SL Green’s Hudson Yards deal is breakthrough for Manhattan’s i-sales market

In a typical year in Manhattan real estate, when tens of billions of dollars’ worth of property changes hands, an office tower that sells for less than $1 billion would at most raise an eyebrow or two.

But in the Covid era, it’s being hailed as a victory.

SL Green Realty’s deal this week to sell its Amazon-anchored West Side office tower for about $950 million — roughly $1,550 per square foot — set a new high-water mark for an industry that for eight months has been clamoring for a signal, experts told The Real Deal.

“That’s a huge price,” said Compass broker Adelaide Polsinelli. “It’s a deal that instills a lot of hope and confidence now that a foundation for values has been set.”

After months of broken deals and an all-but-frozen sales environment, the market showed signs of thaw this week when news emerged of SL Green’s deal. The Manhattan-based firm will get $952.5 million from investor 601W Companies for 410 10th Avenue, adjacent to Hudson Yards. The buyer is assuming the $600 million construction loan being used to modernize the property, and SL Green is keeping a 5 percent stake to oversee its completion, which is expected in about a year.

In March, SL Green had calculated that the property might be worth somewhere between $1.05 billion and $1.18 billion. So the contract price represents a discount of about 9 percent to the low end of that expectation.

Of course, what the seller thought it was worth did not represent a market price. One high-level investment sales source opined that SL Green probably overestimated the building’s value from the start, but added that the contract price is likely higher than some might expect in a market like this.

Regardless of the sale price, many in the industry were encouraged just to see the property trade, which they viewed as a sign that investors have not abandoned Manhattan as a result of the coronavirus. And while the price has indeed impressed, it’s important to note that the building is majority leased on a long-term basis to a company, Amazon, that probably has the most desirable credit in the world.

Buildings like these are expected to command premium pricing, and experts cautioned against extrapolating the sale’s metrics to other properties, especially ones that face challenges like rolling leases or require hefty improvements.

“Sometimes people will pay more for properties with rolling leases because they think they can raise rents — a value-add type execution,” said Robert Ivanhoe, head of the real estate practice at Greenberg Traurig, who worked on the 410 10th deal for SL Green. “This isn’t a time when people are going to be doing that.”

Beyond the sale price, another important figure is capitalization rate, which measures how much investors value a property relative to the income it generates. In a case where income remains constant, an owner will prefer to sell a property at a lower cap rate than a higher one.

SL Green went into contract on 410 10th at a cap rate of about 4.95 percent, above the average of 4.8 percent for Manhattan office properties during the third quarter, according to Real Capital Analytics.

But the average figure is a difficult metric to use, given the dearth of deals in the quarter, said Jim Costello, RCA senior vice president. He also noted that cap rates have been expanding now for about two years, reversing a trend of cap rate compression that lasted almost three decades.

“It fits the trend of an increase that was underway before Covid-19,” he said, adding that SL Green bought the property last year for just $440 million. “If the price is $66 million short of where they offered the asset, it still represents a tremendous gain.”

Many are now asking whether the deal will jar loose the seized-up investment sales market and set the city on a meaningful path to recovery.

Polsinelli, the veteran broker, reiterated her belief that the deal is good for the market. But she added that big hurdles remain to be overcome for things to get back to normal.

“Buyers are on one side and sellers are on the other side,” she said. “And the chasm keeps getting wider every day.”