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Category ArchiveRobert Knakal

Anbau Plotting Condos at Verizon Parking Garage Site in Hamilton Heights

Residential development firm Anbau has acquired two adjacent parking garages at 620 West 153rd Street in the Hamilton Heights section of Upper Manhattan for $22.5 million with the goal of building residential condominiums on the site, Commercial Observer has learned.

Anbau closed on its purchase of the two-story garages between Broadway and Riverside Drive earlier this month after entering contract late last year. The seller, Verizon, has been using the facilities to park and house its service vehicles.

Having finalized its acquisition of the site, which features approximately 150,000 buildable square feet, the NoMad-based development firm has drawn up plans for two luxury residential condo buildings, designed by architecture firm DXA Studio, that will be connected via a landscaped courtyard and feature views of the Hudson River.

“We see [Hamilton Heights] as the next logical emerging neighborhood,” Anbau Founder and President Stephen Glascock told Commercial Observer. He cited how prices have “shot up substantially” for both condos and rentals in areas like the Manhattanville section of West Harlem, to the south of Hamilton Heights.

Glascock said the two planned condo buildings would likely hold around 150 units combined, with prices for the all-market-rate units likely to range from below $1 million to up to $3 million. Anbau, which financed its acquisition of the site with a pre-construction bridge loan from Goldman Sachs, expects to begin work on the project within the next six months with a view to completing the development in the next two to three years, he added.

Anbau will also provide parking for Verizon and its service vehicles at the property, Glascock said, with those accommodations to be separate from the parking provided to residents at the condo development.

Representatives for Verizon could not be reached for comment.

Verizon had retained Cushman & Wakefield’s Bob Knakal, Josh Kuriloff, Jonathan Hageman and Patrick Yannotta to market the property. Anbau had no broker in the deal.

Knakal told CO that C&W received “extremely robust budding activity on the property” from prospective buyers, which he attributed to “the positive changes that the [Hamilton Heights] neighborhood has experienced over the last 10 to 20 years.”

“It’s a very desirable location,” Knakal said, pointing to rising interest in the market for Upper Manhattan development sites at large—including at 4109 Broadway in Washington Heights, where C&W has been retained to sell a four-story church building with nearly 90,000 buildable square feet on behalf of Christ Church, United Methodist of New York City.

That property will likely be converted into residential condos as well, Knakal added, noting that developers are increasingly looking uptown to take advantage of lower land costs “that make it a lot more feasible to build condos”—particularly at a price point more appealing to prospective residential buyers.

Glascock agreed, noting that the Anbau “can pass on that low land cost to translate to lower prices for condos” at its new site and that the firm believes there is “strong demand” for units in the $1-million to $3-million range that will be served by the new Hamilton Heights development.

Anbau specializes primarily in the Manhattan condo market, with recent projects including Citizen360, an 84-unit SHoP Architects-designed building at 360 East 89th Street in Yorkville, and 207W79, a 19-unit Upper West Side property at 207 West 79th Street designed by Morris Adjmi Architects.

The firm also owns several multifamily rental properties in the borough; in December 2017, Anbau acquired two five-story buildings holding a combined 22 apartments at 53-55 First Avenue in the East Village for $16.2 million.

Source: commercial

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

Cushman & Wakefield’s James Nelson Making Move to Avison Young

After much speculation and rumor, Commercial Observer can report that Cushman & Wakefield’s James Nelson is jumping to Avison Young.

Nelson’s decision comes shortly after the former Massey Knakal Realty Services partners—including Nelson, Stephen Palmese, Thomas Donovan, John Ciraulo as well as Massey Knakal Founders Robert Knakal and Paul Massey—received the remaining $25 million C&W owed them from the 2014 purchase of Massey Knakal.

Nelson, a vice chairman in the capital markets group at C&W, handles investment sales with his 11-person team. His deals have included selling a Hudson Yards development site, which had a combination of parcels, to Tishman Speyer in 2014 for $238 million. And the Colgate University graduate brokered the sale of Dime Community Bancshares’ $80 million Williamsburg portfolio in 2016.  

He was a partner at Massey Knakal and joined C&W after the global company bought New York-centric Massey Knakal on Dec. 31, 2014 for $100 million.

The deal stipulated that the partners could get 75 percent of the money at closing (although four administrative partners were paid off in full at closing), and the remaining 25 percent on a nine-year note, a source with knowledge of the deal said. But if the brokers remained working at the company as of Dec. 31, 2017, the following day they could accelerate it from nine years to three years. They all gave notice to accelerate it on the first of this year, and they received the remaining 25 percent of their money about two weeks ago.

