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Category ArchiveThe Moinian Group

Hudson Yards Stakeholders Dive into NYC’s ‘Newest Neighborhood’ at CO Event

What kind of work goes into rebuilding and renewing a massive chunk of Manhattan, spanning from the High Line up to Hell’s Kitchen and Eighth Avenue over to the Hudson River?

That was the question posed to a select group of developers, architects, engineers and officials helming the transformation of Manhattan’s Far West Side, who gathered at Commercial Observer’s “The Hudson Yards District: New York’s Newest Neighborhood” conference earlier this month to discuss the various commercial and infrastructure developments that are recreating an entire swath of the island.

The event, held on March 8 at law firm Herrick Feinstein’s offices at 2 Park Avenue near Murray Hill, was kicked off with remarks from Patrick O’Sullivan, a partner in the firm’s real estate department. O’Sullivan, a former executive at the New York City Economic Development Corporation, recalled how the development of Hudson Yards was preceded by the proposed West Side Stadium, which was part of the city’s unsuccessful bid to host the 2012 Summer Olympics. After the Olympic bid (which was awarded to London) failed, O’Sullivan said, New York “went to plan B—and it was definitely a good one.”

That “plan B”—most significantly the Hudson Yards mixed-use mega-development helmed by Related Companies and Oxford Properties Group—was the subject of the morning’s first panel, which featured Andrew Cantor, a senior vice president at Related; Andrew Werner, a senior associate principal at architecture firm and Hudson Yards master planner Kohn Pedersen Fox Associates; Colin Brown, a principal at engineering firm Thornton Tomasetti; and Mitchell Moinian, a principal at The Moinian Group, which is developing its own Hudson Yards office tower at 3 Hudson Boulevard.

With Phase 1 of Related and Oxford’s 28-acre Hudson Yards project roughly one year away from opening, Cantor recalled the process that has facilitated the evolution of a neighborhood that historically was “always seen as too far away” from the rest of Manhattan into one that has “changed the way many people view” the possibilities for development in New York City.

Werner noted the “mixed-use” aspect of the project, which seeks to bring residential, commercial and retail uses all within close proximity of each other with the goal of building a “24-hour neighborhood.” From an architectural perspective, Werner said the multi-tower development sought a design with “texture” that would “drive people to want to be there”—a daunting task, considering the site was a “tabula rasa,” or blank slate, that forced KPF to draw on its experiences building “large-scale cities from scratch” in Asia.

Brown, whose firm handled engineering for much of the Related and Oxford project, cited the “great challenge” of building on a site that was an operational railyard—constraints that made it “hard not to be innovative [in order] to make something work,” and called for out-of-the-box solutions like suspending the development’s retail podium above the railyards and building from there.

Moinian was quick to point out that while the Related and Oxford project occupies several square blocks south of West 34th Street, half of the Hudson Yards district at large is located above the thoroughfare, stretching up to West 41st Street. The district at large, he said, will provide newfound “connectivity from Midtown [down] to the Meatpacking District.”

While acknowledging that The Moinian Group’s 2-million-square-foot 3 Hudson Boulevard, which sits on the north side of West 34th Street, won’t be able to take advantage of the “mini-city infrastructure in place for [Related and Oxford’s] mini-city,” the tower will benefit from the development of Hudson Boulevard Park, which will run from West 34th to West 37th Streets, Moinian said. The developer has commenced work on the foundation of the FXCollaborative-designed office building “on spec,” with no advance agreements with office tenants in place—something that shows the extent to which The Moinian Group “obviously believe[s] in the neighborhood,” he added.

hudson yards panels 90 Hudson Yards Stakeholders Dive into NYC’s Newest Neighborhood at CO Event
From left: Robin Stout, Michael Evans and Henry Caso at CO’s “The Hudson Yards District: New York’s Newest Neighborhood” conference on March 8. Photo: Aaron Adler/for Commercial Observer

The second and final panel of the morning focused on the area’s infrastructure, and the developments and improvements taking place to bolster the Hudson Yards district’s transportation offerings and connectivity. Those include the ambitious redevelopment of the James A. Farley Post Office Building into the new Moynihan Train Hall—a project decades in the making that seeks to build “the Grand Central Terminal of the West Side” while relieving the notorious congestion that affects the neighboring Pennsylvania Station, according to Michael Evans, the president of the Moynihan Station Development Corporation.

