Investment Sales Update, Spring 2022 | The Stoler Report-New York's Business Report

Investment Sales Update, Spring 2022 | The Stoler Report-New York's Business Report

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♪ [Theme Music] ♪ ♪ [Theme Music] ♪ >>> Michael: Inflation. War in Ukraine. The stock market. Higher interest rates. Wow. What effect is this having on the multifamily business? What effect is this having on the investment sales business? I don't know the answer. So, I

assembled this group of three under 40, who are going to tell us their thoughts on the investment sales in New York, in the spring of 2022. My guests include Seth Glasser, senior vice-president of Marcus Millichap. Vic Soz-- Sozio, who is the founding partner. Okay? At Ariel Property Advisors. And last but not least, from Brooklyn, New York. Lev Malatlava? >>> Lev: Mavashev.

>>> Michael: Okay. Who is the founding principle of -- at Alpha Realty. How is the world today? I mean, you've been in the brokerage business over 20 -- over 15 years, right now. How hard is it to do business? And with all of these things that I just brought up, with inflation the war and all that, okay? Low cap rates, governmental controls -- how hard is it to be in the investment sales business today? >>> Victor: I think our investment sales business and industry has historically, always been hard. Right? And it's one of the most competitive markets in the world and it's tough to for a lot of new people in our, in our industry to get a sustainable pipeline. Enough

deals coming in, enough deals going out, closing, contract signing, et cetera. But certainly, last year ended with a flourish, right? In third and fourth quarter was extremely active. We had over $15 billion of investment sales dollar volume in the fourth quarter of 2021. In fact, December had over $10 billion alone, which is the highest grossing month on record since we've been tracking it. So that was good. Things were feeling really good. The beginning of 2022 started off in a similar fashion. However, the last 45 to 60 days have become

increasingly more turbulent. And you mentioned that there's a few large factors. The war in Ukraine is a large one. The inflation is another one. And rising interest rates and all that volatility has definitely created a lot less comfort from a buyer's perspective. And we've been dealing with that. So, it's a busy market in one sense, but we're trying to adapt to all this volatility.

>>> Michael: How do you see it? >>> Seth: I think Vic hit the nail on the head actually. You had a very healthy market towards the end of 2021. And that continued in for the first like three, four weeks or so of January. And then what I noticed

is, and this probably happened to all of us here, on January 15th, the tax bills came out for 2022, 2023, and then all the tax bills went up. So, in last year, the taxes went down as a result of COVID. No one -- that kind of went under the radar I think. Most people didn't really talk about that. And then on January

15th, the assessments came out and boom, they went right back up to where they were and higher. And then right around the same time, you had the rates starting to tick up. So, these two factors on rates and rising taxes, specifically on fully regulated buildings, I mean, that goes right to the, to the bottom line. So, you noticed that. >>> Michael: I was on the phone with the chief lending officer from New York Community Bank about a week ago. And he said,

his best rate today, it's like three and three quarters. It's best rate probably in the fourth quarter of last year was close to 3%. It's a substantial increase just looking at that. >>> Seth: Yeah. If you look the difference between today and Christmas is significant. But even over the last like two weeks, I mean, the treasury went from like one eight to two two. I mean, it's like really significant. This is a really

big impact on our business. And look, the feds come out now pretty openly saying they're going to raise the rates five or six times this year. So, we could be sitting here in Q4 where no one's borrowing below 4%. >>> Michael: Who's investing? Because Seth prior to the show mentioned that the institutional investors aren't really here. What type of investors are you seeing in the market today? >>> Lev: I mean, it's mostly private equity backed operators. And for rent stabilized buildings, I think it's private families and local individuals. But I think, Victor and Seth

raised good points about how we've seen the market evolve over the last few weeks. But I think it's still a very, still a very active and optimistic market. We have -- I mean, you guys could agree, we, the rental market is hot right now. Rents, rents are back to pre-COVID levels. And in many pockets -- >>> Michael: Okay. The rental market is hot. Okay? The rental

market is very hot. But you have limitations because of rent stabilization. You can't really get more money than -- >>> Lev: Right. So rent stabilization -- right. You have

a, you have a cap on the upside and those are always trading on, on the cashflow, on the cap rates. And the main driver of that is the debt markets, which we're still seeing a pretty healthy debt market. >>> Michael: You know, if the rates are gonna go up and I, I'm going to have a limitation on what I can really earn on the situation. We know the insurance is going up, the taxes are going up, you know, how high can it go that I can sustain buying something like that? >>> Victor: Yeah. Look, we have live situations now. Retail driven product that contracts negotiated for months ties into CMBS product that you really can lock, right? Fast forward from two months ago to today, the price was adjusted, you know, substantially, because like you said, a rate that was sub four to begin with is in the mid fours right now on retail driven product. So like Seth said, there's a direct impact to rates. And especially when you have rent regulated product,

right? >>> Michael: What's happening with the land sales, the development sites? How do you see that? >>> Victor: That's been active actually. We've had over $2 billion of dollar volume this quarter, but it's an, it's a little bit of a, of a misleading statistic. Google bill-- bought a St. John's terminal for over $2 billion. Right?

