"I always love to find distressed properties, and they're out there, whereby we can turn them into income-producing properties," Kessner tells GlobeSt.com. "That's something we've been doing for the past 25 years, and that's the best niche for us to get into, wherever it may be in the metro area."
East Harlem, Kessner recalls, was "a great area for us to get into ahead of the crowd." His company, the R.E. Group, began acquiring properties there in the early 1980s. In 1998, the company arranged what was reportedly the first major Wall Street conduit financing in East Harlem, a 30-building package with Nomura Securities. Nine years later, R.E. sold most of its Manhattan apartment and retail holdings, including 47 East Harlem properties, to London-based Dawnay Day for $225 million.
To get to that point, though, required years of confronting challenges not unlike those facing residential owner/developers today. The condominium market evaporated in the late-1980s/early-1990s downturn, and the failing banks could not convert short-term construction loans into longer-term debt. The R.E. Group hunkered down, managing its rental portfolio and establishing itself as a "white knight" willing to take over foreclosed properties.
By 1994, the company was back in a position to grow. Kessner bean acquiring properties, amassing a portfolio of more than 60 by decade's end. However, the apartment properties came with built-in challenges in the form of distress, partial to complete vacancy and scores of housing code violations. Without relying on pubic assistance or, in most cases, bank financing, the R.E. Group managed to rehabilitate each of the properties.
Today, although he'll certainly consider office and other commercial sectors, "Most of the opportunities will be in the multifamily world," Kessner says. "We're finding that the pricing for multifamily has definitely decreased over the past year and slowly but surely, there's more product coming onto the market."
He says he recently bid on a portfolio of debt covering assets in the Bronx, Manhattan and Queens. "We're starting to see the banks release some of their portfolios," Kessner says. "We're also noticing that there's a lot of pent-up demand to buy things."
At present, interest rates remain fairly low, and while Kessner says he's not sure what the bottom of the market will be, "it's getting fairly close. We're all up against the fact that inflation is coming at some point. When that happens, interest rates will definitely rise and values could drop down somewhat."
Kessner says making multifamily buys now will enable us "to get a fair price, not necessarily the bargain of a lifetime. But that fair price also allows us to lock in a low interest rate for an extended period of time. That will offset the valuation. And we project that after five or seven years, interest rates will be higher and we'll got a nice solid internal rate of return."
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
