It’s no secret that the real estate industry was salivating over Amazon’s arrival in Long Island City — and was giddy about the potential ripple effect expected for the entire New York market.
But the retail giant’s decision to ditch its plans for a second company headquarters in LIC had a more apocalyptic effect on some than on others.
Not only had Amazon tapped TF Cornerstone to develop part of its new HQ2 on a site just south of the Queensboro Bridge; more significantly, it also signed on for 1 million square feet of office space at One Court Square, a 1.4-million-square-foot office tower owned by real estate private equity firm Savanna. That move set off a chain of events that has now left Savanna in the lurch as a deadline on its $315 million loan looms.
Amazon’s about-face — prompted by political blowblack from some elected officials and other opponents — also put a halt to the condo-buying frenzy, the development rush and the hopes that LIC would become the next big tech hub, a sort of East Coast Silicon Valley.
The company had committed to creating 25,000 jobs over the next decade, and the overall economic bump was pegged by Gov. Andrew Cuomo’s administration at $27 billion over the next 25 years.
The deep-sixing of the deal has drawn condemnation from all corners of the industry, as The Real Deal has been reporting. One developer even referred to the elected officials who sank the deal as financial “terrorists.”
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“There is nothing we can equate this to in the history of the state,” Howard Zemsky, head of Empire State Development, the state’s economic development agency, said days before Amazon fled, according to published reports. “It’s the largest economic development prize we’ve ever had.”
Real estate brokers and developers had been benefiting from that dangling prize since November, when Amazon announced that Long Island City (and Crystal City, Virginia) had won its much-hyped national competition to land HQ2, which could have eventually encompassed 8 million square feet.
The Long Island City condo market, which had been suffering from an oversupply of inventory, suddenly became frothy, with lines for open houses stretching down the block and developers eyeing more deals. Office leasing brokers expected Amazon to be a magnet for other tech companies.
All of that activity vanished when Amazon, which is owned by billionaire Jeff Bezos, pulled the plug.
Developers are now back to worrying about how to unload units, office space is likely to stay empty for longer, and investors have already pulled back on new land trades.
“Absorption will happen, but it will take some time,” said Michael Tortorici, executive vice president of investment sales at Ariel Property Advisors. “How quickly is anyone’s guess.”
Amazon’s opponents — two of the most prominent being state Sen. Michael Gianaris and newly elected U.S. Rep. Alexandria Ocasio-Cortez, whose district abuts Long Island City — have maintained that forking over roughly $3 billion in tax incentives to one of the richest companies in the world was irresponsible. They also criticized the deal for being negotiated in backroom fashion without any public input. And many opponents declared victory for long-time middle-income LIC residents, who they argued would be pushed out by the inevitable residential price increases.
But other local activists decried the loss of 1,500 jobs that were slated to go to residents of the Queensbridge Houses, the largest public housing complex in the country, over the next 10 years.
“Here comes Amazon, the biggest company in the world, to come to do business with Long Island City and the biggest public housing project in the world, and they turn it down. I don’t understand it. Explain it to me,” local activist Billy Robinson told TRD.
“No one came with a backup plan and said, ‘Listen, given that you guys might lose out on the 1,500 jobs, we have so and so in place where we’re going to be able to give out X amount of jobs,”’ he added. “You don’t hear anything about that. They don’t have a plan.”
Real estate players also point out that the $3 billion in tax breaks was not earmarked exclusively for Amazon — any qualifying company could have taken advantage of them — and that those incentives were performance-based, meaning Amazon had to deliver on its promises in order to get them.
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Despite their ire, real estate players say LIC is still a bankable long-term investment and that it will revert back to where it was before Amazon entered the fray.
And while far from a consolation, Amazon has said it will continue to take office space in New York. While small beans compared to HQ2, it’s reportedly close to signing a 10,000-square-foot lease at the Chrysler Building.
But the missed HQ2 opportunity is still stinging. And the fact that Amazon’s opponents drove the company out of the city suggests that opposition to the real estate industry is hardening in Albany.
