Murray Hill, in Shift, Plans Solo Purchases

Murray Hill Properties plans to shift tactics for its next fund to better position itself to exploit growing distress among Manhattan office owners.

The New York company will seek to raise $500 million of equity - five times more than last time - in order to gain the flexibility to close deals on its own. That's a big switch, because Murray Hill has traditionally served as operating partner, putting up only a minority stake and bringing in equity partners.

The company, founded by Norman Sturner and Neil Siderow in 1973, has been able to line up an impressive list of partners, including Brooklyn investor David Werner, German syndicator Jamestown and fund operators Carlyle Group, ING Clarion Partners and Westbrook Partners.

But as the market weakened in recent months, many investors have moved to the sidelines, making it more difficult for Murray Hill to proceed with the co-investment strategy. Earlier this year, the company was unable to line up a partner for its planned $555 million purchase of the 921,000-square-foot office building at 485 Lexington Avenue in Midtown Manhattan. The missed opportunity convinced Murray Hill it had to change its blueprint for acquisitions and adopt a more flexible, go-it-alone approach.

The company, which has thrived by focusing almost exclusively on Manhattan office properties, figures to have plenty of opportunities if it can reach its equity goal for the fund, now in the early planning stages. Local brokers predict that as many as 30 overleveraged, Class-A office properties in Manhattan - all purchased at the market peak from 2006 to 2007 - may become available at discounted prices over the next few years as borrowers are unable to refinance. The office buildings are generally well-leased, yet have room for upside - making them suitable for Murray Hill's investment strategy.

Market fundamentals in the city have weakened dramatically over the past year. The occupancy rate stood at 90.9% last month, according to CB Richard Ellis, down from 94.4% a year earlier. Average asking rents have dropped to $54.63/sf, from $71.25/sf a year earlier, and tenants in many cases are agreeing to pay only 75% of asking rents, compared with 90%-plus a year ago. What's more, owners now have to give free rent for three to six months to attract tenants - something unheard of during the bull market.

Many real estate players think the city's leasing market is still declining and won't hit bottom until next year, when Murray Hill would be able to begin investing the new fund, Murray Hill Properties Real Estate Investment 5. While the company declined to discuss its plans, it has sent out signals that it wants to begin soliciting investors by yearend. Murray Hill has begun speaking with placement agents, although it may decide instead to hire an equity-raising specialist to work in-house. If the $500 million equity goal is achieved, the vehicle would have $1.25 billion of buying power with leverage.

The firm's current $100 million fund, which closed last summer, is about 60% invested. Murray Hill is expected to use about $20 million of the remaining equity to buy out its partners at the 400,000-sf building at 1412 Broadway in Midtown Manhattan. Murray Hill and the Cayre and Adjmi families acquired the building in 2004 from JER Partners for $105 million. Murray Hill recapitalized the property in 2006, bringing in Principal Real Estate Investors as a partner to replace the two local families. At that point, the property's value was pegged at $178 million.

Market players said that after buying out Principal, Murray Hill plans to bring in a new partner, a move that would allow it to re-use the $20 million of equity. The current fund isn't permitted to own properties by itself.

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