In many ways, 2013 was an historic year for the New York City real estate industry, as price records were shattered in both the commercial and residential sectors.
Hedge funder Bill Ackman and a group of investors reportedly paid more than $90 million for a unit at Extell Development’s luxury condo tower One57, for instance. If the sale closes at that price, it will set a record for the most expensive Manhattan condominium.
On the commercial side, $1 billion became a regular benchmark, with several deals breaking that barrier, including a partnership between Beijing-based developer Soho China and banking giant M. Safra & Co buying a piece of General Motors Building in a deal that valued the property at $3.4 billion.
Meanwhile, the New Year will be rung in with the inauguration of a new mayor, Bill de Blasio.
So, what can the real estate industry expect from 2014? Read on for a closer look at the key issues and projects set to make waves in the coming year.
Interest rate jitters
Speculation that the Federal Reserve could begin to wind down its signature easy-money program has fueled unease in the real estate market in recent months, with buyers feeling a renewed sense of urgency to take advantage of historically low rates before the cost of borrowing shoots up.
That anxiety was eased somewhat in October when President Obama nominated Janet Yellen — a key supporter of the bond-buying program that’s partially responsible for keeping interest rates down — to replace Ben Bernanke as chairman of the Federal Reserve.
But ironically, last month’s release of strong job numbers for October stoked concerns that the administration might determine that the economy is strong enough to survive a tapering down in quantitative easing as early as this month.
The interest rate for a 30-year fixed-rate loan is currently hovering slightly above 4 percent, but experts predicted rates could reach as high as 6 percent in the next year.
As a point of reference: an $800,000 apartment, with a 20 percent down payment and a 30-year fixed rate mortgage at 4.13 percent, will cost the owner about $3,104 in monthly payments, according to StreetEasy’s mortgage calculator. If the rate were to rise to 6 percent, those monthly payments would rise to $3,837.
Brokers, developers and buyers will be eyeing how the interest rate situation unfolds early next year, sources said.
Over the past few months, industry insiders have begun to see an uptick in buying — which was already going strong despite the relative lack of residential inventory on the market — as interest rates have inched up, said Jordan Roth, a senior branch manager at GFI Mortgage Bankers, a residential mortgage provider in Manhattan.
“If rates had stayed where they were in the first part of this year, buyers might have stayed on the sidelines,” he said. “Now, we’re seeing people get into the game.”
If the rates increase significantly, “you’ll see people start to be more creative to get deals done and maybe take a second look at homes they previously passed up,” Roth said.
Still, an increase in interest rates might dampen activity in the long-term, slow the growth of home prices and impede commercial investors’ ability to refinance property, sources said.
But not everyone thinks the Fed will wind down the bond-buying program soon — there have been false alarms about them doing so several times over the last year.
“In order for the Fed to slow down its purchase of mortgage-backed securities, there has to be another mechanism in place. Before the government really starts to wind down [the troubled financial agencies] Fannie and Freddie, which have more than 20 percent of the overall mortgage pool, there has to be something else to replace it,” Roth said.
Fred Peters, CEO of Warburg Realty Partnership, said he’s not worried that interest rates will increase significantly in 2014.
“Unless the economy really picks up steam, I would be surprised if we saw any dramatic shift in rates,” he said. “And while buyers may grumble about increases, I do not believe small increases will impact buyer behavior too much.”
The de Blasio agenda
When Mayor-elect de Blasio takes the reins at City Hall at the start of next month, the real estate industry will, of course, be closely watching to see which of real estate-related issues he raised on the campaign trail gets tackled first.
“Whenever there is a change in administration, there’s understandable trepidation,” said Seth Pinsky, executive vice president at RXR Realty and the former president of the NYC Economic Development Corporation under Mayor Michael Bloomberg. “But there are also opportunities that come with change.”
Among the agenda items on the industry’s watch list are de Blasio’s pledge to push for mandatory inclusionary zoning, which would change the rules on affordable housing for developers.
One of the industry’s biggest concerns is that residential projects now planned as 80/20 buildings — a program through which developers receive tax-exempt financing in exchange for making 20 percent of their units affordable — would suddenly not pencil out if the requirement were to change to, say, 70/30 or even 60/40, especially if no additional tax incentives or development rights are provided in return.
Indeed, the 80/20 model has been around so long that it’s been “priced into the development equation,” Pinsky said.
“If the [de Blasio] administration alters those models, it’s possible that development will become more challenging,” he said. “That doesn’t mean it’s going to be impossible. There are many different ways to skin a development cat. If it turns out that the old models no longer work, creative people will figure out new models.”
The real estate industry “needs to be a little patient and see what specifically the new administration is proposing before jumping to the conclusion that it’s going to be too much,” Pinsky said.
