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Category ArchiveGamma Real Estate

So Long, NYC: Real Estate Execs Flee Big Apple for These Five Cities

Leave it to Jonathan Kalikow, the president of Gamma Real Estate, to tell it like it is.

“In New York City, it’s ridiculously expensive,” the veteran investor said in an interview last month. Pick your poison: property values, legal expenses and most of all taxes—all can conspire to make the cost of real estate deals in the Big Apple as inflated as the price of a pack of cigarettes at a Wall Street newsstand.

Not so long ago, that tab was just the cost of doing business. But with flagging infrastructure investment dinging New York’s livability, ever-improving communications technology rendering geography less relevant and hoards of under-30s flocking to regions with more affordable housing rents, New York might want to reconsider resting on its laurels.

The squeeze tightened considerably last month when Donald Trump signed the Republican tax overhaul into law. The new code, finalized just before Christmas, caps deductions for state and local taxes at $10,000—previously, such deductions were unlimited. It’s a move that stands to hit New Yorkers and Californians especially hard—and most of all those with significant real estate holdings. Residents in the two states alone receive about a third of the deductions the Internal Revenue Service hands out for state and local taxes. In Westchester County, N.Y., more than 73 percent of residents pay more than $10,000 in property taxes—to say nothing of New York State’s top-line income tax bracket of 8.82 percent on income over $1 million.

At a time when New York’s streets and development market have never been more crowded and expensive, some savvy market players are striking out across the country in search of greener pastures—and better deals. Here are five cities that real estate pros told Commercial Observer they are eyeing.


Source: commercial

The Construction Industry Should Brace Itself for a Rollercoaster 2018: Experts

Coming off a few booming years, New York City’s real estate industry—including the construction sector—has been suffering a bit of a setback this year.

The New York Building Congress forecasts at year end, $45.3 billion will have been spent on construction in 2017, the second-highest-ever total dollar amount committed to construction in the city’s history, according to the organization.

But it would mark a 13 percent decline from last year’s record $52.2 billion. At the same time, the number of jobs in the industry increased to 149,800 in 2017 from 146,200 in 2016. And the organization expects it to rise to 151,200 jobs next year.

Construction permits, which indicate the level of future work in the city, meanwhile are up slightly this year, although the pace is slowing. The New York City Department of Buildings issued 109,724 permits in fiscal year 2017, ending in July, a 0.4 percent increase from 109,277 in 2016, according to the city’s annual Mayor’s Management Report released in September.

What does all of this mean for the construction business in 2018?

Commercial Observer spoke with five experts about what to watch for. Overall, they forecast a decline in housing construction, but an increase in work in the public sector and the office market. The jury is out on construction costs. And then there is the elephant in the room: tax reform, which has been passed by the Senate but not the House of Representatives. Republicans cheer it as a win for jobs (and big Wall Street businesses are chomping at the bit as it would cut the corporate tax rate by nearly a half). Democrats are against it, claiming it serves wealthy individuals and corporations. As for New York City construction experts, they are split on the impact to their segment of the industry.

Housing

Over the past few years, there has been a surge in housing development, which many experts say has led to an oversupply. And in turn, construction of new homes slowed down this year by 41.2 percent and that is expected to continue for the foreseeable future. There were 37,700 new housing units added in 2016, just 26,700 this year, and the Building Congress expects 24,000 new housing units in 2018.

In terms of dollars and cents, $11 billion will be spent on residential construction this year, the Building Congress forecasts, a 31.3 percent drop from $16 billion last year. In 2018, the figure will rise to $11.6 billion.

“I think on the residential end—apartment complexes and condominiums—I think that it’s is a little overheated,” said Richard Lambeck, the chair of the construction management program at New York University’s Schack Institute of Real Estate. “There will be a slow down. The products that have been produced have surpassed the absorption rate. The amount of apartments that are going to be purchased is going to be slowed and it will have an impact on the industry.”