>>> Michael: Okay. So, if you know, you can't include that in there. >>> Victor: But it's active and it's primarily active because people are trying to thread the needle and close and preserve eligibility for existing affordable New York tax benefit, before it sunsets in June, on June 15th. >>> Michael: Okay. What happens on June 15th? What happens to

the market? >>> Victor: We've seen it before. It lapsed before, right? >>> Michael: Well, I remember when it lapsed. Last -- >>> Victor: It came to -- >>> Seth: Yeah. And then plus all the rising costs of, to build a building right now. You know, you, you have that. And you lose your tax break. I mean, you don't need to be an econ major, figure out what's [chuckles] going to happen.

>>> Michael: You know, you can't get your appliances, you can't get your sheetrock. You can't get all of the materials. And then you can't get the labor. >>> Seth: Yeah. Yeah, there, it's, it's a funny thing. You

have rising wages, but still a lack of labor. It's a little bit of a head-scratcher where you have some people who don't want to work, but the raises -- the wages are going up and people are moving around a little bit and finding other opportunities. We were talking about this before the show. The, the

office-based worker is now looking to work from home more than they were. Certainly, I, I notice this more in younger people where they're more inclined to stay at home and like adjust to that work-life balance. And they're not inclined to go back to the office. I have several friends I was telling you guys that if their management team asked them to come back five days a week, they wouldn't do it. Like they

would just go look to do something else. So, the world is really shifting underneath us on a week by week, week by week basis. -- >>> Michael: So, who is buying today? Who were the people who are buying? >>> Seth: So, I think it really depends on what market we're talking about. In the heavily stabilized markets, like deep Brooklyn, upper Manhattan, and the Bronx, it's almost exclusively private clients. I would like to hear how you guys

are experiencing this world too, but that's what we've noticed. There's little to no institutional money on the fully stabilized product. It's really friends and family. So, you have one operator raising money from friends in their community, whatever, or you have someone who owns a building around the corner and said, hey, I own over here, I have five buildings in my portfolio, I'd like to make it six. >>> Michael: -- save money maybe with -- >>> Seth: Yeah. They're looking to grow their business. Yeah. >>> Lev: I agree with Seth. It's the, it's the local guys, local families. They're the most competitive on buying these

rent-stabilized buildings. I mean, there are, we're, we're seeing institutional money raising funds to buy these rent-stabilized buildings. But I think you guys could agree. They're not, they're not getting competitive enough to win over the deal. But it's the local guys that are getting

competitive and they're winning over the deal. They're, they're, you know, they're buying a fully rent-stabilized building in Brooklyn at a mid-five cap and, and they're getting, they're getting dead at, you know, three, three and a half, you know, or, or somewhere in the low to mid three -- >>> Michael: People buying retail? >>> Victor: Yes, but it's still a, a tougher product type to move the buyer pools and as deep. And I think Seth and Lev are absolutely right that institutions are extremely hesitant on anything that's governed by RGB today. Right? And they're putting premiums on their exit caps, all their assumptions, and really, unless it's a slam dunk home loan type of deal, they won't touch it, right? Where we still see institutional demand is if we have large affordable housing, product, they'll go after it, right? Whether it's mission-driven or ESG capital, there's still a ton of demand for it. But the rent-stabilized stuff, like Lev and Seth said, it's high net worth private capital. They have a longer term horizon that they can, or economies of scale like Seth said that they could fold it into their portfolio. I'll tell

you where I see product that is performing well and getting more and more increased traction from the high net worth crowd is expiring for 421a or buildings that are conducive to a substantial rehab. And the reason being, if you can have product that at some point is unambiguously free market, they're attracted to that. Right? So, 421a, when it expires, when the units turn over, those are deregulated units. That's attracting capital. Substantial rehab, you

go in, you spend a ton of money. A lot of these buildings need work anyway. We have old housing stock, both building stock, you do a substantial rehab. You got to do it right. You've got to document it correctly. But it's unambiguously free market at that time. That's a market that we see a lot of increased

traction and activity. And it makes sense. >>> Michael: What about the small office buildings, as I would say, the C and the D office buildings? >>> Lev: I hear some of these deals are getting done in, in Brooklyn, I think in Manhattan, I'm not sure about. But also, I think the C and D office market is, is tough right now. You're not attracting the tenants. >>> Michael: C and D office market is very tough. Landlords are giving away incentives that are completely crazy, you know.