Still, some developers are already factoring in the possibility that they may have to include a higher percentage of affordable units when scoping out new projects, said Kevin Davis, chief investment officer of Taconic Investment Partners, speaking at a panel last month.
“The big risk is if you’re buying, and assuming that you’re going to build 20 percent affordable and all of a sudden it changes to 40 percent, that’s where it’s important to tread lightly,” he said.
Ross Moskowitz, a real estate partner at the law firm of Stroock & Stroock & Lavan, said that’s not an irrational concern.
“Can a developer build a residential building under a new formula and still make a reasonable rate of return?” he asked. “Rightly or wrongly, there’s this perception that everyone’s making a lot of money on every project. That’s not the case. There is a line — is it 60/40 or 70/30? I don’t know — but there is a line that’s going to not allow everyone to develop.”
Midtown East rezoning
In the middle of last month, the Bloomberg administration dropped a bombshell when it withdrew its sweeping proposal to rezone Midtown East, citing a lack of City Council support.
The industry-supported proposal would have eased restrictions on how air rights are traded, paving the way for developers to increase the height and bulk of office towers between 42nd and 57th streets and Madison and Third avenues.
Critics of the proposal — which Bloomberg said was needed in order to upgrade the aging stock of Midtown office towers and make New York more globally competitive — argued that the city was undercharging developers for air rights, and that developers were not required to earmark enough money towards infrastructure improvements.
Either way, the rezoning of Midtown East will now be left to de Blasio, who’s pledged to present a revised proposal by the end of 2014.
With millions of dollars in development rights on the line, de Blasio’s reworked proposal could be one of the first major issues the industry and new mayor tangle over.
While de Blasio has said that Midtown East should be “rezoned to allow for the creation of a world-class 21st-century commercial district,” he’s also raised eyebrows in the industry for wanting to put more restrictions on Bloomberg’s proposal.
“It needs to be done right,” de Blasio said in a statement last month. “We need to address the many unanswered questions about this plan, including how to build the infrastructure needed to accommodate the additional density created by the rezoning, and how to ensure that new development rights are appropriately priced to create the best possible value for the city.”
Meanwhile, Bloomberg, who first proposed the rezoning in 2012, said the failure of the council to back the proposal had cost the area “hundreds of millions of dollars in badly needed subway and street improvements” and $1 billion in additional tax revenue.
Pinsky, who as a Bloomberg administration alumni is a strong proponent of the rezoning, said the uncertainty surrounding the revised proposal would cause the market to pause going into 2014.
Still, the short-term impact on office rents will be negligible because the change wouldn’t have filtered into the market until 2019, said Mark Weiss, a principal at commercial brokerage Newmark Grubb Knight Frank.
Pinsky said the rezoning is a “small down payment” on upgrading the city’s office stock, and that while it wouldn’t “be sufficient alone … it’s an important step forward in modernizing the city’s office inventory.”
“Once you start reopening the issue, it’s likely it would go through substantial change,” he said. “It’s very hard to predict whether, once you start moving the pieces around, it would end up being successful or not.”
The condo concern
This year was undoubtedly the year of Extell Development’s One57 and Macklowe Properties’ 432 Park Avenue. But, according to brokers, 2014 will be the year when the industry finds out whether the batch of luxury towers conceived in the wake of those two high-profile condos can survive.
Residential brokers told TRD that rather than watching in awe as properties break price records as many did in 2013, that in 2014 industry insiders will be watching to see whether the new projects can achieve the prices needed to justify the high costs for land their developers paid.
“It will be interesting to see those projects that were conceived out of [today’s] irrational exuberance,” said Shaun Osher, CEO of real estate brokerage CORE.
“There are going to be those buildings that come out of the ground that should not necessarily have been built,” he added. “Developers are looking at those projects [like One57 and 432 Park] as benchmarks, but they’re on a different playing field.”
Osher predicted that new units coming to market with exaggerated price tags will linger.
“Buyers are not going to be foolish,” he said.
Pamela Liebman, CEO of residential brokerage the Corcoran Group, echoed that point.
“I’m worried about all the new condo inventory hitting the Midtown corridor that expects to trade in excess of $6,000 a foot,” she said at an event hosted by Haute Living magazine last month. “When you look at historically what that market has done and then you see what’s coming to market, you do tend to get a little nervous. How deep is that market? I think we’re all about to find out in the next couple of years.”
And power broker Dolly Lenz, head of Dolly Lenz Real Estate, agreed: “If I were the banks financing on those projects, I’d be really very watchful as to what’s going on,” she said at the same event.
Land prices have reached previously untested heights, according to a recent report by commercial brokerage Avison Young. The price per buildable square foot averaged roughly $400 in Manhattan in the first half of this year, the brokerage reported, while prices for land suitable for prime luxury residential development soared to $700 or $800 a foot in some instances.
