By: James Nelson
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:
- 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.
- 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.
- 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/.
- 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/.
- 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.
- 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.
- 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.
- 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.firstname.lastname@example.org so we can connect on it.