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Bargain-Basement Skyscrapers

Buildings that sold for $500 million in 2007 may now be worth half that. And vultures are circling giddily in the air.


(L-R) 777 Third Avenue; 11 Times Square   

On a sweltering day at the tag end of summer, M. Myers Mermel, a 47-year-old former Morgan Stanley banker turned real-estate vulture investor, stands in his pin-striped suit outside an elegant white 23-story building at Madison Avenue and 61st Street. The place brings back fond memories.

Mermel had the pleasure of flipping the tower above Barneys twice in the last six years as Manhattan property values soared. First, he bought it for $160 million in 2003 with the help of a wealthy Los Angeles family. Mermel filled the upper floors with hedge funds whose managers loved gazing at Central Park from their desks. “The hedge-fund guys were fairly price-insensitive,” he chuckles.

Rents soared. Three years later, Mermel and his backers sold the building for $220 million to Broadway Partners. Mermel was certain that there was more money to be made here. So he kept a minority interest in the property. Sure enough, Mermel and Broadway Partners sold 660 Madison Avenue to Risanamento, an Italian real-estate firm, for $375 million in 2007. He got out just before the credit crunch hit. Since then, he has raised $50 million for a vulture fund. Now he plans to prey on competitors who weren’t so lucky.

One of the properties that Mermel is circling is 660 Madison Avenue. Since the economy collapsed, Manhattan office-building prices have fallen as much as 50 percent. Mermel estimates that this one is now worth $143 million—considerably less than Risanamento’s $175 million mortgage. He is heartened by news that the Milan-based company is trying to unload the tower to stave off bankruptcy. It only improves his chances of picking it up again cheaply.

One of the building’s engineers, a guy with a shaved head and an outer-borough accent, is leaving for lunch and notices Mermel on the sidewalk. “Hey, you coming back?” he asks.

Mermel grins.

“Seriously, you in the market?”

“I’m always in the market.”

“Call me,” the engineer yells over his shoulder as he disappears into the crowd.

How bad is the Manhattan skyscraper market? Not as bad as in the seventies, when New York nearly declared bankruptcy, nor as troubled as in the nineties, when the skyline was full of empty towers from the Reagan boom. But according to Mermel’s firm Tenantwise, which tracks 12,800 commercial buildings, the midtown office-vacancy rate, including sublease space, reached 17 percent at the end of July—a 38 percent increase compared with the beginning of the year. The firm says midtown rents fell 28 percent, to $58 a square foot. In other words, “if you bought within the last two years on a two-year note with the expectation that you could rent to hedge funds at $225 a square foot, you are screwed,” says Tom Fink of Trepp, a firm that tracks office-building debt.

The city has already witnessed some spectacular flameouts, like when Harry Macklowe defaulted on $7 billion worth of short-term debt that he had borrowed from Deutsche Bank and the hedge fund Fortress Investment Group to buy seven midtown office towers and was forced to relinquish his prized GM Building to Mort Zuckerman’s Boston Properties. And there are undoubtedly more to come. According to Trepp, $80 billion worth of securitized commercial-real-estate loans come due in 2010 across the country—$7.6 billion on New York City buildings. Some real-estate moguls will find new lenders to refinance their debt. But many won’t. No wonder vultures are hoping to pick up buildings at half off their 2007 prices. If investment banks start clamoring for office space again, their profits could be enormous. “We are just waiting for things to ripen,” says David W. Levinson, chairman of L&L Holding, a real-estate company that has started a vulture fund with Prudential Financial kicking in up to $500 million. “Then I think we are going to see the opportunity of a lifetime.”

That’s certainly the way Mermel sees it. Accompanied by his driver Ruben, he’s agreed to give a tour of “distressed” midtown office buildings, and he has a woeful tale for each one. It’s almost as if he were polishing his arguments for future negotiations with their beleaguered owners. Even now, of course, there is only so much a vulture can buy with $50 million in Manhattan, although he hopes to raise a lot more than that. Mermel thinks the biggest distressed skyscrapers on his list will be devoured by companies like Boston Properties. “I hope to make a nice living on the smaller ones,” he says.

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