Oh Crystal Ball: Outlook on investment sales in 2021 | The Stoler Report-New York's Business Report
♪ [Theme Music] ♪ ♪ [Theme Music] ♪ >>> Michael: Oh boy, you are dull. My -- my crystal apple is so dull. I hope to shine it, but I'm not sure, because 2020 has been a difficult year in real estate, especially investment sales. So today I've assembled this group of gurus, these specialists, these leaders in the investment sales business to provide me and my audience their insight on the market. My guests include Bob Knakal, who is the chairman and head of New York investment sales for JLL. Aaron Jungreis, who's the
founder and CEO of Rosewood Realty Group. And last but not least, David Schechtman, senior executive managing director, Meridian Investment Sales. So, Bob, I think you have a pool table in your office. So, I understand that in 2020 you spent a lot of time at the pool table because there wasn't much sales taking place. As the end of the year, you know, now, with
the release of potential vaccine, but how do you really look at the market? >>> Bob: Well, Michael, first of all, I was doing a lot of things, but I wasn't shooting a lot of pool, unfortunately, I wish I was playing more pool. But you know, clearly, as you said, the market has really taken a pummeling. We were at a peak in terms of number of buildings sold in 2014, over 5,500 this year, we're on pace, you know, only for about 1,867, if we annualize third quarter results. So, we'll be down about
66%. If we look at dollar volume, we were at 80.1 billion back in 15. We'll be lucky to scrape over 20 billion this year, that'll be down about 74%. But interestingly, if you look
at how the market's reacting, smaller transactions are becoming much more popular. If you look at only the deals over 10 million, the numbers are down 79% in terms of number of building sold and 80% in terms of dollar volume. So, I think we're all probably doing more smaller deals than we're used to, but that's because that's where the action is today. So
we're hoping that yes, the pan, the pandemic has been terrible and yes, the vaccine is a good thing, but I think next year we're all going to see a lot more deal flow and a lot more activity, mainly because of the distress that finally is going to come home to roost. And I think, the banks are going to be major players next year as they have to deal with, with issues they're going to have based upon how negatively impacted property values have been, based upon what's been going on. >>> Michael: That's a good point to bring up the banks, because I remember David during the last recession, you were very active with the banks and Aaron, you you'd really got more involved with the banks today on distressed properties over there. David, how do you see the distress business starting in
2021? Have banks said I'm ready to sell my notes? What's really happening on that? >>> David: So, when you're talking about the lenders, you really, you have to, it's important that you classify them and I really do it in two major groups. The first one of the portfolio lenders, the chartered banks. And the second one is any non-conventional. It could be credit funds, special servicers,
high net worth individuals and family offices. The lion's share of the action last time was, was from both of them. But you saw the first movers were really the chartered banks because when Bear Stearns blew up in August of 2008, in September of 2009 on Labor Day after Lehman and Bear, essentially disappeared. The regulators were in all of these chartered banks throughout the country saying to them, look, you can't lend until you excise these cancers, these problems that you have on your books and by the middle of 2009, up through 2012, everybody on this panel, the lion share of our business wasn't selling fees simple real estate, was selling notes. The major difference this time is this wasn't credit driven and we've all heard it ad nauseum. It's a social problem. But the truth is banks know that
they the chartered banks know that they've had issues since at least June of 2019 with the changes and the hyper regulation to multifamily properties. What we're hearing now from the lenders, and everybody on this panel has been doing it, is we've been providing opinions of value at a pace of anywhere from two to 26 opinions of value a week in this space, which I occupy, which is really 5 million to about 150 million. What's fascinating this time is the lenders will call us back.
We'll review the work product we've done. And they'll say, we agree with you, in the market our position is we're 65 cents or 70 or 80 or 50 even. And then I say, great, sign me up, let me create a market for you. Let's get rid of this and, and, and raise some capital for you. The charter banks have been telling
us, look, we don't need to yet. We want to make it out of 2020. We want to get our bonuses first of off, and we don't have any pressure from the government. And since we've been incentivized and cajoled by the local governments into forbearances, we'll just put a pin in it. What has started to happen, probably since November, is a lot of these lenders are realizing, okay, I need to beat the curve. Schechtman, I'm going
to engage you to sell this $30 million note, and I'm not going to do it next year, because I think by Q2 of 2021, there will be a hundred similar notes and that could depress pricing. So, it's a fascinating phenomenon, I did hear yesterday, couldn't be more timely that a major U.S. bank, one of the largest lenders in the country, their special assets folks told me that the regulators are coming into the third week of December. Now this is good, good and bad. Bad for the bank, because they're going to be told, you got to write these losses off and monetize them, good for the market, because that creates product at prices that has been marked to market. So, it's increasing week over week, we've closed four defaulted notes sales, including one with Mr. Jungreis.
