New York investors are eyeing smaller and mid-sized opportunities due to slower transaction volume in the city but most are coming up short, according to panelists at a recent Ariel Property Investors breakfast briefing on the state of the city’s investment sales and leasing market. “Investors need to set their expectations lower,” said Ari Shalam, founder of RWN Real Estate Partners, a local investment company.
A confluence of factors that include rising land and construction costs, combined with property values that are well above the peak seen during the last cycle, has made buyers wary. When other markets go into a recession, New York goes into Mexican standoff mode, Shalam quipped, noting that the firm sees pockets of opportunity in small to mid-sized transactions.
RWN Real Estate recently bought a shell building on Bowery in Manhattan, with Shalam seeing an opportunity to transform the property into modern office space and demand rises from tenants in the TAMI sector for boutique offices. “In the long term, 10 to 15 years out, we can always flip it back to condos. Pre-built and small works for us,” he said.
Matthew Baron, president of Simon Baron Development, believes value-added deals will generate lower than expected returns at this point in the cycle. “We’re definitely seeing a correction, considering what land values are versus what developers are trying to achieve per square foot – we’re not really desperate to do deals, as there’s not a lot out there,” he added.
Speculative development is still happening, albeit with greater concerns about potential returns. “Some investors will tell the developer, ‘I like this deal but my number is more conservative than yours – you could be working for free.’ The developer goes into it with eyes open,” Shalam added.
Jacob Sacks, principal of Cayuga Capital Management, there’s been a shift in the kind of deals that will work in Brooklyn. “The markets we used to play in are not working – Williamsburg and Park Slope, Brooklyn don’t work for rental. We missed Greenpoint – we didn’t buy at the right time and now it’s too expensive for us,” he said, adding that Greenpoint has seen 10,000 units come online in just the past five years.
The residential market throughout the city is seeing substantial growth. Queens’ Long Island City submarket will see about 10,000 residential units delivered over the next couple of years. Along with the co-living company that it helped found, Ollie, Simon Baron Development is building 500,000 square feet of micro apartments and shared suites in LIC. “Investors may take a lot of wind as these developments get absorbed,” Baron said. “We prefer investing in the middle and lower market – stay away from the high end.”