Bisnow: State of the Market Interview with Ron Cohen

How would you define or describe NYC’s commercial real estate market in 2016?  Has it done better than your expectations?
Overall, the investment sales market is healthy and continues to show strength, though it has unquestionably cooled the first half of 2016.  While it’s down about 20% from both a dollar & volume standpoint for the first half, we have to maintain perspective that we’re coming off a banner year and still talking about close to $30 billion.  Land and development related sales have decreased sharply, which is no longer news to anyone.  There is concern about the retail sector and even hospitality, while multifamily continues to be arguably the most desirable asset class attracting investment far and wide.  Pricing has held at peak level, though I believe there’s a disconnect starting to seep in. Words I’d use to describe the current temperament would be uncertain and cautious.  I anticipated numbers to be down this year to some extent, so market performance is pretty in line with my expectations.

What part of the cycle do you believe we’re in?
Next guy to make the baseball/inning analogy drinks, okay?  (Laughs.)  As I see it, we’re in Year 6 of arguably the best bull run seen yet, and 2015 appears to have been the peak.  In fairness, we don’t have long enough sight in the rear-view mirror quite yet to make a concrete claim on that.  However, it looks like we’ll be hard pressed to surpass total volume achieved in 2015 at this point.

What are the most noticeable or most concerning trends happening in the NYC market right now?
The slowdown in land sales and subsequent new development is the most noticeable from our vantage point.  What I observe to be a more interesting trend is investors dipping toes into new waters.  We’re seeing them buy in locations they previously hadn’t, and also moving into new asset classes.  RXR is doing a residential project at 810 Fulton Street in Brooklyn, for example.  Several luxury condo developers have asked me to show them affordable housing opportunities, which strikes me as a 180-degree shift in strategy.  A well-known developer who builds both ground-up condo and manages rent stabilized multifamily was recently quoted as saying: “Sometimes you want pizza, sometimes you want a burger.”

Besen does a lot of work in multifamily. Are you finding that this sector has taken a hit this year with the loss of the 421-A or are you only working existing properties?
421-a has had an impact on development, largely on the ability to build rental.  So, this has been a contributing factor to softness in land sales, though lack of construction lending and land prices (for nothing but high-end condo product) has frankly had a more direct effect there.  We work on both ends of the spectrum as we sell development sites and income-producing multifamily.  I would hardly characterize the multifamily sector as ‘taking a hit,’ though it’s fair to say that we are probably due for some pricing adjustment that hasn’t happened yet.  We’re still seeing some walkups in Manhattan trade over $1,000 per square foot and cap rates with a 3 handle.  The regulatory environment is the biggest challenge for the sector as the goal post keeps moving, certainly not in favor of property owners.  Buyers are seeking free market status more so these days to allow greater flexibility and control, as opposed to previously perceived upside potential of rent regulated units at lower rents.  The ideal opportunity at present is a mix of both to provide the aforementioned benefits.  Day-to-day management isn’t easy by any stretch, and profit margins continue to get squeezed.  I’ve heard a number of owners lament about being “partners with the City” in reference to increasing taxes and restrictive regulations.  That said, savvy investors are still making money, largely on the exit. Particularly those who have sold in recent times.

How’s retail leasing fairing? Experiential retail is on the rise, but many vacancies are hitting the market? Just how much damage is e-commerce doing?
Retail leasing is a growing concern, with mounting pressure from high-priced real estate and e-commerce serving the masses. Vacancies have become more prevalent and outwardly visible.  Rents in first half of 2016 have reportedly come down in 7 out of 12 of the major corridors in Manhattan from an average of $153 to $126. Certain shopping districts have notably high availability rates, such as lower Broadway in SoHo (25%), and Fifth Avenue in the 40’s (30%). Landlords who have acquired these assets at tremendous prices have held firm on high asking rents to see returns and are subsequently sitting on space.  Though the outlook tends to be somber at the moment, there are certainly some bright spots where growth is occurring, such as the Financial District, Downtown Brooklyn, and even Long Island City.  The former FAO Schwartz space got leased to Under Armour, and the group that bought 529 Broadway (on the corner of Spring) for $150 million just got $195 million in financing for a 53,000 SF retail redevelopment there rumored to be leased to Nike for a flagship.