CBRE’s Mary Ann Tighe said the Amazon deal was unique in its potential to transform LIC. “A key point on the Amazon deal is that they elected to pioneer a neighborhood,” she said. “Google’s growth is obviously a huge blessing for the city, but they’re growing in among the most desirable neighborhoods for New York City office space.”
From frenzy to freak-out
Before the Amazon deal, Long Island City was by all accounts a buyers’ market.
That all changed after Amazon selected LIC.
Condos began selling sight unseen, prices started rising, brokerages began jockeying for business, and developers were scrambling to start new projects.
According to data from the listings portal On-Line Residential, 79 contracts were signed in LIC and Astoria between Sept. 13 and Nov. 12 of last year — before the deal with Amazon was announced, the New York Post reported late last month. That number shot up 98 percent to 157 between Nov. 13 and Feb. 13, during the period when Amazon was on its way to LIC.
Meanwhile, in the five weeks after the Amazon deal was announced, 18.8 percent of listed homes in the area saw a price jump versus zero in the previous five-week stretch, according to StreetEasy.
Eric Benaim’s Modern Spaces was already seeing the bump in business.
“It’s devastating for New York,” said Benaim, who collected roughly 4,000 signatures on a petition after news reports surfaced that Amazon was reconsidering.
Benaim, whose firm is a market leader in the neighborhood with $45 million in active listings, said his company would be alright: “We were going fine three months ago, and we’ll continue to be fine.”
Still, he said, condo absorption would slow down.
Savanna’s Christopher Schlank, left, and Nicholas Bienstock
“We’ll have to work like we worked before,” said Benaim, who added that the firm will move forward with post-Amazon plans to recruit between 30 and 40 new agents. “It’s hard, but that’s the work.”
Halstead’s Robert Whalen, director of sales in Long Island City, said, “the future of the neighborhood is still going to happen.”
“But Amazon could’ve accelerated the process,” said Whalen, whose firm had 77 in-contract listings and 13 active listings in the neighborhood on the day Amazon pulled out.
In many ways, though, the aftermath of Amazon’s exit is still playing out.
Stribling & Associates’ Patrick Smith said some LIC buyers with contracts out chose not to sign and “opted to take a wait-and-see approach,” while others signed. He added that the three-month period before Amazon backed out didn’t see notable price increases, but it did reduce negotiability in the market.
Now buyers who went into contract during that time may attempt to renegotiate prices, said Jonathan Adelsberg, a partner at the law firm Herrick Feinstein.
While it’s still early, Adam Swanson, a real estate litigator at the law firm McCarter & English, noted that some buyers could eventually find themselves in foreclosure if they closed on units at too-high prices. He also said there could be a spike in buyers looking to retrade on closed deals, hoping that speculators “with steel spines and ice water running through their veins” will look to capitalize on a potential overcorrection.
Smith said that in retrospect, he’s glad he warned clients that the Amazon plan was not a done deal and that they should invest in the neighborhood for broader reasons.
“Add Amazon, and people felt it would supercharge the growth rate even more,” Smith said. “Take that out, and you’re still left with a good real estate market.”
Developers decelerate
With Amazon now a distant memory, development deals have already started to slow.
Nancy Packes, president of Nancy Packes Signature Marketing Services, said she had a client who was looking to acquire a roughly 35-unit rental building in Astoria, which borders LIC.
After the Amazon deal fell through, the client — which does acquisitions, not ground-up development — instead opted to buy and renovate a similar-size building in Jersey City.
“For them, [Amazon] swayed sentiment away from Astoria,” Packes said.
Herrick’s Adelsberg said LIC was seeing a “substantial slowdown of people putting shovels in the ground” before Amazon selected LIC.
The numbers back that up: Last year, there were 21 LIC development site sales totaling $229 million, according to Ariel. By comparison, in 2015, at the peak, there were 34 deals totaling $524 million.
“People thought Amazon would offset any slowdown,” Adelsberg said. “[The fact that the company pulled out] will have a profound impact.”
Compounding matters is the deluge of development that’s already occurred.
Since 2006, about 16,800 residential units have been added to the market, with another 11,700 units expected to open by 2020, according to the LIC Business Improvement District.
