New Skyscraper Ignites Growth Below 34th Street

January 10, 2011

Dana Rubinstein, The Wall Street Journal

A real-estate group led by developer Douglas Durst plans to break ground within the year on a $350 million skyscraper just south of Herald Square, in one of the first major private construction projects to move forward in the wake of the downturn.

The development of the 40-story apartment tower also signals the transformation of Sixth Avenue south of 34th Street, from a wholesale and flower district into a high-end residential and retail corridor.

Mr. Durst and has partner Harold Fetner closed on the purchase of the site on Dec. 21, six years after they first considered buying the site. They are finalizing negotiations with Pelli Clarke Pelli Architects to design the glass facade of the 500,000-square-foot building that will include at least 300,000 square feet of rental apartments, 80% of them luxury, 20% "affordable."

The developers haven't decided what to put in the tower's base. "Right now, we're leaning towards retail, though we are talking with hotel developers too," Mr. Durst said in an interview last week.

The project is moving forward at a time when the private construction market is struggling to come back to life after one of the worst real-estate markets in a generation. Financing is still difficult to obtain and clouds of uncertainty are still lingering over the city's economy.

Demand in the apartment residential market, though, has been relatively strong compared with other sectors. Effective rents, which take into account landlord concessions, grew 5.25% in 2010 after suffering a record 5.9% drop in 2009, according to market research firm Reis Inc.

Also, Mr. Durst has a reputation for taking advantage of down markets to move forward with development plans. The grandson of the late Joseph Durst, the family patriarch, Douglas Durst, also helped lead the industry out of the recession of the early 1990s with the Conde Nast Building in Times Square.

The neighborhood south of Herald Square has changed dramatically since the 1995 rezoning of Sixth Avenue, which ushered in higher-density development. In 2000, the Albanese Organization completed the Vanguard Chelsea at 24th Street and Sixth Avenue, the first residential development there of note.

Now, as the Flatiron district moves west and Chelsea extends north, Sixth Avenue south of 28th street is crowded with mammoth luxury rental towers, such as the Archstone Chelsea and the Chelsea Landmark.

The area between 28th Street and Herald Square is just now taking off, with the recent opening of the Beatrice, a hotel and residential development, at 30th Street and Sixth Avenue. The avenue's retail remains a mix of wholesale garment stores, and the occasional psychic and flower shop.

The developers don't see that lasting for much longer. "Everyone's going to go running to it when they see we're building something," Mr. Fetner said.

While Mr. Durst's family is mostly known for office buildings, he has ramped up his residential developments in recent years. Since 2007, all of his major residential projects have been done in partnership with Mr. Fetner, a longtime family friend. Their other projects include the Epic, a luxury rental building on 31st street between Sixth and Seventh avenues.

Like many real-estate investors, Messrs. Durst and Fetner have been looking for opportunity in the economic downturn, creating a $300 million fund to purchase distressed assets. So far they, and others, have found it difficult to do that because lenders have been reluctant to foreclose and sell troubled assets.

But the Sixth Avenue site provided them one of those opportunities.

Mr. Fetner and Mr. Durst first developed an interest in the site, which encompasses the west side of Sixth Avenue, between 30th and 31st Streets, while they were developing the Epic, their first project together. "A lot of people thought we were nuts for building midblock, off the avenue," Mr. Fetner said.

Initially underwriting the Epic at $49 a square foot, the developers were ultimately able to achieve an average rent of $70 a square foot, making the apartment building the most lucrative in their portfolio. That means a 1,000-square-foot two-bedroom apartment would rent for more than $5,800 a month.

"So, in terms of being bullish on the market, we love this marketplace," Mr. Fetner said.

As they were developing the Epic, the site at 855 Sixth Avenue became available. At the time, the development parcel was occupied by tenanted commercial office buildings, and the price, at about $260 a square foot, was too expensive for their taste. "I was really disappointed and said, call me when you get a little bit more realistic," Mr. Fetner said.

The site went through a number of owners ending up with a venture of Yitzchak Tessler, of Tessler Developments, and Jacob and Meyer Chetrit, of the Chetrit Group. In 2007, they purchased the land for $140 million, using $105.3 million in debt from Fremont Investment & Loan, whose real-estate business was later acquired by iStar Financial. The following year, they added a seventh parcel for an additional $12.3 million.

Messrs. Chetrit and Tessler announced they would build a residential tower atop a retail base there. They cleared all but one building from the site. But their plans were upended when the real-estate market collapsed. In 2008, Messrs. Chetrit and Tessler defaulted on their iStar loan, according to court documents. Messrs. Tessler and Chetrit didn't return calls requesting comment.

Their problems gave Messrs. Durst and Fetner another opportunity to go after the site. Last July, the distressed fund they had created bought the iStar debt, paying the full face value, then $101.5 million. By that time iStar had commenced a foreclosure process. The developers figured that either they would eventually take over the site or Messrs. Chetrit and Tessler would repay the debt, plus interest.

"If we lost, we won," said Damon Pazzaglini, chief operating officer for Durst Fetner Residential. "If we didn't get the property we wanted, we would have made 40% in six months."

Ultimately, Messrs. Durst and Fetner succeeded in convincing Messrs. Chetrit and Tessler to turn over the site. That happened late last month.

"Now," Mr. Fetner said, "the fun starts."

"We're very anxious to start building again," said Mr. Durst.