Investing in real estate can be daunting, especially in the unpredictable post-Lehman market. And the strategy favored by new investors in the mid-2000s — ground-up condo construction projects — is now viewed as extremely risky.
But newcomers to the world of New York real estate investment — especially those with some prior industry experience — are nonetheless finding creative ways to carve out a toehold in the business.
For some new companies, like Stone Street Properties and Benchmark Real Estate Group, that means investing in low-risk, multifamily assets and rolling them over for considerable profit, thanks in part to the thriving rental market.
Other would-be real estate moguls are building ground-up projects, but keeping them much smaller than in the past. Aspen Equities founder Seth Brown, for example, recently completed a new-construction house — one of only a few fully new brownstones built in Park Slope in decades — and the eight-unit condo Sterling Green in Prospect Heights. Brown said young firms like his, which launched in 2005, are gravitating toward smaller projects because of the difficulties in securing financing for larger deals.
“We have been dealing with a lot of new investors in their early 30s who are looking at value-add situations all over Brooklyn, Queens and Upper Manhattan,” said Jerry Swartz, president and founder of HKS Capital Partners, a capital advisory firm. He said his firm is doing an average of two deals a week that involve putting investors and borrowers together to purchase multifamily properties.
“The companies all are probably two to four years old, looking to buy distressed opportunities and off-market transactions with low rents,” he said. “They are all very hungry to grow a portfolio and consummate transactions.”
A ‘financeable’ investment
During the easy-credit real estate boom of the mid-2000s, it was common for industry newcomers to plunge into condo projects — whether or not they had any experience. But when the market crashed in 2008, these newbie developers were in for a rude awakening, and many lost significant amounts of money.
As a result, traditional, large condo projects are no longer viewed as the optimal way to get started in New York City real estate. Instead, many investors are focusing on the less-risky world of multifamily acquisitions, especially in the current hot rental market.
According to a recent report by residential brokerage Citi Habitats, the average Manhattan monthly rent was $3,376 in February. That’s just below the all-time peak recorded by the firm in May 2007.
With rents soaring, lenders are eager to provide financing for low- to mid-size residential opportunities in the city.
“The multifamily asset class is very financeable,” said Ariel Property Advisors president Shimon Shkury. “You can borrow at less than a 4 percent interest rate, and the capital needed is much less than if you were looking to get a construction loan.”
As a result, the multifamily sector is attracting a broad swath of investors, from high-net-worth individuals to REITs. That’s one reason why the volume of New York City multifamily building sales spiked 33 percent between 2010 and 2011, according to recent data from Ariel Property Advisors.
But multifamily is especially attractive for new companies because of relatively low barriers for entry, explained Aaron Jungreis, founder of commercial brokerage Rosewood Realty Group.
“Without trivializing it,” he said, “it’s not the most sophisticated business. … It’s a very fixed type of asset that’s not that difficult to master.”
The initial yield on multifamily assets is traditionally low, but value can be unlocked by making building improvements or removing rent-stabilized tenants. That’s where young, hungry professionals can make their mark.
“These are young, energetic guys who are not afraid to get aggressive with tenants,” Jungreis said.
It helps that multifamily lenders also have limited expectations. Since the asset class presents a conservative amount of risk, lenders “don’t expect tremendous amounts of return,” Shkury added.
Stone Street Properties is a real estate investment firm founded last year by Jeffrey Kaye and Robert Morgenstern.
Kaye, who previously worked for developer the Gotham Organization, and Morgenstern, a former Gumley Haft Kleier residential broker, used their industry connections to partner with the investment firm Rockwood Capital. In September, they paid $90 million for a portfolio of five Manhattan rental buildings.
Stone Street manages its properties in-house, aiming to add value by “completely gutting and reconfiguring the apartment[s] to utilize every square foot,” Morgenstern said. Using that strategy, he said, the firm recently leased one unit at 7 Cornelia Street for more than twice what it went for when they bought the building.
They said the current strong rental market has also been crucial to the firm’s success. At one of its Manhattan portfolios, Stone Street is paying its investors returns north of 10 percent.
