Developers, investors hustle for bulk condo deals

Niche market alive with interest as condo developers scramble to shed units

TRD New York /
Jun.June 22, 2020 07:00 AM
New York City developers and investors are seeing an uptick in bulk condo deals, thanks to an already soft market and coronavirus-related distress. (iStock)

New York City developers and investors are seeing an uptick in bulk condo deals, thanks to an already soft market and coronavirus-related distress. (iStock)

Danny Fishman cannot keep up with the demand.

Danny Fishman, Gaia Real Estate

Danny Fishman, Gaia Real Estate

The investor, who leads Gaia Real Estate, is contending with a deluge of pitches from developers hoping to sell him condo units in bulk. He said the missives began picking up last year but recently have been coming in at such velocity that he hardly has time to look at them.

“I would easily say at least 50 percent of new [condo] construction in the city is talking about bulk [sales],” Fishman said.

Gaia is in advanced talks to buy five condo packages ranging from 12 units to more than 100 at projects in Manhattan and Brooklyn. All are new deals that appeared since March, when the coronavirus shutdown halted apartment showings and slowed sales to a trickle.

Ankit Duggal, RockFarmer Properties

“Any time you see a crisis point is usually when you see an opportunity for some kind of bulk buying,” said Ankit Duggal, vice president of acquisition and debt investments at RockFarmer Properties.

$1.6B

The total value of 2,295 units sold in bulk deals in NYC between January 2015 and May 2020, according to a TRD analysis

The luxury market was already in strife when the pandemic hit, with $5.7 billion in existing condo inventory at the beginning of the year and another $33 billion worth in the shadows. But now, with sales stalled and financing harder to come by, developers and their partners are looking at any way to move units. Some investors, however, still feel prices aren’t low enough to justify a big bet on New York City’s beleaguered condo market, particularly in light of added stress from a global pandemic and new regulations affecting the rental market, a key part of many bulk buyers’ business models.

“It’s almost the same as [if] they’re just surrendering property. If you’re a bulk buyer, you’re trolling around to find the most desperate sponsor.”

Dan Hollander, DHA Capital

“Right now, everything is a guessing game, which isn’t great when you’re running numbers for these,” said Corey Dyer of Sotheby’s International Realty, whose team has been analyzing deals based on comparisons to other periods of economic uncertainty.

“It’s too soon to tell, and I think anybody that tells you otherwise … I don’t know if I can trust them.”

The developer’s calculus

Interest in bulk deals is out there, but making them happen can be difficult.

Sponsors generally forgo the profits they stood to earn from final units sales because bulk deals only happen at below-retail prices.

Dan Hollander, DHA Capital

Dan Hollander, DHA Capital

“It’s almost the same as [if] they’re just surrendering property,” said developer Dan Hollander. “If you’re a bulk buyer, you’re trolling around to find the most desperate sponsor.”

But there are reasons sponsors may go that route.

One, said Josh Winefsky of Kramer Levin, is if a loan maturity date were looming and sales were slow. In that case, selling the remaining units might be more appealing than kicking more equity into the project, finding a new partner or refinancing at a potentially higher rate, Winefsky said.

Ceruzzi president Art Hooper said he’s been getting calls from bulk buyers interested in the developer’s Upper East Side condominium, the Hayworth, where just two units are in contract. A planned deal for an inventory loan at the site recently stalled because of the pandemic.

“There’s no question that the condo market is not robust in New York,” Hooper said in an earlier interview.

Vickram Jambu, Lee & Associates

Vickram Jambu, Lee & Associates

Vickram Jambu of Lee & Associates, who is marketing a bulk package at the Chamberlain condo at 269 West 87th Street, said a common misconception is that bulk offers arise only when a project is in distress. He argues that such deals can be a useful way for a developer to change business strategy. (Jambu declined to comment on the Chamberlain condo specifically. Its developers, Simon Baron and Quadrum Global, also declined to comment.)

