Even as the overall investment sales market has slowed, some foreign investors have stepped up their game and are taking advantage of this challenging marketplace. In the U.S., foreign investment rose to its highest level in Quarter 1 2023 since 2015, accounting for 18% of the total sales dollar volume, according to Real Capital Analytics (RCA) data. During the past 24 months, 41% of the purchases made by the top 20 foreign investors have come from Canadian buyers. Singapore’s sovereign fund GIC has held the top spot as a foreign buyer in the U.S., marked by deals such as the participation with Oak Street in the acquisition of real estate investment trust Store Capital Corp. in a deal valued at around $14 billion, as reported in MarketWatch. In addition, the Financial Times notes that GIC, which is estimated to have assets that exceed $700 billion, has alluded to an interest in increasing exposure to US-focused funds. Other foreign buyers have come from Bahrain, Japan, Spain, Norway, France, Israel, Germany, and Australia.

Among U.S. cities, New York has returned to the #1 spot for preferred investment, according to the AFIRE International Investor Survey: Q1 Pulse Report. Foreign investment in New York City more than doubled in the first quarter of 2023 compared to 2022, increasing from 5% to 12% and accounting for $1,881,857,688 in sales dollar volume.

Buyers from Korea have been the most active foreign investors in New York City during the past 24 months, accounting for 31% of the purchases made by the top 20 foreign investors. This is followed by foreign buyers from Germany, Japan, and Canada. Historically, Canada has been one of the top foreign investors in the city, and Brookfield AM has held the leading spot during the past 24 months among foreign buyers, with acquisitions totaling $1,076,650,000. While China has constituted nearly a third of the foreign investment in New York City in the past, recently the country has remained quiet. China’s level of investment has accounted for a mere 2% of the purchases made by the top 20 foreign investors in New York City during the last two years.

The recent patterns reflect what has occurred during previous down cycles for commercial real estate. Oftentimes local investors sit on the sidelines as the market fluctuates, preferring to wait for conditions to improve before they move forward on an opportunity. At these times, foreign investors frequently see the chance to make purchases. They may not face the same challenges related to speed and tighter competition that typically appear during upswings.

The Appeal of Low Maintenance
Foreign investors must abide by certain guidelines, including the provisions of the Foreign Investment in Real Property Tax Act (FIRPTA). The law requires non-U.S. persons to follow tax and interest rules as they buy and sell real estate. When entering a U.S. market, foreign investors often participate as limited partners.

As they search for acquisitions, non-U.S. investors usually opt for properties that are more passive in nature and don’t require heavy hands-on management styles. Investments in regulated multi-family housing may not be on the top of their agenda. If they do pursue this route, they may look for a strong local operating partner to oversee the related daily business needs. Instead, foreign investors frequently choose establishments with fewer tenants such as retail properties.

The Ability to Acquire All Equity
One of the biggest advantages for many foreign investors relates to the capital they can bring to the table. Many are not reliant on the debt markets to finance their purchases. Investors from countries outside of the U.S. might come into a deal with all cash. This was the case in the recent capitalization of 245 Park Avenue, in which Japan-based Mori Trust Co. took a 49.9% interest of the office space. The property had a gross asset valuation of $2.0 billion. In the deal, Mori brought all equity to the table, and agreed to assume $500 million of the debt.

A Long-Term Outlook
Many see that there is upside potential for those who can enter a market now and wait for it to recover. This is especially true in places that have historically performed well, including New York City. Simon and David Reuben, affectionately known as the Reuben Brothers out of the UK, continue to invest in the metro area, closing on seven New York City investments since 2020, as reported by Bloomberg. They recently acquired approximately 11,000 square feet of retail space at 747 Madison Avenue. Through the deal they joined Jeff Sutton’s Wharton Properties as owners of the flagship shops of Versace and Alexander McQueen. In addition, the William Pears Group, another British real estate investor, has been investing in New York City during the last years. Run by Mark Pears with younger brothers Trevor and David, the billionaire group has bought unsold sponsor units in bulk.

The uptick in foreign investments emphasizes the need for sellers to work with an investment sales broker who is able to implement a broad marketing campaign. The days of making a half-dozen or dozen phone calls to the most logical local prospects are in the past. Owners will want to connect with professionals who can reach far and wide, and leverage resources that go beyond social media and digital marketing. It’s also in a seller’s interest to cooperate with the brokerage community, as foreign investors are frequently represented by residential brokers. Non-U.S. buyers may start in a market by purchasing a residential apartment, and later consider a commercial investment.

Clearly there are opportunities in today’s market for those who have the resources and are ready to act. Foreign investors taking advantage of the market dip may be able to reap the rewards later. A long-term approach could yield higher returns as the market recovers and eventually regains momentum.

The post Foreign Investment Increases in U.S., with New York City Attracting Most appeared first on Real Estate Weekly.

The real estate market is experiencing unprecedented dynamics, raising questions about the possibility of returning to normal levels of inventory. The scarcity of available homes has created a trigger effect, with potential buyers opting to delay their home-buying plans due to limited options and sellers being motivated to stay put, as they see no immediate incentives to move and lose their record-low interest rates.  

As agents, it is crucial for us to navigate the ever-changing real estate landscape with resilience and adaptability. To determine if inventory levels will return to normal, we must first examine which key factors are impacting inventory, including market stability, homebuilders, high demand and interest rates.   

Market Stability and High Demand 

Last fall, a wave of panic swept through the local homebuilding industry in Las Vegas due to interest rate fluctuations. In response, homebuilders sold off their land holdings, creating an even greater default in available inventory. 

However, builders have recently regained confidence and are in the process of repurchasing the same land or acquiring new parcels. While it will take at least 12 months for the new homes to be built and spark up more inventory, it still marks a positive shift towards replenishing the inventory. 

The demand for homes also remains consistently high, leading to a highly competitive environment where homes are quickly absorbed by eager buyers. Not only are homes not on the market for long, but homes are slow to come to market. This sustained demand further emphasizes the need for a greater supply of available properties. 