“When we purchased this portfolio, we anticipated distributions ranging from 5 percent to 8 percent over the course of several years, but have achieved much more in just the first few quarters,” Kaye said.
But real estate investors need more than just elbow grease to get started in today’s uncertain climate.
Lenders are still cautious, industry experts said, so they prefer new investors (or their partners) to have some experience, and to have financial skin in the game (see “Fear and lending in New York: With regulators on their backs, banks get timid”).
Benchmark, founded in 2009 by Aaron Feldman and Jordan Vogel, is only 50 to 60 percent leveraged at the 14 multifamily buildings it’s purchased so far, Vogel said.
And Feldman and Vogel, both 32, previously worked at acquisitions firm SG2 Properties, where they were “groomed” in multifamily building management. Without that experience, “I don’t think we would be in a position to do what we’re doing,” Feldman said. “We went down this path because this is what we know.”
In October, the firm sold 142 Sullivan Street for 60 percent more than it originally paid, after increasing the rent-roll by 35 percent. At 156 Sullivan Street, a 22-unit building Benchmark purchased for $6.05 million in 2010, Feldman and Vogel are aiming to repeat their success. They’ve listed the building for $15.75 million.
Other young firms who started out doing new-construction condos have now moved into the multifamily sphere. One example is New Jersey–based Treetop Development, founded in 2005 by Adam Mermelstein and partner Azi Mandel. In the mid-2000s, Treetop built the Saffron condo in Jersey City and a 13-unit condo building at 471 Keap Street in Brooklyn, which eventually went rental.
But recently, the firm has moved away from ground-up development to focus on multifamily acquisitions. Treetop in February paid $18.4 million for 82 residential and 11 retail units in Upper Manhattan. That transaction was closely followed by the $53 million purchase of 17 buildings on the West Side, between 105th and 108th streets.
“I don’t think we feel the [limitations of the] credit market as much as we did with condos,” Mermelstein said.
Multifamily is not for everyone, however. Aspen’s Brown, for example, “never found too much stuff that I got really excited about” in the multifamily sector, he said. “You have to do a really large volume to have it really make sense.”
Instead, he focuses primarily on boutique, ground-up construction projects.
Last year, he and a partner completed construction on a new two-family brownstone at 319 Fourth Street, which they ultimately sold for $2.87 million.
“It did not feel like it was low-risk,” Brown said of the project, which was planned in 2007 and put on hold during the downturn, “but the capital required was less [than for a larger development project.]”
And at 580 Sterling Place, all eight units were sold within seven months of the marketing launch for an average of $501 per square foot, said Brown, who is now scouting for larger opportunities. The project yielded a 30 percent annualized return for investors, he said.
Brown, who previously worked at Hudson Companies and the LeFrak Organization, said his prior experience was helpful now that he’s out on his own. “If you have a track record of success, it certainly gives lenders peace of mind,” he said.
Developer Kate Shin has targeted a different niche: very wealthy Manhattanites.
In 2007, Shin founded WEmi:t (Where East Meets West), which focuses on restoring and modernizing townhouses. For her first project, Shin partnered with architect Toshiko Mori to restore a 22-foot-wide carriage house at 170 East 80th Street.
Shin purchased the townhouse for $8.5 million in 2008. In January of last year, she listed it for $35 million with Paula Del Nunzio of Brown Harris Stevens.
“We’re targeting a top-tier market — people with money will always have money,” she explained. “There’s a limited supply for this type of project, but there’s a lot of demand for it all over the world.”
Shin was previously a director in the private equity department at Angelo, Gordon & Co., and has significant experience raising funds for investment in Asian real estate markets. (In fact, she has already lined up investments for her second and third projects, currently in the pipeline.)
She gravitated toward townhouse renovation, she said, because it was a niche market where she could be competitive. If she’d chosen to take the capital from her Asian investors and build a large condo development, she’d be battling for buyers with New York’s top developers.
“It would be impossible to survive,” she said.