Knickerbocker Hotel Gives Hope to Commercial Real Estate

Sorry James Dolan, but while we wait to see if LeBron James will give hope to your New York Knickerbockers, the trade for the Knickerbocker Hotel has given great hope to the commercial real estate industry. Its not the fact that something of significance traded hands, but more so the pricing at which it traded hands.  The competitive bidding environment for this property, at this point in the cycle, may indicate a paradigm shift in investment strategy for those rich with capital to deploy.  Let’s examine further.

A partnership of Highgate Holdings, Ashkenazy Acquisitions Corp. and Crown Acquisitions bought the landmark property for $180M. The purchase of the 300,000 square foot asset included the  adjacent 10,000-square-foot lot at 1466 Broadway. In recent years the Knickerbocker Hotel was repositioned for office use, but previous owner Istithmar World Capital gave back to Danske Bank in March after defaulting on a $300-million mortgage. The partnership now plans to convert it into a boutique hotel with high-end retail at the base, and to develop the adjoining lot into a new luxury retail complex.

But here’s the interesting twist. Investor interest on the property was so hot, it may have indicated that buyers are starting to believe that values have bottomed out.  Furthermore, sellers seem to be smelling blood in the water, as an additional six other comparable Midtown buildings are actively on the market.  If investor interest for those assets remains as strong as with the Knickerbocker, all of the massive war chests that have been amassed by various funds over the last 24 months may have to look elsewhere (as in riskier asset classes or properties) to achieve their IRR hurdles and preferred returns to investors.

This of course, would be a godsend to the commercial real estate industry as a whole.  If capital begins to entertain investment in non-core assets, more transactions are likely to get completed.  That would be a boon to the entire industry.  More transparency would come back to the market as appraisers would have comps to work with, which could facilitate bank lending across multiple asset classes. Let’s hope this is a step in the right direction, and that more of those steps follow.