It’s hard enough to sell an apartment these days in Manhattan. Try selling 448 of them in Queens — while trying to lease out 800,000 square feet of virgin retail space at the same time. That’s the challenge facing Muss Development, the 106-year-old, family-owned real estate company that usually does its own building, sales and management. Sky View Parc, the developer’s $1 billion, three-tower project in Flushing, has the dubious distinction of being one of the city’s largest mixed-used projects under construction during one of the worst real estate climates in generations.
Located a couple blocks west of downtown Flushing’s epicenter on a 14-acre plot Muss purchased from Con Edison in 1983, the 3.3 million-square-foot venture seemed ambitious even back in the heady pre-crash days of early 2007. But with 421-a and other tax abatements as well as a city rezoning of the area, the groundbreaking seemed propitiously timed. And it provided Muss with a signature project that would transform the neighborhood.
Then the recession hit. In January 2009, a showdown with a reticent lender reportedly forced the Queens-based company to pony up its own cash for several months to prevent the project from shutting down.
The problem has been resolved, but the schedule has slipped long past the original occupancy date of last summer.
This March, Muss suffered what appeared to be another blow when it ceded the leasing, marketing, selling and managing of the project over to the Related Companies. News reports have implied that Muss’s equity partner, Toronto-based Onex, a leading private equity firm, became frustrated with the slow pace of sales, “started calling the shots,” and pushed the developer aside.
In an interview with The Real Deal last month, however, Jason Muss, a principal of the company, insisted Muss and Onex came to the decision jointly, and that “everybody agreed that it made sense.” The commercial portion of the project is now 70 percent leased, with big-box tenants such as BJ’s and Best Buy, and about 40 percent of the apartments in the first three towers are sold.
“Related is a company that has a tremendous amount of skill and experience in just what we’re doing,” Muss said. “Now there’s one company where the buck stops, and they will control all the management and sales issues.”
Muss also dismissed the negative media attention and downplayed the idea that the current challenges will have any impact on the company’s overall fortunes.
“Come on,” he said, during an interview last month in Brighton Beach at the offices of the company’s Oceana condo complex. “We have so many projects, and we’ve done so many things over the years — not everything is going to go perfectly well; it’s just not possible. If you need to bring in somebody to help you out, and that’s what makes sense for the project … we’re big boys and that’s fine and that’s totally understandable.”
He added: “Listen, there’s work to be done. But we’re all going to work together and get it done.”
Assessing the damage
Muss, a private company, does not release financial information. So it’s difficult to discern the impact any troubles with the Flushing project will have on its balance sheet.
But the company has apparently shelved at least one other project: Before the market crashed, it had plans to erect an apartment building on Third Avenue between 87th and 88th streets in Manhattan, according to a source familiar with the plans.
After the crash, however, Muss put the site on the market, but then took it off when it failed to receive a strong enough offer, according to the source. Muss declined to comment on the property.
The company also has at least one ambitious development that appears to have been slow to rent. It purchased 40,000 square feet of offices from the city in December 2007 at 345 Adams Street, next to its successful Renaissance Plaza project in Downtown Brooklyn. Muss plans to convert the property to retail space. But so far, no tenants have signed on.
Jason Muss said the company “started talking to potential tenants about a year or so ago.”
“We’re pretty close with a nice restaurant and will hopefully announce it in the next couple months,” he said.
Despite the pace of leasing, most real estate observers agree there is little reason to believe the Queens project or any other setback will have a long-term impact on the company, which has built more than 5 million square feet of space, including 1,000 hotel rooms and more than 1,500 residential units in the last 10 years alone.
Like other family-run firms, Muss is known for relying on low leverage, a conservative building strategy, and mostly knocking out what Jason Muss calls “singles and doubles” rather than “grand slams.” That requires accepting modest profits in exchange for modest risk, a concept many firms tossed out during the boom.
Even as it garners some negative attention in Queens, Muss continues to look for new opportunities.
According to the Observer, Muss is one of the 29 firms that submitted a competitive bid to the city to redevelop the massive Willets Point site in Queens. The company is up against heavy hitters like Silverstein Properties and Related, but may have an edge thanks to its experience in the boroughs.
Regardless of the outcome there, the company will have plenty to do once the market recovers. It plans to build another 50 or 60 apartments with retail at Oceana in Brighton Beach over the next couple of years, Muss said. The timing will be “market driven.”
Meanwhile, the company also owns two parcels in the St. George section of Staten Island, and is working to get approvals to build housing there.
Rather than a calamitous miscalculation with Sky View Parc, some real estate analysts say it appears more likely that Muss is simply in for a longer haul in Flushing than originally anticipated — if the company can stick it out.
Richard Xia, president of Fleet Financial Group, a developer in Flushing who sold out his new luxury Shangri-La Towers condo development last year in spite of the downturn, attributed the challenges facing Sky View Parc to its location, which “is a little bit off the center of Flushing and the downtown area.”
But he noted that the Bloomberg administration’s Flushing redevelopment plan calls for an overall shift of downtown’s center of gravity toward College Point Boulevard, where Sky View Parc is located.
The construction of Sky View Parc, in fact, is designed in part to help facilitate that shift.
“BJ’s and Best Buy just opened two months ago,” Xia said. “It takes some time for people to get used to the shopping and everything. The project will do well.”
Plus, he added: “There’s a real demand for high-end luxury condos, because the market has been so underserved by this type of product for so long.”