In addition to the oversupply problem, there are a lot of people crying “Not in my backyard,” a.k.a. NIMBY. Community organizations are rallying against large skyscrapers such as SJP Properties’ 200 Amsterdam Avenue on the Upper West Side, Gamma Real Estate’s planned 67-story building at East 58th Street between First Avenue and Sutton Place, and Extell Development Company’s 69-story tower at 50 West 66th Street.

The fear is that these projects could be forced to scale back or canceled altogether due to community opposition, which will lead to less work for construction companies and subcontractors.

“I worry about community to reaction to projects,” Louis Coletti, the president and chief executive officer of contractor association umbrella Building Trades Employers’ Association. “We are going to go back into the 1990s where NIMBYism just takes over and stops the city. You see this opposition to as-of-right projects, that’s crazy. You see the general direction of the city becoming progressive. You just wonder if it is the natural course of things as people become more politically active.”

Public works

Government spending for public infrastructure projects climbed this year for projects of note around the five boroughs, such as the redevelopment of LaGuardia Airport and the expansion of the Jacob K. Javits Convention Center and the new Kosciuszko Bridge.

Spending on similar projects is expected to reach about $16.9 billion in 2017, according to the Building Congress report—a 16 percent increase from 2016’s $14.6 billion. And the organization expects a further increase to $18.8 billion next year.

“Our infrastructure and transportation systems are the key,” Coletti said. “They are the real foundation to continued growth in the city. Those systems have lacked appropriate level of investment for many, many years. That’s the reason why the governor has to move billions of dollars for the [John F. Kennedy International Airport] and LaGuardia [Airport] [redevelopment projects].”

He added: “There is going to be a real focus on how to finance and really build our infrastructure to allow New York City to have continued growth.”

On the horizon, major infrastructure projects such as the redevelopment of JFK, the next phase of the Second Avenue subway and the Gateway Tunnel project—which would build another tunnel to New Jersey—lay in wait.

And some are questioning the viability of the next phase of Second Avenue subway project in the short term, as the calls to repair and fix the existing subways grow louder, meaning dollars would go to maintenance. While that could be great for commuters, maintenance produces less construction work than new projects.

“I don’t know if the [Metropolitan Transportation Authority] has sufficient funds to start that early,” Lambeck said. “At least from the MTA psperspective, they have been getting a lot of pressure, primarily in maintenance.”

Office   

All across the city there has been an abundance of construction on office projects in 2017. Just along the Far West Side alone there is Related Companies and Oxford Property Group’s Hudson Yards, Brookfield Property Partner’s Manhattan West and Moinian Group’s 3 Hudson Boulevard.  

In Brooklyn, Two Trees Management Company is building an 380,000-square-foot office tower at 292 Kent Avenue in Williamsburg; Rubenstein Partners and Heritage Equity Partners is working on the 500,000-square-foot 25 Kent Avenue in Williamsburg; Tishman Speyer and HNA Group is converting the upper floors of the Macy’s at 422 Fulton Street into 620,000 square feet of office space in Downtown Brooklyn; JEMB Realty and Forest City New York are building a 500,000-square-foot building at 1 Willoughby Square; and Thor Equities is working on Red Hoek Point in Red Hook, a nearly 800,000-square-foot office development. And in Queens, Tishman Speyer is building a 1.2-million-square-foot two-building office and retail project called The Jacx in Long Island City.

Construction work on all of these projects, as well as others, will continue into next year, keeping contractors busy.

“You have a lot happening with Midtown West products. You have a lot of activity in Lower Manhattan and upgrades to office buildings [across Manhattan],” said Carlo Scissura, the president and CEO of the Building Congress. “Office is a strong part of the market. And you are seeing [large office developments] happen in Brooklyn and in Queens.”  

Looking forward, the demand for office space in Manhattan is high (as CO recently reported), and there is a need to renovate a crumbling older stock of buildings. Redevelopments of towers and expansions are an area that could see growth next year. Midtown East—thanks to its new rezoning—will allow for larger projects and developers could look to redevelopment projects in the area, which would create more work for construction companies.

“Hudson Yards has proven that there is a tremendous need for new space and much of the city’s current product needs to be replaced,” said Kenneth Colao, the founder and CEO of CNY Group. “If you had another large sector of town that was wide open for development, I think it would be in play. The [Midtown East] rezoning I think will support more redevelopment.”