>>> Michael: How much of a discount did the bank take on the deal? >>> David: Well, at the moment, we're between 84 and 84 and a half cents on the dollar. And my broker opinion of value back in Memorial Day said, I could re -- I could recover 90 to 92%. The lender has been very frustrated with me, and they were concerned that it was a bait and switch, to which I simply responded with empirical data. And I said, look, since Memorial Day, your
rents and you're gone down 31% and the building is now 50% vacant. I'm glad that the bids didn't go down 30%, but the deal is going to get done. And I think that very encouraging thing for all of us to know is this time it wasn't just real estate experts who know that the market fundamentals have eroded.
You have the nonconventional lenders, the credit funds, the servicers, everybody's reading the same news. I would go out on a limb and say, next year will be exponentially more closings than this year, but they'll largely be lender driven. >>> Michael: Aaron, let's talk about what you've done this year, specifically in the note business, within the new group and also talking about for out of town buyers. >>> Aaron: On the note business we've gotten hired and sold a bunch of this year. A lot of them were in Queens, a lot of them were from trustees, bankruptcy deals. We've also
been able to do the regular multi-day deals, which are few and far between. But we got lucky on some deals in Brooklyn and the Bronx where we had sellers who were desperate, the buyer is, did not want even look at the deal unless it was at least a five cap and most of them were probably trading and today are trading at about a six. And then about February, we started to focus on Maryland and other markets. Believe it or not, Louisiana, Texas, Florida, the Carolinas. And what we found
was a lot of the New York buyers, and New Jersey buyers who were buying here said, hey, let's start buying in the other states. And we've been getting hired on deals or we've been getting off market deals where people are buying at probably five caps, maybe even lower. Borrowing at three, and getting a cash on cash return that's almost double digits. They're allowed to charge whatever rent they can get. They're allowed to
get an increase. This is now foreign in New York, there a lot of collect the rent and they're able to have lenders who are more open to lending there than lending in New York. A lot of lenders are also very nervous in New York. They're putting on a lot of reserves. A year or 18 months of reserve. So, a lot of the guys who were historically buying deals here have now just moved the flag, they're buying in Florida, they're buying in the Carolinas. We are doing another deal in Washington, DC. And I would say out of ten deals we're doing, nine out of ten buyers are New Jersey and New York based guys.
>>> Michael: Let's talk about retail if, if there is anything on retail, let's talk about office what's what's happening in those markets and how do you see that for 2021? Mr. Knakal. >>> Bob: Yeah. Michael, I think different product types are reacting very differently. And as Aaron said, probably one of
the most troubling trends we've seen and it really started in 2018 is that folks who for decades have only purchased New York City multifamily are now looking all over the country. And it's not just, you know, we talk about this pandemic and that it's a -- David mentioned, it's not a credit issue. It's a, a, you know, a health crisis and an externality of that type, but it's really more than that. It really is a real estate
fundamentals crisis, which is brought on by the overbuilding. And we started to first feel that in October of 15, it's a, political crisis that we have. It's a fiscal crisis, a number of things. So, I think this, this whole ball of wax that we're dealing with now is impacting different property types very differently. Clearly the, the most adversely impacted
product sectors have been hotels, retail, and land, where you could say values are down plus or minus 50% in those categories. And I can give you several examples of where that's the case. And multifamily has had now a double body blow. The rent law changes in June of 2019 with the first ones, COVID has been the, the second one and that is really having a negative impact on things. And then, with respect to office, there have been so few office trades. We really don't know. And the, the
impact of the pandemic on the office sector is going to play out over a longer period of time mainly because we will determine how it's going to react based on lease expiration and what happens at lease expiration. Does somebody take more space, less space? Do they need more space so people can social distance? Do they take less space because some divisions will constantly be working from home? And that's really going to be the key is to look at every, every new office lease that's signed, the key metric is going to be how many feet did that tenant come out of? Yes, a hundred thousand foot lease signing is a great thing, but it's really great if the tenant came out of 50,000 feet, it's really horrible if the tenant came out of 200,000 feet. And so, I think each of these different sectors is going to play out differently. And clearly the only sector that's done really well has been the industrial sector. Unfortunately, that's such a, a small component of what we have in New York City that it hasn't really moved the needle, but, but metrics in the industrial sector have been off the charts. >>> Michael: You said the land values have dropped 50%. Aaron and David, do you concur with
Bob on that situation? ‘Cause I haven't heard that from many people. >>> David: I think it's deal specific. We just put into contract a, a $42 million deal in Brooklyn, which is about 20%, call it Dumbo, Vinegar Hill. It's about 20% off of the market peak, but what was
fascinating is, during the time we were in contract, we've actually received offers to flip that land. So, I haven't experienced with the handful of land deals that I'm working on a precipitous drop in value. What I have found, however, is there's a precipitous drop in interest. It used to be that if the three of us were competing for a hundred foot wide plot of land anywhere in the four principal boroughs and it was reasonably priced, we would walk out of the pitch, whomever got it would say, hey, this is going to sell. Today, instead of
having 20 or 30 potential bidders, you may have one. And that person's going to set the market. So, it's definitely challenged, but I don't think it's anywhere as close to retail in the hospitality sector, which has just been decimated price-wise. >>> Bob: No, but let me clarify though, the, the plus or minus 50% is for Manhattan. In the outer boroughs, values are holding up much better. In fact, I think that the diminution in