On a small deal, they'll give you a five to four to five months free rent. They'll give you TIAA that you'd never expect. But they want some tenant to be there. >>> Seth: Yeah. I just had a client tell me that he closed on a building, like a class B or C office building mixed use in Midtown on the west side for $290 a square foot. $290 a

square foot in Midtown. >>> Michael: That's -- >>> Seth: I mean, come on. That's -- >>> Michael: So,what about the, the thoughts about, you know, conversion of these office buildings -- the B and C, the C and D really not the, the A, B -- to residential? I mean, we have a dire need for residential. The residential market is hot as hell. Any -- every apartment doesn't stay on the market, it's leased in no period of time. >>> Seth: Yeah. Look, I, I think some of this, the, the, the

development world needs cooperation from the government here. Because, and you, from the government's perspective, you can't be pro-affordable housing, but anti-development. It just doesn't work. You have to marry the two. And you need to massively increase the supply here in New York. Otherwise, the rents are only going to go one way and we're going to put further pressure on these free market apartments. So, I think anything that we can do to increase the supply, whether it's converting these old office buildings that no one's really seems to want any more into apartments, I think is great. I

think obviously getting the 421a abatements set for the long-term would be great. And look, the city owns a lot of vacant land. >>> Michael: Not, not today. I mean, vacant land when I started the show, perhaps, I mean years ago. But it's much less vacant land. >>> Seth: Much less. But still exists. >>> Lev: Still have a good chunk.

>>> Seth: They still have a good chunk. >>> Lev: I agree with Seth. >>> Michael: There's vacant land in Brooklyn. I mean, how about Coney Island? How about East New York? >>> Lev: There is plenty of vacant land in Brooklyn. But again, the government kind of has to be a partner with, with these developers. They've got to give them incentive to develop.

There are, there are development sites selling in East New York, Brownsville, Crown Heights. But again, the developers are looking to -- they're looking to partner up with the governor or they need some sort of program. So, they need some sort of incentive to develop these lands. But I agree with Seth. I mean, you, you have, I mean, 45% of our housing stock is rent-stabilized. Pretty much kind of, you know, off the market. So that's why you're seeing 15, 20% rent increases in the last few months.

>>> Michael: Speaking of that, are you seeing any cos-- co-living today in Brooklyn or even in the market in general? Certain people, I mean, prior to the COVID people were looking around and taking their apartments and have the co-living. Even banks were doing it. The banks today they won't even talk to you about co-living. But, what do you -- >>> Victor: It was a trendy idea a few years ago, Michael. I

haven't seen it applied with great success since. I mean, I, if I remember correctly, I think the Collective was a group that had that ambition based out of London. They bought a big site in Bed-Stuy, I think it was, or somewhere. They just recently sold it. Right? And other similar deals I've seen decks on

throughout the city that were predicated on that shared living concept with super high rents per foot. And nothing has really materialized as far as I've seen. You know, look, I would like to see that concept prove out. Right? But I haven't seen it yet.

>>> Lev: We're starting to see more of it come back, but it's not a bankable business plan. I think it's, it's, it's upside buyers might be, you know, buyers might buy a fully free market building and maybe that's their upside, but they're not thinking in, on, on a co-living business. >>> Seth: Yeah. There's a little too much uncertainty. What I've

noticed in some of the secondary markets like upper Manhattan, the bigger units are a lot harder to rent today. Like -- >>> Michael: Really? >>> Seth: Oh, yeah. Like, so everyone's talking about, oh, the rents are like pre-COVID levels. Like, oh my God, it's so high. But in some of the secondary markets, it's not there. Like, you're not renting a three and four bedroom apartment in like overnight. You're still, it's still much --

I mean, do you agree? Like what's some of the feedback that you've gotten? >>> Victor: Look, the more efficient units are the way to go right now. Even if you talk to developers, you know, building ground up product, they're going to go for those ones, those efficient ones and twos. >>> Michael: The studios, ones and a small number of twos.