Construction costs

In May, Turner & Townsend released its annual construction market survey that pegged New York City as the world’s most expensive city for construction. The average cost of a building was at $354 per square foot, surpassing Zurich, Switzerland which came in at $328 per square foot.

Rising costs has become a problem in the industry due to a variety of factors, including the cost of labor. Construction companies have blamed union’s high hourly wages and an abundance of regulations.

On the latter point, unions have been making compromises in contract negotiations and lowering hourly wages as more developers demand general contractors take bids from nonunion companies in order to increase profit margins. Some construction leaders expect this trend to continue as the competition between organized labor and other subcontractors heats up further.

“I think the unions have to recognize that in order to be viable they need to work with their development clients and figure out ways to reduce costs,” said Richard Wood, the CEO of Plaza Construction.

Another reason for inflated construction costs is high insurance rates. New York is the only state with a law that allows a worker injured on a construction site to sue everyone—construction companies and individual superiors. This increased liability raises insurance premiums.

But regulations for the industry have increased towards the end of the year, as the City Council tried to improve safety on construction sites. The council passed a number of bills this year targeting construction safety, including one polarizing one: Intro-1447-C. The legislation will require workers to have at least 40 hours of safety training. Opponents to the bill claimed that it will force contractors to fund courses for their workers, increasing the bottom line. And the council also passed yesterday Intro-1399, which gives most industry employees, including construction workers, the right to “flextime” or two days off from their regular schedules.  

One construction watchdog said losing workers could disrupt work flow on projects.

“This isn’t a store or a restaurant—this is a construction site,” Coletti said. “We have schedules and budgets we have to make.”

Tax reform

As of publication, Congress’ tax reform bill had not been signed into law. But it looks extremely likely that it will as Republicans in the Senate passed a final version of the bill early today and their counterparts in the House of Representatives will re-vote on the legislation today after approving it yesterday with some errors.

The legislation will cut the corporate tax rate to 21 percent next year from 35 percent, which could mean a boon for companies. With extra money on their balance sheets, companies could reinvest in their offices. And real estate developers may use those funds to upgrade facilities in their assets. This will lead to more construction projects.

“I think indications are that it will be good for the construction industry,” Colao said. “If in fact the tax reform results in corporate tax reductions, corporations may start sprucing up facilities, then there would be an uptick in activity. Corporations—and entities that are tenants in office buildings—if they are looking at an improved bottom line at the same revenue—they might look to increase their capital expenditures.”   

However, as a part of the regulation, individuals will be limited in deducting state and local income taxes, sales taxes and property taxes to $10,000. Homeowners will be able to deduct mortgage interest on debt up to $750,000, down from $1 million. These segments of the bill don’t bode well for real estate interests in New York City, which has an average home sales price at $987,000 as of the third quarter, according to the Real Estate Board of New York. If people can’t reduce their taxes it will add to Gotham’s living expenses and could mean less people wanting to relocate to the city—lowering demand for more housing and impacting construction.  

“New York and especially the New York City area is one of the highest areas for state and local taxes,” Wood said. “I think there is going to be a tendency for people to want to move to states that don’t have high state taxes, and with that, many corporations may think in order to get a good labor pool they’ll want to move their offices to those low-tax states.”

He added: “I personally think that people are going to have to stay focused on solutions to that problem, because it could have long-term adverse effects on the real estate industry and the construction industry in New York.”


Source: commercial

City Planning Approves Zoning Change, Allows Construction of Sutton 58 Resi Tower

The City Planning Commission on Wednesday approved a revised rezoning proposal that aimed to cap the scale of Gamma Real Estate’s planned 800-foot-tall residential tower at 3 Sutton Place and limit the scope of future skyscraper development in the Sutton Place area.

Both proponents and opponents of the proposal—brought forth by the East River Fifties Alliance and certified by the CPC on October 2—scored small victories with the decision, ahead of it being advanced to the City Council for consideration.

