As the credit markets continue to tighten, those looking to tap into New York’s real estate market are mining deeper than ever for alternative funding sources.
Pension funds, sovereign wealth funds, foreign investment groups, hedge funds, insurance companies and offshore investors are just a few of the sources that have gotten attention recently for stepping in to the fill the void left by traditional lenders.
In some cases, Midwestern insurance companies and financial firms that haven’t done business in New York in decades are also getting in on deals here, even requiring mini-tutorials to bring them up to speed on the city’s real estate landscape.
While blockbuster deals like the sale of the GM Building to a group that included two Middle Eastern investors make splashy headlines, many lower-profile deals are tapping foreign investors in the same way. Others are turning to new buying partners and less-usual sources of funding.
In March, for example, the Dermot Company, the owner of One Hanson Place in Brooklyn, acquired a rental apartment complex at 210-230 West 107th Street near Columbia University for $60 million. The deal was financed through a fund sponsored by London-based Henderson Global Investors, which had never before invested in New York, after a number of traditional lenders retreated, according to Steve Kohn, president of Cushman & Wakefield Sonnenblick Goldman, a real estate investment banking specialist.
Cushman & Wakefield arranged $23 million in financing from the $205 million Casa Partners IV fund, which was established by Henderson in 2007.
“They have raised the money from various institutional investors — to a great extent pension funds,” said Bill Dickey, president of Dermot. “The purpose of the fund is to invest in rental apartments. They had not previously invested in New York City.”
Kohn said the environment for putting together a deal like this has changed tremendously in the last year. The inability to sell mortgage-backed securities has made it more difficult to raise debt, he noted. In addition, lenders are less willing to finance loan-to-value ratios of more than 70 percent, meaning that buyers have to come up with additional equity or pay higher interest rates. As a result, the number of deals has dramatically slowed down.
“Many of the institutional investors have capital, but they’re waiting on the sidelines,” said Kohn.
Leaning on locals
Scott Singer, executive vice president at the Singer Bassuk Organization, which arranges equity and debt financing, said that despite the established reputations of many of his clients, he has been forced to search his Rolodex in order to finance new deals.
His firm is working with several Midwestern insurance companies that haven’t done a major deal in New York since the 1990s. For many of these firms, the biggest issue is getting them comfortable with some of the emerging residential markets in New York.
“A lot has changed in New York in the past 10 years, virtually all of it to the good,” said Singer. “If we’re talking about a residential deal, the number of neighborhoods that were considered reasonable for high-end luxury apartment buildings — that was a much more limited area 10 years ago.”
Singer said he was not at liberty to name the firms because the deals have not been finalized.
Of the out-of-state firms, he said, “We’ve always tried to maintain those relationships. When you get into a market like this, their response is not, ‘Hey, we haven’t heard from you in 10 years.’ Their response is more collegial.”
Meanwhile, David Schechtman, senior director at Eastern Consolidated, said that while overseas funds, pension funds, American firms based outside New York and other investors are entering the real estate mix here, they are leaning on local experts to guide them through the process. He said that top financial experts, architectural firms and real estate attorneys are being asked to navigate investors through the process.
“I think the lion’s share of these equity sources, if they’re not sophisticated enough on how to structure deals, they’re being well-coached by local partners,” said Schechtman. “In this city, in real estate, you can always hire somebody to think for you.”
GM’s ripple
The May acquisition of the General Motors Building by Boston Properties is a prime example of how the landscape has changed. The real estate investment trust led by publisher Mort Zuckerman agreed to buy the GM building and three other Manhattan properties from Harry Macklowe for about $3.95 billion.
The purchase price included about $1.65 billion in cash, $2.47 billion in debt and a $10 million stake in Boston Properties L.P. for Macklowe. Zuckerman was able to tap into his Middle Eastern joint venture partners (which reportedly include a Qatari sovereign wealth fund and the Kuwait Investment Authority) to finance the deal.
Spencer Levy, senior managing director of capital markets at CB Richard Ellis, says despite the talk of sovereign wealth funds investing in the U.S. and in deals like the GM sale, there is still a sentiment that the dollar has not bottomed out.
As a result, he said, much of that money remains on the sidelines. “While a lot of people are suggesting there should be a large influx of that capital to the states, as of today we haven’t seen it,” he said.
Still, Woody Heller, executive managing director of Studley, said the GM deal is an important benchmark that speaks to the willingness of sovereign wealth funds to make long-term investments in the U.S.
“For the last several quarters, the word on the street was that the sovereign wealth funds were distracted by Asia and less interested in the U.S.,” said Heller, who leads Studley’s capital markets group. “They were not interested in low initial yields and not interested in deals that didn’t have near-term upside.”
Dan Fasulo, managing director of research at Real Capital Analytics, predicted that the GM deal would spur a new round of trading in the city in the next few months.
“Everybody is going to be looking at the prices they trade for and will use that as a baseline,” said Fasulo. “I have a feeling that some of buyers are going to come out and play in the fall.”