Work on Moynihan Train Hall is scheduled for completion in early 2021, and Evans cited the logistical obstacles involved when “working within the busiest train station in the Western Hemisphere.” But the project is expected to increase concourse capacity at Penn Station “by 50 percent overnight,” Evans said, and build momentum for further, “critical” infrastructure improvements at the transit hub deridingly referred to by New York Governor Andrew Cuomo as “the catacombs.”

Further west, the Jacob K. Javits Convention Center is in the midst of its own major overhaul, as detailed by Robin Stout, the president of the New York Convention Center Development Corporation. The four-year, $1.2 billion project seeks to expand the convention center’s roughly 400,000 square feet of exhibition space to 500,000 square feet in order “to attract the largest shows,” Stout said.

The expansion will also add 50,000 square feet of new meeting room and breakout room space, as well as a new 6,000-person capacity ballroom that will be “the largest ballroom in the northeast,” according to Stout. There will also be upgrades to the Javits Center’s infrastructure, including a new three-story electrical transformer building and a new truck-marshalling facility that will be built on West 40th Street.

“We don’t want people to think of Javits as low-rise protection for Hudson Yards’ river views,” Stout said. He added the convention center, and the commerce it will bring to the Far West Side, will spur further hotel and retail development and help Hudson Yards achieve its goal of becoming “a vibrant 24-hour neighborhood.”

Source: commercial

Michael Shah Talks His New Projects, Toledano and Why He ‘Loves’ This Retail Market

By now, Michael Shah’s origin story is well known in real estate circles. Twelve years ago, at the age of 28, the Harvard Law School graduate quit his gig at Midtown-based business law firm Wachtell, Lipton, Rosen & Katz after growing fed up with the demands of the job.

“I worked horrible hours, as all lawyers do,” Shah recalled. “I did not find it to be very fulfilling. You don’t get the chance to spend any of the money you’re making.” He spent the following six months “just partying in New York, going out every day and figuring out what I wanted to do.”

The Long Island native’s parents, both of whom were doctors, had invested in affordable housing properties in the city with their savings, providing Shah with some exposure to the nature of the real estate business. That, coupled with his own nous in the fields of business and law, meant that real estate proved an attractive opportunity for a smart young guy looking to reboot his professional life.

His first purchase was 1314 Seneca Avenue, a six-story affordable housing building in the Hunts Point section of the Bronx, which he bought for $6 million. “It was a true crack den, in every sense of the word—if you’ve seen New Jack City, it was the Carter building,” Shah said. Those kinds of outer-borough multifamily acquisitions represented Shah’s initial foray into the business, but in time, he began venturing into more ambitious segments of the market.

Today, the 40-year-old bachelor, who lives on Union Square West, oversees a diverse portfolio of New York City real estate assets approaching $1 billion in value, he said. His company, East Village-based Delshah Capital, owns everything from Meatpacking District retail properties, to Lower East Side apartment buildings, to a 1,100-unit federally subsidized housing complex in Staten Island.

Additionally, Delshah has established itself as a ground-up residential developer. Shah’s boutique Chelsea condo project at 221 West 17th Street, known as the Dorian, recently topped out after suffering a 2015 fire that set construction back a few years, and he’s also pursuing new high-end rental developments at 22 Chapel Street in Dumbo, Brooklyn, and 30 Morningside Drive in Morningside Heights (the latter being a conversion of five former medical buildings that Delshah acquired from Mount Sinai St. Luke’s hospital in 2016).

Shah recently spoke with Commercial Observer about those projects and more—including his firm’s venture into the Israeli bond market, his feud with troubled real estate investor Raphael Toledano and why he’s actually bullish on the retail market.

Commercial Observer: Looking at Delshah’s portfolio, you have a notably diverse array of investments in different types of properties. Do you feel that gives the firm an advantage, rather than just focusing on one asset class?

Michael Shah: It’s definitely an advantage, and there is a method to the madness. Some people just focus on certain submarkets. My personal investment philosophy is you’ve always got to remember real estate is cyclical, and depending on where the cycle is, there are different asset classes you want to be in.

At the top of the market, you want to be in debt, because people are paying more for assets than what they’re worth—so you want to be putting money out. At the bottom of the market, retail rents accelerate way more than residential rents—so if you feel like you’ve hit the bottom, you want to be heavier in retail, and office too. That’s how we pick what we’re in.

We also look at gentrifying submarkets: where people are moving, where we think they’re going to be moving, and where we think rents are going to grow.

You’ve recently increased your exposure on the Lower East Side, where you bought a walkup building at 138 Ludlow Street earlier this year for $19 million. Do you think that neighborhood still has a lot of embedded upside?

