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Are we in a correction? How long is it going to last?

Dec 14, 2016

EisnerAmper Real Estate Private Equity Summit panelists discuss whether the market is in a period of correction, and what’s ahead for vacancies and pricing.


Kenneth Weissenberg: We've heard from various people throughout the day as to what their view of the market is. Some are more optimistic, someone more pessimistic. Are we in a correction? And if we are, how long do you think it's going to last?

Jonathan Kaufman Iger: I wouldn't call it exactly a correction. I think what we're starting to see and what we would hope to see in the next 12 to 18 months is a reversion back to what we call traditional underwriting. That the properties that we've been trying to compete for the investment level in New York, whether it's core or value add, you're competing against investors who are not using traditional underwriting techniques. They're looking at these assets as a flight to safety for capital. You're seeing Canadian pension funds who are happy to underwrite to a three percent cash on cash return, completely unlevered. That's not a playground that we can play in. But I think some of that capital is starting to dry up while there's still a tremendous amount of capital on the sidelines to be deployed. So we have a very positive outlook on the market. We're just kind of waiting for that complete reversion to occur to jump back in.

Leslie Himmel: We spoke about this the other day that residential and land sales have already been repriced. Retail vacancies are having a huge impact and retail condo sales or having a lower price. So those two sub-segmentations of the market have already repriced. Offices now is still looked at and coveted after, but real estate's all linked so I think in time, again as the vacancy rates start going up and then not only the vacancies but the shadow vacancies, I think that there'll be some repricing that happens. So when you're doing a development deal, instead of going for a potential cash on cash return of five percent, which is this again what Sam was talking, they used to be priced up to 7 or a 10 stabilized, I think you'll be getting paid for the risk. And since we buy underperforming assets and then reposition them, we don't buy to eventually just get a five percent because you're not getting paid for the illiquidity of real estate or the risk. So we believe that there'll be great opportunities, and the correction has not started yet in commercial, but around the country it certainly has.

Phil Watkins: People that bought 9, 12, 18 months ago that are now I think starting to struggle to get some of those projects off the ground on the development side, as well as frankly capital on the construction development side was much easier to come by 9 or 12 months ago, both equity and debt and you're seeing sort of a shift in sentiment there that’s changing the pricing. And what I think we're seeing even on the value add side, I think if you talk to a lot of the large brokers that are trying to sell some of these transactions, they're not seeing a fall in pricing widespread. They are still trying to push basically for the one buyer, the outlier buyer that's willing to keep pricing going, and they'll tell you when, if that buyer doesn't come through, the sort of mean of more typical underwriting folks like those of us on the stage are all clustered at a more normalized valuation. So, you know, I don't know, it depends on how you want to look at it, whether that's a fallen pricing or just a return to something, that those prices were never justified.

And we’ve continued to be predominantly residential. We do look a fair amount in the commercial spaces as well. One unifying theme I think for us has been sort of trying to find locations slightly ahead of the curve and that's one way we can get paid for value. So there's a couple of examples, in Brooklyn we purchased in Dumbo but in what was the more Vinegar Hill section of Dumbo that I think is clearly with a lot of developments recently, sort of that core is shifting, and as a result we were in a land there for sub $200 a foot that's now for four or $500 a foot. So I think we're always sort of, I'm thinking about those types of ability to sort of expand in that way geographically at our first sort of ventures outside of New York City proper is a small transit oriented development, a site multifamily development site in Westchester County. And we do sort of see some of that play as an areas, especially on the residential side is as certainly Manhattan, but even Brooklyn and Queens are starting to get. So the pricing is starting to get so high you are starting to see folks who still want something of the urban lifestyle and that type of a downtown core but are willing to trade-off the New York City proper for 50 to 60 percent lower rents with the right amenity package. So I think we continue to look sort of opportunistically across that geographically as well as asset types.

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