value in the outer boroughs is probably only 25 to 50% of what we're seeing in Manhattan. We've signed three land contracts within the past two weeks, and I'm telling you there, the values are down plus or minus 50% because nobody is looking at doing condos in Manhattan today. Every deal has to underwrite as either an office building, ‘cause nobody's building hotels, so if it's a commercial land, it has to be an office building underwriting. And if it's residential land, everybody's looking at a rental underwriting, it's not a condo underwriting. So yes, absolutely. We we've signed a contract a couple of months ago in Long Island City, that I think was at the full pricing of what it was worth pre-COVID just about, or at least what the highest comp had been. So, I think you have to look at Manhattan very, very differently from the outer boroughs. The dynamics in the outer boroughs
are much better than they are in Manhattan. >>> Aaron: Oh, you're, you're right. >>> Michael: -- outer boroughs. Aaron? >>> Aaron: I want to actually comment on what Bob said. I have
never seen such a close proximity of prices from the Bronx, Brooklyn and Manhattan. Everyone now is looking at these deals and say, hey, Aaron, I want to buy the NOI. So, whereas I used to have a deal that I had an NOI of 500,000 in Manhattan that would sell at a two or three cap. Everyone is going to now look at it at a five cap. So, you have the Bronx, Brooklyn and Manhattan, which has about the same NOI and the same prices, sometimes there's a 10 or 15% difference in the prices now, believe it or not based on multiples of rent, because people are not buying square footage, they're not buying price per door, they're not buying anything other than the NOI metric. And so, we see a lot of prices in Manhattan and the Bronx shockingly coming very close together. I'm selling
stuff in Manhattan at a 10 multiple and in the Bronx at a nine and a half multiple sometimes. >>> Michael: Where do you see the suburbs, the transit-oriented development sites, okay? Where there's, where the legislations are easier in the towns, I mean, New Rochelle. They're very open to development. I had David -- on my show, he's doing something in Mount Kisco. You know, there, there are things taking place in the, in the suburbs. How do you see the suburban market for investment sales? >>> David: I, I think it's the most interesting that it's been in the 15 years that I've been a broker, we are in the market with a big piece of land in Long Beach, Long Island. And I will tell you the amount of confidentiality agreements and bids that we've received for this 180,000 square foot buildable piece of land, they are trumping another assignment I have and it's counter-intuitive, because that's a Soho assignment. I think the lack of over -- let's
just say regulation and, and the idea that it's a little bit easier to build is attracting people. The issue, however, Michael, is what people don't realize is dealing with local municipalities. Oftentimes they're dealing with a county and a town. It can be a bit of a honey trap in the sense that
some of these towns, even the New Rochelles of the world, they act a little bit like, Mayberry 1965, when you have a, their, their buildings boards become very difficult. So, it's, you have to be selective, but I would take an assignment in Hackensack, New Jersey or White Plains, reasonably priced before a wildly overpriced Brooklyn deal. Tremendous -- >>> Bob: I think what David's saying is spot on. From a real estate perspective, the biggest beneficiary of the pandemic has been the single family home markets in New Jersey, Westchester, Connecticut, and Long Island. And similarly
that's, that's flowing through into the investment sales markets and those in those areas. Demand is good. People are moving there. It's really, it's a big issue for the city. And I think that our elected officials really have to start thinking about what they're doing and thinking about the bigger picture, because our tax base is very, very fragile in New York. Out of the eight and a half million people that live in the city, 65,000 families pay 53% of our taxes. And 1,600 families pay 27% of our taxes. And I'll tell you right now,
those are statistics based on last year. I know for a fact, some of those 1,600 families no longer our primary residence in New York. When Kingsbridge Armory wants to get redeveloped, encourage it. When a huge corporate giant wants to move to
Anable Basin, encourage it. When Industry City needs to be rezoned, encouraged it. You're, you're driving tens of thousands of private sector jobs out of the city when we need to broaden the tax base, not worry about getting reelected. >>> Michael: In addition to the June of 2019 laws, do you see any more changes which are having an effect on investment sales that people won't buy because of additional regulation? >>> Bob: I think that's absolutely happening, Michael. Look, we we've had for decades, we've had a super majority of Democrats in the New York state assembly. And again, this is not a commentary Democrat-Republican. I'm talking
as a real estatetarion. Now for the first time, we have a super majority of Democrats in the Senate, and you would think given what's happening with the significant vacancies that we have in, in free market rental housing, the significant collection loss we have in rent regulated housing, and maybe the elected officials would let up a little bit on policy changes, but from what we're hearing from our folks in Albany, there's a very, very high likelihood that could cause eviction i.e. universal rent control is going to kick in. I think there are bills that are being drafted now to prevent combination of apartments to get new first rents, there's legislation being drafted to look at effectively stabilizing net effective rent as opposed to face rent. Each and every way that you possibly can extract some value in an entrepreneurial way are being taken away from folks. And that's why, you know, Aaron's so
busy doing stuff around the country, because the folks that have attained such wealth here are no longer wanting to invest in multi-family housing in New York. They rather go to the Carolinas, or Florida, or Tennessee, or Texas, or Arizona. And that is as a, as a someone who loves New York and has lived here for 36 years, I hate to see that, but you can't blame them for wanting to go where the opportunity is better.
