Harry
Macklowe’s $6.4 Billion Bill
IN August 2003,
Harry B. Macklowe raced from lender to lender to round up a record-breaking
$1.4 billion to buy the General Motors Building, the 50-story commercial skyscraper
in Midtown Manhattan that is one of New York’s trophy properties.
Then 66, he
gambled mightily to outmaneuver rival bidders and to vault back into the top
ranks of New York developers. He went so far as to put down a nonrefundable
$50 million deposit and sell many of his residential buildings to raise cash.
Some bankers and real estate executives scoffed at the deal, privately suggesting
that Mr. Macklowe had overpaid and would drown in an undertow of debt.
Not for the
first time, Mr. Macklowe, an acknowledged master of winner-take-all real estate
poker, proved his skeptics wrong. He expanded and enhanced the valuable retail
space of the G.M. Building — on Fifth Avenue at 59th Street — by
creating a glass cube for an Apple store that has become a popular tourist
destination. As the market soared, Macklowe Properties refinanced the tower
twice, most recently in a deal that values it at about $2.7 billion.
But these days
Mr. Macklowe is scrambling for financing yet again. He has a $6.4 billion
debt payment coming due next month in connection with his purchase of seven
other Midtown Manhattan office buildings a year ago. When he bought those
buildings from Equity Office Properties, he more than doubled the size of
his real estate portfolio and used only $50 million of his own money to do
so; he borrowed $7 billion to finance the rest of the purchase.
As often happens
in real estate, a once-frothy national cycle is losing steam and the market
has turned against many buyers. Mr. Macklowe, with his empire of 15 prime
office towers and two development sites in one of the world’s best business
districts, is awash in expensive, short-term debt at the very moment that
financial backing for megadeals has all but shut down. One of his loans is
backed by a $1 billion personal guarantee, and he is already in default on
$510 million in development loans for a Park Avenue project.
Mr. Macklowe’s
predicament marks the denouement of an unprecedented four-year period in which
developers threw gobs of money at real estate as prices for office towers,
especially in Manhattan, doubled and tripled almost as fast as sales could
be recorded. Investment banks avidly underwrote the binge, often basing loans
not on existing rents but on projections of rental income well into the future.
All of this
worked swimmingly so long as the economy hummed along and banks could pool
the loans and sell them to investors. Now, the economy is showing signs of
stress, and Wall Street’s repackaging machine is sputtering.
“In hindsight,
everybody should have been more cautious,” said Robert Bach, the chief
economist at Grubb & Ellis, the national real estate brokerage firm. “We
all knew this wasn’t going to last, but we hoped it would end with a
whimper, not a bang.”
Analysts, bankers
and developers are not predicting the imminent collapse of the commercial
real estate market, a reprise of the early 1990s, when property values dropped
by half, vacancies soared and banks were crushed under the weight of soured
real estate loans. But developers who jumped in at the top of this market
are likely to feel some pain because purchases were built on the assumption
that rents would keep escalating and that the value of buildings would keep
appreciating.
With building
owners no longer able to refinance their properties and pull out cash, Mr.
Macklowe and his son, William S. Macklowe, have only a month to repay $7 billion,
work out a new deal with their bankers or risk the breakup of their empire.
There is widespread speculation in the real estate industry that the Macklowes
may be forced to unload some of their properties at a discount to creditors
— including a sizable stake in the G.M. Building. At worst, they could
be forced to shed much of their portfolio.
“This is
very high-stakes poker,” said Scott A. Singer, the executive vice president
of the Singer & Bassuk Organization, a real estate finance and brokerage
company in New York. “To owe more than $5 billion in this environment
is tremendously risky. There are a very, very limited number of lenders who
can make multibillion-dollar loans now.”
For his part,
Mr. Macklowe — a fierce competitor who still races his custom 112-foot
yacht in regattas off the coast of Sardinia — coolly plays down the crisis.
He went sailing in the Caribbean three days before Christmas while his son
stayed home negotiating with the family’s bankers.
“Our lenders
have supported us in the past to an extraordinary degree,” Mr. Macklowe
said in an interview in his stark white offices on the 21st floor of the G.M.
Building, the evening before he flew south. “We’re pretty confident
that, going forward, we’ll be able to achieve accommodations and extensions
from our group of lenders.”