For example, broker-turned-developer Michael Shvo paid $23.5 million, or around $800 per square foot, for a High Line-adjacent site in Chelsea earlier this year. That acquisition price will require him to secure $3,000 a foot for the condos he’s planning to build in order to turn a profit, sources said.
In an October interview with the New York Times, the developer said, however, that it’s “not about the dollar per square foot.”
“When you go buy a Birkin bag at Hermès, you’re not calculating how much you’re paying for every inch of your bag. It’s truly looking at real estate as a luxury brand,” he said.
“The only way these deals are being financed is that the developers are really betting on condo sellout prices that are higher than current comps,” Josh Goldflam, managing principal of HighCap Group, told TRD for this month’s Q&A. “Hopefully they have no unexpected delays or problems, because their margins are so thin that one little thing can put your entire project under water.”
Among the most anticipated projects set to go up in Midtown — either onto the market or out of the ground — in 2014 will be JDS’ so-called “skinny” tower at 107 West 57th Street, which is slated to rise to 1,350 feet (see this month’s architecture review) and the 1,423-foot glassy skyscraper Extell is building at 225 West 57th Street.
Developer Michael Stern said he’s not concerned about the price he paid for the land, since he acquired a piece of the lot at a low cost basis before land prices started to escalate.
While a partnership led by Stern’s JDS and Property Markets Group invested $177.8 million to acquire both the Steinway building at 109 West 57th Street and its accompanying land lease in 2013, a key part of the site was acquired in 2012, for $40 million.
Redevelopment of the South Street Seaport
With its redevelopment of the famed South Street Seaport, the Howard Hughes Corporation is betting that it can lure New Yorkers to a neighborhood long seen as a tourist-only destination.
Indeed, the Texas-based company broke ground on a new $200 million, 300,000-square-foot retail complex at Pier 17 in Lower Manhattan in October. The new multi-level glass building, which will have a rooftop event space, will replace the existing dated retail complex.
And the retail brokerage and investment community will be watching closely in 2014 to see whether that bet pays off.
Specifically, observers will be looking to see whether the complex can attract a world-class tenant roster that can compete with the new retail portions of Brookfield Place (formerly known as the World Financial Center) and the World Trade Center. While a slightly different mix of tenants is expected at the Seaport, all three complexes will likely be pitching a few of the same international brands, sources said.
Howard Hughes is currently in negotiations with several high-profile prospective anchor tenants, its principals told TRD last month. The firm declined to identify them, saying only that major leases would be announced in 2014 and would likely include international and local brands.
One source told TRD that the company was in talks with hospitality magnate Danny Meyer for the rooftop restaurant space.
RKF, the retail brokerage, is marketing the project but declined to comment.
“South Street has always suffered because it’s never been a true destination,” said Stroock & Stroock & Lavan’s Moskowitz, who is not connected with the project but whose firm has offices in the neighborhood. “Howard Hughes has to erase that history. The fate of that project will really be decided depending on the anchor.”
Christopher Curry, senior vice president of development at Howard Hughes, said the tenant roster will be completely different from the pier’s previous incarnation.
“We’re building for the New York customer,” he said. “This will not be geared towards the tourist. I don’t even know if we’ll have any tenants coming back. This will no longer be the South Street Seaport that most New Yorkers think about.”
The rapid rise in the residential population Downtown in the last five to 10 years has not been coupled with the addition of enough local retail, he added.
While Curry declined to comment on asking rents at the complex, sources told TRD that they are between $200 and $350 a foot, depending on the level of the building. That’s substantially lower than the World Trade Center, which is asking up to $500 a foot plus a percentage of the stores’ revenues.
With the anticipation of these three major retail projects, rents have already inched up Downtown in the last six months, said Robin Abrams, executive vice president at retail brokerage Lansco. Only two years ago, rents on Lower Broadway were closer to $200 a foot, she said. Now, they’re topping $500 a foot near the World Trade Center.
Meanwhile, tenants of both the World Trade Center retail spaces and the Brookfield Place retail slots will also be announced next year.
The renewal of Seward Park
Investors and developers are expected to zero in on the Lower East Side in 2014. That’s thanks in no small part to the $1.1 billion dollar investment in the neighborhood being made by a partnership led by L+M Development Partners, BFC Partners and Taconic Investment Partners.
In September, following a competitive RFP process, the trio was selected by the city to construct a 1.65-million-square-foot, mixed-use project in and around Seward Park, a public park and playground slightly north of East Broadway. The six-acre site is the largest swath of undeveloped city-owned land in Manhattan below 96th Street.
The developers will pay the city $180 million for the development rights.
The project will include 1,000 units of housing (half of which must be permanently affordable) as well as a 15,000-square-foot open space, a school, a community center, 250,000 square feet of office property, and a mix of retail spaces.
