Charlotte Market Roundup

From Coldwell Banker Commercial Market Intelligence :

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Charlotte leads in lowest office vacancies

Condo Conversions Switch Gears to Go Commercial

The strength of Manhattan’s commercial property market is causing developers to rethink plans to convert aging office buildings into residential condominiums, and some are deciding to sell buildings outright to developers that specialize in commercial projects.

The International Toy Center, a well-known building on Madison Square Park, is the latest example of a reverse in the residential conversion trend. In a deal announced Monday, the building is being sold for about $500 million to the L&L Holding Company, which will reposition it as Class A office space.

The site, used by designers and manufacturers in the toy industry, was purchased more than two years ago for $350 million by the Chetrit Group, a development company. But Chetrit had trouble getting all of the tenants out and had to deal with several lawsuits. Now, it has decided against converting the 800,000-square-foot building into condos.

The seemingly insatiable appetite for luxury condos over the last few years enticed developers to buy old Class B office buildings and spend hundreds of millions of dollars on conversions. Others have been building new condo towers in areas of Manhattan that had long been considered inhospitable to high-end residential uses. But with the commercial market tightening and construction costs rising, a handful of developers have changed course in the last six months.

“It’s the perfect situation for us,” said Robert T. Lapidus, president and chief investment officer of L&L, a privately owned real estate investment firm that specializes in commercial property. “Big blocks of office space are rare in Manhattan, so we looked at this solely as an office property.” When asked about tenants still in the building, Mr. Lapidus said that the seller was obligated to deliver the property vacant.

He added that the deal is expected to close this month and that asking rents will be in the middle $70s to low $80s a square foot.

The Toy Center will undergo major renovations, Mr. Lapidus said. The planned upgrades to the 1912 building include turning the interior courtyard into a series of hanging gardens, and possibly installing a sky lobby on the top floor, with elevators that would take tenants to a roof garden.

Chetrit also owns an adjacent building, 1107 Broadway, which is connected by a sky bridge but was not part of the sale. Mr. Lapidus said he believed that 1107 Broadway would be sold as well, although L&L was not interested, believing it was not well suited to offices. Mr. Lapidus speculated that it would better serve as hotel property.

David Levine, vice president of Chetrit, said that the company had sold the Toy Center to L&L because it was a “unique opportunity,” but that his company was going forward with residential plans at 1107 Broadway “for now.”

Another large block of space that had been earmarked for conversion to condos but will remain commercial is at 636 11th Avenue. Cushman & Wakefield, the commercial real estate company, recently began marketing the 530,000-square-foot building, owned by the Hakimian Organization, as office space for about $50 a square foot.

Formerly the headquarters of Global Crossing, a high-speed communications company that went bankrupt, the building has been empty for two years. Hakimian announced in the fall of 2005 that it would create 450 apartments, but decided against a residential conversion about six months ago.

The 11-story building overlooks the Hudson River and the home of the Intrepid aircraft carrier and museum; the carrier is docked in Bayonne, N.J., for repairs. The building occupies the entire block on 11th Avenue from 46th to 47th Streets. The large floor spaces, covering as much as 72,000 square feet on a single floor, would have made for a complicated condo conversion, but they are attractive to office tenants. The lobby will undergo a major renovation, and 70,000 square feet will be developed for retail tenants.

That is not to say that Hakimian has given up entirely on residential conversions, however. In a joint venture with Peykar Brothers Realty, Hakimian bought 75 Wall Street for $185 million in December 2005. The former headquarters for JPMorgan Chase, the property is a 36-story, 660,000-square-foot building that will become a hotel with 250 rooms and 350 condos on floors 20 to 36. “Structurally these buildings are very different,” Rex Hakimian said. “Eleventh Avenue is shorter and wider; 75 Wall is taller and thinner. It was a tough decision on 11th, but the commercial market is so strong, the numbers made more sense to go commercial. But 75 Wall is an exceptional building. The smaller floor plate and high ceilings — it’s as if it was built to be converted.”

Macklowe Properties also recently decided against converting 510 Madison Avenue at 53rd Street into condos. The site had been entirely demolished and a condo tower was going to be built. Instead, it will become a 30-story, 350,000-square-foot office building. It is expected to be ready for tenants by the third quarter of 2008.

A parcel of land owned by Robert Gladstone of Madison Equities on Eighth Avenue from 54th to 55th Streets had been slated to become a mixed-use residential development. Instead, Mr. Gladstone partnered with Boston Properties and acquired an adjacent property and some air rights, and all of it will become an 850,000-square-foot office building with retail businesses on a 50,000-square-foot parcel of land.

Because of the high costs of building luxury condominiums, a developer needs to sell the apartments for high prices, said Brian Ezratty, vice president of Eastern Consolidated, who helped broker the deal. But Eighth Avenue may not attract wealthy buyers, he said.

The area has recently experienced a sharp rise in office rents, however, and putting up an office building carries much less risk for the developer, Mr. Ezratty said.

Diesel USA, the Italian clothing company, bought a 100,000-square-foot building at 220-230 West 19th Street last fall; the site had been undergoing a condo conversion by its owner, Robert Gans. But he received an attractive offer from Diesel, which paid $53 million to turn the 12-story building into its headquarters and showroom.

“It was easier this way,” said Marcia Rose Yawitz, another broker with Eastern Consolidated. “He owned the property for a long time, and it needed to be totally renovated. This was a fast and easy deal.”

Newmark Knight Frank has also decided against turning the top floors of 40 Worth Street, from Church to West Broadway, into condos. The 700,000-square-foot property will be renovated for offices when city agencies move out this spring. Newmark Knight Frank’s construction division, founded 10 years ago, has converted 26 commercial properties totaling more than seven million square feet, creating approximately 5,400 residential units, mostly in Lower Manhattan.

The commercial market “has a shortage of large blocks of space, and this is a large block of space,” said Barry M. Gosin, chief executive of Newmark. “Part of the problem with condos is, you sell it and pay taxes and you don’t have the building any more. If the economics are close, we’d rather own the building.”

http://www.nytimes.com