Projected Impact of Interest Rates 

The current low-interest-rate environment has led many homeowners to stay put, benefiting from favorable mortgage rates as low as 2 percent. However, with interest rates predicted to shift in the next 6 to 9 months more sellers may be inclined to put their homes on the market. The expected increase in interest rates often serves as a motivation for potential buyers, compelling them to act swiftly in order to secure more favorable financing terms. As sellers become aware of this trend, they are likely to seize the opportunity, recognizing the increased demand. 

Agent Strategies to Create Inventory 

Agents can proactively create inventory by staying in touch with their clients and identifying potential life-changing events that may prompt homeowners to sell, such as career advancements, growing families, or parents moving in. Engaging with neighborhoods and employing proactive approaches, such as cold calling or sending out mailers, can uncover potential off-market listings. 

While the Southern Nevada real estate market currently faces challenges in achieving normal inventory levels, real estate agents can play an active role by fostering client relationships and employing proactive strategies to create inventory, even amidst bidding wars and increased competition. Adapting to these challenges will allow agents to continue satisfying clients’ needs and securing the best deals, recognizing that the path to normal inventory levels may be challenging. Staying informed and agile in navigating the evolving market landscape is crucial for success. 

About the Author  

Alex Adabashi is a licensed Broker, Realtor® and team lead with the Adabashi Group at huntington & ellis, A Real Estate Agency. With dedication and persistence, he consistently ranks in the top 1% of agents in his market. Alex’s extensive knowledge, razor-sharp skills, and team of experienced professionals make him a sought-after Las Vegas real estate expert. 

The post Assessing the Future of Real Estate Inventory: Will Normal Levels Return?  appeared first on Real Estate Weekly.

Although there is quite a bit of uncertainty in the capital markets currently, three key themes are emerging for the Westchester market as we approach the second half of 2023.

1.      Resiliency in both volume and pricing

2022 wrapped up as the best year since pre-COVID days, seeing $2.75 billion in transaction volume compared to $3.31 billion in 2019. This recovery was particularly strong in the multi-housing sector where sales volume in 2022 reached $1.1 billion, a 41% increase from the pre-COVID 2019 multifamily volume.  Nearly half of that volume is attributable to two large transactions, including 500 Town Green Drive in Elmsford, NY for $306 million (or $496,000 per unit) and Halstead Station at 255 Huguenot Street in New Rochelle for $200 million (or $490,000 per unit).

Given the challenges in the lending environment, Q1 2023 overall transaction volume was down from Q1 2022 by 59%. The retail sector demonstrated the only uptick in Q1 transactional volume, an increase from $114 million over six transactions to $147 million across seven transactions when compared to Q1 of 2022.

Despite there being fewer transactions to gauge market pricing, recent Westchester deal pricing has remained relatively stable and resilient when compared to 2019 pre-COVID pricing per-square-foot. Industrial pricing in the first quarter of this year, averaging $138 per square foot, actually increased 42% from 97% for the same time period in 2019. Multi-housing pricing, averaging $374,000 per unit in Q1 2023 has been especially buoyed by strong demand, experiencing a 26% jump from the same period in 2019. This is due largely to the pre-Covid development trend of transit orient development, which remains buoyed post-pandemic by lasting tenant demand.

2.      Limited distress

Despite challenging macro-economic conditions nationally and globally, there are very few outward signs of distress presently in the Westchester market. According to Trepp, there are approximately 20 buildings or building complexes on the CMBS watch list, however there are zero non-performing loans. The majority of the underperformance is limited to the office sector as other sectors continue to post strong returns. Balance sheet lenders have been more flexible and thus there have only been a handful of buildings that have gone back to the lender and are limited to small loans of under $15 million.

3.      Higher velocity in medical demand

Over the last three years, the Westchester office market has been undergoing a transformation and capturing strong medical demand. From March 2020 to March 2023, leasing velocity from the healthcare sector encompassed roughly 23% of total volume in Westchester County. This trails only financial services, which sits at 34%. According to JLL’s 2023 Healthcare Investor Survey and Trends Outlook, healthcare fundamentals remain strong with resilient occupancy and steady rent and NOI growth, only fueling the demand within Westchester County further. A select number of hospital systems have requirements greater than 25,000 SF while there is also significant demand among users seeking +/- 5,000 SF.

Conclusion – While transactional volume was down in Q1 2023, the Westchester County market has shown an enviable resilience over time, as well as the ability to adapt to, and benefit from, evolving trends on the demand side – from transit oriented multifamily developments to burgeoning medical demand.

The post Westchester market update appeared first on Real Estate Weekly.

Amid rising interest rates and downward pressure on real estate pricing, investors will have tremendous opportunities in the upcoming year. Some of these deals could include purchasing distressed loans and assets. This will be especially acute in the office sector, where the return to the workplace remains lackluster compared to pre-Covid levels.

Out of the $270 billion of bank commercial loan real estate maturing in 2023, about 30% (or $80 billion) are backed by office properties, according to Trepp data. Furthermore, the number of corporate defaults in 2023 through the end of February sat at the highest level since 2009, per Retail Dive. In some cases, this has caused the largest institutional owners such as Brookfield to act. It lost Macy’s in Water Tower Place, the first indoor mall built in Chicago, as a tenant in 2021. About a year later, it handed over the keys to the mall to its lender.
 
If you’re thinking about approaching a distressed real estate deal, there are several methods, but here, we’ll focus on buying non-performing loans, or loans that are in default. If 90 days pass with no payments, the note is said to be non-performing.
 
Buying distressed loans can sound like a great opportunity. However, it’s essential to follow the right path to ensure success and avoid pitfalls. At Avison Young, we have been involved in a variety of distressed sales ranging from loan sales to real estate owned (REO).

