The Real Deal New York

The Lower East Side goes upscale

Big developments target millenials, Asian buyers and value seekers

February 01, 2016
By Adam Warner

From left: Isaac Henderson, Deborah Gutoff and Josh Caspi

From left: Isaac Henderson, Deborah Gutoff and Josh Caspi

The Lower East Side, a neighborhood long associated with counterculture, after-hours bars and rusty tenements, is getting a glossy makeover. “The most surprising aspect of the Lower East Side’s transformation is simply how fast it’s changing,” said Joshua Caspi, the owner of Caspi Development. The change has been ushered in by high demand for new housing stock, both affordable and market-rate, as well as major developments like the $1.1 billion mixed-use Essex Crossing project and Extell’s One Manhattan Square, a luxury condo plan that has a projected sell-out of $2.1 billion and is being exclusively marketed to overseas Asian buyers. It helps that the neighborhood is attractive to millenials eyeing art galleries, hip restaurants, nightlife and other cultural amenities. “It’s probably the most ‘affordable’ cool neighborhood in the city,” said Deborah Gutoff, a senior director at Eastern Consolidated. “Brooklyn has gotten so expensive that the Lower East Side looks good by comparison, and it is that much closer to the city’s employment centers.” Rents in the neighborhood managed to stay low for years as those in nearby neighborhoods like Soho and Nolita skyrocketed. But that’s changing fast as demand far exceeds supply. As renowned songwriter, and neighborhood native, Irving Berlin said: “Everybody ought to have a Lower East Side in their life.” For more on the changing face of the neighborhood, we turn to the experts.

Isaac Henderson
Senior Project Manager L+M Development Partners

Your Essex Crossing project, which consists of nine sites and three phases, is the biggest and most talked about redevelopment in the LES. How much investment is actually pouring into the area right now and how does that activity compare to three-to-five years ago?

The amount of new development in the Lower East Side is very exciting and we are glad to be a part of it. Our particular corner of the neighborhood has so much potential for new renters and homeowners. There’s really a high demand for new housing stock, both affordable and market-rate.

The new development pipeline in the LES is pushing residential condo prices there past the $2,000-a-square-foot marker. How much are condo prices up by in the last few years and how does that compare to other neighborhoods? Also, do you think there’s room for more growth?

Condo prices are up significantly throughout all neighborhoods in New York City. Because there was little to no new development in this corner of the LES prior to the new development coming on line, the new projects are higher priced than the few projects completed at the end of the last boom. The LES, however, is still priced significantly lower than nearby downtown neighborhoods like the East Village, Tribeca and the West Village. And given the neighborhood’s continued improvement and competitive pricing, there is still room for more growth.

How much are prices up or down by on the rental side? And what are we seeing in terms of rental development in the neighborhood?

Essex Crossing will include almost 900 new rental units [and 100 condo units] so we are adding quite a bit of new rental housing stock. Additionally, the rental stock is increasing through the renovation of older buildings. However, land prices have significantly increased in recent years, so besides our development, the amount of new rental stock will be limited as long as the condo market stays strong.

What’s going on with retail rents on the LES? How much are they up or down by in the last year or two?

Similar to the rest of Manhattan, retail rents in the LES are strong and continue to grow. The extreme escalation of rents in neighborhoods like West Chelsea and the Financial District have priced out many users, and that demand is now shifting to neighborhoods like the LES. A great example of this is the burgeoning art gallery scene on the LES as those users move out of West Chelsea. In that sense, the LES is an excellent value.

Aside from Essex Crossing and Extell’s tower, what projects do you consider game-changers in the neighborhood? And what new benchmarks are they setting for the LES market?

Certainly those two projects are significantly larger than any other new developments so I tend to watch many of the smaller LES condos coming on line that will bring additional residents and amenities to the neighborhood. Examples include 50 Clinton, 100 Norfolk and the Ludlow developments.

What do you think about Extell’s decision to market exclusively to Asian buyers? Do you expect other condo developers to follow that strategy?   

Each development is different and the strategy depends on market conditions, locations and type of building. We are not planning to market exclusively to any group as we think there are a lot of buyers from all over.

What do you see as the biggest challenges to development and investment on the Lower East Side? Do you think the market is too saturated with product right now?

The LES is a tremendous neighborhood that so many people want to live and work in, and visit. There is, however, little to no new land so purchasing new projects is competitive, and land prices are at an all-time high. The streets are also narrow so construction can often be a challenge. Prior to our development there was little to no new construction in the LES, so demand is very strong and we believe it will continue to be well into 2016 and beyond. We don’t feel there is an oversupply.

David Schneiderman
Co-Founder, Four Winds Real Estate

How much is buying/renting activity up or down by on the LES now compared to the last few years? Is there a serious influx of buyers/renters or has activity started to recede?