So while Nelson, Palmese, Donovan and Ciraulo’s contracts expired on Dec. 31, 2017, they couldn’t realistically plan an exit until they received the outstanding funds. (Knakal and Massey’s non-compete and no-solicitation deals expire June 30.)

Mitti Liebersohn, the president and managing director of New York City operations at Avison Young, worked to reel in Nelson for a while, with Nelson spotted around the Avison Young offices on the 15th floor at 1166 Avenue of the Americas between West 45th and West 46th Streets. Liebersohn even made an informal announcement to a team of leasing brokers last month that the firm was close to poaching the big-time broker.

“James Nelson has decided to leave Cushman & Wakefield to pursue other opportunities,” a company spokesman said in a statement. “We appreciate his contributions to the firm and wish him success in his future endeavors. Cushman & Wakefield will continue to seize the opportunity to attract and retain the best talent.”

The timing is good as C&W is having the former Massey Knakal brokers, still working at 275 Madison Avenue, relocate to C&W’s 1290 Avenue of the Americas next month.

Moving from the well-established global C&W to Toronto-headquartered Avison Young, a relative newcomer to New York City, makes sense for Nelson, according to one broker, as he won’t be competing with heavy-hitting investment sales brokers internally, as he is at C&W. Avison Young has focused on office leasing in New York City since opening in 2011.

“He gets the same international platform to play on but has some more elbow room in the sandbox where he is playing,” the broker said.

As for Avison Young, Nelson would help beef up its investment sales business.

“Avison needs someone [selling buildings],” another broker said. “Brokers all have gigantic egos. If he goes there he’ll be the number one sales guy at a reasonably sized firm and he can build a sales team there.”

A spokesman for Avison Young did not immediately respond to a request for comment, nor did executives for the company or Nelson.

Source: commercial

RFR Sells Tribeca Loft Conversion to Iliad Realty Group for $55M

Aby Rosen’s RFR Realty has unloaded a nine-story, mixed-use loft building at 67 Vestry Street in Tribeca to Iliad Realty Group for $55.5 million, city public records show. The sale closed last Wednesday.

The second through ninth floors of the 61,250-square-foot former warehouse are divided into 25 apartments, according to marketing materials from Cushman & Wakefield. Of the 25 loft units, a few are still occupied by rent-stabilized tenants, but the majority are vacant, according to C&W’s Robert Knakal, who helped broker the sale. Fourteen units are rent stabilized, according to the most recent property tax bill. The property also has 7,000 square feet of vacant ground-floor retail, the brochure from C&W notes.

RFR purchased the building for $16.5 million in 2005, property records indicate. The company filed plans to build an 11-story, 42-unit residential building on the site in 2014. However, it looks like the developer abandoned the project after 67 Vestry’s stabilized residents fought the development plans and attempted to get the building landmarked. A spokeswoman for RFR declined to comment on the sale, and Iliad didn’t immediately return a request for comment.

Knakal along with C&W’s Will Suarez and Jon Hageman represented the buyer and the seller in the deal.

“I think this was a transaction that was good for the buyer and the seller, and the site has tremendous potential,” Knakal said. “It’s an excellent location and there’s tremendous upside on that property.”

Iliad also took out a $40 million mortgage from Apollo Commercial Real Estate Finance, according to public records.

Source: commercial

Ariel Property Advisors’ Shimon Shkury on the Struggling NYC Investment Sales Market

Shimon Shkury remembers the feeling of nervousness and self-doubt that crept in when, as a young man in his late 20s, he found himself in a reception room at a top American university, awaiting a graduate school admissions interview.

“I’m looking around at the waiting room, and you see people dressed sharply, reading The Wall Street Journal, who seem to have a lot of confidence and experience,” Shkury said. “And I’m scratching my head thinking, ‘What am I going to bring to the table?’ ”

For the Israel native who grew up on the outskirts of Tel Aviv and had only been to the United States once before in his life, the nervousness was short lived.

“I thought, ‘You know what? When I was 18, I was recruited to the army; I’m 27 or 28, I have pretty good experience in life, and that’s what I’m going to bring to the table—I’m going to bring my Israeliness to the table,’ ” he said. “And that was the attitude. From almost being threatened by not having the language, the culture, the know-how to the extent that others do, I’m going to take what I do have—which is a lot.”

Shkury subsequently studied at the Wharton School of the University of Pennsylvania, where he would earn dual master’s degrees in business administration and international studies through the university’s Lauder Institute program. After a brief stint at New York investment bank SG Cowen (now Cowen and Company), Shkury landed a job as an investment sales broker at Massey Knakal Realty Services (now a part of Cushman & Wakefield).

