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Category ArchiveDouglas Harmon

Slow Season: NYC’s Investment Sales Brokers Are Optimistic Despite a Challenging 2017

Two thousand seventeen “was still good—it just wasn’t great.”

Those are the comforting words that Aaron Jungreis, the co-founder and president of brokerage Rosewood Realty Group, offered to Commercial Observer last week when asked about the state of the New York City investment sales market.

Yet one could be forgiven for considering that a rather optimistic assessment, given how the numbers depict a commercial property market that has experienced a significant downturn since the halcyon days of 2015.

Two years after eclipsing an all-time high of $80 billion, total commercial real estate investment sales in the city fell just shy of $35 billion in 2017, according to a recent Cushman & Wakefield report on the state of the New York City real estate market. Transaction volume (the total number of property sales across the city) fell more than 30 percent in that time, and perhaps most damningly—after nearly a decade of unrepentant property value appreciation in the wake of the Great Recession—the average price per square foot for Manhattan commercial real estate sales (excluding the blighted retail market) fell for the first time since 2010, to the tune of 5 percent.

Even the outer boroughs—which have emerged to an unprecedented extent as viable markets in their own right—saw a 17 percent decline in the number of properties sold and a 27 percent dip in dollar volume (albeit from a record high of $18.2 billion in 2016) to $13.3 billion, per the C&W report. And while property values in the boroughs continued to climb last year, Robert Knakal, C&W’s chairman of New York investment sales, warned of “contagion” from the slipping Manhattan market leaking into the property markets of Brooklyn, Queens and the Bronx.

Numbers aside, talk to the commercial real estate brokers who are taking the calls and making the deals, and they’ll virtually all agree that the market for New York City real estate simply isn’t anywhere near the frothy peak of a few years ago, when one could procure buyers galore for virtually any parcel or property that hit the market. But despite this slowdown, most investment sales brokers are trying to paint a more positive picture of a market in a state of correction—with property values and transactions still at relatively high levels historically and signs of strengthening conditions heading into, and during the early part of, 2018.

“It’s still a good market,” Jungreis said. “The fundamentals are still strong, and people still want to come to New York. I just think we’re so spoiled with the market having gone up and up. I’m really not that concerned.”

Jungreis and other brokers who are active in the multifamily investment sales market attributed lower deal and dollar volumes to headwinds that have hindered investor appetite for both rent-regulated and market-rate residential buildings, as well as development sites that would have proven attractive for ground-up residential projects in years past.

Rent-stabilized properties have long been considered among the safest investments in New York City real estate due to their high occupancy rates and embedded upside once units become deregulated and landlords are able to charge higher, market-rate rents. But thanks to the de Blasio administration, multiple sources said, a more stringent regulatory environment has made it increasingly difficult for landlords to realize that upside and has consequently dampened investor enthusiasm for the asset class.

“De Blasio has won; the perceived upside is locked, and [property] taxes are going up every year,” Marcus & Millichap’s Shaun Riney, one of the brokerage’s leading Brooklyn-focused investment sales brokers, said of the market for rent-stabilized multifamily properties. “To keep up with the Joneses, you have to vacate units. That’s the dilemma [investors] have—you have to believe people are going to leave [their units] unless you’re a long-term investor, and long-term investors aren’t the ones paying 20 times the rent roll [for buildings].”

Chad Sinsheimer, a senior director at Eastern Consolidated, echoed the sentiment—noting that prospective buyers have become “a lot more passive and cautious in buying stabilized properties” due to regulations that have made it harder for landlords to approach tenants about buyouts and “unlock that upside” at rent-stabilized properties. “With all these tenant harassment lawsuits and headlines, there’s a little bit of fear on behalf of these landlords now,” he said. “They don’t know how long they’re going to be stuck with these tenants.”

While describing rent-stabilized assets as “still the darling of the market,” Bestreich Realty Group Founder and President Derek Bestreich cited the “administrative burden” of landlords having to deal with “layers and layers of government bureaucracy overseeing everything you do.”

“For owners, it’s like you’re guilty until you’re proven innocent—it’s evolved into a ‘gotcha’ type of environment where owners are on the defense, even if they’re operating their buildings admirably. It puts a bad taste in investors’ mouths,” the investment sales broker said. “People want to be able to grow the value and make a return, and I think there’s less confidence in their ability to do that nowadays.”