The Lower East Side is 100 percent gentrifying. I started investing there in 2007, and I’ve ridden the wave up. You have so many things happening there: Essex Crossing is coming online, and that Ludlow and Rivington corridor, where we bought 138 Ludlow, is maturing right now. I think there is additional upside.

I think the East Village still has upside. Greenwich Village and the West Village are two of the most desirable neighborhoods in Manhattan, so why wouldn’t the East Village a couple blocks over be? That’s where my friends hang out, that’s where some of the cooler bars are, that’s where people want to live.

image001 Michael Shah Talks His New Projects, Toledano and Why He ‘Loves’ This Retail Market
Rendering of Delshah’s Dorian condo project at 221 West 17th Street in Chelsea. Image: Delshah Capital

Let’s talk about some of the new projects you’re currently working on, like 30 Morningside Drive, 22 Chapel Street and the Dorian. Where do those projects stand, and what’s your investment thesis on those properties?

Thirty Morningside Drive will be a market-rate, five-building rental complex; the first two buildings are going to be delivered this time next year, and they’ll all be online by the end of 2019. The thesis is, you’ve seen SL Green do 1080 Amsterdam Avenue, Brodsky Organization [did 400 West 113th Street], and we think there’s demand for luxury product in that neighborhood that’s underserved.

Twenty-two Chapel is my first Brooklyn ground-up project. We’re supposed to close construction financing this month. It’s a very cool building; there will be a pool on the roof, which I think will be a very nice amenity, and a fitness center and lounge. Everyone’s seen what’s happened in Brooklyn over the last five years. It’s no longer a lower-cost alternative to Manhattan; it’s where people want to be instead of Manhattan. That building is also rentals, and 25 percent of the units will be affordable. We’re doing that under the new Affordable New York Housing Program.

We just topped out the Dorian and are going to start closings this September. That building is 45 percent [in contract]; one more unit would take it to 50 percent. Right now, between Chapel Street and Morningside, we have close to 450,000 square feet under development. I think we want to finish out these projects before we look at more development.

What are your thoughts on the Affordable New York program, and how does it compare to the previous 421a tax abatement that it was designed to replace?

Honestly, as a developer, the previous plan was more favorable for developers, but what the city is trying to do is smart. I think the city solves the affordable housing problem by giving people FAR [floor area ratio] bonuses to build affordable housing. Right now the law is that you get the tax incentive if you do a partially affordable building, which I think is great and it works. But I think what would be really good would be if you get an FAR bump—that way you keep all your market-rate FAR, can build the affordable and get the tax incentive.

Delshah has a good deal of exposure to the Manhattan retail market. I don’t have to tell you that it isn’t the easiest time for that market; what are your thoughts on the current state of retail real estate, and have you felt the downturn across your own portfolio?

I love it. We’re one of the few actively investing in retail right now. It’s a market that rose crazy fast from 2012 to 2015, and people always forget that rents don’t go up forever. With that asset class, market timing is very important. People are shying away from it, but we just picked up two notes on Manhattan retail assets from Signature Bank and may pick up a third. People bought vacant retail hoping to lease it up at huge rents, and they’re not because their whole investment was based on rents in 2015.

There’s a market for retail. The thesis is, stock markets are up, people feel wealthy, tax cuts are in place, there’s more disposable income, and retail’s been beaten to shit over the last few years. A lot of the pain was built into the pricing, but [companies] were reporting earnings and this was the best holiday shopping season we’ve seen in five years. When [rents adjust], you’ll see people signing new leases. If you’re a landlord with vacancy, it’s a hot retail market—as long as you don’t need 2015 rents.

But all my shit is leased. No bankruptcies; Restoration Hardware [at 55 Gansevoort Street in the Meatpacking District] is still crushing it, and Urban Outfitters [at 58-60 Ninth Avenue in the Meatpacking District] has very little debt anyway. We have good tenants.

You mentioned Delshah’s purchase of those retail notes; the firm has been particularly active in recent years in scooping up commercial mortgages and particularly debt that is nonperforming or on properties that have slipped into bankruptcy. How did you come to enter that market?

It’s a very active part of our business plan. I think a lot of people understand that buying nonperforming debt is a good strategy. What’s unique about us is that we’re not a purely financial purchaser; some people just buy the paper, but we’re very happy to own and reposition the asset because we’re effectively a real estate operating company. We’ve had tremendous success on all of them.

But those deals have also earned you enemies like landlord Raphael Toledano, who allegedly said he would “bury you” after you bought the note on his building at 97 Second Avenue. What did you make of that? [In November 2017, a federal bankruptcy court judge dismissed a lawsuit filed by Toledano seeking to block Shah’s acquisition of the property.]

