Big gains, small deals

Wave of firms snap up small rental buildings in Brooklyn and Queens, driving up prices
By Adam Pincus | December 01, 2016 01:00PM

recent surge among a handful of professional real estate owners buying up small apartment buildings in Brooklyn and Queens is sparking a sea change in that market. All told, these players — characterized by their use of limited liability companies or other corporate structures — have poured nearly $3.2 billion into properties with 10 or fewer units purchased from mom-and-pop owners in both boroughs over the last five years.

The new owners range from the low-profile variety that use post office boxes in Williamsburg as their corporate address all the way up to midsize institutional players such as Sugar Hill Capital Partners TRData LogoTINY and Silvershore Properties, and even the national real estate giant Related Companies. A sudden rise in demand from these buyers has caused the average price of an apartment unit to double in such buildings, known by their tax classes 2A and 2B, from $150,000 in 2012 to nearly $350,000 in 2016, an analysis by The Real Deal found.

At the receiving end of this phenomenon are sellers who often lived in one of the units and rented out the others, and in some cases owned a few buildings in their own names.

“The vast majority of the sellers are in some way owner-occupiers,” said Eli Tabak, a principal with New York-based Bluestone Group, which has lent money to some of the new buyers. As for the sellers, he said: “They are getting a windfall number they never imagined.”

The wave of acquisitions involving professional buyers in Brooklyn and Queens accounted for nearly half of the 7,300 properties with 10 or fewer units to trade since Jan. 1, 2012. The total volume of 2A and 2B apartment building sales across the two boroughs totaled more than $9 billion and resulted in more than 38,000 units changing hands in that five-year span. Only recently has the doubling of prices taken some of the pressure off demand, sources said.

The incentives for buyers include stricter limits on how much the property tax bill can increase in a given year, and — for buildings with five or fewer units — an exemption from the state’s rent regulation laws.

The professional purchasers apply multiple strategies to buy in bulk. Some turn to brokers, while others reach out directly to owners.

“I only buy properties from long-term owners because if the seller is a real estate investor, it’s either juiced out or something is wrong,” said one buyer, who asked to remain anonymous.

Over the five-year period, the most active acquirer was Harlem-based Sugar Hill. Founded in 2009, and led by Alex Friedman and David Schwartz, the firm purchased 232 units for a total of $87.6 million. Representatives for Sugar Hill did not return a request for comment.

Next was Midtown-based Silvershore, a firm led by Jason Silverstein and David Shorenstein, which was also founded in 2009. Since 2012, it has snapped up 52 buildings with a total of 330 apartments in Brooklyn and Queens, paying $75.2 million. The firm, which owns about 100 apartment buildings in the city (most of them under 10 units), seeks to buy properties without a broker.

“We are approaching owners directly,” Silverstein told TRD. “David and I found a little niche that works well because of the amount of property we own,” Silverstein added.

Having snapped up 124 units for $47.4 million, Yoel Goldman’s All Year Management ranked as the third-largest buyer. Close on its heels was Related, which has partnered with several of the city’s pension funds to buy workforce housing, including 86 units for $46.4 million. Rounding out the top five was Valley Stream, Long Island-based Center Street Capital, led by Eric and Ben Orlofsky. The firm acquired 101 units for $36 million over the five-year period.

While some investors still have a strong interest in these assets — particularly buyers with 1031 tax-free exchange money to spend — several of those in the 2A and 2B market said they were being priced out and see the market cooling.

“I see interest going down, but it’s got nothing to do with the [overall] slowdown,” Tabak said. “It’s because prices have come to a level where they’re not as attractive as one, or two, or three years ago.”