Beyond heightened regulatory scrutiny, Bestreich pointed to shifting fundamentals that have meant “cap rates have gone up, prices have dropped and there’s less demand [from buyers] than there was in the past” for multifamily assets. “Five or six years ago, I’d have 100 buyers wanting to buy a rent-stabilized building, while today I’d have 20,” he said. “There’s far less demand, but still enough that prices haven’t come down a whole lot.”

But like other brokers, Bestreich stressed that the market is still performing well overall despite having lost some steam. “We’re coming off a period where rents grew for so many years and interest rates dropped, and that combination led to really high property values,” he said. “Today, property values are still high; rents have dipped in a lot of areas from their peak, but there’s been such tremendous rent growth over the last seven years that, for rents to pull back 10 percent, I don’t find that to be an earth-shattering thing.”

Flat to falling rents are arguably the biggest issue facing the city’s market-rate rental properties—a condition exacerbated by the sheer number of free-market units that have arrived across the city in recent years, through developments like the swaths of luxury high-rise buildings that have cropped up in neighborhoods like Williamsburg and Downtown Brooklyn, in Brooklyn, and Long Island City, Queens.

As Jeffrey Levine, the chairman of Douglaston Development, told CO, the city is now experiencing a market-rate rental supply glut that was partially exacerbated by developers rushing to take advantage of the 421a tax abatement prior to its expiry in 2016.

“You had an abundance of product going into the ground, primarily in Downtown Brooklyn and Long Island City, and that product is now being delivered to the market and creating a real distortion in the marketplace,” Levine said. That dynamic, coupled with high construction costs and land prices that “have not yet fallen sufficiently,” has made it “very hard to pencil new [rental] development in the five boroughs,” he added—even with the new Affordable New York housing plan designed to replace 421a.

Landlords are now resorting to handing out tenant concessions, such as months’ worth of free rent periods, to attract renters to their buildings, further affecting investor appetite for market-rate properties as well as development sites that would house ground-up rental projects.

“There are a lot of amenitized buildings [on the market], and there are only so many young people who can pay $6,000 a month to split up a three-bedroom [apartment]. That’s why you’re seeing these concessions spike,” Sinsheimer said of the luxury rental space, noting that it’s not uncommon to see landlords dole out two to four months of free rent at some buildings, depending on the length of lease.

As such, developers are now targeting certain asset classes that are perhaps underserved in certain areas of the city. While the ultra-luxury residential condominium market’s recent travails have been well documented, brokers are finding strong demand for condo projects in outer-borough neighborhoods like Williamsburg and Long Island City—traditionally rental market strongholds with relatively low for-sale inventories, and areas where condos would sell at a price point more reasonable than that of, say, Billionaires’ Row in Midtown Manhattan.

Marcus & Millichap broker Jakub Nowak said that his team has seen an increase in land sales in Queens driven by “a surprising uptick in activity” from condo developers. “Any residential development site that my team is selling in Long Island City at the top level, the bidders are all condo developers,” Nowak added.

Bestreich, meanwhile, cited a similar trend in areas of Brooklyn: “Well-located development sites in Williamsburg, we can’t keep that stuff off the market,” he said, pointing to “seven to nine” parcels sold by his firm in the north Brooklyn neighborhood in the last several months that he said will virtually all become condo projects. “There’s so much concern over the L train shutting down, but condo developers are saying, ‘Let me buy something now, and when I’ve built it in two years, the L train won’t be an issue anymore.’ ”

Across other asset classes, the retail apocalypse has been highlighted ad nauseam, while the market for trophy office properties has also taken a hit in the wake of the record-breaking deals for Class A Manhattan properties seen in 2015 and 2016. On a recent conference call discussing Cushman & Wakefield’s 2017 real estate market statistics, Knakal noted that declining retail property values have made it difficult to find buyers for mixed-use properties with a retail component. His colleague Douglas Harmon—co-chair of C&W’s capital markets division and one of the city’s top brokers in the market for major trophy properties—pointed to a lack of such major deals in 2017 as a key contributing factor to the investment sales market’s declining dollar volumes.