THE Macklowes
aren’t the only real estate barons in a tight spot. The Kushner Companies,
also family owned, plunged into the Manhattan real estate market in 2006,
paying $1.8 billion for 666 Fifth Avenue, at 53rd Street. The cash flow
from 666 Fifth represents only about two-thirds of the amount needed to service
the debt on the building — a shortfall of about $5 million a month —
according to Real Capital Analytics, a research company in New York.
In Los Angeles,
the developer Robert F. Maguire III may be forced to sell his publicly traded
company, Maguire Properties, after buying a portfolio of buildings from the
Blackstone Group just before the subprime credit crisis sent many of his tenants
into bankruptcy. An Australian company, the Centro Properties Group, is putting
itself up for sale after failing to refinance billions of dollars of short-term
debt stemming in part from its acquisition of an American shopping center
company.
To be sure,
some bright spots remain. Though vacancy rates are up nationally, the Manhattan
market remains healthy, with the vacancy rate in Midtown, the most desirable
business district, just 5.5 percent. Because relatively little new space is
coming on line in Manhattan in the next few years, the New York market appears
to be relatively solid.
But fewer deals
are being made and rent increases have slowed, if not stopped. If financial
institutions continue cutting payrolls, much vacant space could come back
on the market and drag down rents, even in Manhattan.
Despite the
problems hanging over Mr. Macklowe’s holdings, some analysts say that
it would be a mistake to count him out. This is the third time Mr. Macklowe
has stumbled since he started in the real estate business about 48 years ago,
and each time he has come roaring back. He has a knack for enhancing the look
and cash flow of his buildings, and he is regarded as a shrewd, brass-knuckled
negotiator in a rough-and-tumble industry.
A senior member
at a major real estate investment firm, who described Mr. Macklowe as a friend
and asked not to be identified so as not to jeopardize their relationship,
said the developer has “assets with enough value to pay off his bridge
loans.” But, this person asked, can Mr. Macklowe “do it with everybody
smelling blood in the water and looking to buy a bargain?”
Some of the
wiliest players in the real estate business have already been circling Mr.
Macklowe.
This past fall,
Vornado Realty Trust, of which Steven Roth is chairman, bought a stake in
loans collateralized by four of Mr. Macklowe’s buildings on an apparent
bet it might snare some great real estate on the cheap, bankers and real estate
executives said.
For the last
month, Stephen M. Ross, the chairman of the real estate company Related, has
been talking to Mr. Macklowe about a deal for Macklowe Properties’ coveted
Drake Hotel site, at Park Avenue and 56th Street, an executive involved in
the talks said. Real estate executives say another rival developer, Sheldon
H. Solow, may buy some of Mr. Macklowe’s debt in a bid to gain control
of the G.M. Building, although a spokesman for Mr. Solow said Mr. Solow was
not trying to acquire any of the debt.
THE Macklowes
readily acknowledge that they are looking for equity partners. Mr. Macklowe’s
son, William, emphasizes the quality of the buildings in his family’s
Manhattan portfolio, which includes 2 Grand Central Tower, Park Avenue Tower
and Worldwide Plaza. He points out that the buildings are also largely full.
“It’s
not a real estate crisis but a capital markets crisis,” the younger Mr.
Macklowe said. “Our legacy and acquired portfolios are renting at market
rates or better. In August, when the world took a 180-degree turn, we and
others got caught up in it.”
As it now stands,
the Macklowes say they owe Deutsche Bank a $5.2 billion payment in February,
in connection with the Equity Office transaction. They owe the Fortress Investment
Group, a leading private equity and hedge fund firm, $1.2 billion for a bridge
loan backed by a limited partnership interest in the G.M. Building, stakes
in 11 other Macklowe buildings and a personal guarantee from the Macklowes
for $1 billion.
The Macklowes
are in default on a $510 million loan connected with a project planned for
the Drake site. Although the Macklowes have a nonbinding agreement with an
anchor tenant, a Nordstrom department store, they have not acquired all the
land for the project. A spokesman for Nordstrom said the company was also
talking to other developers.
At the same
time, the family is trying to obtain a new construction loan for a 30-story
office building being built at 510 Madison Avenue, at 53rd Street.
Even during
this tense period, Mr. Macklowe often interrupts an interview with jokes.
And those who know him say that he can be both endearing and notoriously tough.
He has tangled with lenders, regulators, city officials, tenants and even
his former East Hampton neighbor, Martha Stewart.
