A new guard takes Upper Manhattan

Institutional players out, local shops in as portfolio trading spikes

Feb.February 01, 2014 07:00 AM
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An active year for the Upper Manhattan multi-family market was topped off in November by the acquisition of an 84-building portfolio by Brooklyn-based real estate company E&M Associates from notorious landlord Baruch Singer. The $340 million deal was the largest multi-family portfolio sale of 2013.

And it wasn’t the first in Upper Manhattan by E&M, which is led by investors Irving Langer and Leibel Lederman. The pair also snapped up 539 units in March from Coltown Properties for $75 million.

E&M is among a number of investors nabbing Upper Manhattan units in bulk. They’re joined by New Jersey–based outfits like Treetop Development and the Orbach Group, Queens-based Alma Realty, Doug Eisenberg of A&E Real Estate and Castellan Real Estate Partners.

Those companies’ combined purchases in the last two years represent a changing of the guard in Upper Manhattan, as large institutional players move out of the market.

Since 2011, major Upper Manhattan landlords backed by institutional capital have largely sold off their massive holdings. Those sales, sources say, are due not only to the strength of the Uptown market, but also to reputational risk associated with operating those portfolios.

They’re being quickly replaced with a new type of investor: smaller local shops, less beholden to institutional purse strings. These new buyers instead have alliances with other types of financial backers chasing yield, such as private investment companies and high-net worth individuals, and can sometimes eschew institutional money altogether.

For those who do rely on institutional capital, their private equity partners remain notably under the radar.

“Portfolio deals are driving a lot of the volume that we’re seeing in Upper Manhattan,” said Victor Sozio of commercial brokerage Ariel Property Advisors. “The amount of transactions year-over-year were almost identical, but the amount of buildings that traded spiked.”

In fact, while there were just 106 multi-family transactions Uptown between January 2013 and November 2013, a 1 percent increase year-over-year, the number of properties sold jumped 88 percent, to 151 for the 11-month period, according to data provided by Ariel.

Meanwhile, total dollar volume of the year’s transactions more than doubled, to close to $1.5 billion, from just short of $600 million.

Who’s backing out?

Investment firms backed by private equity amassed giant Upper Manhattan portfolios in the years preceding the 2008 economic collapse. In all, they took hold of around 75,000, or about 6 percent, of the city’s rent-regulated units between 2004 and 2008, according to news reports.

Their business plans involved buying giant rent-regulated apartment buildings with plans to perform upgrades and replace existing tenants with high-paying ones, sources said. Since the buildings generated lukewarm cash flows, these companies were almost entirely dependent on boosting rents above average.

The most active players were companies like Neil Rubler’s Vantage Properties, backed by Apollo Real Estate Advisors (which later changed its name to Area Property Partners), and Joel Wiener’s Pinnacle Group, backed by Praedium Capital and private equity firm Normandy Real Estate Partners.

Allegedly aggressive tactics on behalf of some of these companies to try to vacate rent-regulated tenants led to headaches and bad press. Then New York State Attorney General Andrew Cuomo led an investigation into Vantage’s conduct in 2010, eventually forcing the company to cough up $1 million in a settlement. A lawsuit filed by rent-regulated tenants across Pinnacle’s buildings citywide still has not been resolved.

Both companies have persistently denied significant wrongdoing.

These investors largely did not make the returns they hoped for. At Harlem’s 1,802-unit Savoy Park apartment complex, which Vantage purchased in 2006 for $175 million, the developer spent four years digging out from under its debt before selling the complex for $210 million in 2012.

Vantage and Area unloaded most of their collective holdings beginning as early as 2010. Last year, Area sold 10 multi-family properties in Washington Heights and Inwood, known as the Decathlon portfolio, for $49 million, about $7.5 million less than the duo paid in 2007. Vantage had largely exited the investment. The purchaser was Alma Realty.

Behind the sales

There are two reasons for the “exodus” from Upper Manhattan real estate for the major private equity players, said Adam Mermelstein, a principal of Treetop.

“For one, they perceive it as a PR risk. They no longer want such reputational risk in their portfolios,” he said. “Also, the market as it stands today has risen quite a bit. It’s an opportunity for funds which do have a life cycle to exit and make a fair amount of money.”

