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With 500 W. 23rd, Zell bets on West Chelsea
With 500 W. 23rd, Zell bets on West Chelsea
June 01, 2011 07:00AM By David Jones
Sam Zell and a rendering of 500 West 23rd Street
Since the 2008 financial meltdown, the pace of new residential construction in Manhattan has been limited by tight capital markets, rising labor and material costs, and weak demand for new housing. But a new luxury West Chelsea rental project from billionaire Sam Zell is being closely watched as an indicator of where new development is headed in the near future.
Already, the project at 500 West 23rd Street has been a focal point for union protests. Certainly, with 23 union contracts set to expire this month in New York, the kerfuffle is indicative of the deteriorating relationship between big developers and organized labor in the city. Still, the developers have high hopes for the High Line-adjacent building, as the rental market recovers in one of the city's busiest areas for new development.
Equity Residential -- the giant real estate investment trust led by Zell -- paid $11.25 million in January 2010 to acquire the 23rd Street development site from struggling developer Shaya Boymelgreen, who had planned to build 107 luxury rental units there but stalled out. (Boymelgreen defaulted on his loans and couldn't work out a deal with his lender, Aristone Capital.)
Just months after the acquisition, Equity Residential began working with Gerner, Kronick + Valcarcel Architects to redevelop the property. Called TEN23, the development will have 111 market-rate apartments and 10,000 square feet of retail space. The project is one of the few ground-up residential developments in New York since the downturn.
Now, almost a year and a half later, the $55 million development -- which topped out in January -- is scheduled to debut by the fourth quarter of 2011. Equity officials said the company, which owns and manages more than 3,800 units in Manhattan alone, sees this new project as an important addition to its existing portfolio.
"New York is a core market for Equity Residential and we generate 13 percent of our net operating income here," company spokesman Marty McKenna said in an e-mailed statement. "It's a terrific place to own apartments, and we continue to look for opportunities to [expand] our New York portfolio both through acquisition and development."
The company declined to release further details about the project, but confirmed that rents at TEN23 will begin at $3,000 a month for studios, and range up to $5,800 per month for 1,053-square-foot, two-bedroom apartments, with private terraces and washer/dryers inside. The property, which is being marketed by an in-house team, will also feature three common roof gardens in a bid to attract the hip, young crowd that frequents the restaurants and arts scene around the newly constructed High Line park. A new section of the High Line is expected to open this month between 20th and 30th streets.
Meanwhile, Newmark Knight Frank's senior managing director, Craig Slosberg, is marketing the building's 10,000-square-foot retail space.
In planning the project in the aftermath of the financial crisis, Equity Residential was one of several major firms engaged in talks with New York labor unions for concessions.
"We were asked by one of the general contractors [on the project], Bovis, to see if we could do something to be more competitive with the nonunion labor," said Terry Moore, the business agent for Local 46 of the Metallic Lathers and Reinforcing Ironworkers Union.
Moore said that union workers agreed to a number of concessions regarding wages and work rules, but Zell decided to go forward with nonunion labor on the project. As a result, the building has been the target of union protests since June 2010.
"We're looking to work with [Zell], but he won't work with us," said Moore.
The union has posted a website called "Equity Residential Watch," which raises questions about the company's labor policies and safety record.
Among the issues the site highlights is the 2010 collapse of an Equity Residential-owned apartment building garage in Hackensack, N.J., which cost the company more than $12 million to repair.
McKenna told The Real Deal that Equity is in the final stages of rebuilding the garage and most of the tenants have moved back into the building.
During the company's first-quarter conference call with analysts in late April, Equity Residential executives stood by the decision to bypass the union agreement at TEN23. David Neithercut, president and CEO of the REIT, said the company gave the unions specific targets to hit, but that they were "unwilling or unable to do so."
Since then, union members have "tried to do things to annoy our residents at various buildings around New York, and I tell you, our residents don't care," he added.
He noted that the Regional Plan Association, a Manhattan-based urban policy research group, released a report last month urging labor unions to offer additional concessions to help get new construction projects off the ground. The report, released in advance of the expiring union contracts, advocates the adoption of open shops with a mix of union and nonunion labor, which the RPA said could save more than 20 percent in costs for new developments.
"Unfortunately, New York's construction costs have risen to uncompetitive levels," said RPA president Robert Yaro in a statement.
Gary LaBarbera, president of the Building and Construction Trades Council in New York, which is negotiating labor agreements on behalf of unionized contractors, emphasized union labor's competency and safety. "It's unfortunate that the developers of 500 West 23rd Street don't understand that we have the city's most skilled and prepared workforce, with an excellent safety record," LaBarbera said. "While the largest and most successful developers already know this, we will continue to communicate to others like Mr. Zell who are looking to cut corners on their projects in New York."
Neighborhood hot spot
Zell is only the latest big-time New York developer to bet on the area around the High Line.
Iman Bacodari, vice president and associate broker for the Jacky Teplitzky team at Prudential Douglas Elliman, said many of the boutique condos in the West Village and Chelsea markets have sold out, and there are relatively few options for renters in the area.
"A building like 500 West is a welcome addition," said Bacodari.
Janine Young, a salesperson at Bond New York, said demand for rental apartments along the High Line has been strong since last summer, as landlords have attracted new tenants with generous concessions. (Equity Residential declined to say whether it plans to offer concessions at 500 West 23rd Street.)
"The apartments at the Caledonia and other buildings just fly off the market," Young said. "It's kind of like a new frontier in a lot of ways for Manhattan."
Equity Residential, the biggest residential landlord in the U.S., has been on an acquisition spree in Manhattan, rapidly increasing its presence to compete with some of the dominant residential players in New York, including the Related Companies, Extell Development Company, TF Cornerstone and others.
Weeks after acquiring 500 West 23rd, Equity closed on two acquisitions and agreed to buy a third property from real estate mogul Harry Macklowe for a total of $475 million. The two closed acquisitions included River Tower, a 38-story property at 420 East 54th Street, and 777 Sixth Avenue, a 294-unit tower at the corner of 27th Street. As part of the third acquisition, Equity agreed to buy Longacre House, a 293-unit tower on 50th Street in Manhattan. Those acquisitions gave Equity Residential a total of 26 residential buildings in New York, including some 7,320 units.
Equity is still trying to recover from the economic slump, however. Recent filings with federal regulators show that the company's net operating income in the New York market is down 3.1 percent from last year, based on an average rent of $2,928, and average occupancy of 95 percent.
Still, despite the lingering concerns about the economy, Equity officials say the New York market is gaining in strength.
Mark Parrell, chief financial officer at Equity Residential, told analysts during the first-quarter conference call that concessions are down citywide due to increased demand from prospective tenants.
"There's little new supply coming into New York this year or next; the brokers' fees [paid by building owners] are pretty much all gone," Parrell told analysts.