Big deal in the Big Apple

At $5.4 billion, the MetLife sale of Stuyvestant Town and Peter Cooper Village is the largest multihousing deal in history. While it's a vote of confidence for Manhattan real estate, it's also one of the last bastions of hope for Manhattan's middle class.

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The bidding war for the largest apartment complex in Manhattan is over. The winner of Stuyvestant Town and Peter Cooper Village, built by Metropolitan Life Insurance in the 1940s, is a JV of Tishman Speyer, BlackRock, Inc. and the California State Teachers’ Retirement System (CalSTRS). The victors beat out a number of other high profile bidders to acquire the 110-building asset that overlooks the East River for $5.4 billion, or more than $480,000/unit.

Among those with offers on the table during two rounds of bidding were Vornado Realty Trust, ING Clarion, Apollo Real Estate, the Related Group and 25,000 tenants from the 11,232-unit rental community. When the sale closes this quarter, it will net MetLife affiliate, Metropolitan Tower Life Insurance Co., $3 million in income taxes and bring in $100 million in tax revenue for the state and city.

The per-unit price isn’t the highest paid for a rental property in the Manhattan market. That designation probably goes to condo converter Property Markets Group, which reportedly paid $60.2 million, or $1.25 million per unit, for the 48-unit, 823-825 Park Ave. at the pinnacle of the condo craze last year.

But for sheer size in a much sought after location on First Avenue between 14th and 23rd Streets, Stuyvestant Town/Peter Cooper is a jewel in Manhattan’s crown. Compare this deal to Morgan Stanley Real Estate’s PRIME Property Fund’s acquisition of AMLI Residential in February for $2.1 billion, or around $75,000/unit. The former REIT’s more than 28,000 upscale units were concentrated in six mostly soft markets across the South, Southwest and Midwest. Gables Residential, which sold for $2.8 billion, or $136,585/unit, to ING Clarion and Lehman Bros. last year, owned 20,500 high-end units in nine markets from coast to coast, including top performers Washing-ton, D.C., and San Diego.

Darcy Stacom, vice chairman and partner at CBRE’s Investment Partners Institutional Group, and one of two brokers who handled the Stuyvestant/Cooper transaction for the seller, believes the sales price shows the strength of Manhattan’s residential rental market. “There never was an asking price,” she points out. The property is 99% leased.

Seth Weinstein, CEO of Hannah Real Estate Investors, which has offices in New York City, agrees. “The property sold for about 10 percent more than the expected sale price, which is not an extraordinary amount more. But the fact that it sold at these numbers is an extremely strong vote of confidence in the Manhattan market long term and in the real estate marketplace in general. There’s been so much talk recently of bubbles bursting, the downturn in the marketplace, and so much fear mongering going on, the fact that a cluster of extremely substantial and knowledgeable players, local and national, would bid this property into this range was quite refreshing and positive,” said Weinstein. Weinstein is a proponent of a soft landing scenario and believes there’s no reason to predict a major real estate decline, even in the for-sale housing sector.

For trophy property owner Tishman Speyer, the transaction is right up the company’s alley. “Their M.O. for an extended period of time has been to buy high-profile, quality projects, pay a high number for them in order to beat out the competition and then look at a variety of ways to improve the cash flow and, therefore, the economic value of the properties,” said Weinstein.

Last year, in JV with the New York City Employees’ Retirement System and the New York Teachers’ Retirement System, Tishman Speyer paid MetLife $1.72 billion for the 58-story MetLife Building, formerly the Pan Am building. That deal represented the highest recorded price paid for an office building in the nation. The new owners will likely be looking at panoply of opportunities to increase the value of Styvestant/Cooper. “Clearly the current cash flow structure of the property does not anywhere near justify a price approaching $5.4 billion. But they bought 80 acres in Manhattan and 11,000 plus units of housing with the intent of increasing value through increases in rent where they can on deregulated apartments. There’s also the eventual for-sale conversion of substantial portions of the property as they become available and come off regulation. And, don’t forget that although 75 percent are subject to regulation, 25 percent are not. That represents 2,600 units of housing, so the non-regulated portion of this transaction is quite dramatic,” Weinstein remarked. Before condo conversions can take place or rents are raised, the buyers must do some substantial work on the units to bring them up to market standards.

The new owners also have the right to develop further improvements on the site.The sale is evidence that multifamily rental or for-sale still is very much in demand as an investment vehicle. But what does it mean for the Manhattan’s demographics and the fate of its middle-class housing?

Weinstein believes it’s inevitable that the Stuyvestant/Cooper project ” built by Metropolitan Life Insurance Company after WWII as a sanctuary for working class families and those who might not otherwise have been able to afford life in Manhattan ” will change as other neighborhoods within the city are changing.

“Areas where ten years ago you might not have imagined would be gentrified in Manhattan are being gentrified as we speak. Areas such as Hell’s Kitchen or the meat packing district, with names that you wouldn’t think would attract high-end development, are. The entire island of Manhattan is gentrifying across all its neighborhoods, so clearly there will be a change in the economic makeup, which in a way is too bad, because working people will be forced to move into the fringes of the outer boroughs. That certainly isn’t good for the diversity in Manhattan and it’s not good for Manhattan’s economy. Without working folks you can’t run a city,” said Weinstein.

Where will working people move when Manhattan’s rent-stabilized units have gone to market? Weinstein thinks they’ll be forced far out to the ends of the subway lines. “Fortunately, NYC has an enormously good transportation infrastructure, so people can live some distance from their jobs and have a reasonably cost efficient commute. But it’s difficult to balance the need for affordable housing with the requirements of the marketplace,” he adds.

Weinstein believes the buyers have a longer view and are respectful of the rules of the game. He doesn’t expect they will violate in fact or spirit the regulations in place. “That being said,” he adds, “they’re going to do what they can within those regulations to enhance value. Although they have patience and long horizons, they can’t wait forever to start turning a positive flow on their investment.”

That’s what keeps watchdogs vigilant. The 25,000-member tenants association, PCVST, led by City Councilman Daniel Garodnik, intend to keep the pressure on the new owners to retain the community’s long- term affordability and to ensure new buildings are not added to the historic property.