The inventory is dominated by rentals, but interest in condo development has been ramping up lately. For example, Adam America and Vanke have the 182-unit Galerie on the market, and CBSK Ironstate has the 85-unit Corte. (The Corte saw 39 contracts signed while the world was under the impression that Amazon was moving in.)
Ariel’s Tortorici said that residential supply will “come into check” as fewer development sites trade.
If there is a silver lining here for the real estate industry, it’s that Amazon didn’t wait even longer to pull out, sources said.
Even if developers wanted to pounce during the three-month window of real estate euphoria, they had a short amount of time to scope out and close on deals.
In addition, brokers say the neighborhood has another major thing going for it. Large sections of LIC are located in an Opportunity Zone, the much-ballyhooed federal tax deferment program.
“We were bullish even before Amazon because of the Opportunity Zone,” said James Nelson, head of tri-state investment sales at Avison Young. “That will help drive some of the activity.”
An ‘iffy’ office outlook
If anyone is actually losing sleep over the loss of Amazon, it’s likely Christopher Schlank and Nicholas Bienstock, the heads of Savanna.
With Amazon no longer taking space at One Court Square and with Citigroup, the tower’s current anchor tenant, expected to leave either this year or next, the firm could see vacancy in the building soar to 70 percent.
Now Savanna is struggling to refinance the building, with talks to borrow more money or sell stakes in the building all but dead, the Wall Street Journal reported.
“It is going to be hard to get a large commercial real estate loan on a property that is 70 percent vacant,” Joe McBride of research firm Trepp told the Journal.
Savanna’s $315 million loan for the property matures in 2020.
The company, which declined to comment, could lose the property to creditors if it cannot work something out before then.
Beyond One Court Square, the industry was readying for a bump in pricing and a drop in vacancy in the LIC office leasing market with Amazon as a draw.
In November, Savills Studley Vice Chairman Jeffrey Peck said the neighborhood could become the new Midtown South, a submarket that has become a hub for tech companies in recent years.
Overall, 2018 leasing activity in LIC totaled 742,000 square feet in 2018, a 93 percent increase over 2017, according to CBRE. That bump was driven by two large transactions — a 299,793-square-foot expansion by Macy’s at Tishman Speyer’s 1.2 million-square-foot JACX office complex and a 100,000-square-foot renewal by the New York City School Construction Authority.
But LIC still needs more tenants.
In late 2018, Newmark Knight Frank put its availability rate at 26 percent — versus the Manhattan average of about 12 percent.
“For everything Amazon would’ve brought, it was giving hope to the office market,” said Jonathan Eshaghian, an investment sales agent at Marcus & Millichap. “Now the office market is looking iffy.”
The next big fish
While New York missed the Amazon boat, the company is still being wooed by other cities. Chicago, Miami and Newark — all contenders in the original national competition — have reiterated their interest in the online retail giant.
Already home to Amazon-owned audio affiliate Audible, Newark had considered offering up to $1 billion in tax breaks — one of the largest subsidy packages offered outside New York — to land HQ2.
The question now is whether the loss of Amazon will hinder New York as it goes after other tech tenants.
Facebook, Google and Spotify are just a few of the tech companies that have grown in the city in recent years. And a report from the New York City Economic Development Corporation found that more than 7,000 startups with a combined economic value of $71 billion are located in the city.
But will other tech giants follow Amazon’s lead and opt not to deal with the messy politics and community opposition that they might encounter in New York?
The speculation is mixed.
“I do worry about the implications and about the message it sends to the next company that wants to make a big bet on New York,” said Julie Samuels, executive director of Tech:NYC, which advocates for the technology community.
The growth of the tech sector is important to diversify the city’s economy, which has been dominated by financial companies, she said. Given the market’s inevitable ups and downs, Samuels said, a more diverse economy would help New York better weather the downturns.
Others took a more optimistic outlook.
“Can New York City entice another company?” said Marcus & Millichap’s Eshaghian. “Everything is clearly there. Amazon liked it, another company can like it. It’s already a set table, ready for the diners.”
Additional reporting and research by Kathryn Brenzel, Katherine Kallergis, Erin Hudson, Will Parker and Kevin Sun