Winefsky characterized bulk trades as a “deviation” from the sponsor’s business plan, usually because of slow sales.

“It’s unlikely that someone goes in thinking, ‘I’m going to sell in bulk,’” he said. “I don’t know that I would say it’s an act of desperation … but it’s in all likelihood not a sign of a very healthy project.”

Josh Winefsky of Kramer Levin

Josh Winefsky of Kramer Levin

Another developer, who spoke on the condition of anonymity, said he mostly didn’t take bulk offers too seriously because even though it would be great to move a huge haul of units at once, there is usually a catch.

“In a market where there isn’t movement and nothing is sold, most bulk buyers are looking for a significant discount and that sits below the lender’s release price,” the developer said. “So unless you have a lender aligned with a bulk sale, they tend not to happen.”

A growing niche

Bulk buying has never been a huge driver of New York City’s sales market. An analysis of property records by The Real Deal showed 2,295 units were sold in bulk deals across the five boroughs for $1.6 billion between January 2015 and May 2020.

Still, there have been a slew of notable trades in recent years, including Gaia’s 144-unit buy at the Corinthian condo in 2014 for $147 million and Moinian Group’s $27 million sale of 32 apartments at the W Downtown. Last year, Gaia closed on 90 units at the Brodsky Organization’s Bridge Tower Place Condominium for $52 million.

Mark Zborovsky, a broker who specializes in selling blocks of converted sponsor units, said the market has been steady for many years. The main change he’s seen since he started out in the 1970s is growth: The market has increased, and prices have gone up.

“People were buying blocks for 10, 15 cents on the dollar,” he said of his early days. Now, investors pay between 30 percent and 40 percent of the units’ market value.

When bulk deals first gained traction in the 1980s, they were driven by the banks. At the beginning of the decade, a rush of developers came into the condo market. But a change to the tax law in 1986 altered the deductibility of certain investments, depressing real estate values. By the end of the decade, the country was facing a major banking crisis.

Andy Gerringer of the Marketing Directors

Andy Gerringer of the Marketing Directors

“That’s when the banks took back, for the first time, many, many projects,” said Andy Gerringer of the Marketing Directors. “There were so many condos on the market at that time, and the banks had to get them off their books.”

But investors were in short supply. Hedge funds and the private-equity firms weren’t as prevalent in real estate as they are today, Gerringer said. Most of the investors with both the money and appetite for bulk deals came from overseas.

That has since changed: Over the years a handful of New York investors and developers such as Myles Horn have teamed up with larger players to buy units cheaply, renovate the apartments and sometimes common spaces and then sell at a markup.

Myles Horn

Myles Horn

Horn, who has bought and sold more than 5,000 units in bulk deals over about 40 years, is also seeing more interest in what had been a niche market. The developer and investor is in talks to close on 250 units across multiple co-operative buildings owned by one sponsor. Those negotiations pre-date Covid, but Horn said he has since begun working on another bulk deal, this one at a new condo.

“It’s a very, very small business,” he said. “Now everyone and their mother is looking for these deals.”

Condo distress

It’s easy to see why Manhattan’s luxury market is ripe for bulk deals. Though it showed signs of life in the early part of this year, Covid-19 quickly scuttled that momentum.

“The problem, as I see it, is there has not yet been a realization on the owners or lenders’ part as to how deeply underwater these projects are. I think [buyers] may get burned.”

Myles Horn, developer

Despite virtual tours and other platforms geared toward contactless deals being rapidly adopted by agents and consumers, the number of new deals has plummeted. In May, Manhattan’s co-op and condo markets saw respective year-over-year drops in contract volume of 80 percent and 83 percent, according to a report from Douglas Elliman and appraisal firm Miller Samuel. Brooklyn’s co-op and condo markets fell 76 percent and 44 percent, respectively.

Faced with any combination of those headwinds, exposed lenders and institutional equity investors will often push for bulk sales.

