The Residential Rental Market | The Stoler Report-New York's Business Report

The Residential Rental Market | The Stoler Report-New York's Business Report

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♪ [Theme Music] ♪ ♪ [Theme Music] ♪ >>> Michael: What's really happening in the resi-- residental rental market in New York City? I really don't have that the answers. So today with the assistance of my executive producer, Shaun, we're bringing together a group of three individuals to talk about the residential rental market spring 2021, is Shawn Riney, who's the senior vice president of investments at Marcus and Millichap, the Ny-- NYM Group. Jay Greenberg, who is right now in Brooklyn, I believe, correct? Jay is a principal at Z + G Property Group. And last but not least David Lloyd, the managing principal at Davean Holdings. So, Mr. Riney, since you've brought these people together, and since you are the leading investment sales broker around, tell me the truth. How is business today?

>>> Shaun: Business is, as we like to call this a coiled spring, kind of like a rattlesnake ready to strike. There's been a lot of pent up demand on both the buyer and seller end to transact. I would say over the last 60 days, it's been a breath of fresh air, many of the assignments that we had, that we could not hit the pricing on over the fall and winter have suddenly hit the pricing. And mostly that's been buyers, you know, coming up to the sellers' price. Rentals are now moving and, you know, people are having, you know, retention where they otherwise had vacancy, which is causing a lot of a positive lift. And all the common sensical things that you thought would happen and more activity as COVID restrictions, you know, lower and just more people touring properties, more banks ready to lend, all that's kind of coming into fruition and really shaping up to be a hive last of the Q3 and Q4. You know,

like I said, it's kind of like a rubber band. You can only pull it so far back before it snaps. And there's going to be a lot of transaction velocity setting aside the conversation on pricing. So happy broker for now. >>> Michael: The big question is, you know, two years ago, they came out with the housing stability and tenant protection act. Okay? Each and every day, the legislation talks about other effects taking place. That really put a pin in

the, in the investment sales market. Let's talk to our two investment sales, former investment sales people over there. David, now that you're on the other side of the coin. How do you like the market? Is it a buyer's opportunity? And Jay also, but let's start with David. >>> David: Yeah. It's certainly an opportunity. You know, we're buying deals, you know, basically 50% plus off, you know, where they were trading from the peak. So yes, there's been some turbulence in the market with the rent laws and then with COVID, but, you know, that brought opportunity and, you know, we've looked all over the country, but we keep coming back to New York, just because of the value.

>>> Michael: So, Jay, let's talk about you. What have you done in the last two years with regard to acquisitions? >>> Jay: Well, the last two years have certainly been two different gut punches for investors like us with the housing laws in 2019, and then COVID last year. And so, some of the uncertainty does create opportunity. You find that investors that we have, they're looking different in different ways right now, different, different things, opportunities. Some investors are saying, I don't wanna, I don't wanna invest at all in New York anymore. And some are saying, I have never seen prices on sale like this in the last ten years.

So, it creates opportunities. And what we found is the market's pretty fragmented right now. You have certain people -- certain product types, fully fair market, tax class protected properties, vacant properties that you could fully -- that you could fully renovate without tenants in the way. Those

properties are, are very attracted to investors, very attracted to us. There are other things that we own and that we're looking to buy that you take a pause because you don't know what, what other regulations are coming down the pike next year. So, we have to be careful now, but anytime there's uncertainty in the market and anytime that the market is shifting from a low point, it is certainly an opportunity.

>>> Michael: You know, yesterday when we all spoke on the phone, we brought up the subject of the 1031. Let's talk about that. If they don't have the light kind exchange, what effect is that going to have on the investment sales and what type of effect is it going to have on you, the people who are buying properties? Shaun? >>> Shaun: It's forcing the issue right at the surface, you know, with the elimination of 1031 exchange, people have to have a gut check and they either need to do their vows again and recommit to the property that they have, or start that transition now in order to complete the exchange by, you know, the end of the year, it'd be the safe way to do it. So, all of a sudden, the last two weeks, a lot of these, you know, potential sellers that have had the itch that just haven't scratched it have called us up, hired us immediately. We're rocking and rolling. And I think that there's going to be a lot