From our experience, I’ve found a few guidelines our clients have found successful to evaluate distressed loans:

1. Have the right team in place.
   In my book, The Insider’s Edge to Real Estate Investing, I discuss that having A-level players on your side is essential for success. This is especially true when buying a non- performing loan from a bank. You’ll want to work with a real estate attorney who has experience in this space. Team members with knowledge about bankruptcies will be
   useful in case the borrower files for bankruptcy.
2. Make sure the loan is “money good.”
   For a non-performing loan, you’ll want to establish the collateral value first. Then subtract the legal and closing costs to find its true value.
   During the process, you’ll need to estimate how long it will take to foreclose and resume possession. Then you can decide what type of return you are looking to make over this holding period to determine the Internal Rate of Return (IRR). Based on the risk profile and unknowns of this type of investments, most investors will look for a return in the “high teens” or more.
3. Understanding why a loan is in default.

Was there a monetary or technical default? A technical default refers to the failure to uphold an aspect of the loan terms outside of the payments. For instance, the borrower might not maintain the qualifying ratio they need, such as their total debt-to-income ratio. You’ll want to check if any issues related the loan payments and terms could be resolved.

4. Know where the loan is in the capital stack.
   Check what position you would maintain in the capital stack. This will help you evaluate the risks involved. Are you buying a secure senior first position? Is it a mezzanine debt? Are there other secured creditors who could have prioritized claims that would lessen your claim?
5. Check the foreclosure.
   Consult your attorney to understand next steps in the legal process. Has the lender started a foreclosure process? If so, what step are they on?
   You’ll also want to have a grasp of the foreclosure process in the state where you are buying. The arrangement can differ drastically in judicial and non-judicial states. For example, a foreclosure process in Texas might only take a matter of months, while New York could drag on for years to get to the collateral.
6. Determine the pay-off amount.
   Besides the original loan balance and interest due, there may be additional default interest applicable. Most loan documents will provide for the lender to recoup legal costs. That said, some courts will waive this in additional settlements.
7. Get intel on the borrower.
   You’ll need to understand the borrower of the loan. Are they looking to make an amicable resolution and move on? Are they litigious and stalling in hopes of receiving concessions?
   If there’s a personal guarantee on the loan, check the borrower’s net worth. A bank would have required a net worth statement when the loan was made. However, remember things can drastically change over time(!).
8. Understand the unforeseen liabilities.
   You likely won’t have perfect information on the property tied to the loan. You might not be able to see the exact state of the rents, arrears, and expenses. You’ll need to give yourself plenty of room in your offer to allow for these uncertainties.
9. Consider the alternatives.
   There may be other options besides a foreclosure and taking the property back. In somecircumstances, receiving a discounted payoff or allowing for a discounted payoff might make more sense.

Remember, loan transactions are complicated in nature, and these are but a few of the myriad evaluations to consider. These guidelines are simply a starting point to help you know what questions to ask and which indicators to find.

Buying a non-performing loan is not for the inexperienced investor. Most lenders will look for quick, all-cash non-contingent deals. As such, making sure you’re buying at the right basis is crucial. There will be incredible opportunities as banks look to unload bad loans off their balance sheet. Use your time now to prepare or partner with someone experienced in this space, and you’ll be ready to act when you find the right deal.

The post 9 Considerations for Distressed Investments appeared first on Real Estate Weekly.

The Manhattan Retail real estate market underwent a significant transformation in the first quarter of 2023, with owner/users making up nearly two thirds of buyers, a remarkable 150% increase from the same period last year. This shift was driven by a variety of factors, but overall has created an opportune time for owner occupants to capitalize on current market conditions.

The retail sector has emerged as a resilient asset class in the Manhattan commercial real estate market, despite its recent fluctuations. Avison Young’s latest quarterly report indicates that over the last four quarters the sector has shown an impressive surge in total dollar volume, with a 48% increase across 12 transactions, amounting to a total of $179 million. Additionally, the price per square foot has risen significantly, reaching $1,578 per square foot, which outpaces the trailing four-quarter average by 32%. The retail sector’s strength is largely attributed to the robust activity of owner/users in the market.

Decline in Buyer Competition:
Navigating the rapidly evolving retail landscape is a challenging task for traditional investors. In response to inflation, the Federal Reserve has raised interest rates at an
unprecedented pace, bringing the federal funds rate to 4.75% – 5%, more than double that of January 2022. As a result, deals have become less attractive to traditional investors and are prompting many to exit the market or remain on the sidelines. Additionally, the perceived distress on the horizon has contributed to a lack of urgency among traditional investors, who are waiting for more attractive pricing before focusing on purchase opportunities.

With the lack of traditional investors active in the market, owner/users are taking advantage of the opportunity to acquire retail assets in prime locations which were previously beyond their reach, even if it means paying a premium price.

Owner/Users Paying Premium for Highly Visible Storefronts in Desirable Locations

In the first quarter of 2023, the demand for prime retail spaces in major shopping corridors by owner/user buyers has set a new bar, with 30% of owner/users primarily purchasing in high-traffic, low vacancy areas like SoHo, which has seen a significant 50% increase compared to Q4 2022. The attractiveness of areas like SoHo stems from the diverse audience and branding opportunities it presents, as indicated by the Placer.ai foot traffic data, which shows that retail foot traffic in SoHo has returned to pre-pandemic levels as of March 2023.

Owners of vacant retail spaces in well-located areas, particularly in sought-after
locations such as SoHo and the Upper West Side, are in an advantageous position to sell
their properties at a premium to eager owner/users, as there is less competition in the
market from traditional investors. Typically, owner/users tend to purchase at a 10-15%
premium over traditional investors on account of having more flexibility in their
decision-making and are often motivated by more emotional factors such as location,
branding, and where their clientele is located.

Just last month, Avison Young’s Tri-State Investment Sales team achieved a new milestone by signing a retail condo with an owner/user in the West Village at a record-breaking price per square foot along Bleecker Street. This purchase follows Dyson Vacuum’s recent acquisition of 155 Mercer Street from Thor Equities and ABS Real Estate Investments for a staggering $60 million in Q1 2023. These transactions are representative of the increased demand for highly visible storefronts in desirable locations and the willingness of owner/users to pay a premium to secure them.

