(Bloomberg)—HNA Group Co. will be hard-pressed to get anything close to the $2.2 billion it paid for a Manhattan office tower during its real estate binge.
Last year, the Chinese conglomerate bought 245 Park Ave., a late 1960s-era building that’s home to JPMorgan Chase & Co., paying one of the highest prices ever for a New York office property. Values have since dropped and HNA faces the challenge of selling a building that’s starting to lose some of its gold-plated tenants and in need of improvements that could cost its new owner more than $1 billion, said Gregory Kraut, managing partner of K Property Group, which considered buying the building and examined it closely.
“You’d have to put a ton of money into it,” said Kraut, who estimated the 1.7 million-square-foot (158,000-square-meter) property will require about $850 million in upgrades, like a new lobby and sprinkler system, and another almost $230 million more to renovate spaces for tenants over time. That’s “a lot of risk even for Park Avenue.”
HNA, among the most prolific dealmakers in recent years, is pulling back after its gorge on trophy properties helped push up New York real estate prices. Now HNA, which used borrowed money to expand and accumulated one of the biggest debt loads in China, is under pressure from the government to liquidate assets. The company has already put about $4 billion of U.S. commercial real estate on the block.
Prior Sale
Last month, HNA sold its 90 percent stake in 1180 Avenue of the Americas. Northwood Investors LLC, run by John Kukral, former chief executive officer of the real estate unit at Blackstone Group LP, paid $305 million for the building. HNA bought its interest for $246.6 million in 2011, according to figures from Real Capital Analytics Inc.
But it won’t all be easy to sell, especially higher-priced buildings like 245 Park Ave.
“When you’re marketing a $2 billion asset, the list of buyers is shorter,” said Woody Heller, vice chairman and co-head of capital markets at commercial property brokerage Savills Studley. “It’s more difficult to show a profit reselling something you just bought, particularly in a market where pricing hasn’t risen.”
Sales of New York City commercial properties have slowed as the overseas buyers that helped propel values to records -- HNA not least among them --now retreat. Manhattan office values have fallen 3.4 percent as of February from their peak last April, according to data from real estate research firm Green Street Advisors LLC.
Bank, Baseball
HNA’s 45-story Park Avenue tower, near Grand Central Terminal in Midtown, is home to a collection of high-profile companies such as French bank Societe Generale SA, Major League Baseball and alternative investment firm Angelo Gordon & Co. Its largest tenant, JPMorgan, occupies more than 40 percent of the building, according to data compiled by Bloomberg.
A new owner will have to contend with vacancies of about 13 percent, according to data firm CoStar Group Inc., and tenants leaving for renovated buildings. JPMorgan’s lease expires in 2022. Last month, the bank announced plans to erect a new skyscraper at the site of its current headquarters at 270 Park Ave. The firm could leave 245 Park Ave. and consolidate in the new building, which it plans to complete by 2024. Major League Baseball is leaving behind about 220,000-square feet of space and moving to 1271 Avenue of the Americas, which underwent a $600 million renovation.
One nearby landlord isn’t concerned.
“Tenants come and go all the time on Park Avenue,” said Scott Rechler, chief executive officer of RXR Realty LLC, landlord to nearby 237 Park Ave. and the Helmsley Building at 230 Park Ave., a New York City landmark.
HNA’s Park Avenue tower should benefit from ongoing growth and an influx of people to the area. By 2022, SL Green Realty Corp.’s multibillion-dollar project at 1 Vanderbilt will be complete and the effort to bring Long Island Rail Road trains into Grand Central should be done, Rechler said.
HNA paid $1,282 a square foot last May when it bought 245 Park from Brookfield Property Partners LP and the New York State Teachers Retirement System, according to Real Capital Analytics. SL Green and RXR also bid on the building.
HNA “bought it for anywhere between $150 million to $200 million more than probably some of the more sophisticated New York City investors” would have paid about a year ago, said K Property Group’s Kraut. “It’s not exactly like we’ve had the market pick up materially since then, so I would venture to say it’s going to be a little challenging for them.”
--With assistance from Christine Maurus and Sarah Mulholland.To contact the reporter on this story: David M. Levitt in New York at [email protected] To contact the editors responsible for this story: Daniel Taub at [email protected] Heather Perlberg
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