Concern Over Manhattan's One Vanderbilt Project Grows -- Update

By Peter Grant Features Dow Jones Newswires

With the Manhattan office market showing signs of softening, some analysts are expressing more concern about the leasing outlook for one of the most high profile new developments in the city: SL Green Realty's 1.7 million square foot tower next to Grand Central Terminal.

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The building -- named One Vanderbilt -- has announced only one office deal, a 200,000 square foot lease with TD Bank, a subsidiary of Toronto-Dominion Bank.

SL Green, New York's largest office landlord, plans to start laying steel in June and is optimistic it will do a lot more leasing by 2022 when it is scheduled to be completed.

But SL Green jarred some analysts when it advised them recently against anticipating leasing until next year. That "kind of reset expectations," according to Craig Mailman, an analyst with KeyBanc Capital Markets Inc.

It is also not clear that SL Green will be able to hit the average rents of $150 a square foot the real-estate investment trust has told Wall Street it expects. Some think that is ambitious. Average asking rents in Midtown in the first quarter were $80.45 a square foot, essentially unchanged from 12 months earlier, according to CBRE Group Inc.

On a conference call with analysts to discuss first-quarter earnings last week, SL Green chief executive Marc Holliday continued to voice optimism. While average rents are in the $80 range, he pointed out that "there were many, many deals done at levels of $125 a foot and higher over the past 12 months."

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He also pointed out that SL Green doesn't "need" $150 a square foot rents for the project to be successful. "Need is a funny word," he said.

Mr. Holliday said a rent of $135 a square foot would still produce a yield of over 6% "which is still actually quite high." At $150, the yield would be 7.1%, "fairly extraordinary for a building of this size and quality."

SL Green earlier this year announced it had sold a 27.6% stake in One Vanderbilt to the National Pension Service of Korea and a 1.4% interest to Hines Interest LP. That deal still leaves 71% of the project with SL Green, Mr. Holliday acknowledged on last week's call.

But he pointed out that "With the $525 million equity commitment that we now have in the project, combined with the $1.5 billion of construction financing, which is locked and loaded, our future equity commitment to the project between now and 2020 is less than $100 million a year."

Responding to Mr. Mailman's remark, an SL Green spokesman said Tuesday: "We corrected analyst expectations to reflect our consistent expectation that leasing beyond the TD Bank anchor tenancy would begin in earnest starting in 2018."

Write to Peter Grant at peter.grant@wsj.com

(END) Dow Jones Newswires

April 25, 2017 18:04 ET (22:04 GMT)