Over eight-plus years, he helped build up the firm’s presence in the uptown Manhattan and Bronx markets, eventually earning himself a partnership. In January 2011, Shkury and several Massey Knakal associates left the company and formed Ariel Property Advisors, where he now serves as president. The firm and its 55-person staff focuses predominantly on the New York City multifamily investment sales market, and has helped facilitate roughly $750 million in transactions across more than 120 properties over the past 12 months.

Shkury, 46, lives with his wife, their 8-year-old son and 5-year-old daughter on the Upper West Side. He recently spoke with Commercial Observer at Ariel Property Advisors’ offices near Grand Central Terminal about his life and career, as well as the state of the New York City commercial property market.

CO: Your first job out of Wharton was in investment banking, at SG Cowen. How did you pivot into real estate? Was it something you had an interest in previously?

Shkury: I graduated in 2001 and had a few job offers; one of them was [Cowen]. If you remember the time, it was right after the recession of 2000, and right after that was Sept.  11. I spent about six months at that bank and got laid off. In January 2002, I’m trying to figure out what do I do next? Nobody’s hiring for investment banking or consulting anymore. The fact that I couldn’t get the jobs I could get before led me to wanting to be more entrepreneurial.

Real estate was always something I wanted to know more about but never did anything with. I think a lot of Israelis are like that; there’s this fascination with land and with building. One of my friends from business school said that if you want to do real estate, that’s great—figure out platforms that sell real estate, that’s the easiest route to get in. And as I was looking, I was introduced to Massey Knakal, and I really liked what I saw—because they had a focus on small to midsized buildings, because they carved out the city into territories so that each one of the agents had their own thing within the business.

I really wanted to focus on uptown and Harlem. I thought that if you want to do building sales below 96th Street, it’s extremely competitive. If you want to do it above 96th Street, still on the island of Manhattan, there’s no reason for that area not to grow.

Was it a challenge at all to move from a finance-oriented world into the realm of deal-making?

The first thing I understood is that it’s an information business. The minute I got that, I think everything came a lot easier to me. When I went to a client, it wasn’t about selling them something, it was about giving them something in return for a meeting or a call: “Here’s the information, and here’s what you can do with that information—you can sell, you can refinance, or you can hold. Here’s what’s happening in the neighborhood.”

Looking back 15 years, there was no PropertyShark; CoStar existed, but it wasn’t relative to our business. The first thing you do when you join a company like Massey Knakal is you catalogue an area. How did you do that? Well, you take an Excel spreadsheet, you take a “blue book” [compiled with property information], you open it like you’re playing the piano, and for weeks you sit there and type in addresses, names, phone numbers. There was email, but nobody was using it for business then. The second thing you do is you go out and walk the streets and take a picture of every single building in that area. Three to four months into it, you didn’t make one phone call, but you’ve built a database, and you’ve built expertise in that location. And then you start canvassing, sending information out, calling people and, slowly but surely, get listings.

The company was very supportive of what I did, and at the end of the day I helped build that portion of the company [focused on uptown Manhattan and Bronx investment sales]. About a year later, I said to [company founders] Paul [Massey] and Bob [Knakal], “Look, I really want to do more—maybe I can build a division.” I did that together with another partner, Marco Lala, who’s at Marcus & Millichap today; they gave us equity in the firm, and we became partners in 2004.

At the same time, I also hired, between 2003 and 2005, three people who were instrumental to my team and today to Ariel Property Advisors because they’re partners in the company: Victor Sozio, Michael Tortorici and Ivan Petrovic. So we were basically growing a sales team and a division that continued to do well until 2010 or so, when I felt that it was about time for us as a team to do something different.

It must have been an exciting time to be working in the uptown Manhattan and Bronx investment sales markets given the sheer upside of those neighborhoods.

I think it’s still extremely exciting in a different way. Everything’s relative; if you look at upper Manhattan, the Bronx or any other area [in New York City], everything has appreciated. Still, if you look at those areas, it’s still cheaper.

But what did change, which I think is exciting, is the flow of information. That revolutionized the way real estate is being done today. Although people say the real estate industry is lagging behind on technology compared to other industries—which is true—it has still made a huge leap compared to what it was 15 years ago. The level of sophistication that buyers are asking for is on a different level.

Leaving an established firm like Massey Knakal and starting your own shop is no small task. What motivated that decision?

Massey Knakal was a fantastic platform. I’m very friendly with both Bob and Paul; I owe them a lot from a professional perspective. It was me—I wanted to build something. It was something that I desired to do and felt that I could do very well. And my current partners, then-team members, felt the same.

Part of the vision for this company was that the territory system works—that’s great, let’s implement that. What we thought could be better is a centralized research and sales support arm that services the company and, in addition, leverages a data platform—in our case, it’s [cloud provider] Salesforce that we’re working on—to do a few things. The first is to accumulate information that we need for New York City, or anywhere we service our clients, with regards to building data, ownership data, relationships between ownership and capital and so on. And then, internal communication within our teams about that information.