Ran Eliasaf, Northwind Group

Ran Eliasaf of Northwind Group

“They are very welcome,” said Ran Eliasaf, managing partner of Northwind Group, an investor-turned-lender that recently launched a $220 million debt fund to originate condo inventory loans for New York City–based projects.

“It all depends on the price,” he said, acknowledging that while bulk deals trade at discounts, it’s worth it if the final price matches what the lender underwrote or significantly contributes to paying down a loan.

For bulk buyers, price is a major stumbling block too. Historically, the rule of thumb for a bulk discount is 30 percent to 40 percent below retail asking prices, according to Horn. But most bulk offers he’s reviewed have a 10 percent to 15 percent markdown, which he calls “nonsense.”

“That’s not the price. It’s in fact their wish list,” he said.

Active deals in the market offer some insight into where developers are.

Marketing materials for the Chamberlain show the developers are offering an additional 10 percent discount on all 26 remaining apartments at the 38-unit condo.

At HFZ Capital’s XI condominium, the Douglas Elliman sales team has held talks about a 10-unit package with a blended discount of 20 percent.

“The problem, as I see it, is there has not yet been a realization on the owners or lenders’ part as to how deeply underwater these projects are,” Horn said. “I think [buyers] may get burned … Most of these deals have not yet reached the appropriate discount.”

Fishman agreed, noting that Gaia is buying “only on discount.” He said he expects lean years ahead and isn’t counting on the residential market bouncing back anytime soon.

“We don’t believe in buying market price and hoping everything will grow with the city,” he said. “We don’t think there will be growth.”

Hunting for a bargain

As the country settles into a recession, many in the industry are watching to see if a new wave of bulk deals emerges.

“We’re seeing opportunities being offered on the condominiums that have maybe 10, 20 percent sellout and now they’re stuck,” said RockFarmer’s Duggal. “We’re also seeing, on the other side of the trade, distressed debt being sold off on that structure as well.”

Duggal said his firm had been looking at deals before the pandemic, including a portfolio of Bronx co-op deals that was marketed last year. But in recent months, more have started to come across their desks.

When they underwrite bulk deals, Duggal said his firm considers the debt position of the building and whether there’s a strong market for the product. If the buyer sentiment is negative, he said, they work on the assumption that the units would not sell for a long time, instead focusing on what rents they can achieve.

“The upside for us is the condominium sellout,” he said. Renting, though, is always the fallback.

In New York City’s notoriously tight rental market, the idea of struggling to find tenants may seem laughable. But these aren’t ordinary times. More than 40 million Americans are unemployed because of the pandemic, and many well-heeled city dwellers have been renting vacation homes.

In April, at the height of the pandemic, new rental activity dropped by more than 70 percent to the lowest level since 2009. That means any rental figures bulk buyers are relying on to forecast their income are out-of-date at best.

Attorney Mark Hakim also noted that the changes to the rent laws last year, in addition to the specter of the “good cause” eviction bill, which would effectively cap rent increases on market-rate units statewide, may have likewise prompted some investors to think twice about bulk buying in Manhattan.

That’s the case for Gaia’s Fishman, who said New York’s eviction moratorium and lack of landlord relief in light of the pandemic has been particularly hard to absorb.

“There’s a political risk,” he said. “I will invest in New York only if I’m getting a discount to account for the added risk.”

Jambu of Lee & Associates said high-end bulk deals don’t make sense without the sales component.

“Typically speaking, the discount is not heavy enough to have the entire business plan predicated on purely rental,” he said. The model, particularly now, is “buy and hold and sell.”

But how long can an investor hold a vacant unit to sell it at a profit?

“If an investor can come in and carry them for five, 10 years, [these bulk deals] are great buys,” Dyer said.

Horn, however, cautioned that bulk buyers should prepare for the worst-case scenario: not being able to sell units.

“Nobody knows how long this is going to last … We all think we’re geniuses until we screw up,” said Horn. “The market makes you a bum or a hero.”

Write to Sylvia Varnham O’Regan at [email protected] and Erin Hudson at [email protected]


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