The gold rush in Lower Manhattan real estate continues to make fortunes for those invest here, but much less of a difference in the lives of people who live or work here. The most recent case in point is the Courtyard New York Marriott Downtown, at 133 Greenwich Street (near the corner with Thames Street), which opened in November.
The site of the hotel has changed hands four times in 12 years. In each of those transactions, save one, the seller paid vastly more than the price for which the property was purchased just a few years before.
The saga begins in 2005, when real estate development firm the Cooper Group purchased the then-vacant lot of approximately 10,000-square foot at 133 Greenwich $20 million. They considered building either a hotel or apartment tower there, but in the end decided to settle for doubling their money in 24 months, without ever putting a shovel in the ground.
Enter Ofek International, an Israeli real estate firm that, in 2007, purchased the parcel from the Cooper Group for $40 million. Their timing was as lamentable as Cooper’s was fortuitous, coming just months before the real estate crash and nationwide economic meltdown triggered that year by defaults in subprime mortgages.
When Ofek defaulted on its mortgage for 133 Greenwich later that year, the lender behind the transaction forced the company into bankruptcy and held an auction for the site. This process took five years, but when it was done, the bidding had been won by Hidrock Properties, a Manhattan-based developer of hotels and office buildings.
Hidrock paid $28 million for the site, and was the first owner actually to begin construction of what was, by then, destined to be a hotel. The result was a 35-story, 130,000-square foot edifice, with 317 rooms, branded to the Courtyard by Marriott chain. Multiple published accounts peg the cost of development for the hotel at $100 million.
The hotel opened in late November. But by that time, Hidrock was already in negotiations to flip the recently completed property. They found a buyer in Union Investment Real Estate GmbH, the property arm of Germany’s DZ Bank Group, based in Hamburg, which paid Hidrock $206 million for the hotel. This has yielded Hidrock a profit of $78 million over its initial investment of $28 million.
But Union Investment didn’t get the whole property. Hidrock kept for itself the 2,600-square foot retail space at the building’s base, which it will operate as a commercial condominium.
In an attempt to determine a value for this portion of the property, the Broadsheet analyzed ten comparable examples of retail space being sold in Lower Manhattan from 2014, 2015, and 2016. The properties were as large as 300,000 square feet and as small as 1,600 square feet. The prices fetched by these retail spaces were as high as $115 million and as low as $4 million. The average price for all the retail space that was sold in Lower Manhattan during this period was $2,181 per square foot.
Using this metric, the retail space that Hidrock has retained is worth approximately $5.6 million. This brings its total profit on the transaction to slightly more than $83 million. This represents an overall return of 186 percent, or an annualized return of 23.41 percent.
170 Broadway
And this story is far from anomalous. Another nearby hotel project further illustrates the turbo-charged exuberance of the Lower Manhattan real estate market. The building at 170 Broadway (at the corner of Cortland Street) was converted from Class B office space into a Marriott Residence Inn in 2014. The developers who purchased the entire building in 2011 for slightly more than $60 million announced three years later that they had sold the 20,000 square feet of retail space at its base for $70 million. This means that all the money the developers would earn from the remaining 15 stories of the building would consist entirely of profit. This potential was realized in December of that year, when they sold off the hotel for $150 million. This brought their total return on an initial investment of $60 million to $220 million.
Amid the broader development landscape of Lower Manhattan, developers of hotels, office buildings, retail complexes, and residential towers are making similarly vast fortunes on projects that will draw legions of additional tourists, workers, shoppers, and residents to Lower Manhattan’s already densely clotted streets. But no portion of these profits is being set aside to create any of the infrastructure needed to handle such a population.
One local leader who wants to change that is State Assembly member Deborah Glick. Ms. Glick is the sponsor of a bill in her chamber of the State legislature that would (if enacted) impose a tax on new residential development in New York City, and create a new, dedicated funding stream to build public schools.
Although this law would apply to all of New York City, such a levy would be more directly relevant for Lower Manhattan than almost any other community in the five boroughs. In the square mile below Chambers Street, the frantic pace of residential development in recent years has left local schools operating well in excess of their designed capacity and bursting with students.
School impact fees, while almost unknown in New York, are prevalent in almost every other fast-growing area of the United States, urban or suburban. The idea behind the policy is that new building projects should directly pay at least a portion of the cost of providing additional public services, the need for which would not arise without the development. Some form of impact fees (which are also used to pay for services such as police and fire protection, water and sewage infrastructure, and new roads) is levied in about 60 percent of all U.S. cities with more than 25,000 residents, and almost 40 percent of all metropolitan counties, according to Duncan Associates, a Chicago-based consulting firm that advises local government around the United State on how to formulate impact fees. In California and Florida, the two states that utilize impact fees most extensively, they are assessed by 90 and 83 percent of all cities and counties, respectively, according to the company.