more sellers that enter the market alongside more buyers, you know, participating. So, it's all shaping up to be a Q3 and Q4 of just a lot of velocity. You know, but I think it, it is putting into focus, whether I want to stay with the building aka Reed Marriott, or I want to find a new bride? And that conversation has to happen right now. >>> Michael: Jay and David -- you're, you're the, you're, you're the owners. What are you doing today with regard to offering tenants opportunities, you know, with concessions and other opportunities to move into your properties -- for the vacant units? >>> Jay: For the last 12 to 15 months, and since we've been in the pandemic, last year around October, we couldn't give away apartments. Nice apartments that we've, that we renovated. And

we, we try to do the best work in the stuff markets that we serve. It was very, very difficult. So, we became almost like, almost like investment sales brokers, and condo sales brokers, where we get involved in the negotiation of leases with tenants. And I've never had a tenant make a comment to our standard form lease before until this year. And so, we started hearing it and listening to what tenants wanted and trying to figure out what drove tenants to sign leases. And it came back to basics. You know, tenants want certain amenities in their apartments and their buildings that are important to them. The

washer dryer in the unit became -- you had to have it, if you can rent the unit. So, we're still offering some concessions. They've been dropping. We were down at some buildings, 30% off the highs and rents, and you're giving away a month, two months. And now, that's sort of going away. The velocity of leasing has picked up dramatically and the prices are going to follow soon after. We're, we're anticipating this summer as there's more certainty with students going back to school and employees going back to offices, we think that the supply is dwindling and there'll be time to for rents to pick back up a bit to where they were in 2019.

>>> Michael: David, how do you see it? >>> David: Yeah, things have been improving by the week. You know, we're leasing 50 plus units down on McDougal Street, the deal we've just purchased and renovated. And we started with, you know, several months of concession and, you know, in the, in the eye of COVID. But literally, by the week it's been

improving and we're dropping concessions, literally by the week. And then, you know, you look at the type of renter that's coming in on the applications and we're starting to see students, NYU students, as well as young professionals. So, it's really the type of renter that's returning. It's very encouraging. And I think that momentum is just going to continue into the summer.

>>> Michael: Why don't we talk about McDougal - >>> David: You know the McDougal street perks, I mean, it's just a, it's a great example of the value that that was available in the market, you know, during COVID and then, you know, moving forward to today, you know, this, this is an opportunity, you know, that was out there for 45 plus million. And we secured it for 50% off plus said at 22 and a quarter. You know, there was a point in time where it was tough to, you know, tour people through buildings, tough to do lease reviews. And, you know,

the, the sellers really were motivated. It was at a state. And so, we started to realize, you know, the way we're going to win this deal is by coming up with a creative solution. We offered a one day closing and you know, it fit their needs. And we were able to get a great price.

>>> Michael: Well, with regard to, you know, closings and everything, it's very important to have the banks over there. How are the banks reacting today on financing, new purchases, and also refinancing some of the properties that now your tenants that you've been renting up? >>> David: Yeah. So, the banks have been incredibly active, you know, at least on, on our stuff. That's what we're seeing. It definitely pays to have relationships, especially during COVID. And, and that was a benefit to us. But right now, whether we're refinancing or on new acquisitions, the capital markets are, are humming. We're getting a ton of interest from

different types of lenders all across the board. And I definitely don't think capital is an issue right now, if you have the right product. >>> Michael: What about the subject of co-living? That was an item that I remember two years ago, it was a big item. Where's co-living today? >>> David: Yeah. So, the heads in beds model or co-living, you know, that is, you know, that's a way you could maximize a layout and maximize your rent per foot. So we were very

attracted to that, that concept in, you know, during the pandemic, that kind of went out the door for six months or so, and people just preferred space. They preferred, you know, outdoor space, more apartment. But now we're seeing the heads and beds model come back really quickly. And that's, you know, like I had referred to before, just a function of the young renter coming back. So, you know, we're still bullish on that model. And as you know, COVID is more and more in the

rear view mirror, we think that that market is just gonna get stronger. >>> Michael: Shaun, and how do you see that? >>> Shaun: Yeah, I think it's going to come back as well. I think it will be more on the fringe than a mainstream business plan. We sold the $29 million property on Greenpoint Avenue, in the heart of Greenpoint at the end of -- actually the beginning of 2020. And I think that even though

that buyer may mark the building down from their purchase price, I guarantee you two years from now, it'll be well in excess of the purchase price. So, you know, you can't buy what you don't own and what is nicely renovated will always retain value. So, the extent that you can buy on regular free market rents and then the upside is the co-living strategy, I think that's a sound proven strategy, and it will all come back into play as rents go up and supply gets tight, which we're already seeing one month into the, you know, the lift of the restrictions. It's just funny how quickly that can come back.