>>> Michael: You know, we had this phenomena on co-living in many places, which has had an effect, certain people would buy a property and they felt they had an additional opportunity to get higher rents. Where do you see the co-living market taking place today? >>> David: I have to quote a dear friend of your show and a luminary in the industry, Ofer Yardeni, who once said about co-living and I, and I may not get it spot on, I apologize to Ofer, you grow up to be in your mid-twenties so that you can move out and not have roommates, the concept of then looking for roommates again, it's a little bit babyish, I think is the word that he used. I always believe that there's certainly a, a utilitarian and deficiency to it, but I never believed that it was going to sustain. And I think that's proving out now. The model of paying increased rents or triple net leasing buildings above market has proven to be fatal, because a lot of these co-living tenants aren't wed to one or two year leases. They're closer to month to month. So that's an income
stream on which you could never guarantee. And then the underlying master lease goes into fall. I think it's going to diminish. I think there's certainly a need for it and a use for it the same way there's a use for co-office working, but certainly not to the tune of $60 billion worth of co-office working or tens of billions of dollars of co-living. This is in Hong Kong. We have more room, you can have your own apartment. >>> Michael: You know, we're all talking about with the regulations, the difficulty of collecting rents. Why do people
even say, I want to buy residential multi-family in New York? It's a dilemma. You know, you're going into a headache it sounds like. >>> Bob: No, Michael, you know what, there are, there are folks that are buying aggressively and those are the folks who believe in the cyclicality of things. Look, the market has been, is and always will be cyclical. Political headwinds have typically been cyclical and the folks that are buying believe in long-term in New York City. And fortunately, there's
still a good slice of those folks that are in the market that are buying where we're out on the market now with a very, very, very prime, super prime multifamily asset. And I think it'll be very interesting to see how that asset gets received by the marketplace. So far indications are pretty good that the execution is going to be almost at pre-pandemic levels, but there are people who really believe in the city and the long-term benefits of, of the city. >>> Michael: A couple of years ago, a lot of the properties were being acquired by private equity funds and foreign investors. Are those people still in the market for the,
these assets? >>> David: Not as much. You know, it used to be that the Westbrook partners and the SEF blouse, where the top of your Rolodex, when you would have that institutional sized, a hundred million dollar plus prime multi deal, or even let's keep it to multi -- these days I think the Rolodex is, is upside down. We just closed a $211 million deal, sub four cap in Union Square. That's a buyer who had foreign capital. So, I think high net worth individuals, generational families are really your best buyers of the day and new entrance to the market.
Private equity from outside of New York that wanted the barrier to entry to lower a little bit, and really the number one characteristic of the fervent buyer today is they recognize that they can't underwrite to an exit in 36 or sometimes even 60 months. For the past 10 to 15 years, everybody was in and out if you were an institution in 36 to 60 months. Today, what's exciting is you have people who are saying, look, I need a bite of the Big Apple. I need exposure here, I need to increase it. I'm going to look at the deal again in five to ten years, because I think that's where the rebound is. And if you look, and I know with whom I'm sitting the statistician, if you go back to the early 1900s and look at a comprehensive study of real estate or real estate values, it's the reverse law of gravity. If you buy it today, it'll go up.
>>> Michael: So, I have a red screensaver, which I'm using right now, to shine up the apple, but it's still a little dull. But hopefully 2021, 2022 will be much better. I'd like to thank Bob Knakal, aka the statistician, Aaron Jungreis, and last but not least David Schechtman and I'll see you next week. Thank you. >>> Thank you. ♪ [Theme Music] ♪