MARKET HIGHLIGHT, MARCH/APRIL 2012

NEW YORK CITY

LENDERS INCREASINGLY FAVOR LAND IN NYC,
ALONG WITH MULTIFAMILY AND HOSPITALITY

In a recent four-week period, more than $1.7 billion dollars of mortgage capital flowed into New York City. Not surprisingly, more than half of that figure — $800 million — went to multifamily deals in the five boroughs. Hotels scooped up the second most with almost $360 million and office came in third with just over $150 million. Surprisingly, vacant land attracted nearly $140 million in debt capital as developers are finding success in obtaining financing for new projects. Continuing the trend, multifamily developments took the lion’s share of the construction financing as well with nearly $120 million in product having some type of residential component.

The largest transaction during this time period was a $265 million loan from Citibank to fund the buyout of the tenant-in-common interests in the Park Central Condominium conversion located at 870 Seventh Ave., now operated as the Park Central Hotel. The second-largest loan was a $160 million mortgage taken out by Alexico Management Group from German American Capital Corp., which is secured by the leasehold interest of Upper East Side properties at 992 and 1000 Madison Avenue.

Rounding out the top three loans was a $71.5 million loan to fund Friedman Management’s 28-story residential tower project, billed as 113 Nassau. The New York State Housing Finance Agency provided the funding.

Clearly skewed by the huge hotel loan, the hospitality property sector took the top spot in average loan size at just over $51 million, with land in second place at $13.7 million and multifamily in third with $12.7 million. In total, 129 loans were secured during the four weeks averaging $13.4 million.

— Brian McCarthy is co-founder and vice president of Off-Market RADAR, a data service that provides verified and direct contact information related to properties priced above $2 million. OMR tracks foreclosures, loan sales, mortgages, deeds, CMBS loans and other transactions.

New York City Multifamily

The multifamily market in New York City picked up steam in 2011 and is continuing to thrive during the first quarter. Multifamily building sales citywide jumped 33 percent in 2011 compared to 2010 as institutional investors drove the year-over-year jump in dollar volume up by 43 percent.

Our company’s research report, the Multifamily Year in Review: New York City 2011, shows that citywide there were 436 multifamily transactions in 2011 consisting of 589 buildings totaling $4.23 billion in gross consideration, compared to 2010, which had 392 multifamily transactions with 442 buildings totaling $2.949 billion in gross consideration.

Manhattan south of 96th Street and Brooklyn posted the strongest gains in 2011 versus 2010. Each saw a 25 percent increase in multifamily transaction volume and around 50 percent increase in building sales. Year-over-year multifamily building sales in Northern Manhattan and the Bronx rose 25 percent and 23 percent, respectively, but declined 7 percent in Queens.

The pricing environment has shifted dramatically in favor of sellers and prices are ticking up as a result of several fundamental value drivers. Rents have now recovered to pre-financial crisis levels and tenant concessions have all but disappeared. Interest rates for cash-flowing multifamily assets have hit all-time lows, giving owners the ability to either sell at excellent cap rates or re-finance inexpensively.

Supply versus demand dynamics are also in favor of multifamily owners. Many owners are reluctant to sell today because re-financing and enjoying a continuous cash flow remain a more attractive option than alternative investments they would need to pursue with the proceeds from a sale. This has resulted in relatively few assets coming to market. Demand, on the other hand, is stronger than ever as high net worth individuals, REITs and international investors scour the market for transactions. Many view New York City as a premier global market that is a safe haven with upside compared to other real estate markets worldwide.

In 2011, multifamily sales were also distinguished by the return of institutional investors — REITs and private investors that stayed out of the market between 2004 and 2007 — and an increase in portfolio sales. Institutional sales grabbed a larger share of overall dollar volume, accounting for 57 percent of New York City’s total dollar volume in 2011, versus 40 percent in 2010. Also in 2011, there were 36 transactions that sold for $20 million or higher, which is more than double the number of similar, high-priced transactions in 2010.

The top institutional investors in 2011 based on number of transactions included East Coast Holdings, Metro Props LLC, Croman Realty, Benchmark Real Estate Group LLC, Chestnut Holdings of NY, Silverstone Property Group, Alma Realty Corp., Finkelstein-Timberger LLC, Fortress 31 LLC, and Minuit Partners. The top dollar transaction for the year was UDR’s acquisition of the Rivergate Complex with 709 units at 606 First Avenue in Manhattan for $443 million, while the top portfolio transaction was Chestnut Holdings’ $47 million purchase of the 11-building Sheridan Avenue Portfolio in the Bronx.

This year, Newark-based TreeTop Development partnered with New York City-based Latus Partners LLC to buy the West 116th portfolio consisting of four buildings in Harlem for $18.4 million, a deal that Ariel Property Advisors brokered, and also closed on an additional 350 units on the Upper West Side the following week.

With rents now rising even as state unemployment remains 8 percent and with interest rates expected to stay low through 2014, we believe there will continue to be opportunities for investors in the New York City multifamily market over the next 18 to 24 months. Investors should also keep an eye out for more properties coming to market towards the end of 2012 as property owners look to take advantage of today’s lower tax rates, which could rise significantly after the 2012 elections.

— Shimon Shkury, president of Ariel Property Advisors in New York City

Manhattan Retail

Recovery was the name of the game in 2011 for many major retail corridors in Manhattan. SoHo and the Flatiron District were among the most significant rebounding areas.