The trend of owner/user buyers is not just limited to the retail sector, but is also rapidly
growing in the office sector. This is evidenced by recent high-profile purchases such as
Hyundai Motor Group’s acquisition of 15 Laight St. in Tribeca for $275 million, which will
serve as their office and showroom, and New York University’s purchase of 400 Lafayette Street, for just under $100 million in their latest expansion around their Greenwich Village campus. These acquisitions are part of a larger trend of companies and occupiers expanding their base in NYC and owning their own real estate.

SBA 504 Loans: An Advantage for Owner/Users
Owner/users have a distinct advantage over traditional investors thanks to the availability of SBA 504 Loans. These loans are an attractive option for businesses due to their cost-effectiveness and have played a significant role in the rise of owner/users as dominant buyers in the market. SBA 504 Loans offer a multitude of benefits for those seeking to enter the commercial real estate industry.

SBA 504 Loans offer up to 90% financing, competitive fixed interest rates, and long-term
financing options that extend up to 25 years, enabling businesses to retain working
capital and reduce debt service which is especially crucial during unpredictable
economic times.

With owner/user’s ability to own an asset at only a 10% down payment, the asset itself
typically becomes self-liquidating, meaning that it pays for itself using the income
generated by the asset purchased with the loan. This not only allows the borrower to
benefit from the asset’s appreciation but also provides a sustainable and self-sufficient
investment opportunity.

In conclusion, there has been a clear shift in the Manhattan Retail real estate market in
favor of owner/users, who have emerged as the dominant buyers over the last 2 quarters. As the market inevitably strengthens, it will be fascinating to observe whether this trend becomes the prevailing norm, or if investors will shift to a more assertive approach in pursuing vacant spaces.

The post The Rise of Owner/Users in the Manhattan Retail Real Estate Market appeared first on Real Estate Weekly.

Scott Singer, Principal and Co-Lead of Tri-State Debt & Equity Finance
And James Nelson, Principal and Head of Tri-State Investment Sales

Over the last few weeks, the news of SVB and Signature Bank being taken over by the Fed, and continued speculation and concern about First Republic have dominated headlines and discussions throughout the financial and real estate sectors.  The Fed’s action stemmed the type of quick financial panic that occurred frequently and repeatedly prior to its existence, but many questions remain. Of particular relevance for NYC property owners is how big a void has been created in the marketplace for NYC real estate debt.

So far, the situation in commercial real estate lending mirrors the anecdotal saying about the difference between a recession vs a depression: it depends on the particulars of your situation. Though there have been pullbacks by many lenders, there are also large flows of new funds into that void, and as of early April 2023 Avison Young can report and are demonstrating that there is liquidity for every type of New York City real estate transaction across all deal sizes, property types, and locations. For example, in February-March 2023 Avison Young’s New York City office has closed loans, received formal committee approvals, and received new term sheets on existing office, parking, retail, and multifamily buildings, as well as for acquisition, predevelopment, and construction of luxury condos – as well as closing the sale of multifamily properties and development sites in Manhattan, Queens and Brooklyn.

Are we suggesting the current concerns are overblown and the situation is easy? Absolutely not. Can every property receive the financing it wants? Certainly no. There has been a meaningful pullback by many lenders, creating difficult challenges for many borrowers. Community banks continue to see deposit outflows with some depositors continuing to transfer funds to larger banks despite the newly strengthened (implicit or explicit) FDIC guarantees, CMBS volatility is the highest in recent years, and even the largest banks are feeling stress from regulatory and other constraints resulting from inflation and other challenges.

What is the result, and what can borrower/owners do?

Although The Fed has signaled that the FDIC will likely step up to backstop any bank that faces a run that could set off a true financial panic, there are future implications for CRE lending. Rapid increases in interest rates put pressure on loan sizing because of Debt Service Coverage Ratios constraints, and a big question for the sales market is what effect smaller loan sizing will have on purchaser’s valuations – with many forecasting cap rate expansions. In fact, the ability to execute new financings is in many cases reliant upon a borrowers’ willingness (or ability) to pay down their existing loans, or to provide recourse
to secure refinancings at existing balances – two outcomes rarely seen since the Great Financial Crisis. 

What can borrowers or owners do? The good news is that despite the many headlines claiming a “liquidity crisis” for commercial real estate, there is still substantial liquidity in the market. Even if the community banks continue to step back, numerous other sources including regional and national banks, insurance companies, investment funds and (depending on the week) the CMBS market are there to fill the void.

The cost of borrowing is up, and the sizing of loans is down – two facts which hurt all borrowers. The difference between whether this environment looks like a recession, or a depression, often plays out in the question of whether a borrower and their brokerage concentrated their activities on only a few local banks that are now pulling back or maintained a broad set of relationships which can now be called on for the creativity to solve current challenges. It is important to remember that although Signature Bank
and New York Community Bank were major players, a wide mix of other lenders with both household and lesser-recognized names provide enormous amounts of the total available capital for NYC real estate loans.

The key in this environment – for both financing and sales transactions – is to cast a wide net. Those borrowers who had only a short list of “go-to” relationship lenders could benefit greatly by expanding their horizons by working with an intermediary that has strong relationships with both traditional and non-traditional capital sources, and especially a firm that has both financing and investment sales capabilities.

Avison Young’s Tri-State Debt & Equity Finance Team is currently in the New York City market with over $2 billion of mandates and, as noted above, through creative solutions and a wide breadth of capital relationships, has generated multiple offers on each assignment from a variety of different capital sources. For owners who would prefer to explore the sales market, Avison Young’s Tri-State Investment Sales Team has a wide group of active buyers including some who are differentiating themselves by buying properties all-cash, isolating themselves from the challenges facing leveraged owners/buyers.

This was certainly the case for a corner Broadway property that Avison Young sold in SoHo to an all-cash Swiss buyer. 1031 buyers have also been a great resource who can come in heavy with equity. The simple reality when selling, now more than ever, is to go broad as the first few calls to “logical” buyers, may not yield the proceeds needed to make a sale.

The post Do bank failures equal a commercial real estate liquidity crisis? appeared first on Real Estate Weekly.