The dude was imploding, and it was pretty clear vultures were going to pick his carcass dry, and I wanted to be one of them. From the time Madison Realty Capital made the loan [a $124 million mortgage on Toledano’s acquisition of a 16-building East Village portfolio], it wasn’t a question of if he was going to default—it was when. I think [Madison co-Founder and Managing Principal Josh] Zegen is going to do really well on that [portfolio].

I don’t really know how anybody in their right mind believed [Toledano] was going to out-litigate us; he’s not very litigation-savvy. I think it was a lot of noise and press—he’s a colorful guy. Before we did the deal, we had analyzed the litigation risk and knew how a bankruptcy would end, and it played out exactly how we planned. [Note: Toledano and his firm, Brookhill Properties, could not be reached for comment.]

michaelshah 461 Michael Shah Talks His New Projects, Toledano and Why He ‘Loves’ This Retail Market
Michael Shah at Delshah Capital’s offices in the East Village. Photo: Yvonne Albinowski/For Commercial Observer

Delshah is among a select group of U.S. real estate firms to have tapped the Israeli bond market via a publicly traded bond offering on the Tel Aviv Stock Exchange [the company has raised roughly $180 million to date in Israel, including a $50-plus million issuance last August with the expressed goal of financing 30 Morningside Drive]. What’s that experience been like thus far?

When I look back, that—along with Charlie [Oshman, founder of proptech startup Reonomy] coming on to be COO—have been two of the transformative things that have led to the company’s success. To become a publicly traded entity in Israel, you have to do a lot with organizational infrastructure, and I was a good real estate investor, but organizational design wasn’t something I spent a lot of time on. Charlie came over here, and now the company operates like a company and not just a deal shop.

It’s been very important to our trajectory; having access to that market allows us to do larger deals. We did our Series C offering for 30 Morningside, and here that money would have cost a lot more. It’s a great capital market. There’s a premium you pay when you’re a first-time issuer because the market doesn’t really know you, but this company was the perfect size for that market.

Related, Extell, those companies had larger issuances, but they didn’t pay attention to the market as much. Both Moinian and we looked at it not as a one-off but as a recurring thing for future growth. We have active investor relations programs; we go back to Israel when we’re not looking to raise money, we do a quarterly call after our earnings releases. That has gotten the market more comfortable with us.

How else do you finance your projects? With the growth of the alternative, non-bank lending sector in recent years, is that a segment of the financing market you’ve taken advantage of as banks have retreated from the realm of development lending?

30 Morningside was [financed] with Square Mile—we have a great relationship with them and CapitalSource. Bank of the Ozarks is doing the senior loan on 22 Chapel, and they were the acquisition financier for 30 Morningside. We’re still getting our deals financed; it’s just about how much leverage.

I think the real estate capital markets have matured a lot since 2009; since the credit crunch, alternative capital has stepped in to fill that void. It’s good for us because we tend to do complicated things. Historically, this company has used its own balance sheet [to finance operations], and this year one of the big initiatives for this company is to launch our own credit fund. We’ll be starting to lend on any asset class that’s based in New York.

You’re very much New York City-focused. Do you plan on increasing your exposure in any real estate markets outside of the city?

I think for the immediate future, we’ll be in New York [mostly]. I did buy a building in Miami recently—a corner building just outside of the Design District. We’re turning that into a 12,000-square-foot retail building.

And outside of real estate, you’ve also established yourself as a restaurateur.

I’ve got three operating restaurants and bars: Sons of Essex [on the Lower East Side], Petaluma [on the Upper East Side] and Leave Rochelle Out of It [on the Lower East Side]. They’re all in buildings that I’ve owned. I tried to do one at 200 Allen Street, but the Lower East Side community board feels they have a saturation issue [with bars and restaurants].

What was your motivation for entering the restaurant business? I feel a lot of people get into it so they can have a place where they can bring their friends and hang out.

That was never my motivation—though my dad did do that. It’s a tough business, and you have to manage expenses. I started doing it because I had vacant retail in 2009 and 2010; the thought process was, if we can put our own operating businesses in here, it’ll help pay rent. I definitely think we’ll end up with at least one more [restaurant] opening this year.

Lastly, do you still work out with Hamid Castro? [Castro, a personal trainer, was the subject of a 2016 New York Post article headlined “I Train Fat Rich Guys and Then Get Them Laid.” Shah featured prominently in the article, noting that he began training with Castro after hitting “a low point in my life.”]