Momentum is a funny thing. >>> Michael: So which borough do people want to live in? Everybody still wants to be in Brooklyn and Manhattan? Or have we, have we seen changes? >>> Shaun: Yeah. Most of our velocity last year, we have 22 properties in contract right now in between Brooklyn and Queens and a high percentage of the velocity was in traditional brownstone Brooklyn neighborhoods. And the reason was, the rents did not go down that far in those sub-markets and buyers were nipping at the bids, even take a 10% discount off of pre-COVID pricing. And the reason being, most Brooklyn, larger unit styles, they're rooted in New York City, they're not shares. It's very common sensical why the share market

disappeared overnight. No one wanted to work out of a small bedroom. Those people lived to be outside in the city. But those, you know, larger units, people that were rooted in the boroughs, you know, they didn't leave. And you know, and that part of the market for that reason was very liquid. Probably the easiest thing I could sell today would be a gigantic five units, statutorily free-market brownstone Brooklyn, Carroll Gardens, you know, townhouse. Those are can't get enough of

them, can't sell quick enough. >>> Michael: You know, people were talking about the Bronx. And Bronx always has a good workforce housing. Are we seeing investments as in the Bronx and we seen Jay and David interested in buying property in the Bronx? >>> Jay: For us, we don't own in the Bronx and it's not because we don't like it. It's just, we don't know it. And in terms of New York City, and I learned

from, I learned this from my former employer and your friend Ofer Yardeni, you've got to buy kind of where you know, and where, you know, each block by block where you have an advantage. And we, we stick to Brooklyn and parts of Manhattan, where we know. I live in Brooklyn, my partner lives in Brooklyn and our offices are here. And we just want to, we want to be competitive where we have that advantage, where we know the blocks, where we can see it even before the listing comes out or even before Shaun gives me a call, I have a property for sale. We want to know what those rents could be,

if we put our spin on the apartments and what they are now, where that, where that kind of value is. And so not that we don't like the Bronx, we just don't know what is as well as we know Brooklyn. So, we, we've stayed away, >>> Michael: David? >>> David: Yeah. So similar point of view. I mean, we've looked at deals in the Bronx. We're not, we're not focused

there. We're very much focused on, you know, the young professional in downtown Manhattan and the better parts of Brooklyn. And that's really been our focus and, you know, our bread and butter and we've been executing really well there. But not to say we wouldn't look at a deal in the

Bronx. We just haven't seen anything that, that works for us. >>> Michael: Shaun, Shaun, do you know what the Bronx is? >>> Shaun: I know what the Bronx is. >>> Michael: -- Detroit, you -- it's similar in certain cases -- >>> Shaun: There is a tremendous crossover between Bronx buyers and Brooklyn buyers. There's a tremendous crossover between a Harlem and a Crown Heights, you know, Lefferts Garden buyer, you know? Buyers kind of know they know their locations, but they also know the type of tenant and the rent per square foot that are achieved in parallel markets. There's usually a lot

of crossover in. I will say, as a comment to the rent stabilization product type, in the last 60 days, we've seem to have hit a floor. Our team has put seven buildings in hard contract, all traditional 11 to $1,200 average rent, elevator, rent stabilized buildings, no quote unquote upside the moment. And they've all transaction between nine and eleven times the rent roll. And all of a sudden there's a market again, that I think we've hit the floor on where if you can be between a five and a five and a half percent cap rate, and somebody sees no downside, the upside might be capped, there's a market and there's all of a sudden, a New York City where there's some type of building for everybody in it. And I do

think, you know, lateral moves are, are willing to be made. I have a owner trading, a free market building in Midtown for, you know, trading out of the volatility of a free market building for the stability of a rent stabilized building. So this is an interesting kind of time to, to mix and match.