Rental activity on the LES continues to increase and we expect this trend to continue as Essex Crossing blossoms over the next few years. Tenants are attracted to the unmatched cultural amenities — bars/restaurants and art galleries — that the neighborhood has to offer.

What projects do you consider game- changers in the neighborhood? And what new benchmarks are they setting for the LES market?

Before Essex Crossing and Extell’s South Street tower, the original game-changer for the LES was the Ludlow Hotel. The developers of the hotel have always been leading indicators for neighborhoods that were primed to transform. Prior to the Ludlow Hotel, they created the Bowery Hotel, Mercer Hotel and Marlton Hotel. They also wisely filled the valuable retail space with [the bistro] Dirty French from Major Food Group. This has attracted the fashion crowd to the neighborhood en masse.

The LES has long been one of the city’s most diverse neighborhoods. You have young hipsters, Chinese, Hispanics and a close-knit community of Orthodox Jews. How do you see the demographic changing over the next 10 years?

We are already seeing the demographics change in the neighborhood in our portfolio of rental buildings. In April, we bought a three-building portfolio for $49 million on the corner of Ridge and Rivington streets in partnership with Admiral Capital Group and USA Real Estate Company. Since closing we have seen higher-income tenants moving into the neighborhood. Over the next ten years the neighborhood will evolve much like Chelsea has over the past 10 years and we will see more families and an older demographic.

What do you see as the biggest challenges to development and investment on the Lower East Side? Do you think the market is too saturated with product right now?

The biggest challenge is finding development sites and investment properties at prices that make economic sense. Additionally, there are very few larger development sites available at any price on the LES. The market is far from saturated. There is a very limited supply of condominiums and new rental housing in the pipeline. The demand currently far exceeds the supply. With this said, it will be interesting to see if the current condominium prices of approximately $2,000-$2,500 a square foot hold when the inevitable slowdown occurs.

Deborah Gutoff
Senior Director, Eastern Consolidated

How much are prices up or down by on the rental side? And what are we seeing in terms of rental development in the neighborhood?

We’re seeing monthly residential rents range from $2,100 for a studio to $7,000 for a two-bedroom, with the average price per square foot rising to as high as $80 for renovated, amenitized product. Our analysis of four multi-family buildings that sold in the last six months shows that these properties will be maintained as rentals in the near term, and in at least one case, repositioned as a luxury rental with high-end retail.   

How much is buying/renting activity up or down by on the LES now compared to the last few years? Is there a serious influx of buyers/renters or has activity started to recede?

The influx of millennials is driving up rents because many apartments are shared, with young people paying between $1,500 and $2,000 per month in rent for a bedroom. While this 25- to 35-year-old demographic is willing and able to pay high rents, we’re not seeing many of them enter the condo market because they enjoy the flexibility of renting or can’t afford to buy yet.

What’s going on with retail rates on the LES? How much are they up or down by in the last year or two?

The increased foot traffic that Essex Crossing’s 1,000 new apartments, office and retail is expected to bring is already being factored into the area’s retail rents, which are now well over $100 per square foot, a threshold rarely seen before on the Lower East Side.

What kind of development or investment opportunities are you looking for in the LES? Any deals you can share with us right now?

We’re currently marketing a 11,825- square-foot mixed-use apartment building for redevelopment at 125 Rivington Street, one block from Essex Crossing, for $11.4 million. The investor/user interest in this property has been particularly strong. 

Daniel Hollander
Managing Principal, DHA Capital

How much have land/development prices in the LES risen over the last few years and how does that compare to the rest of Manhattan?

On a percentage basis, probably more, from around $400 per square foot to $700 per square foot.

How much are condo prices up by in the last few years and how does that compare to other neighborhoods? Also, do you think there’s room for more growth?

Prices jumped quickly on a per-square-foot basis from around $1,300 to, in some cases, more than $2,000. That is a function both of appreciation in values and developers bringing right-sized units into the market.

What do you think about Extell’s decision to market exclusively to Asian buyers? Do you expect other condo developers to follow that strategy?

That is such a large project that I think they would like to say that they are 30 percent sold at their domestic opening announcement. I doubt smaller projects would do that.

How do you see the demographic changing over the next 10 years?

I think it will continue to be a diverse area.  The co-ops and rent-stabilized housing assure that there will continue to be many long-term residents in the area along with newcomers.  I think that’s one of the reasons that buyers like this area — it doesn’t feel homogenized.

What do you see as the biggest challenges to development and investment on the Lower East Side? Do you think the market is too saturated with product right now?

There are a lot of units on the drawing board. It could lead to a slowdown in sales eventually but not in the immediate term.

In terms of condos, what is the composition of buyers? Are you seeing more families? What other neighborhoods are they weighing the LES against?