Hamid and I are still good friends, though he’s not my trainer anymore.

Is exercise still a big part of your life?

Yeah, it’s basically my hour to myself every day to get into the mindset for what I’m trying to do at work. It’s a good way to start the day. And not being fat anymore is also a huge perk.

Source: commercial

Knotel Inks 20K-SF Deal at 72 Madison Avenue, Signs Starbucks to Space

Office provider Knotel has signed its latest Manhattan lease at the Moinian Group’s 72 Madison Avenue in NoMad, where it is taking 20,000 square feet of space across four floors.

Knotel agreed a 10-year deal for the entire second, third, 11th and 12th floors at the 12-story, 58,500-square-foot building between East 27th and East 28th Streets, it announced today. The company, which provides short-term lease arrangements to office tenants who license their space from Knotel, said its footprint at 72 Madison Avenue will be 100 percent occupied by full-floor tenants including Starbucks and Sequoia Consulting Group upon opening this month.

The deal represents the second time Knotel has taken space at a Moinian-owned property; last year, the company inked a lease that will eventually see it occupy all 25,000 square feet of office space at the landlord’s 55 West 21st Street in the Flatiron District, as CO reported in September 2017.

Knotel was represented by Elie Reiss of Skylight Leasing, while it was not clear who handled the transaction on behalf of the landlord. Representatives for both Knotel and Moinian declined to provide rents in the deal. Reiss did not immediately return a request for comment.

While the bulk of Knotel’s clientele to date has been small- to medium-sized companies seeking shorter-term leases, the firm said it is seeing stronger demand from larger corporations, such as Starbucks, that are also being drawn to the prospect of more flexible arrangements for their office space.

“Big corporations also need flexibility, whether to scale during good times or adapt during more turbulent times,” Amol Sarva, Knotel’s co-founder and CEO, said in a statement. “We’re one of the few players that help bigger companies stay agile.”

Knotel now has more than 700,000 square feet of space across more than 30 locations in New York City and three in San Francisco. The company has been a prolific consumer of office space in New York since securing a $25 million Series A funding round in February 2017 (disclosure: Observer Capital, led by Observer Media Chairman and Publisher Joseph Meyer, is among Knotel’s investors).

The office provider says it expects to grow its footprint to “several million square feet” over the course of this year, and has drawn up plans for “further expansion in large global cities” including London.

Source: commercial

Knotel Takes Entirety of Office Space at Soho Building

Office provider Knotel is taking more space in Soho—this time agreeing to a 14,000-square-foot lease comprising the entirety of the office space at 521 Broadway, the company announced today.

Knotel signed a 10-year deal earlier this month for the entire second through fifth floors at the five-story, 21,000-square-foot building between Spring and Broome Streets. The deal represents the second time Knotel has inked a lease to occupy an entire Manhattan office building; last year, it agreed to take all 25,000 square feet at the Moinian Group’s 55 West 21st Street in the Flatiron District, as Commercial Observer reported in September.

The transaction does not include the street-level retail space at 521 Broadway, consisting of 3,000 square feet on the ground level and another 3,300 square feet of lower-level space, according to marketing materials from retail brokerage Isaacs and Company. That space was until recently vacant but is now occupied on a short-term pop-up lease by apparel brand Nirvanna Designs.

Knotel did not disclose the asking rent in the deal. Elie Reiss of Skylight Leasing represented Knotel in the transaction, while Nir Gilboa of Nolita Group handles office leasing at 521 Broadway on behalf of Montreal-based landlord Rumpf. Skylight, Nolita Group and Rumpf did not immediately return requests for comment.

The office provider has been active in the Soho market as of late, having recently signed a lease for more than 23,000 square feet at 584-588 Broadway, as CO reported last week. Knotel, which provides short-term lease agreements to office tenants that effectively sublease their space from the firm, has more than 600,000 square feet of office space under lease across more than 30 locations in New York City and three in San Francisco.

Source: commercial

Moinian Group Nabs $118M Square Mile, Bank of the Ozarks Loan for Dallas Office Tower

Square Mile Capital Management has provided a $118 million loan to The Moinian Group and SMA Equities for Renaissance Tower—a 1.7-million-square-foot office building in Downtown Dallas.

Square Mile brought in Bank of the Ozarks to take a senior portion of the loan, which will be used to repay an existing CMBS loan on the property and bridge the asset through stabilization.

HFF’s Whitaker Johnson and Steve Heldenfels arranged the financing on the dazzling tower, outside shots of which depicted the fictional home of Ewing Oil in the 1980s television series Dallas.