Area CEO Richard Mack hedged on why the company moved out of Upper Manhattan. “We had great success up there, as well as a lot of difficulty. I think we would still do business up there, if we found the right deals,” Mack said. He added that the departure “wasn’t related to the market, it was on a deal-by-deal basis.”

Mack, (who is featured in this month’s Closing) also admitted that some of the bad press generated by their Uptown deals influenced the decision.

“There’s a high level of scrutiny that comes with being a landlord up there,” he said. “I think Area was under more scrutiny than most owners. That’s a shame, because it’s a place that can use more institutional owners, not less.”

Yet institutional players have ceded ground across the board. While Treetop has some institutional backers, such as Phoenix Realty, it’s much more challenging to strike a deal now for institutional partners, Mermelstein said.

“In the past, it used to be a slam dunk that you’d get an institutional backer,” he said. “Today, there are probably five or six that are active players. That’s maybe a third of what the number was five years ago.”

Some of those backers also believe the market has reached another peak, said Aaron Jungreis, a founder of Rosewood Realty Group.

Sellers “are getting prices they never thought they would get,” he said, noting that competition for these assets has intensified. “We’ve had 20 or 30 qualified bidders on some deals.… Five years ago, there might only have been two or three.”

Moving in

The new breed of Upper Manhattan landlord was born out of the recession, said Robert Shapiro, a Massey Knakal investment sales broker specializing in the neighborhood.

Indeed, the majority of the firms in high gear in 2013 started actively acquiring around 2011 and 2012, as the market started to regain its footing.

Orbach, founded in 2005, now has 5,500 apartment units in New York, New Jersey, and Pennsylvania, according to a recent release from the firm. While it was not clear how many of those units are in Upper Manhattan, the group purchased a 33-building apartment package above 96th Street for $246 million in September from a joint venture of Heritage Real Estate Partners and Dune Real Estate Partners.

A&E’s Eisenberg, who previously worked as a principal of his family business Urban American, departed the company in 2011 and has snapped up several Upper Manhattan portfolios since. In addition to the 103-unit 1 Bogardus Place, which he bought from Vantage and Area, he picked up a four-building multi-family portfolio in Inwood for $31 million from development and investment firm the Dermot Company in December. A&E is known to partner with asset management giant AllianceBernstein on deals.

Meanwhile, Treetop has purchased over 800 units in Upper Manhattan since 2012, Mermelstein told TRD. Upper Manhattan now makes up just under a third of the company’s market-rate portfolio.

While yields have undoubtedly diminished, as buildings there have become pricier to buy, Mermelstein still perceives Upper Manhattan as undervalued.

“In the East Village, you’re seeing portfolios trade at $350,000 to $400,000 a unit,” he said. “Granted, there’s a lot more upside in that the East Village is a true and tested condo market, so there is that exit play. In Northern Manhattan, you can still buy units for under $200,000 a door.”

Despite the fact that many institutional players have already exited, there is still significant room for upside, sources said.

“Regardless of how aggressive an operator wants to be in turning over rent-stabilized units, it’s rare that they would be 100 percent successful at it,” Ariel Property Advisors’ Sozio said. “They got the low-hanging fruit, but there is still more upside for a new owner coming in there.”

Indeed, some new owners may be content to wait out the market. Rents have been steadily rising. The average asking rent for a one-bedroom apartment in Harlem was $2,480 in December, compared with $2,364 a year earlier, according to residential brokerage MNS.

“Some people are not really looking to cash out,” Jungreis said. “They’re looking to put that $10 million gain into a building and they don’t really care about refinancing or reselling right away.”

Brokers active in the neighborhood are now tailoring their offerings to these new buyers, Shapiro said, noting that Massey Knakal broke down a portfolio, of roughly 1,100 units across 15 buildings, into more manageable tranches for these mid-sized firms in 2013. The portfolio, formerly owned by Lehman Brothers, sold in six separate transactions for an aggregate of $139 million.

“Breaking it into smaller pieces made it much more manageable,” Shapiro said. “You’ll probably be able to extract more upside out of the smaller portfolios.”

Mermelstein agreed: “Everybody likes to buy in bulk,” he said. “It’s great to buy 400 units at a time, but 1,000 units at a time gets difficult to wrap your hands around.”

“That’s not to say that we would never do it, but I’d probably prefer to take on 400 units now, and another 400 units in three months,” he said.

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