But other asset classes, such as industrial properties, are booming to an unprecedented extent. Industrial assets are in enormous demand given the rise of the increasingly influential e-commerce sector and the relative scarcity of warehouse and manufacturing properties remaining in the five boroughs (particularly in more central, well-located areas with access to bridges and highways).

“Industrial has probably been the most exciting asset class in the past year and a half,” Eastern Consolidated Senior Director Andrew Sasson said. “There’s not a ton of industrial buildings in the city that have 25-foot-high ceilings and that are being kept for that use, or can be repositioned as distribution centers.”

Likewise, Marcus & Millichap’s Nowak noted that as “so much of the legacy industrial space in New York City has been repurposed in recent years”—usually either redeveloped as loft-like office and light manufacturing buildings targeting creatively minded tenants or razed to make way for new residential projects—the supply-constrained industrial market has “benefited tremendously.”

All things considered, investment sales market participants are now dealing with an altogether spottier market than they have in recent years. But overall sentiment is the market remains in a position of strength, with many noting a pickup in activity toward the end of 2017 and macroeconomic developments—particularly the passage of the Trump administration’s business-friendly tax reform bill—as reasons for optimism.

“In December of 2016, I was not enthusiastic about 2017,” said David Schechtman, a senior executive managing director at Meridian Investment Sales. “In December of 2017, I felt excited to get back to my desk on the 2nd or 3rd of January, and I haven’t been proven wrong.”

As Schechtman pointed out, the market may very well be getting its legs back as property owners come to terms with the correction that has taken place, and as the discrepancy between the prices that sellers seek and prospective buyers are willing to pay—commonly cited as another reason for the drop-off in investment sales—is reconciled.

“It’s a very difficult environment when, each day for several years, you’re reading as an owner that your property is worth more,” he said. “It takes time for an owner to recognize that they may be selling below the zenith. Not every deal is going to set a new benchmark—for many assets, the high-water mark has been hit—and as long as the seller is willing to receive below that, there will be a buyer.”

Source: commercial

What’s Happening With Chinese Investment in New York City Commercial Real Estate?

There was a lot of nail-biting from the New York real estate community heading into this year after hearing that the biggest whale in terms of investment might not be allowed to swim in our waters. We’re talking, of course, about China.

With China’s capital controls in place, the country was expected to tamp down outbound investment in 2017. While the number of New York City investment sales deals involving the country has dwindled significantly this year, China still represents the biggest cross-border player, according to Cushman & Wakefield.

Chinese investments dropped to 16 percent, or six, of the 38 foreign capital deals (excluding debt deals) in New York City in the first three quarters of the year, versus 28 percent, or 16, of 58 acquisitions at the same time last year, C&W data indicates.

Francis Greenburger, the chairman and chief executive officer of Time Equities, explained the issue in Commercial Observer’s survey for this year’s Owners Magazine: “Although there are exceptions, Chinese investors are subject to government restraints in arranging to transfer funds out of China. This has caused a reduction in transactions by one of the most active group of New York City buyers.”

But in terms of dollar volume the dip in Chinese investment in New York City hasn’t been dramatic, and the country still has spent more than its competitors. Chinese investments made up 11 percent of the $24.51 billion spent on commercial real estate in New York City this year through September compared with last year’s 13 percent of $45.87 billion.

Despite a slowdown in deal flow and a reduction in investment sums, the Chinese have been going for big deals in New York City.

“Starting in 2016 through the first half of 2017, China surpassed Canada as the largest foreign investor in New York City,” said investment sales broker Douglas Harmon of C&W. “Capital controls caused Chinese buyers to participate in less transactions, but the capital was consolidated into the larger deals.”

Harmon and colleague Adam Spies are representing SL Green Realty Corp. in the sale of a 49 percent stake in a 54-story office tower at 1515 Broadway between West 44th and West 45th Streets to China Investment Corporation (CIC), a Chinese sovereign wealth fund. It is a property valued at $2 billion. A spokesman for SL Green said the deal has not closed.