“Dealing
with Harry can be a charming experience, and it can be like a trip to the
dentist without anesthesia,” said Peter Hauspurg, chairman of the real
estate investment services firm Eastern Consolidated. “At the end of
the day, Harry’s operative phrase is: It’s just business.”
DESPITE Mr.
Macklowe’s hard-edged business reputation, friends say he also devotes
considerable time to his grandchildren, his collection of modern art, golf
at the Atlantic Golf Club in Bridgehampton and, of course, sailing.
The son of a
Westchester County garment executive, Mr. Macklowe was a college dropout when
he started as a low-level real estate broker in 1960. Three years later, he
and his supervisor formed their own company, Wolf & Macklowe. By the 1980s,
he was building a succession of towers, including the angular black-glass
Metropolitan Tower, on 57th Street between Sixth and Seventh Avenues; 2 Grand
Central Tower; and the residential building RiverTower, on the East Side,
where he and his wife, Linda, have a duplex.
Mr. Macklowe
would like to be known for his building designs, or his art collection. But
what many New Yorkers recall is that in 1985, Mr. Macklowe’s company
was involved in the illegal, nocturnal demolition of two single-room-occupancy
hotels near Times Square, only hours before a law went into effect protecting
the buildings. He was not indicted in the incident, but one of his executives
pleaded guilty to a misdemeanor charge of reckless endangerment. Five years
later, he opened the Hotel Macklowe on the site.
As his purchase
of the G.M. Building demonstrated, Mr. Macklowe often gets the timing right.
On the day the stock market crashed in October 1987, he sold a package of
15 buildings to Joseph Neumann for $350 million, or $120 million more than
Mr. Macklowe and his partners paid for them 10 months earlier. Mr. Neumann’s
empire subsequently collapsed.
Like many other
developers in the early 1990s, Mr. Macklowe took a beating during a severe
real estate recession, ultimately returning both the Riverbank West tower
on 42nd Street and the Hotel Macklowe, now known as the Millennium Broadway
Hotel, to the lenders.
Rather than
disappear, Mr. Macklowe did a series of smaller projects in the mid- to late
1990s, building less-glamorous apartment houses or renovating office buildings
on Madison Avenue. In 2003, he bought the G.M. Building, a move that left
many of his peers describing him as a real estate genius. The building was
built for General Motors in 1968 and now houses tenants like hedge funds,
the investor Carl C. Icahn and the law firm Weil, Gotshal & Manges. Mr.
Macklowe suggests that the building is worth $3.5 billion or even $4 billion,
though it may be hard to find a lender or investor who agrees.
By the fall
of 2006, Mr. Macklowe was sitting pretty, primarily because the value of the
G.M. Building had jumped so handsomely. He was putting together a premier
development centered on what was once the site of the Drake Hotel, which he
bought in 2006 for $418.3 million. He and his son were also building a hotel
and apartment house at Madison and 53rd Street. After the residential market
appeared to slow, they nimbly converted it into an office building for hedge
funds, complete with a swimming pool and a luxurious health club.
Earlier this
year, Mr. Macklowe decided to try his luck again. After the Blackstone Group,
a private equity powerhouse, beat back Vornado to take over Equity Office
with a $39 billion bid, Blackstone quickly decided to sell most of Equity
Office’s Midtown Manhattan buildings without taking possession of all
of them. During 10 days of whirlwind deal-making, Mr. Macklowe secured financing
and stepped in to buy seven of the buildings for $7 billion.
The timing looked
propitious. Credit was so readily available that Mr. Macklowe needed to put
down only $50 million. He borrowed the rest in short-term loans from Deutsche
Bank and Fortress. But that left him in the dicey position of having to find
new sources of permanent financing or equity to pay off the short-term debt.
“He went
from utter comfort to being on the precipice again,” said one real estate
executive who has worked with Mr. Macklowe and asked not to be identified
to retain a relationship with the developer.
The annual rent
for the seven Midtown buildings was generally $55 to $59 a square foot, according
to William Macklowe, but Deutsche Bank and Fortress underwrote the deal on
the assumption that rents would soon rise to $100 a square foot.
After all, the
commercial real estate market was higher than ever. The vacancy rate had fallen
to record lows, while high construction costs made new buildings prohibitive.