>>> Michael: Package rooms are a big item, but in these older buildings, there's not enough room. How are you handling as owners? Okay? The-- the number of packages that are being delivered today to the older buildings. Jay? David? >>> Jay: This is a, this is a topic near and dear to us. We, we talked to the New York Times about this last year. We were the first building in Brooklyn to have latch as our, as our smart lock system for the doors. And the reason that we decided

to do that is because we knew we were buying walk-up buildings without doorman. And we saw just the plethora of packages arriving and being stored in front of the building. And so, a lot of times it became the onus became on the mail carrier to actually get packages in the door. And so, we wanted to make it as easy as possible for them. So, we started installing latch on these doors, so that the FedEx driver or the UPS driver, even USPS can get into the building and put it securely somewhere. And we in some, and we have our property managers meet them there to show them exactly where we want them.

We've used technology in ways to connect with tenants and make their lives easier because we know when living in walk-up buildings, which a lot of our, a lot of our tenants in Brooklyn want that feel. There are certain downsides to that and difficulties with, with package delivery, like you said, in deliveries in general and just mail. So, smart locks, connecting with tenants, connecting with mail carriers and ma-- and making sure that everyone knows what they should be doing. It decreases package theft and it allows people to

basically have the comforts of, of a doorman building without the person there. >>> Michael: David, how do you see it? >>> David: Yeah. I mean, the, the package room is a, it's almost as important as the gym. We were looking at a few buildings at one that we're closing on an a, in a few weeks in Chelsea and literally, small room in the basement and we're thinking, oh, hey, let's make it a gym. And now we're, we're, you know, transitioning and making a package room. I mean it it's so important right now, especially for the young renters, especially for, you know, today in the pandemic.

>>> Michael: You know, with regard to safety, how are you protecting your own building for your tenants to be safe in various locations in Brooklyn and Manhattan? >>> Jay: First things first, security cameras, having them there as both a deterrent and something that the police could use if there's an incident that occurs. But more importantly is especially in these buildings that have, there are smaller, maybe ten units and below that don't have doormen having, having supers or handyman that live nearby that have a presence at the building is key. You want these people to be both the face to the building and represent you, and also have the tenants feel like they're there someone that could protect them as well. Obviously not getting in the, in the line of duty or anything like that, but it just, in terms of being there and being a face to the building looks like it's well protected and that there are people around all the time. >>> Michael: Here's a question for all, all of you. With regard to a couple of years ago, the private equity firms, you know, were very active in buying buildings and then there were foreign investors. Are we seeing

the private equity and the private investors coming back to be partners with you, because you're operators in properties? Okay? Shaun, you're on the forefront because you're selling all of these buildings. >>> Shaun: Yeah, I think for the most part, private individuals have been the ones buying properties, over the last 12 months. I mentioned a lot of rent regulated trades, those are almost all private families, that are, you know, seeing the same properties they used to be 15, 16 times around roll at, at 9 to 10 and jumping on it. This has not been a liquidity crisis has been a confidence crisis in New York City. And there's been

a lack of confidence in when is the city center open and when are rents going to come back? When can I fill my vacancies and has all those confidence issues start to clear up, you know, there's going to be a great environment to, to again, buy and sell. But the money is out there. It just needed to feel like it was not making a mistake. sometimes people are more versed to losing money than they are excited by making money. >>> Michael: What about institutional investors? Okay? Are we seeing the Blackstones? Are we seeing, you know, the, the, the other smaller institutional players coming in to buy some properties? >>> Shaun: I'll just add one thing. You're seeing both the institutional buyers and strangely enough, also willing to fund rent regulated housing, just the same as they were pre-law change and also chasing smaller 10 -- under protected tax class, primarily free market buildings, looking to assemble a lot of scale. So, they bring an institutional lawyering to the

table, which I don't always appreciate, but they are active. >>> David: You know, the institutions have come back and, you know, we, we're partners with institutions and as well as foreign capital. And it's all based around the narrative shift that we've seen in New York. And, you know, I think right now the opinions forming that New York City is coming back and you can feel it if you're walking on the streets and the numbers are starting to show it. So, yeah, we we've been partnering with

institutions and there seems to be an increasing appetite. And, yeah, we're looking to do more deals with them. >>> Jay: For the last six years, we partnered mostly with private individuals and in the last year and a half, it's been more institutions than we dealt with in the past six years. And I,

like I said before, I think the institutions know exactly what they want. They have a strategy and they're partnering groups like ours to, to implement them because a lot of this strategy revolves around smaller buildings and protecting themselves from unlimited taxes and staying under 10 units and buying free market units and so that you can renovate them. And so, it's interesting time in the market, because I haven't seen this many institutions go after these type of property -- properties in a long time. And so, it should shape up to be in a very interesting next 12 months. >>> Michael: With regard to the subject of work from home -- Okay? Now, you know, it's a big topic of interest. Your, your building's a small, sometimes it's difficult to work from home, especially if they've have roommates over there. What do