Joseph Sitt, CEO and founder of Thor Equities, who knows company president Joshua Muss, Jason’s father, well, said, “He is somebody who is often ahead of the curve,” who will buy in areas that have not fully matured, but eventually thrive. ? Muss, he added, “has been through many, many different cycles in his career” and has weathered them all.
“He knows what it is to manage through an environment like today,” Sitt said. “While a lot of folks won’t be left standing, my bet is he will be.”
Refusing to walk away
Joshua Muss may be best known, in fact, for refusing to walk away from another project that was hit with seemingly never-ending financing, political and logistical delays.
Indeed, it took his firm 15 years to construct the 1.4 million-square-foot New York Marriott Renaissance Plaza at the Brooklyn Bridge, a 32-story tower which contains office space and 656 hotel rooms, and which was Brooklyn’s first hotel in half a century.
Muss signed a 99-year lease with the city for the parcel where he wanted to build the hotel in 1987. But after the real estate market crashed that time around, he faced a slew of setbacks, including potential tenants backing out and obstacles with financing.
For its part, the city gave him a deadline and threatened to force him to forfeit the property. Sound like a familiar environment?
At the 11th hour, Brooklyn’s then-borough president Howard Golden convinced the Giuliani administration to back off, buying Muss more time. Eventually, he locked down financing and tenants and got the project built.
“Most developers would have walked away from building a hotel in Downtown Brooklyn when they were confronted with unwillingness by the city to help, and instead [were] issued demands,” said Steven Spinola, president of the Real Estate Board of New York. “He didn’t walk away. He continued to argue and make his point, and it eventually became a big success.”
Meanwhile, the Oceana in Brighton Beach — one of Muss’s largest housing projects to date — also took years to come to fruition. A former beach club, it was first leased by Joshua Muss’s uncle Alexander, in the 1950s. He acquired it in 1980 and agreed to sell it to Muss in 1996, after he grew fed up with community opposition to planned high-rises and faced financing problems.
Muss pursued a more modest development strategy, offering to build no more than 12 stories high, with most buildings no higher than seven. The company overcame financing challenges by doing the project piecemeal, starting with four buildings, and adding additional buildings one at a time.
The project now contains 15 buildings with a total of 865 units.
Greg Winter, founder and managing partner of W Financial Funds, a direct private lender that makes bridge loans, said the Muss family has been around for so long and has so many resources that they “think generationally.”
“There are very few other real estate families that have such a long-term perception of the market,” Winter said. “They are actually so big that they can put something on the side and go back to it 10 or 15 years later.”
That strategy is often a major advantage in the boroughs, where profit margins are lower and approvals can take time.
“The economics of most things are less compelling and less obvious in the boroughs,” said Jed Walentas of Two Trees Management, the Brooklyn company that played a key role in building up Dumbo. “To build a large project anywhere in the city, you need political support. But it’s much harder to galvanize political attention [in the boroughs] because City Hall is always going to be a Manhattan-centric place. It’s harder to generate the excitement you need at a high level.”
Still, profit expectations don’t need to be as high to secure financing in the outer boroughs.
In Manhattan, in order to get financing, you need an internal rate of return of 25 percent to 40 percent to offset the risk and building costs, Jason Muss noted. In the boroughs, “you can probably get a project done for 12 percent to 20 percent internal rate of return.
“You don’t have to have the huge home-run number off the bat to get financing,” Muss said. While a solid middle-class neighborhood in the boroughs will likely always be able to sell for $450 to $500 a square foot, “in Manhattan at $450 to $500 a square foot, you’re dead in the water. You wouldn’t even cover your building costs,” Muss said.
Still, it’s no secret that even solidly middle-class areas in the borough have been seriously hurt by the current downturn. And even with city support lined up, Muss has its work cut out for it, especially in Flushing.
Ben Thypin, a senior market analyst at Real Capital Analytics, said that while Flushing is not in as much trouble as neighborhoods like Red Hook, Williamsburg and Greenpoint in Brooklyn, it’s still going to be tough to sell there.
“We are still in a market where people feel there are bargains to be had and they may not buy in Brooklyn or Queens when they feel they can get a good deal in Manhattan,” W Financial’s Winter added.
However, there are indications the Queens housing market has seen the worst of the recession. And the area of Queens that includes Flushing appears to be doing better than the borough as a whole.
There were 3,113 sales in Queens during the first quarter of this year — down 26.9 percent from the prior quarter, but up 71.8 percent from the 1,801 sales reported in the first quarter of 2009, according to data from Miller Samuel. In Northeast Queens, where Flushing is located, there were 783 sales in the first quarter, down 27.5 percent from the prior quarter, but up 85 percent from the 423 from the same period last year. And, while average prices in Queens fell 7 percent, they stayed roughly the same in the Northeast Queens area.
Flushing also has one major advantage over other neighborhoods: its large immigrant Chinese population, which has reason to favor the neighborhood. A captive Russian immigrant population had attracted Muss to Brighton Beach and contributed greatly to the success of Oceana. The company is banking on the same factor to help Sky View Parc succeed.
“The immigrants add vitality,” Muss said. “They don’t just have convenience reasons to be here, they have cultural reasons to be here. They are very likely to buy in the neighborhood if you give them something nice. And they are going to stay.”
Muss noted that the value of each successive building his company constructed in Oceana rose as residents told their family members and friends about the project.
Muss Development has a similar strategy at Sky View Parc. Though the project calls for six towers eventually, the first phase calls for only three.
The company will start on the second phase when “market conditions allow,” Jason Muss said.