza district.

Crown Acquisitions, based in New York, and Highgate Holdings agreed to buy the 600,000 sq ft building, Crown said. The property has about 75,000 sq ft of retail space in a prime tourist and office area.

The purchase is the largest of an entire building in the US since Google's US$1.8 billion acquisition of 111 Eighth Avenue in Manhattan in late 2010, and on a sq-ft basis it exceeds the record of US$1,583 paid for 450 Park Avenue in 2007.

In another deal for a trophy Plaza district property, a 40 per cent stake in the General Motors Building was sold to the families of Chinese real estate developer Zhang Xin and Brazil's Safra banking empire, said a person familiar with the transaction.

"The true trophy properties are in a league of their own," said Robert Stuckey, managing director and head of US real estate at Washington-based Carlyle. "There's just a quantum leap in both rents and building values when you're in that category."

The area is known as the Plaza district because of its proximity to the landmark Plaza Hotel, two blocks west of 650 Madison. It commands some of the priciest office rents in America, and is home to notable retail stores including Bergdorf Goodman, Tiffany, FAO Schwarz and Apple's outlet at the bottom of the GM Building.

The GM Building stake sale, completed last Friday, valued the 50-storey tower at about US$3.4 billion. That works out to roughly US$1,700 a sq ft for the tower, located at 767 Fifth Avenue between 58th and 59th streets.

Crown managing principal Haim Chera said the biggest value of 650 Madison was its retail space. The tower was not comparable to 450 Park because of its location at the centre of a retail triangle created by Barneys to the north, Bergdorf Goodman to the west and Bloomingdale's flagship Lexington Avenue store to the east, Chera said. Those stores, as well as the Apple store across the street, combine for about US$2 billion of annual sales.

"We expect to achieve a retail value of close to US$1 billion on this asset, giving us a basis of about US$300 million in a trophy office building," Chera said.

The building's current tenant is a Crate & Barrel household store, under a lease that runs until 2019. As part of the deal, Carlyle agreed to pay Crate & Barrel US$55 million in return for paying a higher rent, thereby expediting Highgate and Crown's return on its investment, according to two people with knowledge of the transaction.

"In that building, you could easily get US$2,000 to US$2,500 a sq ft," in rent, said Faith Hope Consolo, chairwoman of retail leasing for Douglas Elliman Real Estate. Crate & Barrel "was one of the first big boxes on the street".

Vicki Lang, a spokeswoman for Crate & Barrel, declined to comment on the company's lease at 650 Madison.

The new owners would discuss reconfiguring the Crate & Barrel space to unlock some of the value, said Chera.

"You're not going to find a more savvy group of investors than Highgate and Crown," said Howard Michaels, chairman of Carlton Group, a New York-based real estate investment bank. "This deal just affirms the desirability of the New York office and retail market. I'm sure they've got a plan to maximise the value of the property's retail and office."

Adam Spies and Douglas Harmon, of New York-based Eastdil Secured, were the brokers on the tower sale. Bidders included Vornado Realty Trust, HFZ Capital Group and a venture of General Growth Properties and Brookfield Office Properties, according to people close to the sale.

Carlyle and a partner paid US$680 million for the 27-storey building in 2008, according to research firm Real Capital Analytics. The owners finished renovating the building earlier this year, improving the lobby and installing a glass entrance and new elevators. They also completed more than 400,000 sq ft of leases.

"This is a great outcome for our investors and validates our opportunistic approach," Stuckey said.

The sale of 650 Madison marks the second profitable exit of a 2008 investment for Carlyle. The private-equity firm teamed up with Crown in July of that year to buy a controlling stake in the retail portion of 666 Fifth Avenue from Kushner Companies for US$525 million. They introduced new occupants including Japanese clothing retailer Uniqlo, and later sold the asset in a pair of deals for about US$1 billion.

With the sale of 650 Madison, Carlyle will have distributed a substantial portion of the capital invested by its fifth real estate fund. The fifth fund still holds more than 100 investments, Stuckey said.

Crown is among New York's most active retail-oriented developers. Crown and a partner last year acquired a stake in the Olympic Tower on Fifth Avenue from the Onassis Foundation, a legacy of Greek billionaire Aristotle Onassis.

In 2010, Crown and Highgate, a real estate firm headed by Mahmood Khimji, together bought Manhattan's Knickerbocker Hotel along with Ashkenazy Acquisition.