you think is going to happen with the work from home phenomena? >>> Jay: I can't say that it's going away anytime soon. I think that a lot of people that work for larger companies got a taste of working through home and, and really liked it. I, I, I don't myself. But I think that tenants are gearing up to prepare

themselves for work from home life, at least a couple of days a week. And for us, that means tailoring to those needs. Some of those apartments now need, instead of two bedrooms, now they're one bedroom with a home office, it's kind of built out. It's making sure the wifi is really good. It's, it's making

sure that all the things that they need at work are there for them. People coming back to offices now, which is good to see. But I do think that people will try to keep one or two days a week work from home. And as a small building owners, we have

to cater to that and give them kind of the amenities that they need. >>> Michael: As small building owners and also as an investment sales, Shaun, let's talk about retail today. You know, the small retail in your building, how, how are you adapting and what, what type of incentives are you offering, the, the retail tenants to, to be there because it's an amenity to the building? And also, you could use the cash flow. >>> Shaun: I'll add one comment. I think amortizing any back rent

that you have into a new lease could be a very interesting way to add value moving forward. Mixed use has actually been very liquid in the sense that the retail component of the property was already in turnkey space. So, bars, restaurants, something that was already vented with existing infrastructure in place, savvy investors were snapping that up over the last 18 months, basically baking in that there might be a reset of rent, but if rents were to go back to where they were, you're looking at a six to six and a half percent cap rate, and you otherwise would never be able to get that in certain locations.

So, I think there's a big disconnect between side street retail and main street retail, and you know, the traditional, you know, corridors of Bedford and Court Street and Steinway. And there's also a big difference in price point. You know, $15,000 a month and under seems to be bouncing back quite a bit. And you know, again, there's a big disconnect in terms of pricing. If the, if the space has finished its leases

and it's easily sellable, if it's raw and needs a lot of capital investments, the same concept as an apartment tenant, they usually don't have a hundred thousand to build out the apartment, but they can, you know, put up three months of rent and start a business. So same kind of concept it was. >>> Michael: Jay and Dave? >>> Jay: Yeah, I think retail is a real opportunity right now. Obviously over the last couple of years, it became almost a bad word in this industry where you hear about retail buildings and a lot of people don't want to touch them. I think I really like retail buildings. We bought a couple in the past couple of years and one of the strategies we had was to bring in retail operators with experience that survived the pandemic simply because they had a business that, that worked for kind of pandemic quarantine living and now we're ready for their second shop, third or fourth. And a lot of these, a lot of these operators are smart. They understand that, that they add a

ton of value to our buildings, especially when they have a name brand behind them. And so, we brought some retail operators into the ownership structure of the buildings themselves. And so, if they can protect their own interests by being partners in the building, it creates kind of a dual incentive for both the owner and the retail, the restaurant owner to co-exist. I

love retail and really good locations right now. Tough deals to buy in terms of capitalizing them. But if you can get them, you can get a really good discount. And like Shaun said, you can build a really nice cap rate.

>>> Michael: David? >>> David: Yeah, we we've looked at mixed use. We own a lot of misuse, but really in, in prime locations, you can't get too -- with it. But if you're, if you're willing to take some vacancy risk in prime locations, yeah, you know, when you're looking at a model, you can build to a very healthy cap rate. And, you know, we took that, that vacancy risk at

MacDougal and we leased it up within two months as a 7,000 square foot retail space and very unique block through, you know, between Minetta and MacDougal and we just knew it when we walked in, this is, this is prime, prime, real estate, prime retail. Somebody going to want this space. It's a unique opportunity. And, you know, we factored in a very low retail rent that was in our numbers and restaurateurs saw value in being able to tie a space like that, you know, during the downturn. So, for us, it worked for them it worked and we'll continue to look at the deals with vacant retail, as long as it's in a prime location. >>> Michael: So, I think the real comment is location, location, location. That's for everything in business, especially if it's a residential rental building or a mixed-use building. I'd like to thank our executive producer, Shaun, Jay,

Lloyd, and I'll see you next week. ♪ [Theme Music] ♪

2021-06-04 18:24

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