SMA Equities and The Moinian Group have owned the building since 2006. The previous loan was securitized in the Wachovia Bank-sponsored WBCMT 2006-C29 CMBS deal and split into a $64.5 million A-note and a $64.5 million B-note.

One of the tallest buildings in Downtown Dallas, Renaissance Tower sits in Dallas’ Central Business District. Its tenants include Hilltop Securities, Neiman Marcus Group, Dallas County and EY.

The Environmental Protection Agency also recently signed a 20-year lease for 229,000 square feet at the property, and the tenant is scheduled to move in December 2018. 

“We are excited to establish a lending relationship with SMA Equities and The Moinian Group on this transaction,” Square Mile Principal Matthew Drummond said in prepared remarks. “As Downtown Dallas continues to benefit from additional redevelopment and as evidenced by the recent signing of the EPA lease, Renaissance Tower is well positioned as a cost-effective alternative to other high-quality office buildings located in submarkets such as Uptown and Plano.”

“We received extremely competitive financing packages from multiple sources but ultimately closed with Bank of the Ozarks and Square Mile,” a spokeswoman for The Moinian Group told CO. “The terms gave us the flexibility we required to complete lease up of our Class-A office tower.”

Source: commercial

Knotel to Take Entirety of Office Space at Moinian-Owned Flatiron District Building

Startup office provider Knotel has agreed to take 25,000 square feet at the Moinian Group’s 55 West 21st Street in a deal that will see the company eventually occupy all of the office space at the Flatiron District building.

Knotel signed a 10-year deal last month for its space at the six-story, roughly 30,000-square-foot property between Fifth Avenue and Avenue of the Americas, the officer provider announced last week, and began occupying the building earlier this month.

While Knotel did not disclose which floors it immediately occupied, a spokesman for Moinian said the tenant has taken the entire second, third and sixth floors and part of the fifth floor, for a total of 17,500 square feet.

Under the agreement, Knotel also has the option to take the remaining office space at 55 West 21st Street as existing tenants’ leases expire, sources with knowledge of the deal told Commercial Observer. That would include the entire, 5,000-square-foot fourth floor currently occupied by Skin Spa New York, previously the building’s largest tenant, according to CoStar Group data. Knotel is expected to exercise its option on the rest of the property’s space excluding its ground-floor retail, sources said.

While neither landlord nor tenant provided asking rent at the building, it is in the low- to mid-$50s per square foot, CoStar indicates. Knotel, which provides short-term and rolling lease terms to companies who effectively sublease their office space from the company, was represented in the deal by Elie Reiss of Skylight Leasing. The Moinian Group’s Gregg Weisser represented the landlord in-house.

Knotel has aggressively expanded its New York City office footprint this year and now has north of 400,000 square feet of space across more than 20 locations in Manhattan and Brooklyn. The company has set its sights on the popular Midtown South office market, in particular; in addition to the deal at 55 West 21st Street, Knotel recently signed leases for 28,000 square feet at 114 West 26th Street in Chelsea and more than 17,000 square feet at 373 Park Avenue South in NoMad, as Commercial Observer first reported last month.

While Knotel has sought to differentiate itself from coworking providers like WeWork—citing its business model of leasing partial or full-floor spaces that house small and mid-sized companies, rather than individuals—the company also announced its first foray into the world of coworking last week: a “strategic joint venture” with coworking provider Grind.

The joint venture will see Knotel take over Grind’s 9,000-square-foot location at 419 Park Avenue South in NoMad, the company said. Under the partnership, Grind will refer inquiries to Knotel from larger companies looking for office space, as well as companies that grow out of the coworking model and into a more traditional office model. Knotel, meanwhile, will refer freelancers and smaller companies looking for coworking space to Grind.

Knotel also recently announced plans to expand its business into San Francisco—the first market outside of New York that the company will be active in.

Source: commercial

Yield of Dreams: Foreign Investors Have an Increasing Appetite for Sub Debt

Having dipped their toes in the U.S. subordinated debt pool for several years, international investors are now jumping in headfirst.

A bevy of factors, including low yields on senior debt and more conservative bank lending, have created a booming business in U.S. real estate for mezzanine and other forms of subordinated debt. And, foreign money has become key in this rapid growth with investors in Asia and the Middle East, in particular, showing strong appetites.

“Rates are so low, people in the investment business are screaming for yield,” said John Levy, the president of Richmond, Virginia-based real estate investment banking firm John B Levy & Company. “You can get first mortgage money at below 4 percent. For investors who need 5 or 6 or 7 percent, they have to start looking at what are their alternatives. And sub debt, mezzanine debt and preferred equity are alternatives.”