SoHo has benefited from international retailers’ expansion into New York and the city’s record-breaking tourism. New York City welcomed more than 50 million tourists in 2011, including 10.1 million international visitors — more than any other year in its history. The city generated $32 billion in visitor spending and $48 billion in economic impact, according to Mayor Michael Bloomberg and NYC & Company. And SoHo is a major stop on any tourist’s path.

Broadway, Spring and Prince streets have long been the market’s primary retail corridors, and rents on these streets are nearly back to 2008 peaks, with very limited vacancy. In 2011, more tenants, especially European retailers, saw value and opportunity on the interior streets — Mercer, Greene and Wooster — which are one-third to half the rent of Broadway, Prince and Spring streets. The interior streets had suffered from higher-than-normal vacancy levels during the recession; now, they are flush with some of the biggest names in retail and are commanding higher rents than ever before.

The Mercer Hotel and early adopters, including Vera Wang, Costume National and Zadig et Voltaire, helped anchor Mercer Street in years past. In 2011, Yves Saint Laurent, Balenciaga and Versace all announced new stores, which will transform Mercer Street into a high-fashion enclave. TechnoGym first came to Greene Street in 2010; now, Stella McCartney is moving her Meatpacking District store here, and Tiffany & Co. will open a SoHo flagship at 93 Greene Street, with an additional entrance on Wooster Street.

Lower Fifth Avenue in the Flatiron District made a huge comeback in 2011. Unlike SoHo, this is largely a local’s shopping corridor. The area struggled at the peak of the recession; vacancy abounded just 18 months ago and rents dipped to nearly half of what they were at their peak.

The area’s rebound was evidenced by the entrance of five major retailers; Joe Fresh, Madewell, New Balance, Nike Running, and Ann Taylor Loft all took prime open retail spaces, and rents have nearly rebounded to pre-recession levels.

The Flatiron District has benefited from the opening of Eataly, Mario Batali’s 50,000-square-foot Italian artisanal marketplace, which has drawn large crowds, and the added foot traffic from technology and start-up companies that have entered and grown their presence in thriving Silicon Alley.

Outside of these markets, expect to hear a lot about retail in major new developments in 2012. Edward J. Minskoff’s 51 Astor Place, designed by architect Fumihiko Maki, has incredible flagship retail opportunities at the base of the new 400,000-square-foot LEED-certified office building. In Midtown, the World-Wide Group has started to market Phase II of 250 East 57th Street, the 1 million-square-foot mixed-use development site anchored by Whole Foods that will include a 59-story residential tower and two new public schools. Whole Foods is opening third quarter 2012 and will be a boon to the area. The second phase will include an additional 78,000 square feet of retail and the residential tower.

— Ariel Schuster, executive vice president of RKF

New York City Office

Parker

Driven by robust demand from tech and media companies, operations in Manhattan will recover at a moderate pace, though trouble looms in the financial industry. Turbulence in the global economy, a political gridlock in Washington, D.C., and new regulations will prompt hedge funds and investment banks to shed jobs. A few of these users will offer space for sublease to cut costs, which will encourage landlords in Midtown to offer lucrative concessions to compete for tenants.

Midtown South will boast the tightest vacancy in Manhattan in 2012 as media and tech firms backfill space, while the redevelopment of Hudson Yards will ignite leasing activity in the area. Tenants priced out of Midtown will target downtown, where Condé Nast expanded its lease at One World Trade Center to 1.2 million square feet. In Brooklyn, the New York City Human Resources Administration will consolidate operations into 400,000 square feet near Atlantic Yards this year, which will further transform the area.

New York City fundamentals remain among the best in the country. Citywide, payrolls will grow 1.5 percent this year, or 56,000 jobs, while office-using sectors will gain 15,000 positions. In all five boroughs, approximately 1 million square feet of office space will be delivered in 2012, expanding stock by 0.3 percent. Healthy demand from tech companies will help reduce overall vacancy by 70 basis points by year’s end to 9.8 percent. By year’s end, asking rents will rise 4.5 percent to $59.52 per square foot. Effective rents will spike 5.6 percent to $49.05 per square foot.

Investment activity will remain brisk in 2012 as overseas banks liquidate commercial loans, while maturing CMBS debt will prompt operators to list properties. European lenders, including Eurohypo AG, Allied Irish Banks PLC, and Anglo Irish Bank, will shore-up capital reserves by offering notes to private-equity firms at a discount. The new note holder will renegotiate loan terms with the property owner to align debt-service coverage. This trend will unfold in Midtown, where an influx of CMBS debt will mature this year. Elsewhere, REITs and multinational investors seeking lower price points than in Midtown will target highly vacant properties in the Financial District. The buildings will receive a capital infusion and be repositioned to boost cash flow. Outside of Manhattan, local syndicates seeking higher returns will pay cash for value-add, Class B/C properties in Brooklyn and Queens.

Pension funds seeking alternatives to U.S. Treasuries will take an equity position in investment real estate and recapitalize trophy assets through year’s end. Highly leveraged owners will likely use a bulk of the equity to reduce debt, while the remainder will be used for capital improvements to enhance NOIs.

— J.D. Parker is the vice president and regional manager of the Manhattan office of Marcus & Millichap Real Estate Investment Services.

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