Under the revised proposal’s stipulations, any new development in Community District 6—from east of First Avenue and north of East 51st Street—that’s allocated more than 25 percent of its total floor area to residential uses will have to follow “tower-on-a-base” requirements, which mandates that 45 to 50 percent of the building must be built below 150 feet. The initial rezoning proposal the ERFA introduced in June 2016 called for a 260-foot height restriction and the inclusion of a significant portion of the tower to affordable housing.

With the vote, Gamma President Jonathan Kalikow tallied a small triumph in what’s been a two-year-long battle over the acquisition and development of the site. The CPC voted to grandfather Kalikow’s project, adding a provision that exempts buildings currently undergoing development in the area. This allows his firm to proceed with construction on its planned 67-story tower dubbed Sutton 58—located at 430 East 58th Street between First Avenue and Sutton Place—while halting any future similar development in the area.

Still not satisfied, Kalikow, who’s been a staunch opponent of the by products of the proposal, saying it sets a bad precedent for future development across the city, said in a statement, “While we wish that the City Planning Commission had rejected the ERFA’s application outright, we appreciate that they have decided to grandfather our project, which will not only ensure that our as-of-right development can move forward, but also protect the jobs of the hundreds of workers who are relying on construction of our building to move forward.” Kalikow will move to complete the building’s foundation before the proposal reaches City Council so to safeguard the project from any possible amendment to stop its construction.

Councilman Ben Kallos, who represents the residents of Sutton Place and cosigned the ERFA’s proposal, told CO after the CPC’s vote that although he’s ultimately pleased with the result, there’s more to do.

“I’m grateful that this matter has been addressed by the CPC as this has been a years long process,” Kallos said. “We received public guidance from CPC and followed that guidance, putting forth tower-on-base provisions. I’m grateful they voted it out. We now must move as quickly as possible through the city council as there’s a race afoot.

“I do not believe the zoning area should be grandfathered [to allow Gamma’s development],” Kallos added. “I intend to recommend it be removed, and I hope to pass it out of the council without any grandfathering clause.”

Kalikow added: As this application now moves to the New York City Council for a vote, we call on our Council Members to also put aside the politics and influence of the handful of New Yorkers who are leading ERFA’s self-interested charge and consider these many more lives who are depending on our project. We hope that they will follow the CPC’s suit in allowing us to continue with our development.”

The ERFA argued in its proposal that the development restrictions “would more closely align future construction with the existing built environment, while still accommodating reasonable growth.”

ERFA President Alan Kersh called the CPC’s decision to grandfather the development “inappropriate,” adding in a statement that “the Commission should have approved the zoning change as it was presented and left any decision about grandfathering the Gamma project to the Board of Standards and Appeals.”

Real Estate Board of New York President John Banks told CO just before the CPC’s October 18 hearing of the proposal, “[This proposal] would provide an opportunity for people who have the means to mount a challenge to try this method of spot zoning going forward… it becomes a tool for people to use against any undesirable development. We’re concerned that there is no comprehensive planning that would take place if this becomes more of a norm.”

The ERFA’s proposal is backed by several community representatives, including Manhattan Borough President Gale Brewer and Kallos. New York State Senator Liz Krueger has cosigned the proposal, and recently, New York Congresswoman Carolyn Maloney signed on in support of the ERFA’s mission, having already written and voiced concerns to the CPC on the organization’s behalf, according to an ERFA spokeswoman.


Source: commercial

City Planning Holds First Hearing On Fate of Gamma Real Estate’s Sutton Place Development

The New York City Planning Commission yesterday held its first hearing on a revised rezoning proposal that aims to limit the scope of Gamma Real Estate’s planned project at 3 Sutton Place.

On October 2, the city certified the new proposal, which allows Gamma to move forward with construction on its planned 67-story, 800-foot-tall residential tower now called Sutton 58—located at 430 East 58th Street between First Avenue and Sutton Place—without the need for an affordable housing component or height cap.

The proposal, brought forth by the East River Fifties Alliance (ERFA), would force Gamma to follow “tower-on-a-base” requirements, which mandates that 45 to 50 percent of the building must be built below 150 feet. The initial rezoning proposal the coalition introduced last June called for a 260-foot height restriction and the inclusion of a significant portion of the tower to affordable housing.

