Big Apple REIT Moves into Big Leagues

04/04/2007 12:00 am EST

Focus:

Peter Slatin

Founder and Editor, The Slatin Report

Peter Slatin, editor of the Forbes/Slatin Real Estate Report, says that big New York REIT SL Green may be ready to take it up a notch by developing a brand-new Manhattan office building and branching out to the suburbs.

SL Green Realty Trust (NYSE: SLG), known for buying mostly second-tier Manhattan properties and sprucing them up, has acquired two small office properties at 43rd Street and Madison Avenue, just a block from Grand Central Terminal. The properties in the $73 million acquisition are also adjacent to another office building that the company has owned for years.

It is highly likely-especially if the current upward pull of Manhattan rents continues-that the company will move to vacate the buildings and develop a large new office tower on the site. The site could hold a roughly 900,000-square-foot building, says Isaac Zion, an SL Green managing director. Even without development, current rents in the newly acquired buildings are "significantly below market," says Zion. "That's where we see a lot of opportunity."

And so they should. Current asking rents in the Grand Central district average about $60, according to CB Richard Ellis; rents in the recently acquired properties average in the $30 range, says Zion, meaning that SLG could choose to refrain from creating a new development and simply upgrade the buildings-and their rents.

But a new Class A property in an area that is chockablock with older properties would attract a significant rent premium to the rest of its immediate marketplace, particularly because of its access to Grand Central.

The prospect of SL Green buying Class B buildings that it no doubt will eventually raze to build an high-end office high-rise marks a serious sea change for the company.

Buying second-tier office buildings was nothing new for the REIT. SL Green wouldn't just buy its B buildings, but it would also reinvest in them, bringing them up to snuff with modernized or restored elevators, building systems and public spaces. Eventually, the company moved up a step-buying what might be called A-minus buildings such as 1515 Broadway, a Times Square behemoth of newer vintage that is the headquarters of Viacom

That brings us to another recent SLG transaction--essentially a trade with Mack-Cali Realty (NYSE: CLI), in which Mack-Cali is acquiring SLG's interest in an office condominium at 125 Broad Street, in the heart of Lower Manhattan. For its part, SLG is getting a 125,000-square-foot office building in Greenwich, Conn.

In January, the REIT jumped into Connecticut when it closed on its acquisition of Reckson Associates. As part of that deal, SL Green also took over a nine-property, 1.3-million-square-foot Connecticut portfolio, plus 15 assets totaling 2.3 million square feet in New York's Westchester County. SL Green has since added an office property in Stamford, Connecticut and one in White Plains, NY.

Although this suburban portfolio-along with an eight-building New Jersey portfolio it owns in conjunction with Mack-Cali, is a fraction of SLG's overall size, it continues to grow.

Subscribe to the Forbes/Slatin Real Estate Report here...

Related Articles on