Landlords at prime office buildings were getting more than $100 a square foot
annually, while the average rents for first-class Midtown buildings rose to
$73.31 by the first quarter of 2007 from $55.21 in the first quarter of 2005,
according to Reis Inc., a New York office research company.
At the same
time, average prices for large office buildings in Midtown more than doubled,
to $745 a square foot from $357, according to Real Capital Analytics. Investment
banks and foreign companies began pouring capital into real estate. Lenders,
in turn, took more risks, often providing financing for 90 to even 100 percent
of a building’s price. Investors became ever more willing to accept a
lower initial rate of return, known as the capitalization rate.
As with the
residential market, the money flowed easily because lenders did not keep these
risky loans on their balance sheets — as the commercial banks and savings-and-loan
associations did to their peril in the early 1990s. Instead, Wall Street repackaged
hundreds of billions of dollars of loans as commercial-mortgage-backed securities
and sold them to investors.
“Loans
with more aggressive terms that weren’t available in ’03 and ’04
became the norm in ’06, when suddenly lenders became very accommodating,”
said Mike Kirby, a principal of Green Street Advisors, a research company
in Newport Beach, Calif., that specializes in real estate investment trusts.
“The attitude was, ‘Gee, we’re not going to own this stuff;
we get terrific fees for underwriting these loans, and we can blow it out
in a C.M.B.S. deal in three months.’”
EARLIER this
year, however, the real estate winds shifted. In April, just two months after
Mr. Macklowe bought the Equity Office properties, Moody’s Investors Services,
the bond rating agency, said it planned to readjust how it rated commercial-mortgage-backed
bonds to better reflect their risk. The agency complained that lenders were
making overly optimistic projections about rent growth.
By last summer,
as the subprime mortgage crisis hit residential lending and credit markets
tightened, opportunities evaporated for developers like Mr. Macklowe to refinance
expensive short-term debt.
Perhaps slow
to realize the severity of the credit problem, Mr. Macklowe paid nearly $60
million in June for virtually the entire seventh floor of the Plaza Hotel,
the Manhattan landmark that has been converted into condominiums. He hired
the architect Charles Gwathmey to design a 13,000-square-foot apartment, which
offers a view across Fifth Avenue to the G.M. Building.
But in September,
the Macklowes hired the investment banking guru Joseph R. Perella to help
them find new equity partners. They flew to the Middle East to visit what
cash-starved developers call “the Big Four” — Kuwait, Qatar,
Abu Dhabi and Dubai — in an unsuccessful hunt for fresh capital.
“We knew
we could get higher value” for the Equity Office buildings, “but
it wasn’t going to come in years two, three or four,” William Macklowe
says. “We had a plan for a permanent capital solution. The events of
the late summer slowed that down.”
The Macklowes
say they also spent more than $150 million paying off short-term lenders at
the Drake Hotel site and received an extension on their senior debt, which
has since expired. But the Macklowes still have to contend with a $510 million
note backed by the site.
“There
are people out there who are very eager to acquire it if Macklowe decides
not to build, or something untoward happens,” Harry Macklowe said. “We’re
talking to several of our peers who’ve asked to join us in that development.
We’re evaluating.”
There is increasing
pressure, meanwhile, to persuade Deutsche Bank and Fortress to extend their
deadline beyond Feb. 8 for at least $6.4 billion in debt, allowing the Macklowes
more time to find new equity partners.
Bankers and
real estate executives are divided over whether the Macklowes will be forced
to sell some properties — maybe even some of the most valuable assets.
Some also argue that layoffs in the financial industry this year will almost
certainly depress the market and the value of commercial property.
Others, like
Scott Latham, a broker at Cushman & Wakefield, contend that the vacancy
rate is so low that it would take tens of thousands of layoffs to turn Midtown
into a tenants’ market. Rents will not go up as fast as they have in
the past 12 months, he said, but almost no one is predicting that rents will
fall.
Mr. Macklowe
“may shed some assets, just because it allows him to control whatever
he holds onto,” Mr. Latham said. But there are still enough foreign investors
interested in the Manhattan market, he said, “that Mr. Macklowe may not
have to sell his core properties.”
A friend of
Mr. Macklowe, who asked not to be identified to preserve a business relationship
with him, put it another way. “Somehow he always manages to pull it off,”
the friend said. “But he won’t do anything until the bitter end.
He will play it out all the way.”
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