The Zelig Effect Comes to the Office Sector

NEW YORK CITY-In 1983, Woody Allen released a mock documentary known as Zelig, purporting to tell the story of Leonard Zelig, a man who became a 1920s celebrity as “the human chameleon” for just showing up anywhere and taking on the characteristics of the people around him. He blended in on the baseball diamond with Babe Ruth, he fit right in with the dignitaries as Woodrow Wilson gave a speech and so on.

Leonard Zelig was strictly the product of Woody Allen’s imagination, but there’s a very real office tower in Midtown Manhattan that also took on the changing characteristics of its environment. At any stage of the cycle we saw over the past several years, 1540 Broadway was there, from the run-up to the market peak through the trough of distress all the way to the return of peak-level valuations on trophy assets. And in 1540, we see parallels with other trophy assets, not only in Manhattan, but around the country.

In 2003, the Paramount Group, which had been quietly amassing an impressive Manhattan portfolio since its founding in 1968 by the Otto family of Hamburg, Germany, launched its first-ever real estate fund with a capitalization of $1.2 billion. The fund sought underperforming, income-producing class A office properties in major markets. Its second purchase, in 2004, was a 44-story tower once known as the Bertelsmann Building and located at… 1540 Broadway. Paramount and its partner, Principal Real Estate Advisors, paid $426 million for 1.1 million square feet of office and retail space.

Two years later, Paramount and Principal flipped the renovated property for almost double their purchase price. Equity Office Properties paid $525 million for the office component, while Vornado Realty Trust took the retail, signage and parking for $260 million.

Six months after that, EOP sold its stake in 1540 Broadway, along with seven other Midtown assets, to Macklowe Properties in a $7-billion-dollar deal that one GlobeStreet reader, responding to our 10th anniversary survey, called “the poster child of excess.” The excess wasn’t in the size of the deal, although it was one of the largest of the 2006-2007 market peak. Instead, it was in how little, well, equity Macklowe put into its Equity Office deal. All but $50 million came from short-term debt, and less than a year later, the music stopped and the company was left without a chair. Unable to refinance the debt, Macklowe handed back the keys to Deutsche Bank.

That summer, Boston Properties paid just under $4 billion to acquire the General Motors Building and three other Macklowe assets that were sold to help repay Macklowe’s debt. 1540 Broadway wasn’t part of that deal, but it was part of the deal that led to the iconic GM building being sold at a discount on what market experts said the property was actually worth.

Following that distressed sale in late spring 2008, the former EOP assets formerly owned by Macklowe found other buyers. Shorenstein Properties took Park Avenue Tower and 850 Third Ave. for $930 million, the Paramount Group acquired 1301 Ave. of the Americas for $1.5 billion, Mitsui Fudosan paid $265 million for 527 Madison Ave., Tower 56 went for $160 million to Transwestern Investment Co. and Worldwide Plaza sold for just under $600 million to a partnership of RCG Longview and George Comfort & Sons. As for 1540 Broadway, it fetched a reported $355 million in a sale to CBRE Investors in March 2009. That’s a far cry from the $950-million valuation Macklowe gave the property in 2007. And if you add all these sale prices up, the total is a little more than half of what the EOP portfolio commanded at the height of the market.

Fast forward to the fall of 2010, and 1540 Broadway is back in the news. This time, the story was how much a 49% stake in the leased-up office component went for. Edge Fund Advisors and HSBC bought the stake based on a valuation of $575 per square foot. That would translate into a value of $520 million for the office portion, just $5 million less than Equity paid four years ago. In other words, as Dan Fasulo at Real Capital Analytics put it, it’s basically back to 2006 levels.

That’s been the story with trophy assets lately, as heavy demand and short supply push up prices. We saw something similar in Boston recently as the John Hancock Tower traded for $930 million just 18 months after it sold in a distressed deal for $660 million and a little less than four years after Broadway Partners paid $1.3 billion. Is it fair to call 1540 Broadway the Leonard Zelig of office towers? Maybe not; for one thing, it cuts a finer figure on the Manhattan skyline. But it has been a chameleon as the market has evolved.