At the recent Stoler Summit, I was fortunate to hear some very telling observations about the drivers of the NYC investment sales market. Many spoke to NYC being the number one choice for global investors when they want to check the US real estate “box”. Since that isn’t news, what’s surprising is the varying opinions on if this was warranted or if NYC is in fact overvalued.
Richard Mack, the North America Chief Executive Officer of AREA, said that they have been priced out of NYC for some time. He believes this market is dictated by the inflow of new capital. He almost went as far as to say that it was like a pyramid scheme, where someone would eventually be left holding the bag. AREA prefers more attractive yields in cities such as Seattle, which has a rapidly growing workforce and offers much in the way of the lifestyle for those who live there.
Not surprisingly, Scott Rechler from RXR, one of the most aggressive NYC office building buyers of late, was the most vocal to speak out against this. He believes NYC has the best workforce in the world because people want to live and work here. He thought the fundamentals couldn’t be stronger.
Many of the panelists concurred that the slowdown in the NYC office leasing market (according to Cushman only 23.2M SF of office space was leased last year compared to 2011’s 30.1M SF) was attributed to companies using space more efficiently and not necessarily due to lay offs. Furthermore, Wall Street’s pause in leasing new space has been replaced by creative tenants who have flooded submarkets such as Midtown South.
As far as pricing, the general consensus was that it is very challenging to make core acquisitions work, as sub 4% caps have become the norm. The competition can also be fierce for these types of investments. When I recently interviewed Giacamo Barbieri, Head of Northeast Acquisitions for TIAA-CREF, he talked about their recent JV with a Norwegian Pension Fund, the largest sovereign wealth fund in the world, which oversees $600 billion, which is just one of the new entrants to the market.
Since NYC “only” had $40 billion of sales last year (with $19.8 billion coming from the 83 sales over $100m+ institutional sized sales), the Norwegians could have bought every sold NYC property last year and it still would have only accounted for 6.7% of their portfolio. With hundreds of similar institutional players chasing NYC, I believe there could be well in excess of a trillion dollars allocated to this market. If so, that is over 50 times the institutional grade properties that actually sell.
Thus, a core buyer is going to have major challenges securing product in this market unless they can find ways to be creative such as TIAA-CREFs recent JVs at 8 Spruce and MiMi where they recapped the properties. With these supply and demand dynamics, one could easily say that yes, the core market is overheated. The good news for those participants is that segment of the market couldn’t be more liquid.
Conversely with value-add, Rechler said there was few equity partners who could underwrite a value-add play aggressively enough to make the numbers work. He referenced the Sony Building and 11 Madison where there was little institutional action. Ultimately, Sony sold to Chetrit a private investor.
In addition to value-add, small non-institutional sized assets, especially those in the outer boroughs, are where institutional investor may have to turn to. Bloomberg News recently reported this trend and cited that Invesco, which has $50B in real estate under management including 51,000 apartments in the US, just made their smallest apartment building purchase ever, as they bought a 48-unit property on East 86th Street. That being said this was a $76 million dollar acquisition due in part to the retail and over sized apartments. Thus, the institutional players are still looking to write an eight figure check when making an investment.
Massey Knakal and RiverOak Investment Corp. had taken note of the lack of institutional players in the $25 million capitilization and under space. As a result, they co-sponsored a private equity real estate fund, MKRO, which will target smaller, value-added segment of the market, particularly for well-located assets in the outer boroughs in close proximity to transportation. Although the partnership is new, George Yerrall, co-founder of RiverOak, has been investing in small to mid-size transactions in the northeast corridor for more than 13 years. With more than 90% of the sales in NYC valued at $25 million or less for the past four years, he believes there is no shortage of deal flow for the foreseeable future.
Although institutional investors are starting to turn their attention towards these smaller deals in their search for yields, they still must find a way to invest vast amounts of equity programmatically and either complete the value-add, not always an easy feat, or continue to focus on stabilized assets that are now cash flowing. In all cases, however, the fact that institutional investors are starting to shift their focus to this space is a plus as it provides for additional liquidity on the exit.
No matter which perspective, all agree that given the uncertainty in the world today, global investors see the US, and specifically, NYC as a safe haven for real estate investing and capital inflows are expected to continue. With the core market heated, I think the opportunity now is on value-add plays especially for capital markets sized assets.
James P. Nelson, Partner
James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 200 properties and loans with an aggregate value of over $1.3 billion in the NY Metro Area. He can be reached at firstname.lastname@example.org or 212-660-7710.
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