Owning and operating properties in New York City presents its own set of unique challenges, especially for owners who live out of state. With a dynamic set of rules, regulations, and market conditions, it’s a challenge for even the most active or largest owners to keep up. To help navigate our complex market, I’ve listed Six Market Factors that out-of-state building property owners should know:

1. Premium Pricing is Still Available Despite Rising Rates and Lower Sales Velocity

It’s no secret that the drastic rise in interest rates over the past year has created a noticeable slowdown in the sales market. Avison Young’s Q4 2022 Manhattan Sales Report shows there were three consecutive quarters of lower sales velocity and activity in Q4 2022 was at a 12% discount from the trailing four-quarter average. Average cap rates for multifamily/mixed-use transactions were up 0.46% and price per square foot is down 11% from the trailing four-quarter average. We often see that when pricing is negatively impacted, transaction velocity follows suit.

That said, we are still finding that there is significant demand for free-market, well-located buildings, especially if there is a value-add component. For example, in the past two weeks, Avison Young has put eight buildings into contract, six of which were 100% free market properties. With a larger, yet more diverse, buyer pool, the team achieved above-market pricing for the free-market buildings due to spirited bidding wars amongst the prospective buyers. The buyer profiles include: one institutional group, two 1031-exchange buyers, two foreign high net-worth individuals, and two first-time NYC buyers.

2. More Stringent Rent Laws are Coming

The Housing Stability and Tenant Protections Act of 2019 (HSTPA) had a drastic impact on the NYC multifamily market. It significantly impacted the values of rent-regulated properties and created an additional set of laws multifamily owners must follow. By removing the ability to meaningfully increase rents with IAI/MCI programs and the elimination of the luxury decontrol threshold, HSTPA left owners with two primary methods to improve the values of their rent- stabilized properties:

· Creation of New Units – By creating a new unit (either through the combination of multiple apartments into one or by separating one larger unit into multiple), owners were legally allowed to establish and charge a first rent. Although the unit would still be rent-stabilized, an owner could charge a new first rent at market. As a result, owners throughout NYC have been combining two (or more) adjacent apartments with low legal rents into a single unit with a new, much higher rent.

· Substantial Rehabilitation – A “substantial rehabilitation” is a process by which an owner can take the entire building out of rent regulation and into fair market status by renovating 75% of the building systems (listed by the Division of Housing and Community Renewal [DHCR]). To qualify, a building must be in a “seriously deteriorated condition” and in need of the renovation. Today, if a building is at least 80% vacant, it is presumed that the building would be eligible to undergo a sub-rehab.

However, both strategies are targeted under newly proposed legislation. The new legislation aims to remove the incentive for creating new units by limiting the new legal rent to a percentage increase or decrease based upon the change in square footage and the current legal regulated rent for the combined (or separated) apartment. For substantial rehabilitations, the proposed bill aims to remove the presumption that a property qualifies for a substantial rehabilitation solely on the basis that the property is 80% vacant. Instead, the bill proposes that a landlord will ultimately need to get approval from the DHCR to justify utilizing the strategy.

3. Good Cause Eviction is Still Being Considered

Good Cause Eviction (GCE) is a proposed policy aimed at protecting tenants from arbitrary evictions by landlords in free-market apartments. If implemented, it would require landlords to provide a “good cause” for not renewing a tenant’s lease, such as failure to pay rent or violation of lease terms. More importantly, the proposal is designed to establish a maximum threshold that landlords can increase rents upon a renewal. By virtually forcing owners to renew leases, and dictating how much they can charge, GCE, if passed, would effectively end up regulating the remaining free-market rental housing stock throughout NYC.

4. Rents in NYC are Still Going Up

Demand for rental housing in New York City heavily outweighs supply. While rents are cooling across the country, NYC’s rental market has not shown any signs of weakness. Miller Samuel reported that January’s median rent reached $4,097/month, a record number for the month of January and 14% higher than pre-pandemic levels.

Recently, New York City Mayor Eric Adams, announced his plan to create 500,000 new units of housing must be created within the next decade in order to address affordability concerns throughout NYC. To put this ambitious number into perspective, NYC added only ~200,000 units of housing over the previous decade, and that was before the 421a program expired, which according to the Real Estate Board of New York (REBNY), was responsible for nearly 70% of NYC’s housing production since its inception.

Until there is a new incentive program for developers to build rental housing, landowners will choose to either build condominium projects or not do anything at all. Yet, lawmakers today are still more focused on creating new regulations for the existing housing stock rather than the creating new supply. Therefore, demand will continue to outpace supply and rents will continue to rise.

5. Environmental Regulations May Require Major Building Upgrades

To reduce carbon emissions, NYC is laws Local Law 97 that will force building owners to upgrade their properties to make them more energy efficient. The scope of required upgrades will vary, depending on building size and class. However, owners would be wise to invest in new, more eco-friendly building systems such as insulations, HVAC upgrades, solar panels, boilers (or removal thereof), etc. While these costs may be at a major expense to the owners, not complying may be an even greater one as most of the new policies will begin to fine owners of properties not in compliance with new regulation.

6. Strategies to Improve Existing Cash-Flow & Property Value from Afar Even if you live out-of-state, or if you are just not a hands-on property owner, there are still multiple ways to improve your property’s net cash-flow, and value, from afar. Finally, here are some ideas to consider:

· Antennas – Some telecom companies are willing to pay for the ability to use your roof for their satellite antennas. In return for providing an easement to your property, these companies are willing to offer a lump sum payment that may be worth over $1M.

· Tax Certiorari – Lowering your property taxes will have a direct, positive impact on your property’s value. An easy first step is consulting with a Tax Certiorari Attorney to see if a building has a case for getting its taxes reduced.

· Cost Segregation Analysis – Through a cost-segregation analysis, you may be able to earn accelerated depreciation deductions for components of your building, adding a significant boost of depreciation benefits owning real estate can provide.

The post Six NYC Market Factors to consider for Out-of-Town Owners appeared first on Real Estate Weekly.