>>> Victor: Yup. Yeah. The big, you don't get the bang for your buck, right? Like Seth said, you'll be lucky to get, you know, if we talk about upper Manhattan, you get in the $40 a foot for a large unit, you're doing well, because the absolute number that you're renting that on a monthly basis is high. Right? And not a lot of people can stomach a much higher number. But you have a smaller unit, you can get 50, $60 a foot in some cases. So, you get much more efficient and -- units and a lot more for the square footage you have if you have smaller units.

>>> Michael: What's happening in lower Manhattan? I mean -- >>> Seth: Sure. The rental market in the bed-- in the prime neighborhoods, East Village, Chelsea, et cetera, those rents are doing exceedingly well. So, you have people coming from -- you're still sort of burning off some of these COVID rents over the last two years, and you've had these people move in to the better parts of the market, upgrade their location. I think a lot of people are spending more time at home now than they used to. So, I think some of the mindset from the tenants is,

okay, if I'm going to be here an extra six hours a week or whatever it is, maybe I'm willing to pay a little bit more to live in a nicer place or in a better location, et cetera. And then you get into the conversation about how the rents have gone up so significantly. Which I think is a little bit of a misnomer. Because you read some of the press and it's like, oh, oh, the rents are up 20, 30% year over year. But that's,

that's true, but, [laughs] there, they're starting from, you know, a much lower trough. So, it's, it's probably not as drastic as the press would lead you to believe. >>> Lev: I agree with Seth, but from a buyer's perspective, I think they're underwriting rents very aggressively in those areas. I was just another underwriting call yesterday where the buyer is underwriting rent at 20% above pre-COVID levels, in the East Village. So, you're, you're seeing aggressive -- you're, you're seeing buyers putting aggressive bids just because they're underwriting these rents aggressively.

>>> Michael: You always did a lot of business in Harlem. Okay. What's happening in Harlem today? >>> Victor: Harlem's a good market. I mean, it was certainly affected more significantly than other neighborhoods in the pandemic. They saw a ton of tenants move out, rents that

dropped off a cliff. I think now it's performing better because those rents have come back up. And there's still a lot of demand from the buyers to be in that location. Right? So, it's performing well. And also, when you think about development sites, that's actually one of the areas of the city that even if the 421a sunsets, there still might be a viable land market because you could hypothetically pencil a condo development at two, $250 a foot, and still transact and execute on it. So, I think, you know, there's good things happening. Relative to a

lot of areas in the city, I think Harlem is performing well and increasingly better in the past few months. >>> Michael: What's happening in the condo market in Brooklyn? >>> Lev: Brooklyn, certain pockets, it's, it's, it's, it's very active. It's there, people, buyers are very optimistic. They're buying. They, they're, I think we're still seeing a trickle from Manhattan. People want bigger spaces. From a

developer's perspective, we sold the, we sold the numerous vacant buildings to condo developers. They're, they're underwriting these at way above pre-COVID levels. I mean, we just did a deal in, in Fort Greene, and, and the buyer was underwriting condo sales at like 1,800 a foot. >>> Seth: So, it's interesting. So, I think a lot of this condo, upward condo pressure actually is tied to the rental market and also rates, right? If, if people are looking at the rents going up, saying, okay, I could rent for this, or I could own a unit for this, and I could try to lock in my interest rate for five, seven or ten years. Right? I'm 28 years old. I'm living with my significant other, thinking about getting to that next chapter of your life. I think a lot of that demographic

is looking at buying something rather than giving the money to someone else. Right? As a renter, you're -- as an owner, you're kind of paying yourself in a way, right? You're building equity, paying down your mortgage. As an owner -- as a renter, it's just a different way to live.

>>> Michael: How are we looking at Long Island City? >>> Victor: It's doing well. You saw there was some big development sites that traded there. So, people are putting big bets there. You know, big companies, capable companies. We have some product out there. Also, the expiring 421a of the

four-- expiring 421a -- and I think it's, it's getting good value on cap rates from a seller's perspective, right? And I think, like Seth and Lev said, you see the kind of trickle down from other areas. People looking to upgrade from possibly outer boroughs to a place like Long Island City, which is has grown in terms of its prestige and its perception as one of the better areas of the city. And it's super convenient. Right? We can be here to Long Island City in what, 15, 20 minutes. So, I think there's a real appeal there.