In the priciest foreign property acquisition of the 12 months ending in October, Chinese conglomerate HNA Group paid $2.21 billion for 245 Park Avenue between East 46th and East 47th Streets. The sellers were Canada-based Brookfield Property Partners and the New York State Teachers’ Retirement System. The deal represents one of the highest prices ever paid for a Manhattan office property. (HNA also bought a mansion at 19-21 East 64th Street for $79.5 million this year.)

At the end of last year, CIC bought a 45 percent interest in the former McGraw-Hill Building at 1221 Avenue of the Americas between West 48th and West 49th Streets from Canada Pension Plan Investment Board. The property was valued at $2.29 billion.

Two other large Chinese acquisitions in the last year include WanXin Media’s $68 million buy of an office building and vacant lot at 7-15 West 44th Street and office developer Soho China picking up the landmarked John Pierce Residence at 11 East 51st Street for $30 million.

Alex Foshay, a senior managing director in Newmark Knight Frank’s capital markets division, said the Chinese government’s restrictions have “really strangled all major investment out of mainland China.”

Foshay cited as an example, China’s Anbang Insurance Group’s pulling out of an investment in 666 Fifth Avenue. Kushner Companies was planning to redevelop its flagship New York office tower with Anbang but talks terminated in March.

Terrence Oved, the head of the real estate department and a partner in the law firm Oved & Oved, said he has seen the drop off in acquisitions generally, and those that are closing are taking longer to complete.

“That rapid-fire tennis-match-like quality that we saw in 2016 [between players] is glaringly absent in the foreign transactions in 2017,” Oved said. “The perception of foreign money is that New York is in the later stage of the cycle.”

Also, Oved said, New York City is facing global competition from other world cities that weren’t as competitive the last few years. He pointed to Silicon Valley’s appeal to the tech company likes of Amazon, Facebook and Microsoft.

HFF’s Andrew Scandalios said that deal flow is down this year because properties are overpriced.

“Buyers are less enthusiastic to pay 2015 prices, and the sellers aren’t going to move [them],” he said. “We haven’t seen the offshore capital abate. It’s just they’re waiting for better pricing opportunities.”

Scandalios worked on the deal in which Singaporean sovereign wealth fund GIC picked up a 95 percent stake in the 50-story office tower at 60 Wall Street from Paramount Group and Morgan Stanley with a $1.1 billion valuation. (He also helped secure GIC’s $550 million acquisition loan from German bank Aareal Capital.)

In the summer, Germany-headquartered Allianz SE contributed the 18-story, 352,000-square-foot office building at 114 Fifth Avenue (which it acquired in 2015 with L&L Holding Company) into a then-new joint venture with Columbia Property Trust to buy and manage U.S. trophy properties. Columbia contributed a Palo Alto and San Francisco property to the venture. The three properties were valued at $1.3 billion and HFF negotiated the deal.

Commercial real estate deal volume is down this year for all foreign buyers in New York City as of the third quarter to 28 percent of all investment sales, C&W found, from 34 percent a year prior. (A look at foreign investment in New York City is limited to investment sales deals because debt and equity transactions are harder to track.) The findings parallel the nationwide trend. As of mid-2017, foreign investors represented 13 percent of all U.S. transactions by volume versus 16 at the same point in 2016, Real Capital Analytics data indicate.

Foshay said that a number of overseas buyers are “skeptical” about plunking down large sums of money (over $150 million) in the U.S., out of concern about “where we are in the cycle.”

This doesn’t mean, of course, that foreign investors aren’t seeking out deals nationwide. And Canada heads the procession.

Canada has sealed 255 U.S. commercial real estate acquisitions in the last year, followed relatively closely by China with 215 before dropping off significantly with Singapore and its 36 deals, RCA data show.

In the last year, Canadian entities have closed some notable purchases in New York City. Oxford contributed $65 million in a $130 million deal for 427 10th Avenue and Brookfield Property Partners input $185 million of $370 million for 1100 Avenue of the Americas. In addition, Canadian pension fund Ivanhoé Cambridge and Chicago-based Callahan Capital Properties paid $652 million for Goldman Sachs’ former headquarters at 85 Broad Street (Ivanhoé Cambridge invested $326 million in the deal).

Finally, Canada-based Oxford Properties Group is in the process of purchasing the St. John’s Terminal site at 550 Washington Street from Westbrook Partners and Atlas Capital for $700 million.

