The Real Deal New York

For mid-sized commercial brokerages, influx of institutional investors in NYC spells trouble: NGKF’s Kuhn

By Katherine Clarke | June 05, 2013 01:00PM

As institutional players such as pension funds and sovereign wealth funds increasingly lead the charge investing in the New York City real estate market, it’s becoming more challenging for mid-sized commercial brokerage firms to keep their heads above water, said James Kuhn, president of Newmark Grubb Knight Frank, speaking today at a breakfast forum hosted by the New York State Society of CPAs.

“Real estate has become much more of an institutional business,” Kuhn said. “Companies that can’t service every aspect of the deal aren’t going to be able to survive.”

A surge in the numbers of institutional real estate backers several years ago was one reason that Kuhn’s firm, then known as Newmark Knight Frank, opted to sell the company to Howard Lutnick’s BCG Partners back in 2011, Kuhn said. Lutnick later merged Newmark with its Grubb & Ellis subsidiary in 2012, forming Newmark Grubb Knight Frank. Having merged with Grubb and become a part of larger entity BGC, NGKF is able to offer a wider platform of services to institutional clientele, such as investment sales and corporate services, he said.

On the flip side, smaller, boutique firms such as Massey Knakal Realty Services and Studley are able to succeed in the business thanks to their focus on niche services, he said. Studley, for instance, focuses purely on tenant representation.

“There’s always room for boutique [firms] as long as your aspirations are boxed in,” Kuhn said.

Institutional investors in real estate, particularly sovereign wealth funds like the Abu Dhabi Investment Authority, Norwegian Investment Fund and the Kuwait Investment Authority, are a different animal than traditional New York City investors.

“They test the market with $1 billion,” Kuhn said, but can only invest up to 49 percent of the equity in any given project before incurring tax penalties. In the majority of cases, they’re looking for long-term partners and can afford to push into the market at top-tier pricing levels, driving values up, lowering yields and sidelining local players.

Thanks to sky-rocketing prices, investors chasing yield are looking towards opportunities where they can change the use of a property, Kuhn said. Buildings that might traditionally have been considered core office assets, such as 650 Madison and the Sony building at 550 Madison Avenue, are now viewed as prospective residential redevelopment plays — 650 Madison as a tear down and 550 Madison as a conversion.

While 650 Madison’s owners Highgate Holdings and Crown Acquisitions don’t necessarily intend on turning the property into condos, it remains a prospective opportunity and could increase the value of the building, industry pros have said.

But a residential play does not always make sense for commercial buildings with large floor plates.

“When most of us walked the Sony building, we found it hard to imagine how you would create apartments. There’s a certain size and then people want windows,” Kuhn said, speculating that the Sony building’s new owner, the Chetrit Group, would have to construct very large units to make the layouts work.

As far as underwriting these kinds of investments, Kuhn said standard prices for underwriting residential developments in New York City have become vague, with units trading in excess of $80 million at several buildings in and around Central Park, such as One57 and 15 Central Park West. The ballooning of condo pricing has made it a challenge for both lenders to underwrite loans for residential developers and for developers to predict the price end users will be willing to pay for the final product.

“Because of a drought of new development inventory and a proliferation of capital coming in from around the world, there’s really no ceiling for underwriting anymore,” Kuhn said. “I defy anybody to really tell me what they’re going to sell their condos for. I don’t know if I believe half the numbers in the press.”

Still, for more purist yield chasers, there are still opportunities outside of the small pool of core office and residential assets, the executive said.

In its own plans for expansion, NGKF targets the next submarket of a major city, such as Brooklyn or Queens, as opposed to new cities like Charlotte, N.C.

“In a political environment, where it’s tough to build, there will never be an abundance of product,” he said.