Well sort of.
Previously leased to Macmillan Publishers for the last 60 years, the building has been sitting vacant since 2019 and supposedly needs something like $100 million in CapEx to make it leasable again. Four of the five current owners have wanted to renovate it, but the fifth kept blocking it, and so the other partners sued for a “partition auction.”
That auction happened last week, and even though the four owners were really trying to lock down the 25% share that they didn’t own, the auction was won by an outsider at $190 million. That said, a 10% deposit was to be due the following day and, apparently, that never happened. So maybe it hasn’t sold yet. But whatever, it’s still interesting to think about its purchase price.
According to Wikipedia, the Flatiron Building is 255,000 square feet. So at $190 million, the building was “purchased” for $745 per foot. Assuming that it needs another $100 million, that’s another $392 psf, for a total of $1,137 psf.
What I am curious about now is how this compares to other office buildings in midtown Manhattan. Is there any sort of premium for being the Flatiron Building? And what would space in this building lease for following a renovation? i.e. What cap rate is the market demanding right now for an empty office building needing $100 million in renovations? Or, is the play to convert to residential?
I don’t know enough about the real estate market in midtown Manhattan to answer these questions with any sort of precision, but I’m hoping some of you do and that you’ll leave a comment below.
BRANDON DONNELLY 
Like anything in real estate, it would be hard to answer these questions with any certainty as two office towers on the same block in midtown Manhattan can pencil at very different prices. That said, with occupancy in the midtown Manhattan class B office space hovering at around 60% and rents down from about $55-$60/SF to $35-$45/SF, this asset class has been hit hard compared to pre-Covid days. Offices pre-pandemic often traded in excess of $1,000 per SF and now trade for about $500-$600/SF (and often lower for smaller no amenity space in places like the Garment District). The cap rates probably aren’t the best metrics for these as the rent rolls are depressed and the buildings are, in some cases, more than 50% vacant so, if you ran those numbers, you could easily be sub 4% cap using actual NOI.
The NYC office market is a story of repositioning, re-purposing and unfortunately foreclosure. There are proposals to convert office to residential in NYC but the economics and zoning are big hurdles that may not be surmountable in the end. Luckily, the zoning for the flatiron building does allow for a residential conversion as-of-right, so perhaps a condo conversion is a potential exit.
In many cases, office owners are looking to restructure the debt on these assets as we speak and others will be handing back the keys to the lenders. RXR may be doing just with two office buildings though the assets in question are in Brooklyn and lower Manhattan. I imagine RXR isn’t the only group…more will follow in his footsteps barring an unforeseeable positive change in occupancy.
As for trophy assets like the Flatiron Building, think of it like owning a Lamborghini: it makes no practical sense, you overpay for it, it breaks down and it’s expensive to fix but, man, it’s the coolest thing to brag about with friends.
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Like anything in real estate, it would be hard to answer these questions with any certainty as two office towers on the same block in midtown Manhattan can pencil at very different prices. That said, with occupancy in the midtown Manhattan class B office space hovering at around 60% and rents down from about $55-$60/SF to $35-$45/SF, this asset class has been hit hard compared to pre-Covid days. Offices pre-pandemic often traded in excess of $1,000 per SF and now trade for about $500-$600/SF (and often lower for smaller no amenity space in places like the Garment District). The cap rates probably aren’t the best metrics for these as the rent rolls are depressed and the buildings are, in some cases, more than 50% vacant so, if you ran those numbers, you could easily be sub 4% cap using actual NOI.
The NYC office market is a story of repositioning, re-purposing and unfortunately foreclosure. There are proposals to convert office to residential in NYC but the economics and zoning are big hurdles that may not be surmountable in the end. In many cases, office owners are looking to restructure the debt on these assets as we speak and others will be handing back the keys to the lenders. RXR may be doing just with two office buildings though the assets in question are in Brooklyn and lower Manhattan. I imagine RXR isn’t the only group…more will follow in his footsteps barring an unforeseeable positive change in occupancy.
As for trophy assets like the Flatiron Building, think of it like owning a Lamborghini: it makes no practical sense, you overpay for it, it breaks down and it’s expensive to fix but, man, it’s the coolest thing to brag about with friends.
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