The smartest guy in the real estate boom | Katonah NY Homes

Last week, RXR Realty Chairman Scott Rechler addressed a group of fellow real estate executives and joked that there were so many familiar faces he felt like it was his bar mitzvah. Chuckles followed his instructions to leave the gift envelopes in the corner.

Mr. Rechler certainly isn’t hurting for cash. In the past 12 months, RXR has invested more than $3.5 billion in Manhattan real estate, including buying or signing contracts to purchase 4 million square feet of space in four properties. Underpinning the spending spree is a $1 billion-plus fund whose dozen or so investors include the Safra family and Rothschild Realty.

“Over the next 24 months, we are going to be very active,” Mr. Rechler told Crain’s. “We are making a substantial bet on Manhattan.”

That’s a switch from four years ago. In January 2007, the then-chairman of Reckson Associates Realty Corp. sold his public company to SL Green Realty Corp. for $6 billion after deciding the market was too frothy. Sure enough, the average price of a Manhattan office tower tumbled 59% between 2007 and 2009.

Mr. Rechler may have shown an excellent sense of timing back then, but some real estate executives say RXR is shelling out too much for its recent purchases. They note that rents, while no longer falling, are largely flat. And just like in the boom, scores of buyers are chasing deals. The average price of a Class A office tower rose 73% last year.

“If you aren’t paying a premium, you aren’t getting the property,” said Richard Baxter, a vice chairman at Jones Lang LaSalle’s New York Capital Markets Group, who doesn’t believe that Mr. Rechler is overpaying.

The office market in Manhattan is indeed improving. In the first quarter, leasing activity soared 34% from the year-earlier period, to 7.6 million square feet, according to Cushman & Wakefield Inc. In midtown, net effective rents—what the tenant pays after accounting for perks like construction allowances—rose 24%, to $57.82 per square foot.

Conservative financing is a key part of 43-year-old Mr. Rechler’s investment strategy. RXR’s plan is to pay an average of 50% of a building’s price in cash and fund the rest with long-term loans. That should allow it to ride out any future drops in the market.

A hit list in hand

“Scott is very smart and leads a great team that understands New York,” said Andrew Silberstein, a managing director at Rothschild Realty, which put $150 million into the RXR fund. “They really understand how to create value with real estate and not just financial engineering.”

RXR entered Manhattan in August 2009. Mr. Rechler had quietly mined his contacts, built over a lifelong real estate career, and compiled a hit list of buildings with financial problems. His goal was to swoop in and snap up a bargain.

“I wanted to be the first call when anything was for sale,” he said.

RXR’s first Manhattan purchase was buying discounted debt on a 556,000-square-foot office condominium at 1166 Sixth Ave. that is leased to two gold-plated tenants. The firm is now under contract to buy 40% of the condo.

Growing bolder, RXR in June 2010 bought 49% of 340 Madison Ave. in a deal that values the property at $570 million, or $760 a square foot. Mr. Rechler knew the building faced a refinancing in 18 months, which would make it less attractive to other investors. He took the risk—and is now in the process of refinancing the property in a deal that will bring in an additional partner.

RXR won 1330 Sixth Ave.—a prize Mr. Rechler had been eyeing since 2009, when Harry Macklowe was forced to give it back to lenders—in a bidding war late last year. Still, the $400 million purchase price was nearly $100 million less than what Mr. Macklowe paid in 2006.

When RXR bought the building, rents were about $70 a square foot. Recently. a tenant signed a $100-a-square-foot lease, Mr. Rechler notes with pride.

He understands that not all rents will jump so quickly. RXR has a contract to pay $900 million, or about $400 a square foot, for the Starrett-Lehigh Building, the sprawling, 2.3 million-square-foot property in Chelsea.

Chelsea, of all places

Mr. Rechler, a midtown maven, says he’s drawn to the West Side neighborhood because it’s becoming a center for media and technology companies that are a vital part of New York’s economy. Google’s recent purchase of its Eighth Avenue home and the eventual construction of Hudson Yards will only add to the area’s allure.

The Starrett-Lehigh Building’s rents, currently around $40 a square foot, could jump to $70, he predicts. Of course, that could take a decade. “I have,” he said, “very patient money.”

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