Among foreign investors, “South Koreans are particularly active,” said Jeffrey Fastov, a senior managing director at Square Mile Capital. This demand has been driven significantly, he said, by the country’s pension funds and insurance companies, which have “very long-term liabilities” and need “long-term assets to match.”

Adding fuel to the fire, “interest rates in their home country are zero or even negative,” Fastov added, “and so they’re searching for real returns.”

U.S. subordinated debt offers these investors something of a sweet spot in terms of risk profile, Fastov said, noting that they were particularly interested in “stabilized, higher-quality properties in major markets with good sponsors.”

“They don’t want to take on a lot of risk because these insurance companies are just trying to cover the cost of their long-term liabilities,” he said. “So this is a way of getting 100 to 150 basis points premium without taking a lot of perceived incremental risk.”

With that risk and targeted return, “it’s essentially the Koreans or maybe money managers or some life insurance companies in the U.S.,” Fastov said. “That’s basically where we find the capital.”

As Commercial Observer reported in May, South Korean investors loaned $45 million in mezz debt toward the refinancing of Edward Minskoff’s 1166 Sixth Avenue. Last year, a group of Korean insurance firms made a $220 million mezz loan on the AXA Equitable Center at 787 Seventh Avenue, and the Korea Teachers Pension fund participated in a $100 million mezz loan on San Francisco’s Westin St. Francis hotel.

Foreign demand for U.S. subordinated debt began to take off in 2015 and, since then, “has been steadily increasing,” said Jonathan Chassin, the head of the Moinian Group’s lending platform Moinian Capital Partners. He described the move into sub debt as part of a progression from senior loans.

“All foreign investors we are dealing with tend to start with whole loans and then get comfortable enough to take mezzanine positions on high quality assets,” he said.

In the case of South Korea, initial forays into the U.S. sub debt market have helped foster the country’s current appetite, Fastov said.

“Like in a lot of places, it’s a tight-knit culture, and all the players in that market kind of know each other,” he said. “And as some of the most innovative thought leaders started to take exposure to this kind of investment, others have followed suit.”

Another factor driving this trend has been the loosening, in recent years, of regulations governing investments in foreign real estate and other assets by Korean insurance companies and pension funds.

Fastov said the uptick in Korean sub debt activity has sparked interest with investors in neighboring Japan, though Japanese lenders are still small players in U.S. sub debt compared to their Korean counterparts.

“I think they’re making a very measured, cautious re-entry into the market [after the 2008 crisis],” Fastov said.

Chinese investors have also shown some interest in U.S. sub debt, though not “a huge amount,” said Jerome Sanzo, an executive director and the head of real estate finance at Industrial and Commercial Bank of China. According to a report from CoStar, the ICBC Asia was among the investors in the final capital round for the Och-Ziff Real Estate Credit Fund, which launched in 2015 and has raised $735 million to invest in mezzanine debt on various distressed properties.

Chinese entities interested in U.S. sub debt typically invest through established U.S.-based fund managers, as opposed to directly, Sanzo said.

Controls on outbound investment recently imposed by the Chinese government, Sanzo added, could actually lead to a slight increase in demand for U.S. sub debt. (See story on page 32.)

“There are legitimate ways that some Chinese entities can invest here despite those restrictions,” Sanzo said. “Specifically, if they already have cash-generating assets outside of China, they can redeploy those, and some of them are redeploying those into sub debt, I think, because it is getting harder and harder for them to find equity investments that make sense.”

Though, Sanzo said he doubted this would affect the market much. “I don’t think you’re going to see that tilt the needle in any significant way,” he said, “but on the margins.”

In general, the market for U.S. real estate sub debt has grown dramatically since the housing crisis, Levy said, as banks pulled back on construction lending, forcing developers to either invest more equity in their projects or look elsewhere for loans that will let them achieve the leverage they are after.

More stringent criteria around mortgage securitization has also worked to grow the sub debt space, Fastov said. “That market was just very, very aggressive [prior to the financial crisis], and it has gotten more conservative as well.”

“In commercial real estate, 65 percent [loan-to-value] is the new 75 percent,” Levy said. “People want financing but first mortgages aren’t aggressive enough. And that brings up the question of how do you get the leverage. And that just makes a bigger space to play for second mortgages—mezz debt or sub debt or preferred equity.”