In New York City specifically, foreign investment has been dropping because of a dearth of trophy property on the market, according to a couple of brokers.

“There just wasn’t as much property available this year as there was last year,” said CBRE’s William Shanahan, who along with CBRE’s Darcy Stacom brokered the 245 Park Avenue deal.

The duo also sold the 31-story office building at 685 Third Avenue for TH Real Estate and Australian sovereign wealth fund the Future Fund, to Japanese real estate firm Unizo Holdings for $467.5 million.

Foshay concurred about the lack of inventory.

“I would say there has been a lack of trophy product to be purchased,” he said, but “there’s been quite a lot of availability in investment sales of non-trophy assets, meaning Class B product, and it is that trophy investment product that particularly appeals to overseas investors.”

Going forward, Shanahan expects to see “more participation” from Japanese investors.

Harmon said, “We think Chinese investment should pick back up in the first quarter of 2018. Additionally, South Korea, Japan, Norway, Saudi Arabia and Canada make for plenty of competition for domestic investors in 2018.”


Source: commercial

Guardian Life Taps C&W’s Harmon and Spies to Flip 7 Hanover Square

Guardian Life Insurance Company of America has tapped a Cushman & Wakefield team led by Douglas Harmon and Adam Spies to market its headquarters building at 7 Hanover Square in the Financial District, Commercial Observer has learned.

Harmon and Spies, the former Eastdil Secured investment sales brokers who left the firm last October to co-chair C&W’s capital markets division, will be tasked with finding a buyer for the the 27-story, 846,000-square-foot office building between Pearl and Water Streets. While the property has yet to officially hit the market, C&W is expected to begin the sales process after Labor Day, sources told CO.

The building at 7 Hanover Square currently serves as the headquarters for Guardian Life, which recently activated a $147 million purchase option to acquire the property from owners Milstein PropertiesThe Swig Company and Weiler Arnow Management Company, Real Estate Alert first reported in July.

The purchase option was a provision in a 20-year lease that Guardian Life signed in 1998 to take virtually all of the office building’s space. The insurer—which has subsequently subleased much of that space to tenants including law firm Fragomen, Del Rey, Bernsen & Loewy and online media outlet International Business Times—had until March 31 of this year to exercise the option.

Now Guardian Life is looking to flip the asset at a price—north of $400 million—well above what it is paying for the property. The purchase option gives the insurer until September 2019 to close on the $147 million deal, according to a loan-servicer report cited by REA, and sources confirmed to CO that the terms of the option provide Guardian Life and C&W with a delayed closing, giving them ample time to find a new buyer.

C&W plans to market 7 Hanover Square, with its roughly 35,000-square-foot floor plates and 12-and-a-half-foot ceilings, as ripe for a potential repositioning as a residential building—an increasingly prevalent route for office properties in the Financial District. Recent examples of the trend include Rose Associates and DTH Capital’s 70 Pine Street and several properties being converted by developer Nathan Berman’s Metroloft, such as 180 Water Street and 20 Broad Street.

Guardian Life, meanwhile, is expected to vacate its space at 7 Hanover Square as it pursues a sale of the building, with The Real Deal reporting earlier this month that the company is eyeing a deal to sublease office space at 10 Hudson Yards from luxury handbag retailer Coach.

While the insurer’s departure would raise questions for prospective buyers seeking to maintain 7 Hanover Square as an office building, the late-2019 closing date on Guardian Life’s purchase option would provide any new owner with time to re-tenant the property as it sees fit.

Harmon and Spies could look to potential foreign buyers as they seek to drum up interest in the building. At Eastdil, the pair tapped into the unprecedented wave of foreign capital that has sought to invest in the Manhattan commercial real estate market in recent years in facilitating numerous $1 billion-plus property transactions—such as Olayan Group’s $1.4 billion acquisition of 550 Madison Avenue and the Hong Kong Monetary Authority’s $1.15 billion purchase of a 49 percent interest in 3 Bryant Park.

Representatives for C&W and Guardian Life did not provide comment on the matter. A spokesman for Swig Company declined to comment, while calls to Milstein Properties and Weiler Arnow Management were not returned.


Source: commercial