We have our research and sales support centralized, so each broker can tap that resource regularly. Every month, we produce a multifamily market review [report], every quarter more elaborate reports, and our clients receive asset evaluations from us on a regular basis about their buildings and portfolios. So we do about $10 billion worth of valuations for our clients a year, and that eventually gets us assignments on the investment sales and capital markets side.

There, we actually start our relationship with clients. A lot of clients will call us up and say, “We just bought a portfolio a year ago—we need an evaluation.” We’ll put it together, present to them, and that leads us to becoming one of the brokers considered for an assignment down the road. The research advisory is a cost center—it’s not generating revenue for us, but it services our clients and our brokers.

On the capital services side, the firm has done some work advising clients on the Israeli bond market, which has become an increasingly popular vehicle in recent years for U.S. real estate firms to raise debt at lower borrowing costs. What’s your take on the market, and are you still advising clients looking to raise money in Israel?

We’re not doing this as much at this point. I think the companies that will go [to Israel] moving forward are two types: those that already issued [bonds] and those that are extremely high-quality companies. You just saw another company, CIM Group, tapping the Israeli market on a preferred equity structure, which was the first time that was done. You’ll see more of that structure—not just bond issuances.

You’ll also see money coming from Israel here to invest; I think there’s a lot of reception both ways. Israeli investors are looking for quality first, so if you have a quality product, a quality platform and the ability to produce deal flow, you will be able to go to Israel and raise money—be it bonds, be it mezzanine debt for the right deals, be it other structures. The cost of capital there is less expensive, and the access that local operators here provide to deal flow is interesting for that capital. It’s a win-win.

Yet, Ariel Property Advisors also released a report earlier this year showing that Israeli capital investment in New York City real estate had slowed down considerably. Is that still the case?

The market has slowed down in general, especially for bigger deals, so you see less flow of capital out there—from international capital, but all capital in general. We’ve seen some international investors actually cashing out this year as well, selling some properties and waiting on the sidelines. They didn’t forget about New York City—they love New York City. They just want to see what’s going to happen next.

We are now working on a major recapitalization that we’re doing for one of our clients, and we’re speaking to every [type of] capital provider—family offices, insurance companies, private equity funds, high-net-worth individuals, sovereign wealth funds, you name it. Some of them are extremely cautious when it comes to equity, but they want to play—so they’ll play on the preferred equity side, they’ll play on mezzanine debt, they’ll invest in different ways in the capital stack. Some of them are sitting on the sidelines and waiting for the right opportunity to put their money to work.

On the investment sales side, there’s a lot of talk about the drop-off in transaction activity and dollar volume this year. Even though broader economic indicators now look positive, the city’s investment sales market hasn’t followed suit. What’s going on?

You hit it on the head. [Transaction dollar] volume is down about 40 to 50 percent [in 2017] compared to the year before, especially in the first six months of the year.

2015 was the year; there were about $70 billion worth of real estate transactions, and 2016 fell much short of that. What happened at the end of 2015, and throughout 2016 and 2017, is that land values got hit hard. It started somewhere in 2015 with discussions about the ultra-luxury apartment market, lenders that stopped lending, [the expiration of] 421a at the time—all of that. Land traded in 2016 at maybe a third of what it traded in 2015, [and that] trickled down to multifamily, office, etc.

But 2016 was still a great year with bigger deals that were done. Right after the election, however, we got into some kind of uncertainty. Mortgage rates went up about 75 basis points overnight, and I remember that we had multiple contracts out with buyers who looked at their quotes from a day or two before, didn’t understand how to price it again and didn’t want to sign contracts. To be fair, the majority of these contracts were signed, but it took longer; so if something was supposed to be signed in November or December [2016], it signed in February or March [2017]. These three- to five-month delays delayed everything. That, the continuation of land not trading and the continuation of uncertainty led to [owners saying], “I’m not putting my building on the market today.” That was the first six months of 2017.

Compare that to the last quarter or so, we’re in a much, much better place. I’m not saying we’re out of the woods; I think that you will continue to see low volume in 2018 as well. Maybe at the same level as ‘17, maybe a little higher or lower, but more or less the same pace.

Our expectation is that prices, depending on location, will either stay flat or go down a bit. If it’s prime locations—if you’re along the 7 train in Queens, in Flushing for example—we actually see price increases as a result of stronger fundamentals. But our predictions for 2018, absent an event—if there’s an event, all bets are off—with interest rates still low, we think the market will see more or less the same volume and same pricing, with land pricing going down.

Multifamily investment sales make up a majority of your business. Given all the talk about rent growth stagnating and landlords being forced to provide heightened tenant concessions at market-rate properties, is there cause for concern?