Responding to this growth, Levy and investment manager Michael Giliberto have developed a new index to follow the sub debt space. Called the Giliberto-Levy High Yield Index, the benchmark tracks returns on mezz debt, preferred equity and other high-yield commercial real estate investments.

“This has been a market that has been very difficult for investors to understand, to underwrite, to track because there has been no data,” Levy said. “If you were doing mezz debt or sub debt and you said, ‘I got 5 percent or 5.5 percent,’ well, that’s okay, but compared to what? Is the general index for that 7 percent? In which case, you didn’t do very well at all.”

The initial index comprises some $8.5 billion across roughly 250 sub debt positions, he said, adding that he expected improved ability to benchmark sub debt would help grow the space further.

Rising demand for U.S. sub debt among both international and domestic investors has pushed yields down significantly since 2010 and more modestly in recent months, Levy said. “They have certainly come down over the long term. Are they lower in the last six months? Yeah, probably somewhat.”

Moinian’s Chassin suggested that the increased demand for sub debt has driven rates down most significantly for safer, more conservative investments while putting less pressure on higher risk deals.

“I think it’s driving the pricing much tighter for deals that are relatively stable and somewhat [tighter] for more marginal credit deals,” he said. “There are still strong deals to be had for lenders that are able to understand the operational nuances of assets or developments.”

Middle Eastern investors have typically favored this latter sort of higher risk, higher yield deal, Fastov said, noting that this is tied in part to the region’s oil wealth.

“Some of the bigger investors there are tied to sovereign wealth pools that are obviously sensitive to the price of oil,” Fastov said. In recent years, low oil prices have been key in driving these funds’ portfolio management decisions, he added.

“So that might entail looking for shorter duration or more liquid position as opposed to very, very long-term development-type projects,” he said. “So as a general matter we’re finding interest in higher yielding, shorter term [deals] given those conditions there. They may play in equity, preferred equity and mezzanine, but it tends to be much higher yielding, much higher value-add type of projects, that kind of stuff.”

That said, Fastov noted that, like the Koreans, these investors are typically targeting class A properties in major markets.

The United Arab Emirates has been among the more active Middle East countries in U.S. sub debt, he said, and Saudi Arabia could become a bigger player in this area as the country expands its sovereign wealth fund and works to transition away from its high dependence on oil revenues.

Despite the rising foreign demand for U.S. subordinated debt and the downward pressure on yields, Fastov said he believes investors have remained prudent thus far.

“I would measure that by, Are projects that are truly crazy, that really don’t have a chance of performing, getting financed?” he said. “And I don’t think so. I think the market has good tone to it.”

Source: commercial

Backed by Israeli Bond Funds, Moinian Capital Partners Rides the Nonbank Lending Wave

Source: commercial

Coworking Space Provider Opening Midtown Office in Nonprofit’s Space

Source: commercial

Modeling Agency Renews Office Lease at 245 Fifth Avenue

Elite Model Management has agreed to renew its 9,100-square-foot office at The Moinian Group and Thor Equities245 Fifth Avenue in NoMad, sources told Commercial Observer.

The modeling agency signed on for a five-year renewal of its space, which comprises the entire 24th floor of the 25-story, 315,000-square-foot building at the corner of East 28th Street.

Asking rent in the deal was $75 per square foot, according to sources with knowledge of the transaction, with the new lease term commencing June 1. Elite Model Management has occupied the 24th floor at 245 Fifth Avenue since May 2012, according to CoStar Group.

Neither Gabriel Whitman nor Gregg Weisser of Moinian, who represented the landlord in-house, returned requests for comment. Peter Gross and James Gross of Douglas Elliman Commercial, who represented the tenant, declined to comment on the transaction.

Moinian and Thor co-own 245 Fifth Avenue through a joint venture; the Joseph Sitt-led firm teamed with the Joseph Moinian-led company to buy out Moinian’s former partner on the property, Goldman Sachs, for $161.5 million in 2011. The landlords refinanced the building last spring with a $160 million loan from AIG Global Real Estate, as CO reported at the time.

Paris-based Elite Model Management, which was founded in 1972 by John Casablancas and Alain Kittler, opened its New York office in 1977. The company has represented the likes of Linda Evangelista, Gisele Bundchen, Rosie Huntington-Whiteley, Tyra Banks, Naomi Campbell, Cindy Crawford and Heidi Klum.

Other office tenants at 245 Fifth Avenue include data firm Enigma Technologies, talent management company IMG and engineering consultancy Burns & McDonnell. Ground-floor retail tenants include Cafe 28 and a United Parcel Service store.

Source: commercial