Land costs price developers out of new development rental market

Numbers don't work for ground-up rentals in today's market, execs say

TRD New York /
Feb.February 17, 2012 01:30 PM

Residential rentals have proven to be the least volatile among all property asset classes in the wake of the recession, real estate pros agreed at the Bisnow New York Multi-Family Summit held this morning at the Roosevelt Hotel, but are becoming less easy to build from scratch because of sky-rocketing land prices.

Clearly, rentals are the darlings of the banks, said Nathan Berman, principal of Metro Loft Management, who participated on panels at the event alongside Jeremy Shell, head of acquisitions and finance at TF Cornerstone; Paul Massey, co-founder of Massey Knakal; Jeffrey Deitrich, senior associate at Silverstein Properties, and Orin Wilf, president of Skyline developers, among others. “[Real Estate Investment Trusts] especially are coming into the rental arena.”

Despite the rocketing market for rentals however, barely any ground-up rental projects have debuted for which the land was purchased in the last two years, the execs noted. This, they said, is due to the ever-increasing price of land in the city.

“Nothing ground-up makes sense as a rental,” Berman continued, using his company’s recent purchase of a 66-story Art Deco building at 70 Pine Street as an example of the advantage of buying and renovating an existing structure in the current market. “When you’re able to buy an Art Deco landmark for less than the cost of the land, that’s hard to [pass up,]” he said.

Berman also confirmed that Metro Loft would be embarking on a hotel and residential conversion at 70 Pine, and is opting to go for rental units over a condominium. Marrying hotel amenities with rental units is unusual, he noted, but is a good option for this economy. (Beatrice at The Eventi Hotel On West 29th Street is a recent example of this kind of pairing.) The firm is also seeking out space in the Garment District, he said, though its focus on the Financial District remains strong with its residential conversion of an office building at 116 John Street currently underway.

Wilf also admitted that Skyline, a family company, has been going back and forth over whether to build condos or rentals, like at its latest development at 200 East 79th Street. Skyline, which prefers to focus primarily on rentals, was tempted to go condo on the Upper East Side because of the thriving sales market on the luxury end, Wilf said. And it did. Skyline is turning 200 East 79th Street into a 19-story contemporary classic condominium designed by Cetra Ruddy. It is slated to launch sales this fall.

“We felt like the condo market in certain areas of Manhattan had come back,” he said.

Silverstein meanwhile, is enjoying a 7 percent increase in rental rates across its portfolio and the burning off of concessions, Deitrich said. However, it’s still offering one month free rent at Silver Towers On 42nd Street, which opened in 2009. The company is also shopping around for a lender at 99 Church Street, its much-talked-about Four Seasons hotel and condo project downtown. Larry Silverstein was previously quoted as saying that the project wouldn’t break ground until 2013, and wouldn’t open until sometime in 2015.

The industry execs also took the opportunity to talk about the upcoming mayoral election. Real estate taxes will be a contributing factor in the election, Massey said; the real estate community needs a mayor that will make it a priority to stabilize the tax rate, which has risen way beyond inflation. (Massey later told The Real Deal that he was undecided on who to support in the mayoral race.)

Shell added: “The heart of the matter, and a lot of what makes our business so complicated, is real estate taxes. You can’t buy land without a 421-a [tax] benefit because there’s just no way the numbers will work. It just wipes out your profit. The only way [to make a profit] is to renovate existing property or build multi-family. [The problem] will lead to growing rents and will price people out of the market.”

Mason Sleeper, principal at the Praedium Group; Richard Dansereau, managing director at Stonehenge Partners; Ralph Hertzka, CEO of Meridian Capital Group; David Streicher, partner at Rockwood and Paul Leibowitz, executive vice president at CBRE also participated in the morning’s panels.

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