If you look at fair-market [or market-rate] buildings throughout the city in good locations, [such as] Manhattan below 96th Street, fair-market and new buildings have suffered from rent concessions. In Brooklyn, too, because you have to give rent concessions to compete and to absorb tenancy, and that affects everything.

We’re in a period of absorption that will end at some point; it’s hard to say when. In terms of brand new construction, what we find hard to do is project rent growth for the next two to three years. It’s just very hard for us to tell you, as an investor and an owner, [whether] we think one-month concessions will continue for two years, three years or four years. It’s natural, it’s O.K., it’s oversupply for a period of time. All of that is going to be absorbed. [But] it affects this period of time.

In terms of rent-stabilized or affordable [properties], the rules are becoming harder. Yes, you have to operate buildings by the book—which means you have to have receipts if you rehab, or otherwise you’re going to get audited and have the state or the city after you. But, if you’re an operator who knows how to go about managing a rent-stabilized building that needs upgrades and has the tenancy to upgrade it with, that is an opportunity.

I think that anybody [investing] in this market today should look at a longer-term horizon than three to five years; it’s probably five to seven years [now], and that’s a big change. The rate of return is probably lower than three years ago, and the capital needs to adjust for that.

What neighborhoods are you seeing the most activity in across your business? You mentioned Flushing and the positive fundamentals you’re seeing along the 7 train in Queens.

We sold a few buildings this year in that neck of the woods. You bring an apartment building to market in these locations, and the demand is amazing. You just don’t see enough product in these markets. The fundamentals are extremely strong—the rental market [in Queens] went up 10 percent in 2016, whereas in other places it stayed flat or went down a bit. In Brooklyn, different areas are doing extremely well: Bushwick is still doing well, Crown Heights is doing well, Williamsburg is doing well. You’ll see some new rental construction still coming online, which I think is worth watching.

[As far as] Manhattan below 96th Street, I think there’s going to be more activity on the Upper East Side; the Second Avenue subway helps, and Cornell Tech on Roosevelt Island helps. And we’re always big on upper Manhattan and Harlem—that hasn’t changed. You have the whole corridor of 125th Street, which is still in development but already has some new buildings that will change the face of that neighborhood. The South Bronx is an area to look into; we need to see more buildings coming up, but the transportation is there, the zoning is allowing it, and land has sold [there] recently. Overall, New York City I think is going to be fantastic in the next decade.

Source: commercial

Chang Seals $76M Deal for Chelsea Sites From Extell, 45-Story Hotel to Come

Two days ago, Sam Chang of McSam Hotel Group closed a $76 million purchase of two sites on West 24th Street between Avenue of the Americas and Seventh Avenue from Extell Development Company, Chang told Commercial Observer.

The budget-hotel maven picked up 140 West 24th Street for $61 million and Chang is proposing a Hyatt Place hotel at the site. It will be a roughly 173,000-square-foot 45-story limited-service hotel with 510 keys, he said. Architect Gene Kaufman has been tapped for the design, and construction is slated to commence within 90 days.

In addition, Chang acquired a vacant lot at 154 West 24th Street for $15 million. That will house a one-story, 2,500-square-foot ground-floor restaurant, according to Kaufman.

Chang obtained a $33.5 million acquisition loan from Goldman Sachs for the development site, and a $8 million loan from the bank for the other site.

Although there are no renderings available yet for the hotel, Chang said the hotel will be “identical” to the one he is erecting at 140 West 28th Street. That is a proposed Courtyard by Marriott Springfield. Kaufman said the West 24th and West 28th Street hotels will have the “same layout [and] the same concept.” He added: “We spent a very long time on 28th Street getting it to work out the best way possible so we’re basically adapting that idea for 24th Street.”

The Real Deal reported at the beginning of October that Extell was in contract to sell the sites to Chang, and noted that Chang rejected an adjacent vacant site at 157 West 23rd StreetThe Kaufman Organization owns the leasehold for the West 23rd Street building (with Extell subleasing the vacant 4,344-square-foot ground-floor retail space plus 2,147-square-foot basement), and Edison Properties owns the land, but Cushman & Wakefield was marketing the retail portion of the West 23rd Street property along with Extell’s sites.

C&W’s Robert Knakal, who represented Extell along with colleague Brock Emmetsburger, said that the West 23rd Street site could have provided a second entrance to Chang’s hotel. (Chang didn’t have a broker in the deal.)

Extell head Gary Barnett didn’t immediately return a request for comment and nor did his spokeswoman or a representative for Goldman Sachs.

With additional reporting provided by Cathy Cunningham.

Source: commercial

DC Is Talking About Reforming the Tax Code—but What Will It Mean for Real Estate?

