U.S. commercial real estate lenders, investors and developers have focused on high-quality projects in major metros with the aim of reducing the potential downside during the current cycle. But with many in the industry pointing out that supply is outstripping demand at the top end of the market, has this focus on the so-called 1% meant that a high-end crash is inevitable and imminent?
This is the premise for what promises to be an engaging, thought-provoking and timely opening panel session at the Real Estate Finance & Investment 2019 Institutional Investor Summit, a morning event that will be held at Essex House in New York on February 7.
Taking to the stage and swapping stories will be Tawan Davis, founding partner and CEO of The Steinbridge Group; Billy Procida, founder of Procida Funding & Advisors; David Eyzenberg, president of New York-based real estate investment bank Eyzenberg & Company; Tino Korologos, principal of Leonidas Partners; and Michael Cohen, ceo of The Carlton Group.
As such, the panellists represent something of a counter to the prevailing trend of high-end development unfolding across the country: both Steinbridge and Procida are known for their focus on workforce and multifamily housing in their own local markets. Meanwhile, Eyzenberg will be offering insights on the state of the market from his perspective as a provider of bespoke financial services to the commercial real estate industry.
Procida believes that a high-end crash is already underway, pointing to Wells Fargo and other lenders now requiring bigger deposits on home purchases in upmarket locations such as Greenwich, Conn. “There’s just too much supply in the $10 million-and-up market, and the $5 million-and-up market for second homes, and just not enough people to buy them,” Procida says.
“I do think there’s been a softening in the highest end of the real estate markets, and particularly in the high-end condo market in New York and Miami,” says Steinbridge’s Davis. “When you look at $5-8 million and up, those properties are sitting for longer and there are construction delays because there aren’t enough pre-sales to get started. So, I do think [a slowdown] is starting to happen.”
Davis believes there will be a gradual slowing rather than a sudden crash in the high-end market, pointing to opposing economic factors — higher interest rates, volatile stock markets and political uncertainty on the one hand; strong job numbers, nominal economic growth and a relatively strong U.S. dollar on the other.
“As a result, I don’t think there will be a sudden and precipitous crash, but there’s going to be a meaningful correction,” he says.
“Steinbridge is not counter-cyclical, but we are cycle-neutral,” continues Davis, referring to his company’s expanding focus on the residential sector in rising cities like Philadelphia, where it is developing workforce housing.
“Our particular model is focused on middle-income earners, among whom there is perennial demand both on the purchase and rental side,” says Davis. He is aware of super-high-end condo developments from other companies that still remain unbuilt years after the projects were initiated, he adds.
Unlike our other panellists, Eyzenberg, whose company sources and structures funding for real estate development projects, does not think a crash is likely.
Most high-end core assets are purchased by deep-pocketed investors with little or no leverage, he points out. “Though rates ticking up might cause some stress, the reality is the risk premiums will compress to meet investor demand for low-volatility assets,” he adds.
Many investors gravitate towards high-end urban assets because they believe them to be less volatile,” notes Eyzenberg. “In the case of a correction, outside of over-levered buyers with short-term maturities, the assets should be able to maintain cash flows outside of oversupply situations,” he says.
Eyzenberg & Company takes a multi-generational approach to ground leasing. “We prudently invest low in the capital stack and so do not feel we are susceptible to any crash,” says Eyzenberg.
Procida Funding & Advisors has never targeted the high-end market, and Billy Procida describes his firm as catering to the masses. It has always focused on smaller deals and Procida has previously told REFI of his concerns regarding how quickly prices have run up in Manhattan and other gateway markets.
The company also has a relatively local focus, concentrating on multifamily and other middle-market lending opportunities in properties that are within a hundred miles of its New Jersey headquarters.
There are good returns to be made — as well as benefits for society — by investing away from high-end metro developments, says Procida. “Wholesome housing always does well, and fixing communities always does well,” he observes.
Davis, Eyzenberg and Procida will be discussing their strategies in more detail — as well as sharing their observations on the challenges facing high-end real estate development — in the opening panel session at the Real Estate Finance & Investment 2019 Institutional Investor Summit.