>>> Seth: I want to talk about the 421a's that I think there's a, this is like a huge opportunity that a lot of the private client space doesn't typically have maybe the capabilities, or the interest in getting into, but -- and the biggest reason I think is understanding the tax phase out. >>> Victor: That's right. >>> Seth: Right? Because you have this massive exposure really, right? Where your taxes are going to start to grow faster than your rents are going to grow over the next handful of years. But as an opportunity cost, if you have that build, if

you could own that building, or you could own a bunch of rent-stabilized apartments in 100-year-old buildings, over the long-term I think people would actually do much better owning these newer buildings. There's no lead, there's no mold. >>> Michael: I mean, the old buildings, you know, the sprinklers and all of the other changes that are -- >>> Seth: Yeah. That's coming. >>> Michael: -- the sprinkler requirement can kill people. >>> Seth: I think that's a really big deal. You saw the article this morning. Like that's a really big deal that I think is going to have a pretty substantial impact on our business if that bill gets passed. Like sprinkler in these

buildings is impossible. >>> Victor: Yeah, look local law 97, you know, you talked about the office market, get ready for local law 97 and how that impacts the office market. Right? And you're -- you see the emergence of see pace financing specifically for that reason, right? To, to finance the upgrades that are going to be needed to comply to these new regulations in a few years.

Right? And it's a no brainer for the office market. Fortunately for rent regulated product they're exempt from it. Right? Because it doesn't apply. But, you know, I agree with Seth. I think, you know, when you talk about value propositions in today's market, expiring 421a is a good value proposition there.

That is the biggest most significant barrier for purchasers is understanding how that phase out works and what's going to happen to your NOI. >>> Michael: So how do you, how do you educate the buyer -- these, these purchases of this information of what's happening over there? Okay? Their attorneys know a limited amount, you know, there's not everybody who really is an expert. How do you, how do you explain it to people what's going on? >>> Lev: I agree there is pent up demand actually for, for these expiring 421a products. But I think, buyers are underwriting them with, with taxes fully baked in. >>> Seth: A lot of the conversation starts with the mortgage broker and understanding how the bank is going to underwrite the taxes. Number one. Number two is

getting a third-party opinion from a tax -- Never trust the broker's opinion. [laughs] And -- >>> Michael: That's why we're not trusting the three of you [guests laughing] on that situation. Okay? I always say, you know, call Joel Marcus, he understands this, you know, or other people. >>> Seth: Yeah, no, I think understanding -- understanding where the taxes are going to go over the life of the loan is priority number one. Priority number two is understanding and having a belief in where you think the rents can go. Right? ‘Cause you got to see, okay, is there a legitimate upside in these units? If I start turning over five or 10% a year, can I replace my rents? Can I grow them five or 10%? Can they outpace inflation rate? Is this -- it's kind of like a combination of, it's sort of rent regulated in the beginning, but then free market at the end. >>> Michael: I'll give you a

cute story. Number of years ago, I had Mike Fascitelli on the show from Vornado. And he said that one of his analysts came in and gave him some numbers, you know, of where the rents were going to be in one building. And he said $235 a square foot, he says, throw away the numbers. This is hypothetical. It's never

going to happen. In reality, very few buildings are a $235 today. The top floors of One Vanderbilt, or, you know, Hudson Yards building. So, you know, projections are projections. I

think that's what the, the emphasis is. And I just, since I just brought up the Hudson Yards, what's your thoughts about residential within the Hudson Yards? Any idea? Chelsea is still hot I assume. >>> Seth: Chelsea is hot. All the historically cool, funky neighborhoods that, you know, Lower Manhattan, Park Slope, Williamsburg. Those are really where you're seeing -- >>> Michael: Anything happening in the Red Hook neighborhood? >>> Lev: Also, not so many buildings there, but there's, there's definitely development activity. >>> Michael: What about Gowanus? >>> Lev: Gowanus is hot, now that it got the -- >>> Michael: Rezoning.

>>> Lev: Sure. Yeah. >>> Victor: Gowanus is hot. >>> Lev: Gowanus is hot.

>>> Victor: The development sites are trading at a nice, hefty price there. We, we've had a few recent trade, large trades there, and that's an area that has a lot, a lot of demands. >>> Michael: What about Inwood with the rezoning? It's also been approved. >>> Seth: There's just not a lot of product up there, I think is really the biggest issue. >>> Victor: Yes, that's right. But it will change. Right? It's going to snowball. It's just, there's a few, very large

landowners that have big stakes in that rezoned area. And they're starting to develop now. We're talking about JVs to develop. I think you need to give that a lot more runway, but things will happen there. I just, it's not going to happen

in two or three years. I think it's more like 10 plus years. >>> Michael: So, I got a couple of crystal apples here. Are they shiny or they're bright? Okay? Or are they dull? Only the time will tell. And hopefully when the time will tell you or return to the show, I'd like to thank Seth, Vic, and Lev, and I'll see you next week.

>>> Seth: Thank you, Michael. ♪ [Theme Music] ♪

2022-04-07 23:54

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