New York City real estate is heading into a slowdown due to stricter banking regulations and changes on the municipal and state levels, warned Heritage Equity Partners founder and CEO Toby Moskovits during a panel discussion at the annual Real Estate Young Leaders’ Forum recently. But that doesn’t mean a dearth of opportunity.
It’s a great moment for someone who isn’t established in a career to get involved and find opportunity, in a market where typical deal structures or sources of financing are not necessarily going to work, she told an audience. “Sometimes being a little inexperienced in an industry helps you.”
Moskovits joined L&L Holding Co. senior vice president Joshua Carson, Megalith Capital Management principal Philip Watkins, and Cushman & Wakefield senior director Chris Moyer for the panel, which focused on where those opportunities can be found in the office, residential, and hospitality markets.
EisnerAmper tax partner Lisa Knee, who moderated, pointed out that L&L Holding Company’s repositioning projects at 390 Madison Avenue and 425 Park Avenue are 2 prime examples of how you can bring a “wow factor” to old office product.
“The basic concept is that the average age of an office building is Midtown is about 70 years old,” Carson replied. “When you think about what’s changed in those 70 years, it’s just about everything—from technology to architecture to design to how tenants use and lease space.”
In response, L&L is transforming these buildings into modern, first-class assets in a variety of ways—including going down to the guts of new infrastructure, replacing low ceiling heights with double- or triple-height spaces, adding terraces and rooftop spaces, and creating amenities.
“The real focus is de-commoditizing what was previously commoditized product,” he continued. “Through a package of these different concepts, we’re creating at 390 Madison and 425 Park what we think is unique product and what tenants will pay for.”
It’s a strategy working for 425 Park, the first block-facing building being developed on Park Avenue in 50 years. Earlier this year, hedge fund Citadel inked a 200,000-square-foot deal at the building in which it will be paying a reported $300 per square foot for the penthouse space—an unheard of amount in Manhattan. In fact, Carson pointed out, L&L is not marketing the building—any leasing has been solely through word of mouth and planting seeds with select office brokers.
“We capitalized the deal so we didn’t have to do pre-leasing,” he explained, noting that tenants would be able to see the “dramatic difference” between 425 Park and aging competitive space once the tower started coming out of the ground.
But in order to continue to build the new office product Midtown East desperately needs, he said the City’s rezoning plan—which would make way for larger, more modern towers—needs to pass, and unfortunately, L&L did not have the luxury to wait. “We see it as an important element for the future of New York City,” he said. “Something will go through, but we wish we could have participated in it.”
Moskovits recently visited a company on Park Avenue, and while on the elevator passed offices for beer brand Stella Artois. The décor, she recalled, recreated a Brooklyn warehouse in the middle of Manhattan. It’s indicative of a larger trend in which the office market in both Manhattan and the outer boroughs will change rapidly over next 24 to 36 months as buildings turn over, she pointed out.
“I think the office market is transforming and we’re only in the first or second inning,” she said. “People are simply working differently, including their expectations for how their workspace looks and feels and how close it is to their home.”
Knee noted that when people think of Williamsburg, Brooklyn, they think of Heritage Equity Partners and Moskovits. “Most people want to know, how did you know?” she asked.
Moskovits’ venture capital background helps, as it’s an industry where things transform very quickly and it requires the ability to think 2, 5, and 10 years ahead. “It’s a little easier in real estate, because you have what’s called the ‘Gordian Knot’ of the industry—everything is comp-based,” she replied. But if she goes into a new area that she knows is on the cusp of transformation and doesn’t have that comp data or established use, she can’t use typical bank financing to buy office or hotel, forcing her get creative. As a result, she’s essentially making the market.
“On our heels, prices are escalating and others are pointing at the comps of the leases that I have signed to go ahead and get typical financing,” she said. “That is both a challenge and the opportunity …. To me the future is innovation and how building are financed. That flexibility allows creative, innovative approaches.”
Knee then pointed out the 5 hotels that are coming to Williamsburg and asked if there was demand for all those rooms.
“Fifty million people come to New York each year, and there are perhaps 50,000 hotel rooms,” Moskovits replied. “In our pocket, it will be under 400 hotel rooms [that are] high-end, boutique hotels in which the demographic is primarily between 25 and 45 who have been to New York hundreds of times …. They’re coming for the experience.” For instance, Heritage’s Wythe Hotel in Williamsburg has experienced a consistent 95% occupancy and rates have tripled. “I’ve had to send people to Manhattan because there have been no rooms in Williamsburg.”
Watkins also pointed out that Brooklyn is an international brand and destination within itself, benefiting from the City’s push to get tourists out of Manhattan proper and into areas like Williamsburg, Harlem, and Queens. One area where you can see that transformation is Dumbo, where Megalith is currently building boutique condo and ground-up rental buildings in 2 properties that once belonged to the Jehovah's Witnesses.
On the office side, he continued, “There used to not be quality product in Brooklyn—all conversions were on an ad-hoc basis. Now it’s being done in an institutional way and you’re seeing the leasing velocity happen.” One of the biggest examples is at Dumbo Heights, which has hundreds of thousands square feet of leasing velocity, attracting ancillary retail. “You suddenly have a critical mass … People wanted to be there for a while, but there was just an extreme dearth of product.”
Moyer said he had to tap into creative financing for a 14-story condo development Cushman & Wakefield is involved with at 62nd Street and Fifth Avenue, which is being underwritten for $7,000 per square foot and don’t have the needed comps. “But time and again, we’ve seen that when developers bring what buyers are looking for, they get the price,” he said.
In this case, the 3-bedroom duplexes will total 3,000 square feet each and overlook the park. Lenders, however, will only go for $3,000 per square foot. While there’s been pushback from the private side, he reported that closed-end fund, family offices, and high net worth investors are happy to own product at that price.
Given that banks are cheap, he also noted that borrowers are stepping away from them and are willing to pay rates of 8% or 9% for a more flexible loan. “If you miss that $7,000 per square foot sellout because of the loan and the market dips to $5,000 per square foot, you lose way more in the sellout than you would have in financing costs.”
He’s also involved in a $1 billion, 1 million-square-foot expansion project in Seattle that required creative financing for a $600 million construction loan, which would typically need 15 to 30 banks and take 6 to 12 months to close. The owner wanted one lender and a 15-year loan, and Cushman & Wakefield went on global road shows with sovereign wealth funds and insurance companies. Eventually, it was able to close the deal with one lender at 55% LTC for 15 years, separated into 4 separate loans in case the lender decided to sell off any pieces in the future.