The impact of e-commerce is hard to quantify, though it has been chipping away at in-stores since 2011.  Online sales now account for around 16 to 18% of specialty apparel/beauty chain sales, as well as luxury and department store chains.  And Amazon continues to dominate online, growing at twice the rate of the industry.  However, one study indicates that the pace of online sales growth has decelerated.  While online sales were robust in the early years of e-commerce, the growth rate has continued to decelerate as the channel reaches maturity.  Retailers are trying to figure out how to grow brick and mortar profitability while trying to keep up with the likes of Amazon.  In five years, will we strap on the VR for some virtual e-shopping while riding in our driverless cars?  (I’ll pass, just for the record!)

How would you describe the financing field at the moment? Is it harder to get bridge loans and loans for new constructions?
Lenders are playing it more conservatively at present with an eye towards where we are in the cycle.  Bridge loans appear plentiful with numerous capital providers, and construction lending has effectively paused for the time being for the masses.  Well-capitalized, proven sponsors are still securing debt for good projects that pencil out.  Stalwarts like NY Community and newer entrants like BankUnited continue to actively lend on multifamily, though LTVs are trending lower than 75%.

What are some other projects have you been working on, and how are you trying to ensure their success?
In 2016 to date, Besen has closed deals across a diverse range of locations and asset classes, which has kept things interesting.  After being in contract for about two years, the sale of 220 West 57th Street which housed Lee’s Art Shop closed for $81mm, or about $3,700/SF.  Others include a M1-3 zoned 84,000 SF warehouse in Mott Haven for $14mm, a retail co-op on the Bowery, a mixed-use development piece on Jamaica Avenue, and a number of apartment buildings across NYC various submarkets.  Beyond that, my key initiative has been a huge push on talent: recruitment, training & development. I’ve recently brought eight new investment sales brokers on board and have implemented a multi-faceted formal training program featuring high-profile industry guest speakers, outside experts and even CRE finance seminars with a visiting NYU Schack professor.

How do you think things like Brexit, the closing of the L train, the election, international volatility and other factors will affect the market going forward?
In light of the question, I believe the closing of the L train will have a far more tangible impact on real estate values than other variables such as Brexit.  While Brexit and other international volatility will have ripple effects across the pond, these are just additional circumstances that make New York more attractive.  People talk about it as if it’ll be akin to the recent surge of Chinese investment here, but can we say emphatically that the British are coming?  I just don’t see it.  Maybe sales brokers will start canvassing on behalf of a “British real estate fund with a 1031 requirement” now to pique interest!  It’s hard for me to speak about this circus of an election objectively, but it indirectly affects the market.  It’s at the semi-subconscious level for now, as uncertainty drives anxiety, which causes some to pause and hesitate.  We know that one of the candidates is certainly pro real estate, though I’ll refrain from any editorializing on the subject.

What are some markets/neighborhoods/sector that you’re keeping a very close eye on?
About 24-36 months ago The Bronx started to attract new investors who discovered what many have known for years…it’s a solid value play.  Thor just acquired their first multifamily asset there, a 180-unit building for $44mm.  That price worked out to $157/SF for the bricks, which is hard to find elsewhere in NYC. There’s growing interest in Queens, particularly in neighborhoods along the 7 train corridor.  I wonder if there will be any divestiture along the L train, that’s going to create hardship.  Long Island City & Astoria continue to evolve, and the far West Side still has great growth potential.

What are some other things that you’re keeping your eye on in the last quarter?
The election, though periodically I take self-prescribed “time-outs” from watching the news.

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