Private equity prefers debt to buying real estate

TRD New York /
Nov.November 18, 2008 11:37 AM

Private equity real estate investment funds are sitting on the sidelines rather than investing in commercial and residential real estate. The general consensus of hundreds of real estate leaders, as well as this author, is to be cautious and wait until the dust settles before you return to investing in real estate.

Last week at my class and at the NYU Schack Institute of Real Estate’s 41st annual conference on capital markets held at the Waldorf-Astoria, a group of private equity investment firms with over $100 billion of funds available for investment, noted that during the first 10 months of 2008, few if any moves were made to acquire real estate. These investors preferred to invest in corporate and distressed debt, equity and high-yielding debt instruments.

Larry Fink, chairman and CEO of BlackRock, said at the conference: “It is better to purchase [the] corporate debt of Verizon yielding 9 percent [rather than take] a risk in commercial real estate.”

Investment funds are turning their focus to debt investments which can yield 15 to 20 percent.

In September, two private New York City-based equity real estate funds, who asked to remain anonymous, joined together to provide funding for a first mortgage on a retail site in the Meatpacking District. The funds expect to achieve an overall yield of 21 percent on their investment.

More recently, the same group provided a preferred equity debt of approximately $30 million to the developers for the construction of the first phase of Gotham Center, a major mixed-use development in Long Island City.

Two Gotham Center is the first phase of the proposed 3.5 million-square-foot Gotham Center development, being developed by Tishman Speyer and the Modell family. The mezzanine loan is secured for the tower, a 662,000-square-foot, 21-story tower at the corner of Queens Plaza and 28th Street. The Class A office tower will be occupied by the city’s health department and will include about 9,400 square feet of ground-floor retail space and more than 180 parking spaces. The building will replace the Queens Plaza Municipal Parking Garage. 

The New York City Employee Retirement System and the Teachers’ Retirement System of the City of New York will each commit up to $9.3 million in equity towards the project.
Construction financing for Two Gotham Center, in the amount of $260 million, was provided by a consortium of lenders led by Wells Fargo, HSBC, Nord LB, Helaba and Bank of Ireland.

The total cost of Gotham Center is approximately $316 million, which
consists of debt from the lenders, preferred equity, retirement funds
and money from the developers.
With investors focused on mid-teen returns for debt, rather than determining when the price is right to invest in real estate, expect real estate investment funds to increase their allocation of funding for debt, for the foreseeable future.
“There is a great opportunity to purchase real estate today,” Wendy Silverstein, the executive vice president of capital markets at Vornado Realty Trust, said at the conference. “Unfortunately, if you buy property today, it will probably be cheaper tomorrow.”

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” on CUNY TV and “Building New York” on CUNY TV in New York City and  WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is also an adjunct professor at NYU Real Estate Institute and a former columnist for the New York Sun.

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