Lessons from a $110 million penthouse

The physical manifestation of r>g

felix salmon
Jun 8, 2014 · 4 min read

The big NYC residential real-estate headline of the week is that the penthouse apartment of the Woolworth Building — one of the most beautiful skyscrapers in the world, and the world’s tallest building for 17 years — is going on the market at a price of $110 million.

Many people have had grand plans for this grandest of spaces, but the one I remember best was back in 2000, when the top floors were going to be — plus ça change, plus c’est la même chose — turned into a glamorous penthouse apartment. The plan 14 years ago, however, was not to ask $110 million for 8,975 square feet. Rather, it was to charge $15 million for 7,500 square feet. A mere $2,000 per square foot, compared to $12,250 per square foot this time around.

There are a few lessons to be drawn here.

Firstly, and most obviously, there’s the insane spike we’ve seen in the price of top-end real estate. Not only has the space risen in value from $15 million to $110 million in 14 years — it has done so in the face of (a) the dot-com crash; (b) the global financial crisis; and (c) the fact that 9/11 destroyed pretty much the entire neighborhood in 2001.

(To put the price rise in perspective, if you invested $15 million in the S&P 500 in November 2000, and reinvested all your dividends, that investment would now be worth $27.5 million. And that’s with the S&P hitting new record highs.)

Secondly, the new plans for the Woolworth building prove yet again how important it is for anybody in the real-estate industry to have very deep pockets. In principle, real estate investing is a high-leverage game where you need relatively little up-front cash: you put a small amount down, borrow the rest, and then use the income the space generates to pay off your mortgage. In practice, however, the real money often arrives after a space has been empty for a decade or more. You wait, and wait, and wait — and then, when the stars align, you strike.

After all, the top of the Woolworth building could easily have been turned into offices, as was the plan circa 2007. If you rent out 8,975 square feet at $75 per square foot — the top end of the range anticipated in 2007 — that’s an income of $673,125 per year. Which is a perfectly nice income, but you’d have to make that much money every year for 163 years to get to $110 million.

And here’s the thing: once you’ve converted the space to offices, and signed a bunch of long-term leases, you’re stuck. You can’t change your mind and decide that you’d be better off just selling it as a single glorious residence. It’s too late. So if you want the option of going residential, you have to be able to afford to keep the place empty.

The plan to convert the Woolworth penthouse into offices made a certain amount of sense, circa 2007. The neighborhood has no residential character, hedge funds and private-equity shops were flying high and looking for trophy space, and the annual income from the space would be roughly 4.4% of the amount of money you’d get by selling it for $15 million. Given all that, the financially sensible thing to do was to rent it out, rather than sell it.

But in the years between 2007 and today, the ultra-high-end property market has finally made it across the pond to Manhattan from London. Selling an apartment for $110 million is nothing like selling an apartment for $15 million. The buyers no longer worry about things like the neighborhood, the schools, the location of the nearest supermarket. After all, they’ll probably actually stay in the apartment for no more than a few weeks of the year. It’s an asset, safely grounded in the USA, much more than it is a place to live.

And so, now, it has finally become conceivable that the top of the Woolworth building will sell for $110 million, more than 400 times the US median home price.

It’s a physical manifestation of r>g: the way that the rich get richer, while people who have to work for a living fall further and further behind. Any $110 million apartment, of course, will be emblematic of extreme wealth inequality. But beyond that, the only way for the owner of the building to realize the incredible increase in value that the top floors have seen in recent years was to keep them empty. If you need income, you can’t get the wealth; if you want the wealth, you can’t chase the income.

Or, to put it another way: if $673,125 per year sounds like a lot of money to you, then wave goodbye to your chances of making $110 million.

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