In Manhattan, transaction dollars have declined 39% on commercial, and top-end residential transactions and prices are declining. The flood of new very high-end condos on 57th street and Central Park South has led some projects to now be at risk of the mezz lenders taking control. High end brokers say there is just no market right now, and nobody has any idea who is going to be buying all those units. Stand by for workouts, lenders assuming control or developers suffering real losses.

Overall, the Manhattan residential market is struggling with far too much inventory. The coop market, a unique NYC format, is very tough now because to buy a unit in a New York coop, you are subjected to the board having a right to scrub through your personal financial and other information, including, in some cases, a private detective report. Having been through that myself on two occasions, and having sat on a coop board, it is not an experience buyers want to go through. You get board members who know nothing about financials, or business, asking stupid questions that are intrusive. As a result there have not been any new coops formed for many years and there are too many brand new condominiums now competing. If you like elegant pre-WWII buildings, and close selection of your neighbors, coops are good. As a result, coops are priced materially below condos just because of the process of approval.

Across the country CRE transactions are harder to justify at today's prices. Rents are already materially increased, and properties are often stabilized, so there is not, in many cases, a lot of upside left. If an investor is purely looking for CRE assets that pay a steady and decent return, there are deals to do, but the big upside wins are no longer available like they had been. The Chinese government has fully cracked down on capital leaving the country to invest here in real estate, the Russians have pretty much disappeared, and the Canadian dollar is at 73 cents, so US real estate is expensive. The South American money is already mostly here already, and the Europeans now have opportunities there. It is not that there is no capital coming here from any of these places, but the rush to invest here we saw a few years ago is over for now. There are still small transactions occurring, although even those are at a reduced level.

Hotel transactions nationally are also reduced as there is little economic reason these days to buy a hotel. RevPAR is barely above inflation, while labor costs and property taxes rise. In places like Seattle, you have a lot of new supply coming and $15 minimum wages and other left wing regulations to deal with. In many markets, RevPAR is no longer rising. New supply in harmful numbers is now starting to hit the market in some locations, and new brands are proliferating constantly, which just eats into the impact zones of existing franchisees. In several markets, NOI is no longer rising, and the likelihood that will change for the better is very low in the next few years, no matter how well the economy does. The real deals were over in 2013 for most hotels. Despite the pundits and appraisers forecasting continued very good numbers for 2016 through 2018, those projections were just pie in the sky and were off form reality by over 50% on RevPAR, so do your own due dili and ignore all those industry forecasts. Hotels are very market by market. Add to all this that cap rates will rise along with interest rates over the next year, and it is hard to find a hotel to buy that justifies the risk over the next five years.

If you own a good CRE asset now, it is probably a good time to sit on it, refinance and collect a nice cash flow. If you have cash to invest in buying a building, maybe you should look at special development deals. For instance, I am involved in brownfield land development and there are still good opportunities if you know how to select the sites to work with. Because most developers do not like the risks in brownfields, they stay away, and that limits the bidding for these locations. However, you need to know how to develop real brownfield sites and have patience with regulators.

Despite the chaos in DC and the inability of Congress to do anything, the economy will continue to hum, interest rates will still be historically low after the next Fed increases, so owning solid, well located real estate is still a good thing to do.

The views expressed are the author's own.

In Manhattan, transaction dollars have declined 39% on commercial, and top-end residential transactions and prices are declining. The flood of new very high-end condos on 57th street and Central Park South has led some projects to now be at risk of the mezz lenders taking control. High end brokers say there is just no market right now, and nobody has any idea who is going to be buying all those units. Stand by for workouts, lenders assuming control or developers suffering real losses.

Overall, the Manhattan residential market is struggling with far too much inventory. The coop market, a unique NYC format, is very tough now because to buy a unit in a New York coop, you are subjected to the board having a right to scrub through your personal financial and other information, including, in some cases, a private detective report. Having been through that myself on two occasions, and having sat on a coop board, it is not an experience buyers want to go through. You get board members who know nothing about financials, or business, asking stupid questions that are intrusive. As a result there have not been any new coops formed for many years and there are too many brand new condominiums now competing. If you like elegant pre-WWII buildings, and close selection of your neighbors, coops are good. As a result, coops are priced materially below condos just because of the process of approval.

Across the country CRE transactions are harder to justify at today's prices. Rents are already materially increased, and properties are often stabilized, so there is not, in many cases, a lot of upside left. If an investor is purely looking for CRE assets that pay a steady and decent return, there are deals to do, but the big upside wins are no longer available like they had been. The Chinese government has fully cracked down on capital leaving the country to invest here in real estate, the Russians have pretty much disappeared, and the Canadian dollar is at 73 cents, so US real estate is expensive. The South American money is already mostly here already, and the Europeans now have opportunities there. It is not that there is no capital coming here from any of these places, but the rush to invest here we saw a few years ago is over for now. There are still small transactions occurring, although even those are at a reduced level.

Hotel transactions nationally are also reduced as there is little economic reason these days to buy a hotel. RevPAR is barely above inflation, while labor costs and property taxes rise. In places like Seattle, you have a lot of new supply coming and $15 minimum wages and other left wing regulations to deal with. In many markets, RevPAR is no longer rising. New supply in harmful numbers is now starting to hit the market in some locations, and new brands are proliferating constantly, which just eats into the impact zones of existing franchisees. In several markets, NOI is no longer rising, and the likelihood that will change for the better is very low in the next few years, no matter how well the economy does. The real deals were over in 2013 for most hotels. Despite the pundits and appraisers forecasting continued very good numbers for 2016 through 2018, those projections were just pie in the sky and were off form reality by over 50% on RevPAR, so do your own due dili and ignore all those industry forecasts. Hotels are very market by market. Add to all this that cap rates will rise along with interest rates over the next year, and it is hard to find a hotel to buy that justifies the risk over the next five years.

If you own a good CRE asset now, it is probably a good time to sit on it, refinance and collect a nice cash flow. If you have cash to invest in buying a building, maybe you should look at special development deals. For instance, I am involved in brownfield land development and there are still good opportunities if you know how to select the sites to work with. Because most developers do not like the risks in brownfields, they stay away, and that limits the bidding for these locations. However, you need to know how to develop real brownfield sites and have patience with regulators.

Despite the chaos in DC and the inability of Congress to do anything, the economy will continue to hum, interest rates will still be historically low after the next Fed increases, so owning solid, well located real estate is still a good thing to do.

The views expressed are the author's own.

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
NOT FOR REPRINT

© 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.

Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.

joelross

Just another ALM site