1. Reimagine New York’s Business Districts as Vibrant 24/7 Destinations
2. Make it Easier for New Yorkers to Get to Work
3. Generate Inclusive, Future-Focused Growth
   

This roadmap for the City’s future addresses a variety of concerns, ranging from the need for more flexible zoning in business districts, the ever-looming housing crisis, the affordability of childcare, and overall city safety and cleanliness. While this is undoubtably a pivot in the right direction, the real challenge lies in bringing these aspirations to life.

In the three years since the pandemic began, New York City has largely reopened and continues to recover to near pre-COVID levels. According to Avison Young’s data, office visitor volume in Manhattan continues towards stronger in-person visitation, reaching just over half of 2019 levels and surpassing Q3 2022 (51%).

In some submarkets such as Midtown Core, Chelsea, and Times Square, the numbers are even more positive at 67.4%, 68.2%, and 69%, respectively. However, through this process, the rigidness of the existing zoning governance has been underscored.

Many Class B/C offices sit partially or entirely vacant and current zoning laws make it challenging to convert to a residential use, particularly in and around Midtown Manhattan. The code states that any office in a zoning district that allows residential use can convert if it complies with bulk regulations.

Given the architectural differences between office and residential buildings, this is often physically and/or financially infeasible. There are, however, a set of more flexible standards (light, air, yards) for conversion that a building may use if it meets certain criteria:

1. Located in a district that allows residential use Located south of 59th Street, parts of inner Brooklyn and Queens, Downtown Jamaica, St.
2. George or Coney Island special districts or in a special mixed-use district Building built before 1961, before January 1977 in Financial District (FiDi), Jamaica,
3. Coney Island or St. George or before January 1997 in special MX districts.

The 1961 cutoff has severely hampered office to residential conversions in Midtown which is why the majority of office-to-residential conversions have occurred in lower Manhattan where the cutoff of 1977 is more lenient.

One of the initiatives brought forth in the Plan proposes extending this threshold to December 1990, a change that would unlock approximately 120 million-square-feet (sf) of potential office space conversions in Manhattan. There is also discussion around re-evaluating high-density Midtown zones that do not allow new residential use such as areas between West 23rd Street and West 41st Street that are currently zoned as manufacturing districts.

While these proposals are great in theory, some form of tax relief should be introduced in order to make conversion projects pencil. High construction costs, coupled with the increased tax rate associated with residential and the inability to pass-through real estate taxes to tenants, puts a great deal of burden on a landlord, not to mention the fact that there will likely not be affordable requirements attached to any zoning changes. Additionally, the New York City Council and Planning Departments are severely understaffed, impacting the timeline for any zoning text updated. Environmental reviews are also required to make amendments, and these processes are also long and costly.

Another initiative of particular interest for those in the commercial real estate industry is around reducing the barriers of housing growth to address the current housing crisis faced by the City. A recent Commercial Observer article states: “as the population is expected to hit 9 million by 2030, something that has not escaped the attention of city officials since a similar New York University study came out in 2016. AKRF, an environmental, planning and engineering consulting firm, and REBNY released their own study this week, however, that highlights the progress — or lack thereof — the city has made in meeting this need. Projects currently in the pipeline only meet about 14 percent of this demand.”

To remedy this, the Plan establishes a “moonshot” goal of adding 500,000 units to the supply over the next decade. This would require regulatory and legislative changes as the New York State Multiple Dwelling Law currently establishes a state-level FAR cap of 12.00x. If this cap were removed, city officials would be able to cherry-pick areas in which an increase in density would result in buildings that seamlessly fit in with the neighborhood fabric.

In Midtown, for example, many commercial developments far exceed 12.00x FAR, so larger housing projects would integrate quite nicely. Lifting the FAR cap would also target office conversions in under-utilized buildings, especially ones where larger floorplates without access to windows limits conversion potential.

In many cases, these buildings are “overbuilt” for residential floor area, so developers are limited in terms of what they can do because if they were to entirely tear the buildings down, the residential projects replacing them would be much smaller. On the other hand, trying to force a square peg into a round hole and retrofitting an office building to meet residential use requirements can be extremely costly and complicated (cutting out interior light-wells, etc.).

If the New York City and State can come together to lift this cap and amend the Multiple Dwelling Law for the betterment of the city, it would undoubtably result in an influx of new construction and conversion projects.

However, New York City is facing an affordability crisis, and any changes to the zoning or legislature pertaining to housing creation/conversions is destined to include affordable requirements. With the 421a- program now expired, new tax benefits to facilitate multifamily development must be introduced.

In the 1decade leading up to 2020, 90% of rental units built in the City relied on some form of tax relief, and the 421-a program was used in 68% of multifamily units constructed between 2010-2020. These statistics demonstrate the power of this essential resource and its impact on the development pipeline.

Governor Hochul’s initial replacement program proposal, 485-w, didn’t make it through the last budget. This program would have required deeper affordability tranches than the 421a, making it unlikely for any projects in Manhattan or prime neighborhoods in the boroughs to pencil, and even so, the plan failed to gain support and was rejected when it was brought to a vote. Clearly, it remains to be seen if the ultra-left-leaning anti-real estate force in the New York government will be able to pass any meaningful tax program.

As the conclusion of the “New” New York Plan clearly states, the successful implementation of all or parts of this plan will require “an effective and motivated government with appropriate and clear accountability and organizational structures in place.” There is an opportunity for real change to occur, but it cannot happen without a long-term partnership between City and State and a true alignment of goals. If government officials can set aside their political differences to focus on making New York the best place to live and work, there is an exciting future ahead and the positive impact on commercial real estate could be huge.

The post The “New” New York Proposal and What It Could Mean for Commercial Real Estate appeared first on Real Estate Weekly.

Proptech in real estate has experienced a surge over the past decade – the use of information technology has improved the ability of individuals and companies to research, buy, sell, and manage real estate across all asset classes. Within the retail sector, proptech has streamlined multiple processes for brokers, landlords, and tenants, improving businesses’ capacity to identify optimal retail spaces for their operations.