While many Washington, D.C., hands are skeptical that it will ever actually happen, reforming the tax code is a big priority in the Trump Administration.

What would reform look like? Nobody quite knows (hence the skepticism that the administration will pull it off).

Even so, the real estate industry is waiting anxiously to see if the results will be conducive to development and business.

With this in mind, Commercial Observer spoke to several industry honchos to get a sense of what changes the real estate industry is hoping for, and what they’re hoping to avoid should tax reform become a reality.

“I’m hoping to see depreciation schedules reduced to 20 years for both commercial and residential properties,” said Robert Knakal, the chairman of New York Investment Sales at Cushman & Wakefield.

In a column Knakal recently penned for CO, he pointed out the depreciation schedule allows owners to depreciate the value of their real estate over time—27 years for residential property and 39 years for commercial property.

“That would be beneficial to the industry, and it’s a lot more rational [than what’s been discussed],” Knakal told CO in an interview. “What’s been proposed is that depreciation schedules go to zero, and you do an expensing where you can depreciate or write off 100 percent of your investment in year one. It also disadvantages people who own existing portfolios and would make them take steps to do things that they wouldn’t ordinarily do.”

Knakal believes that allowing for full depreciation in year one would overstimulate the market.

“[Let’s say] I’ve been a passive investor, but I have a massive portfolio worth a couple billion dollars, and I haven’t bought anything in a while because I’m happy with my portfolio,” he said. “If expensing goes in and I can’t depreciate the buildings anymore, then I’m going to do a transaction just to take advantage of that depreciation. You’re going to have people swapping portfolios, then swapping them back a year later just to get the depreciation. It’s going to lead to a lot of activity that would not ordinarily occur. I think that’s unhealthy.”

“Anything that affects the interest deduction on real estate is going to be problematic,” said Mayer Greenberg, a partner at Stroock & Stroock & Lavan. “The cash flow system, that methodology, maybe works in other industries, but it won’t work for real estate, which is capital intensive, especially for long-term holders of [property]. Real estate as a long-term asset doesn’t lend itself to immediate write-off, particularly as a trade-off for repeal of the interest deduction. Long-term [asset] holders want the interest deduction to remain in place.”

Should the government change this process, there are also questions about whether expensing land will be part of the package.

“If you’re going to go to an expensing formula,” Greenberg said, “the notion that you can’t expense land would not be proper, because a major investment of a real estate asset is in land. If there is going to be expensing, then the expensing needs to include the entire investment—the land and the building.”

Greenberg is also concerned with any elimination of the “step-up in basis” rule, which allows for the income tax basis of real estate to be increased to fair market on the owner’s passing for tax purposes.

“When a person dies, the tax basis for income tax purposes of assets owned by the person is stepped up—increased—to the fair market value for as determined estate tax,” Greenberg said. “I think eliminating that income tax step-up would be harmful to investors and property owners, who would find out they’re inheriting a property that has significant built-in tax, because the values have increased on a tax-cost basis.”

The elimination of the deductibility of state and local taxes is another change being discussed, and many in the real estate industry are not happy.

“Taking away the state and local tax deductibility…would be an unfair punishment for the Democratic states, New York and California” which rely less on a standard deduction, said Leslie Himmel, a co-founder and partner at Himmel + Meringoff Properties. “We are already at a tipping point, with taxes being high. It would be a [further] tipping point for a lot of companies expanding and thinking about where they can open.”

Knakal added, “Eliminating the deductibility of state and local taxes would be highly, highly negative for the tri-state area. It’s not like people in New York could move to New Jersey or Connecticut, because those are relatively high tax states also. I think you’d have a mass exodus of high-income earners if state and local taxes were no longer deductible.”

Also concerning real estate professionals is the potential elimination of 1031 exchanges, which allow investors to defer capital gains taxes on property sales via reinvestment.

“For people who want to trade out of an investment and don’t want to recognize gain, it allows them to trade the real property to someone who will presumably make more efficient use of it—develop it, improve it, do something,” Greenberg said. “Now, the seller can take the same money they would have had, and invest it in other real property, facilitating the property going to the best owner from an economic perspective.”

Knakal added, “I think it’s critical that 1031 exchanges remain in effect. About 70 percent of our sellers do 1031 exchanges. Unfortunately, the scorekeepers of tax reform in Washington will assume that if there were 5,000 transactions last year with 1031, then there will be the same 5,000 this year without 1031. This is a dangerous and very inaccurate assumption, because economics teaches us that any time an activity gets more expensive, you get less of that activity. If selling a property becomes more expensive, you’re going to get less selling. I think volume would be hurt very significantly if 1031s go by the boards.”