Arik Lifshitz, president of DSA Realty, a Lower East Side-based landlord and investor, said he’s hopeful that the massive nature of the Seward Park project will “spur [other nearby] owners to invest in renovations and upgrade their buildings.”
Charles Bendit, co-CEO of Taconic, told TRD he expects to make announcements about retailers signing onto the project in the second quarter of 2014.
“There’s a huge void between the north side of Grand Street and the north side of Delancey Street,” he said. “By building these buildings, we’re going to create more traffic on the streets. At the moment, you have these vacant lots that are fenced in and have all these cars on them. There’s no life, there’s no vibrancy. I can’t see how [this project] is not going to have a dramatic impact on the area.”
So far, retail brokers said they’ve seen little increased interest in the neighborhood. That’s likely because the project has not yet been widely publicized, Abrams said.
“I haven’t heard a heck of a lot about it yet,” she said.
On the investment sales side, however, there’s been an uptick in activity. Along Orchard Street, near the redevelopment area, an investment boom already appears to be underway.
Earlier this year, a partnership between Joel Schreiber’s Waterbridge Capital and developer Jackie Jangana paid $27 million for the former Ridley Department Store as part of a package of buildings (including 57 and 59-63 Orchard Street, as well as 319 Grand Street). A separate 100-plus-room hotel at the corner of Orchard and Canal streets, formerly home to the Jarmulowsky Bank, is also set to open in 2014. That project is being spearheaded by global investment firm DLJ Real Estate Partners.
“Smart people are buying in the area before this million-plus square feet of retail, commercial and residential is built,” said Stephen Kliegerman, president of Halstead Property Development Marketing. “This is potentially the most exciting mass new development to happen in the city. In some ways, it’s more exciting than the Hudson Yards because this is a neighborhood with such rich culture and history and this will tie it together. You’re going to see values in that area jump by 50 percent over the next five years.”
There are several little-known but potentially important pieces of legislation that real estate players will be following in 2014.
Among them is the slated expiration of the Terrorism Risk Insurance Act. Sources say the federal program — which financially subsidizes insurers in the event an act of terrorism leads to exceptional damages on a property — is crucial for New York City landlords because it provides them with reasonably priced terrorism insurance. Without it they might be left with few — if any — options for where to buy insurance, and might only be able to secure it at exorbitantly high prices.
At a NYU panel discussion last month, developer William Rudin called the scheduled expiration of TRIA “one of the scariest things” he was facing as a landlord.
But the industry is not sitting back and waiting to see how things unfold. The Real Estate Roundtable and the National Association of Real Estate Investment Trusts, both industry organizations, are not just lobbying to have the legislation extended but are also pushing to reform the way terrorism insurance is issued generally. (They’ve created the Coalition to Insure Against Terrorism to do so.)
Ric Clark, chairman of commercial landlord Brookfield Properties, told TRD he was concerned that lenders would not issue loans without terrorism-risk coverage on the collateral.
“Property owners depend on their ability to obtain adequate all-risk insurance coverage for financing,” Clark said. “Approximately $1.7 trillion of commercial real estate loans are scheduled to mature over the next five years. Without terrorism-risk insurance, these loans face the risk of not being eligible for refinancing and going into default. Given the scale of this market, the financial markets face serious safety and soundness issues if TRIA is not renewed.”
TRIA was, not surprisingly, introduced in the wake of the 2001 terrorist attacks to address a shortage of available terrorism insurance. Congress has renewed it twice since it first passed in 2002, but a recent congressional poll found that it might not have enough support to win another renewal.
Clark said post-9/11 lenders would only offer terrorism insurance at “exorbitant prices,” and even then it was “woefully inadequate.”
“We remember all too well what happens when terrorism coverage is not available,” he said. “Commercial borrowers lose their ability to get financing, billions of dollars in real estate-related transactions stall or get canceled, hundreds of thousands of jobs [are] lost.”
Another potentially transformative piece of legislation set to go before Congress in 2014 is the Marketplace Fairness Act.
New York City retail brokers say the bill — which would force web-based retailers to collect sales taxes on Internet purchases even in states where they don’t have a physical presence — would remove a big financial advantage for retailers to be online only. That might mean increased interest in bricks-and-mortar spaces from Internet-commerce companies.
“In an effort to remain competitive, the behemoth online retailers like Amazon, eBay, and other online companies will get even more serious about moving into shopping centers once their sales-tax advantage is gone,” said Adelaide Polsinelli, head of retail brokerage at commercial firm Eastern Consolidated. “Many web retailers are already anticipating the change and seeking out retail stores and warehouses in advance of this legislation.”
Until now, those kinds of companies have largely steered clear of renting stores or showrooms in New York. However, if the playing field is leveled on the sales-tax front, they might opt to get serious about securing city locations.
The bill has already passed in the Senate and will likely go before the House of Representatives in 2014.