With a decade of innovation in the industry, real estate proptech has seen an immense amount of development, supported by funding from venture capital firms across the globe. In this article, we will dive into the growth of the proptech industry, identify how retail proptech has improved the sector, and highlight how proptech will adapt moving forward with changing consumer demands.

Innovation in the Industry

Funding for proptech has remained relatively high since its inception. A report released by the Center for Real Estate Technology and Innovation (CRETI) announced that venture capital-backed proptech companies raised $19.8 billion in 2022. While numerous companies have leveraged private interest, some have made headway in the industry, transforming operations and interactions for real estate professionals across the board.

Funding Billions: Opendoor and Compass

Two companies have made headlines for their massive funding efforts in recent years. Opendoor, an online company that buys and sells residential real estate, and Compass, a company that supports the entire buying and selling workflow, have both surpassed the billion-dollar benchmark in funding.

Launched in 2014, Opendoor has developed a program that can predict the price of a house by using technology to analyze the various factors that contribute to valuing a home. When a seller is interested, Opendoor values a home and creates a cash offer for the homeowner. Once a seller accepts the offer, Opendoor then purchases the home, completes renovations as needed, and resells the home.

Opendoor has raised nearly $2 billion since its inception. Starting off strong, the platform raised $9.95 million in 2014, $400 million in 2018, and $300 million in 2019, and has continued to obtain private funding to support its growth.

Trailing not far behind in funding is Compass, an advisory company that has funded $1.5 billion since 2012. Developed for tenants and realtors, Compass is a real estate technology company that provides an online platform for buying, renting, and selling real estate assets. Compass technology includes a marketing center designed to streamline functions for Compass agents, providing tenants with an improved experience.

Initial momentum in proptech has been in the residential sector, which most experts attribute to the sheer velocity this asset has seen compared to others. Commercial platforms, however, are emerging and altering the environment of commercial real estate.

Making Headway with Millions: Placer.ai and Reonomy

Placer.ai, an analytics platform founded in 2016, uses foot traffic data to generate insights into properties. Since its inception, the company has funded $192.5 million. Placer.ai is connected to roughly 30 million devices in the United States, tracking customers’ movement. The company uses machine learning to develop analytics based on the data that can help businesses understand a specific location. The technology is primarily used by tenants, brokers, and landlords.

Close behind in funding, Reonomy is one of the most utilized commercial real estate platforms today. Founded in 2013, it has gone through multiple rounds of funding, raising a total of $128.4 million thus far. Reonomy relies on big data, partnerships, and machine learning to leverage predictive algorithms, ultimately providing unparalleled access to property intelligence. Its system enables individuals, teams, and companies to unlock insights and discover new opportunities in the market.

Changing the Retail Industry

Dozens of other proptech companies are influencing the real estate world – many finding great momentum in their funding rounds. 

● House Canary, designed for buyers, sellers, investors, and mortgage lenders, has raised $129 million; it uses predictive algorithms to forecast future store performance. More specifically, it uses historical data and geospatial databases to identify the top market to enter. 
● Localize, designed for buyers, has funded $56 million; it uses artificial intelligence (AI) consulting to find ideal locations for buyers by matching individual preferences. 
● Redfin, designed for tenants and landlords, has funded $319.6 million. It uses AI consulting to estimate home values.

As managing partner and active broker at Verada Retail, I constantly rely on proptech throughout my business process. Furthermore, I encourage our team to leverage the innovative technology to ensure we stay competitive in the New York City market. On a daily basis, we rely on various platforms, including Placer.ai and Reonomy. Furthermore, we rely on Esri’s ArcGis, a platform designed to help broker’s research markets, identify new opportunities for growth and expansion, and manage their investments at the market and neighborhood levels.

We also rely on proptech for our marketing, content, and social media needs. One of the most transformative platforms we use includes Matterport. With this technology, we are able to create virtual walkthroughs of every property we list, allowing prospective investors and tenants to view the space from the comfort of their home or office.

However, among every proptech company that has been introduced in the past decade, one similarity exists: the convergence of technology has improved the retail real estate process.

Improved Client Services

Simple functions have allowed brokers, agents, and landlords to improve communication, while more complex systems have offered enhanced data analytics. Pulling these resources together, brokers and agents can now improve their services to clients, using data such as foot traffic to help businesses identify the optimal site for their newest location – whether it be their first store or an expansion.

Maximized Efficiency

From leasing to sales, the integration of AI and predictive algorithms has streamlined the real estate transaction process. Real estate professionals can spend their time assessing data and brainstorming with clients and their team, rather than collecting data. As a result, brokers in commercial real estate can provide clients a more personalized experience and increase their efficiencies throughout the day.

Business Integration and Scalability

Beyond proptech for real estate, systems are being introduced to service businesses directly. For example, Oracle Retail offers a suite of cloud-based retail management solutions, designed for users looking to adopt cloud solutions, including scalability, reliability, and security. Furthermore, Oracle Retail Customer Engagement (ORCE) provides a complete set of tools to help retailers engage with their customers across all channels, while Oracle Retail Supply Chain Management (SCM) helps retailers optimize their supply chains and improve operational efficiencies and customer service. Using proprietary technology, Oracle is changing the way businesses grow, providing a simplified process to
scale their operations.

Brendan Tharapp, managing partner at Verada Retail, further explains that technology has transformed the firm’s ability to service its clients. Mallon elaborates, “We use proptech throughout every step of the leasing and sales process. From using foot traffic and analytics to identify possible tenant sites, to leveraging real-time listing services to market our listings, proptech has changed the way we do business.”

The Future of Retail Proptech

A recent report from the Center for Real Estate Technology and Innovation (CRETI) outlines the hardships that proptech may face in the future. From 2021 to 2022, proptech funding declined 38 percent. However, the future of proptech funding is simply shifting, and experts in the industry have outlined how 2023 funding and innovative proptech solutions will adapt to meet changing economic conditions.