“In their previous proposal, they alleged an affordable housing element. They ended up taking that part out,” Gamma Principal Jonathan Kalikow told CO. “This new proposal really shows their true colors.”

kalikow rally pic City Planning Holds First Hearing On Fate of Gamma Real Estate’s Sutton Place Development
Gamma Principal Jonathan Kalikow speaks in front of construction workers at a rally prior to the hearing. Photo: Mack Burke for Commercial Observer

Prior to the hearing, Kalikow organized and led a small rally in front of City Hall and marched to the Department of City Planning’s offices at 22 Reade Street with labor activists and roughly 20 construction workers carrying signs with messages such as “Preserve Jobs, Not Views,” “No ERFA Backroom Deal” and “Stop Spot Zoning.”

“At the end of the day, people understand this is not the New York City way,” Kalikow told CO while he and his group of supporters were en route to the hearing. “We had a viable process. The fact that we were railroaded, you know, no citizen should want to see that.”

The ERFA wrote in its revised proposal that “the combination of these [new] rules would more closely align future construction with the existing built environment, while still accommodating reasonable growth.” The community coalition consists of 45 area buildings and roughly 2,600 individual supporters who live in approximately 500 buildings in and outside the proposed area of rezoning; it was formed in 2016, shortly after the first announcements of the development, to oppose and combat the construction of Sutton 58. 

Mayor Bill de Blasio’s administration has championed the expansion of affordable housing throughout all five boroughs, but he, as well as the City Planning Commission, opposed the ERFA’s original rezoning proposal, which was backed by several community representatives, including Manhattan Borough President Gale Brewer and Councilman Ben Kallos, who represents the residents of Sutton Place. New York State Senator Liz Krueger has backed the proposal, and recently, New York Congresswoman Carolyn Maloney signed on in support of the ERFA’s mission, having already written and voiced concerns to the CPC on the organization’s behalf, according to an ERFA spokeswoman.

Opponents of the ERFA’s new proposal who testified at the hearing included construction workers from the two companies tapped to build the property—Lendlease, to oversee the project, and Urban, for the building’s foundation—charged with building the project, representatives of New York’s real estate industry, Gamma’s legal counsel and even some residents of the Sutton Place area, who claimed that the bill simply doesn’t benefit the public and only sets a bad precedent for rezoning efforts going forward. They argued that the plan is an effort to spot zone this one property, that it goes directly against de Blasio’s plan to expand affordable housing throughout the five boroughs and that it will also take work away from construction companies as well as inhibit the growth of neighborhood economies.

“The Mayor was very clear about it when he attended a town hall on the Upper East Side a couple weeks ago: [this proposal] would provide an opportunity for people who have the means to mount a challenge to try this method of spot zoning to go forward… it becomes a tool for people to use against any undesirable development,” Real Estate Board of New York President John Banks told CO. “We’re concerned that there is no comprehensive planning that would take place if this becomes more of a norm.”

Members of the ERFA and Kallos said that their efforts don’t constitute an attempt to spot-zone the property and that their rezoning application addresses the entire zoning area. The ERFA, backed by Kallos, wants to take its fight city-wide to stop super tall residential skyscrapers.

The proposal’s supporters at the hearing included elected officials and spokespeople for elected officials, ERFA representatives and residents of Sutton Place. They argued that the community is the victim of what Kallos called an “accident of history” in his official testimony, meaning the nine-block area is the only  residential area of the city zoned R10 without a tower-on-a-base standard or any type of contextual protection. 

“The Sutton area is uniquely vulnerable to the development of super tall towers, a building form that was neither contemplated nor feasible when the R10 district was created in 1961,” Kallos said in his official testimony. “By implementing tower-on-a-base zoning, we would prevent the construction of super-skinny buildings that get to heights of 1,000 feet, by requiring new buildings to pack roughly half of the building into a  base under 150 feet, leaving limited [floor area ratio] for a tower, thus restricting its height.”


Source: commercial