One change being discussed that Himmel would like to see is a reduction in taxes for the repatriation of foreign earnings.

“There’s an enormous amount of cash sitting in other countries,” she said. “They want to give corporations the ability to bring it back without penurious tax implications. The repatriation of cash for these large corporations, with a grandfathering of the tax implications, would help bring money back to the United States.”

Daniel Shapiro, a partner and tax department co-chair at Berdon, said he hopes to see residential condominium construction projects exempted from the percentage-of-completion accounting method.

“That’s an inequitable rule that puts a financial strain on developers,” Shapiro said in an email. “The percentage of completion method involves, as the name implies, the ongoing recognition of revenue and income related to longer-term projects. Under the method, condo developers must recognize revenue on projects that are not completed, which causes financial strain.”

But some believe that the greatest thing the federal government can do right now regarding tax reform is simply set it in stone as much as possible and eliminate the uncertainty plaguing today’s business environment.

“What real estate people hate more than almost any other industry is that every year, Congress tinkers in one way or another with the Internal Revenue Code,” said Mike Greenwald, the business entity tax practice leader and partner at Friedman.

“One year we have bonus depreciation, the next year we don’t have bonus depreciation,” Greenwald said. “One year we’ve got full expensing, the next year we’ve got tax credits instead of expensing. It becomes difficult, because if you’re building a building, you don’t have the flexibility to make changes every year as the tax incentives change. In their heart of hearts, if you ask any real estate person, what they want is certainty and stability. Tell us what the rules are, and we’ll play by the rules. Just don’t keep changing them.”

Source: commercial

Deal Reached for Midtown East Rezoning

Source: commercial

Investment Sales Report Card… Are You Sitting Down?

Source: commercial

What Does the Investment Sales Slump Mean for Lenders?

If the sales market of recent years has felt like a nonstop party, the cranky neighbors downstairs just called the cops. The lights are back on and the volume is down. A lot.

In the first quarter of 2017, U.S. investment sales volume decreased 26 percent year-over-year, according to numbers from brokerage Cushman & Wakefield.

The decline was even more precipitous in the New York metro area, where investment sales fell 42 percent.

The cause? Take your pick: overbuilding concerns, a looming interest rate hike, rents that appear in some markets to have reached the outer limits of sustainability.

“ ‘Cyclical-plus’ is what I would call it,” said David Schechtman, a senior executive managing director at Meridian Capital Group, suggesting that, while specific events have “definitely fueled the fire,” the plummet is largely just part of the real estate market’s eternal ebb and flow.

Robert Knakal, the chairman for New York investment sales at Cushman & Wakefield, agreed. “You typically see big drops in volume when values start to get challenged, because the discretionary sellers, which make up the overwhelming majority of sellers in any market, don’t choose to sell today for less than they could have gotten yesterday,” he said. “It happens in every cycle.”

Be that as it may, for lenders, the drop in sales could prove inconvenient. Roughly speaking, fewer deals means fewer loans means less money made. And that equation suggests banks may begin looking for ways to fill the hole left by the slumping investment sales business.

Where, exactly, might they turn? One obvious answer is refinancing.

“In any year, probably about one-third of bank lending on real estate is on acquisitions and about two-thirds is on refinancing,” Knakal said. “And that refinancing market will remain.”

In fact, given the number of 10-year loans made during the boom years of 2006 and 2007, many of them in CMBS, 2017 is a particular busy year for the refinancing business.

“We’ve had more mortgages come due than any time ever,” said Marc Warren, a principal at Ackman-Ziff. “Those need to get refinanced, and so that keeps people busy.”

Even with talk of rising interest rates, money is still cheap by historical measures, Schechtman noted. And that, he suggested, will also keep the refinancing market strong.

“If you take a snapshot of any 20- to 30- year period, it’s still a staggering time,” he said. “Three-and-a-half, 4 percent, 4.5, even 5 percent will be a good rate historically.”

Knakal said that the declining performance of properties underlying some of these loans could make lenders less eager to refinance, however.

“I think generally there’s downward pressure on rents in all three major food groups—residential, retail and office,” he said. “Lenders have to look at how the building is performing and how it was performing when they made their initial loan, or when someone else made an initial loan, and figure out if they’re willing to give the same, or less proceeds.”

Given the overall timing of conditions, though, he said he expected most properties currently in need of refinancing to be reasonably well positioned to get it.

“If you look at the five-year loans that are expiring now, they were made in 2012 or 2013, and the property probably saw a significant increase in its performance from 2012 to 2015,” Knakal said. “Maybe if you got your financing in, say, 2015, you might not be able to get the same proceeds today, but in that case you probably still have another three years left on your loan. So I don’t think there will necessarily be a refinance problem.”