We are selling smaller units, so most are younger people without children yet. I think that will continue to be the buyer profile for a while, but eventually I think families will adopt the area as well.

Are investors and developers eyeing rental-to-condo conversions in the LES? Or are those seen as risky or challenging?

The better business plan for these buildings is usually mark-to-market rentals. These weren’t great buildings to begin with, so it’s hard to turn them into appealing condo product.

What have been some of the most surprising trends you’ve seen in the LES, in both the retail and residential market? 

The surprise is how ready the market was to adopt luxury, high-end product. The neighborhood turned a corner very quickly.  Luckily we were there at the right moment.

You’re currently marketing a 37-unit luxury condo project at 50 Clinton. How is that going?

We are 65 percent sold in just five months on the market. Great design and efficient layouts are the key.

Joshua Caspi
Owner, Caspi Development

How much have land/development prices in the LES risen over the last few years and how does that compare to the rest of Manhattan?

In 2012, there were 12 development transactions that sold for an average of approximately $294 per buildable square foot. In 2015, there were eight development transactions that sold for an average of approximately $648 per buildable square foot.

How much are prices up or down by on the rental side? And what are we seeing in terms of rental development in the neighborhood?

Pricing on the rental market is up significantly year over year. We estimate this growth at 5 to 7 percent per year. There is a constant pipeline of rental redevelopment of prewar walk-ups and several recent new development projects to hit the market at 331 East Houston Street and 371 Madison.

How much is buying/renting activity up or down by on the LES now compared to the last few years? Is there a serious influx of buyers/renters or has activity started to recede?

Rental demand has been constantly appreciating over the last several years, but the buying activity has increased as a result of the influx of supply. The location is “hip” for millennials as well as a relative “bargain” for younger couples compared to Soho, Flatiron and Noho.

What’s going on with retail rents on the LES? How much are they up or down by in the last year or two?

Retail rents continue to appreciate on the LES, which is a combination of market demand and robust market conditions. Convenience retail (non-bar and restaurant) on the LES has struggled as a result of lack of daytime foot traffic, but in much the same way that the Meatpacking retail is benefiting from the opening of the Whitney Museum, I believe that the LES retail will benefit significantly from Essex Crossing.

What do you think about Extell’s decision to market exclusively to Asian buyers? Do you expect other condo developers to follow that strategy?   

Interesting approach, which I think must have to do primarily with the pioneering location. Foreign buyers are more focused on the new construction elements, amenities, light and views and may perceive the pricing as a “discount” to other projects.

What do you see as the biggest challenges to development and investment on the Lower East Side? Do you think the market is too saturated with product right now?

There are very active and controversial community groups, which are resisting the change and gentrification of the neighborhood. There is definitely not a saturation of rental product on the market; if anything there is a shortage of quality-renovated product at a reasonable price point. 

What kind of development or investment opportunities are you looking for in the LES? Any deals you can share with us right now?

We recently purchased 104, 74, and 72 Forsyth Street, which are between Broome and Hester. We plan to roll out units as they get renovated to a first-class standard for the neighborhood. These assets are truly a testament to the momentum in the LES, as we have in the first month of ownership successfully leased eight of the vacant apartments at competitive rents and expanded one of the existing retailers.

Margaret Anadu
Managing Director Goldman Sachs Urban Investment Group

Goldman Sachs has committed $200 million to Essex Crossing, which is set to deliver what’s seen as much-needed retail to the LES. Is there room for more retail on the LES?

Essex Crossing’s inclusion of significant retail and commercial space was an important part of our attraction to the project. The project plan was developed in coordination with the local community and will provide critical entertainment and cultural components. The Lower East Side is a dense and vibrant neighborhood with strong pedestrian traffic and access to public transportation that to date has had a dearth of high-quality commercial space. We believe that opportunities exist for thoughtful commercial development that contributes to the neighborhood’s character and charm while also providing important services to the community and drawing new shoppers to the neighborhood.

How do you see the demographic changing over the next 10 years?

The diversity of residents living on the Lower East Side is one of its greatest assets and has been for generations. Our Essex Crossing project seeks to preserve this unique mix of communities, and the key way we’re doing this is by building affordable housing. Essex Crossing will contain more than 1,000 residential units, half of which will be affordable for low-, moderate- and middle-income families and seniors. This development, coupled with the significant housing stock that is already owner-occupied (including new condo development as well as co-op buildings), will ensure that the Lower East Side neighborhood continues to be composed of a diverse mix of communities.

What kind of development or investment opportunities are you looking for in the LES?

The types of investments that we are looking for in the Lower East Side are not different from our investments elsewhere. We are looking to make transformative investments that cater first and foremost to the needs of the community — be it safe, affordable housing, resilient infrastructure, access to retail, healthcare or education. 

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