In cities like Miami and Las Vegas, where market slowdowns after hyperdevelopment mean condo gluts, that’s a new opportunity for real estate investors. As developers resort to renting units that won’t sell, some investors are buying blocks of apartments at a discount, then renting them out.
The bulk purchase has come to New York, as a group of Irish investors known as Keane Mahony Smith (KMS) Commercial recently bought blocks in a handful of new condo projects and is now marketing the apartments to potential customers in Ireland.
While notable, it’s not quite the start of a trend, say new development brokers, because the city’s market is still going strong. Buying in bulk will likely remain a niche business here.
“The only time I saw a mass purchase of condo units was when all the properties went back to banks in the 1980s,” says Andy Gerringer, managing director at Prudential Douglas Elliman. “We’re nowhere near that kind of situation in New York.”
Gerringer says bulk sales are happening more in Las Vegas, Florida, and maybe soon in Washington, D.C., where hot markets recently cooled. But in New York, developers don’t need to sell any of their units at a discount because sales aren’t weakening at an alarming rate.
Robert Knakal, chairman and founding partner of Massey Knakal, agrees, explaining that one of the primary reasons for the low rental vacancy rate in New York is that 90 percent of the condos sold are bought by owner-occupants. “There’s actually a need for more rentals in New York because the condos don’t add to the rental market,” he says.
Besides, Gerringer adds, it’s difficult to imagine too many developers finding themselves in financial trouble.
“With the cost of building and the cost of land, you have to be pretty sure about the project,” he says. “Also, the costs make it very difficult to buy a unit or block of units and make any money off of renting.”
Gerringer doesn’t expect any changes in the residential market anytime soon. “There are always some ‘ifs,’ of course,” he says. “If interest rates don’t spike dramatically and as long as there isn’t some kind of major event like a terrorist attack, New York’s market should stay pretty strong.”
That hasn’t prevented KMS, the Irish investor group, from purchasing blocks of units in three Manhattan buildings: the Atelier at 627 West 42nd Street; Gramercy Green on West 23rd Street and Third Avenue; and the Centria at 18 West 48th Street. The group says on its Web site that it will soon be marketing apartments in a new building in Tribeca where it bought units. The name of that project has not yet been disclosed.
Gerringer says KMS approached his clients to buy units in their new building at 225 East 34th Street, but the building’s developers declined the offer because they didn’t want to offer a discount.
According to Gerringer, the point of buying condos in bulk is to get some kind of a discount on the units, usually before the developers start marketing them individually. If developers are somewhat nervous about the likelihood of selling out the building, they might agree to offer some kind of discount to investors willing to buy 10 or more units.
While these opportunities might not arise often in new condo projects, buyers wanting units in bulk can look to older buildings converted from rent-stabilized apartments to condos. Mark Zborovsky, dubbed the “King of Blocks,” has been selling blocks of rent-stabilized apartments to investors for 20 years.
As Zborovsky explains, when landlords convert a rent-stabilized apartment building into condos, there are almost always tenants who have been living in the building for years paying below-market rent who don’t want to move. And New York rent-stabilization law says they usually don’t have to. That’s where Zborovsky and his clients come in.
He’ll sell the block of tenant-occupied units — referred to as unsold shares — to investors who are willing to wait for existing tenants to move out or pass away so they can then sell the apartments on the open market.
And while these investors do have to be patient, Zborovsky says they also do what they can to persuade tenants to move out, either by offering to pay them for the apartment or by conducting investigations to discover whether tenants own other apartments or are illegally subletting. When that happens, tenants have to move out.
Zborovsky is currently selling 21 apartments at 75 East End Avenue, which has been converted to a 200-unit luxury co-op. Individual units are selling for between $1 and $3 million, but remaining tenants are paying only about $750 a month in rent and don’t want to move .
Because of those rent-stabilized apartments, the building has a negative $40,000 cash flow. Zborovsky expects to sell the block of apartments for around $10 to $12 million. Over the years, he says, the investment will return well more than twice what is paid as tenants move out and the apartments can be sold for market value.
Zborovsky says that this niche segment of real estate can be quite lucrative for long-term investors. “It’s like putting money into a retirement plan,” he says. “If you have patient money, this is a wonderful investment.”