Noting the shift away from the pandemic, Paige Pitcher, head of strategic partnership at Moderne Ventures, shares, “The pandemic accelerated adoption of real estate tech, and now wage inflation and shortages are further emphasizing the need to digitize to lower operating costs and unlock new revenue opportunities.”

The rise in technological adoption across all industries, including retail real estate, has been a true phenomenon, expediting the integration of proptech into daily processes. As we move forward, proptech has become part of the foundation, and new ideas are anticipated to expand available services.

Jeanne Casey, global head of proptech and innovation at Nuveen, comments, “We are at an exciting inflection point for tech adoption, and I’m looking forward to seeing the proptech industry continue to mature in 2023. Although the choppy macro environment will create challenges for startups, real estate incumbents are much more open to working with new proptech companies than they were a few years ago. The startups with the strongest value propositions, focus, and discipline will emerge stronger than before. I’m excited to be a part of this next phase of the maturation of our industry.”

According to some experts, those that succeed moving forward will be those that adapt to changing consumer trends. Platforms have been developed as a base, but changes must be made to ensure that values are being considered in technological adoptions of the future.

Ashkán Zandieh, founder and co-chair at CRETI, concludes, “… It’s not all gloom and doom. An area that continues to gain tremendous interest is climate-related real estate technology. Across all sectors of the real estate industry, owner-operators, owner-developers, occupiers, and managers are exploring Climate Tech as companies address climate change, develop differentiated energy sources, and differentiate their assets.”

It’s an exciting time in the world of business – a time when real estate and technology collide, and a future established on effective systems and improved client relations is at the forefront of design. Growth is inevitable, and only time will tell how proptech will adapt to the ever changing environment in modern society.

The post The Importance and Surge of Retail Proptech appeared first on Real Estate Weekly.

With 4Q2022 New York City sales dropping 31% by dollar volume and 26% by number compared to the previous quarter, there is no doubt that a slowdown in transactions is due to rising interest rates. Furthermore, with the Fed signaling that rates might continue to rise in 2023, many buyers may continue to stay on the sidelines perpetuating this trend. With this in mind, it will be a less competitive environment, creating opportunities for buyers. 
 
Here are some investment themes that look promising for the New Year:
 

1. Rescue capital/recaps –  as lenders become more conservative and DSCRs push LTVs down, there will be a need for rescue capital. Many borrowers, especially syndicators who don’t want to go back to their investors, will not do a cash-in refi. A well-capitalized investor can approach these borrowers with pref equity. Borrowers who have little or no equity left in a deal may be happy just to get a “hope note” as opposed to getting entirely wiped out.
2. Seller financing – as Scott Singer and I wrote in a recent article (see: https://rew-
   online.com/the-return-of-seller-financing/), there will be opportunities to bridge the bid-ask spread with seller financing. This will be a creative way to get deals done creating a real win- win. 
3. Tenant-in-hand – I like this approach, especially for retail. Vacant retail spaces are still trading at a big discount. Having a tenant in-hand can not only help with the financing but boost the valuation of the asset day one. See the article I wrote on the opportunity in general for retail: https://rew-online.com/the-pendulum-will-swing-back-for-nyc-retail/.
4. Live-work office conversions – this topic has been written about ad nauseum, but very
   little media coverage about live-work. The challenge is a lot of the obsolete office space has deep floor plates. My solution is to convert to live-work with office space on the interior and residential on the perimeter (assuming the right zoning and light and air). I like this as a condo conversion as opposed to a rental where the real estate taxes might make the numbers difficult to work. If Manhattan class B/C buildings are trading in the $300-400/SF, I believe that the space could be sold in the $700-800/SF with little work depending on the location. See the article that I wrote on office conversions with the various considerations: https://rew-online.com/could-office-conversions-solve-nycs-housing-crisis/.
5. Free market multifamily – having dodged the Good Cause Eviction bullet, it looks like market rate housing will survive in New York City, incentivizing landlords to continue updating that housing stock. With the regulated units frozen and without a 421a, existing free market units will only become more valuable. Going-in cap rates in Manhattan now average 5%, providing a good going in yield.
6. Transit-oriented developments – Look for development and investments in close proximity to new transit infrastructure.  An example of this will be four new train stations at Hunts Point, Parkchester/Van Nest, Morris Park, and Co-Op City estimated to arrive in 2027. The stations are part of the MTA’s Penn Station Access project, which will connect the East Bronx directly to Manhattan Penn Station. See: https://www.nyc.gov/site/planning/plans/bronx-metro-north/bronx-metro-north.page#:~:text=The%20regional%20rail%20service%20is,directly%20to%20Manhattan%20Penn%20Station. I also believe the Grand Central area and Long Island will get a big boost from: https://new.mta.info/grandcentralmadison. 
7. Buying the upzone – Our mayor has been very vocal about “Getting Stuff Built” with his moonshot plan of 500,000 units. See: https://www.nyc.gov/office-of-the-mayor/news/893-22/mayor-adams-get-stuff-built-bold-three-pronged-strategy-tackle-affordable-housing#/0. More details will be needed to consider, but if rezonings and the development process are expedited and accompanied with a new 421a program, there will be great new demand for new residential.  REBNY believes the following: https://www.crainsnewyork.com/real-estate/new-york-needs-560k-additional-housing-units-2030-rebny-report-says. 
8. Covered land plays – While you are waiting for an upzone or entitlements, find good cash-flowing “tax payers” with reliable income. If you can buy on the existing cash flow and the air rights are essentially free, it is a great long-term investment strategy. 
    
   

You’ll notice that I haven’t included industrial investment above. I have no doubt there will still be demand but we need to see where some cap rates will end up before I would advise speculating on it. In a similar fashion, I love the idea of developing condos, but we need to see where end user pricing will end up after the interest rate hike. That being said, I still believe there will be a great supply demand imbalance for the future, with very few new projects underway. 

I would love your feedback on investment ideas that you like for the new year. Feel free to email at James.nelson@avisonyoung.com so we can connect on it.

The post 8 Investment Ideas for the New Year appeared first on Real Estate Weekly.