On the other hand, the 10-year loans coming due today were issued at the peak of a laxly underwritten market, which has prompted some concerns about their prospects for refinancing, but recent months have provided some cause for optimism. According to a report from Trepp, of the $9 billion in commercial mortgage-backed securities debt that matured in April, more than 95 percent was paid off, which, the report notes, marked “the lowest monthly loss total for maturing debt in the past year.”

Another way banks might try to keep deal volume up is by moving into construction loans.

“There’s probably the least amount of debt available today in construction and development,” Knakal said. “There are a few banks that are active, but that’s a void they could fill in.

Although, he added, “that’s also the area with the highest risk. Some banks, regardless of how difficult it is to put out money, they’re just not going to get into that end of the business.”

“It’s bank specific,” Schechtman said, adding, however, that he has seen bank lending for construction loosen somewhat. “If it’s a development play, you’re going to have to roll up your sleeves and find the right lender. But [in the past] if you were to say, ‘I have a development play,’ the answer would very often be ‘there are just no banks for you.’ Today it’s just a question of how hard do you have to look and what rates do you have to accept.”

Construction “transactions are harder than others, but they still get done,” agreed Warren.

According to a March 2017 report from Kroll Bond Rating Agency, construction and development lending was already a hot area for banks even before the recent fall off in investment sales. Construction and development lending by U.S. banks rose 13 percent in 2015 and 14 percent in 2016, even as banks pulled back from lending in areas including residential mortgages, autos, and commercial and industrial.

The report predicts that C&D lending would continue to grow in the first quarter of 2017, “based on the large and growing level of unfunded commitments at year-end 2016.” It adds that, “given considerable pricing pressures in most loan categories, it is always tempting for bankers to increase C&D lending—a comparatively higher margin, but higher risk loan product.”

Banks’ construction exposure is still relatively low, with these loans representing 3.4 percent of their total origination at the end of 2016. That is well below the peak of 8.4 percent that banks hit at the end of 2007. This might suggest that banks still have room to expand in this area, though the High Volatility Commercial Real Estate (HVCRE) regulations that went into place in 2015 as part of the new Basel III rules could act as a countervailing force.

With certain exceptions, the regulations force banks to classify their C&D loans as HVCRE loans, which requires them to keep more capital in reserve than they would have to for a standard loan.

Beyond refinancing and C&D lending, there are various other opportunities for banks to get money out of the door amidst the sales slump, Warren said.

Transactions like partner buyouts and equity recapitalizations don’t appear as sales but can still require financing, he noted. “Sales are down, and everyone’s investment sales business is down for sure, but the [need for] financing has not necessarily dropped off.”

Schechtman said he expected to see banks tweak their products to try to fill the gap left by the fall in sales. 

“For instance, banks who have historically offered a fixed-rate product for an [lengthy] amount of time may now offer a higher interest rate product for a shorter duration of time. More of a bridge or transitional loan,” he said. “That’s an area in which we’ve seen [demand among] a lot of owners and developers actually increase. I think you’ll see conventional banks do that to the extent that they can do it within regulations.”

There’s also an argument to be made that the drop in investment sales isn’t such an issue for lenders, anyway.

Operating as they are in the stricter Dodd-Frank regulatory environment, banks have slowed their output and wouldn’t have been able to handle the sales deal volume of recent years, said Ira Zlotowitz, the president of Eastern Union Funding. The decline is almost fortuitous, he suggested, because it brings volume closer to what banks can actually manage now.

“It’s happened to work out well for the banks,” he said. “Regulators are stricter with the banks with underwriting and so on, and so they couldn’t do the same volume.”

Whatever slack exists in the market now is also being picked up by the agencies, he said. Fannie Mae closed on a record $55.3 billion in multifamily financing in 2016 and did $17.4 billion in new multifamily financing in the first quarter of the year. “This slowdown relieves what could have been untenable pressure to close an oversupply of deals,” Zlotowitz said.

Schechtman agreed, noting that “increased regulation has precluded [banks] from lending at the same pace” as before.

That said, “banks are no different from all other real estate professionals,” he added. “Banks are transaction based. They want higher volume. They want to be gangbusters all the time.”

He noted, though, that it’s helpful to remember that the recent decline is relative to the go-go market of the last several years.

“There are fewer sales signing and closing than there were a year ago, or certainly 24 months ago,” he said. “But there’s an analogy that I use: When you’re traveling at 80 miles an hour for five or six years in a row, and all of the sudden you come into a 50-mile-an- hour zone, you feel like you’ve slowed down precipitously. But the truth is, you’re still moving along at a wonderful clip. That’s kind of where we are. Deals are still happening. If you ask me if I would take today’s volume over other years in my career, absolutely.”

Source: commercial