New York landlords that can't find buyers turn to borrowing instead
AT a time when commercial-property purchases have slowed to a trickle, Manhattan landlords who can’t sell are still getting money out of their buildings – by turning to lenders.
A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest US market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50% from the same period in 2016, to US $15.4bil, the slowest start since 2012, research firm Real Capital Analytics Inc says.
At the same time, the market for debt on commercial properties is booming. Investors of all stripes – from banks, insurance companies, hedge funds and private equity firms – are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.
“Sellers have a number in mind, and the market is not there right now,” brokerage Jones Lang LaSalle Inc managing director Aaron Appel says. Appel arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he says.
At 237 Park Avenue, Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for US $810mil in 2013. After several months of marketing, the Chicagobased firm opted instead for US $850mil in loans that value the 21-storey building at more than US $1.3bil, according to financing documents. The owners kept about US $23.4mil.
“The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery,” says Scott Rechler, chief executive officer of RXR.
A representative for Walton Street declines to comment.
The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, says Rechler, whose company owns US$15bil of real estate throughout New York, New Jersey and Connecticut. That’s a departure for Manhattan’s property owners, who in prior years would pursue one track at a time, he says.
Plunging sales
Across the US, sales of office towers, apartment buildings, hotels and shopping centres have been plunging since reaching US $262bil nationally in 2015, just behind the record US $311bil of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85% in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.
Many landlords who have been holding their buildings for several years are eager to collect on recent gains, according to Spencer Levy, head of Americas research at brokerage CBRE Group Inc. Even as buyers balk, lenders are writing loans large enough for owners to pay off existing debt and keep something extra for themselves, he says.
Typically, a lender would rather see excess cash put back into the building for renovations and maintenance, rather than into the landlord’s pocket, Levy said. But given how competitive the lending landscape has become, it’s now easier for borrowers to negotiate more-favorable terms.
“Some lenders will bend more on that point than others,” Levy says.
Apartment landlords have been among the most active in using debt to extract cash from recently built projects, according to Craig Bender, head of US lending for ING Real Estate Finance. A lot of construction loans from a five-year building boom are coming due, and many developers who might have sold completed properties are instead taking out new mortgages, he says.
In January, Michael Stern’s JDS Development Group secured US $660mil in debt against American Copper, a pair of new rental towers on Manhattan’s eastern edge. The financing, arranged by Appel at Jones Lang LaSalle, followed an earlier attempt to sell a minority interest in the 761-unit property, named for its copper facade. JDS and its partners were able to cash out a large chunk of equity with the new loan, Appel says. Stern declined to comment on the financing.
Red flag
Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyses data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he says.
In a market where building sales are few and far between, it can be challenging to find a comparable transaction to get a reading on prices for an appraisal, according to Levy of CBRE. There are other ways to calculate a property’s value, but it’s impossible to account for changes on a real-time basis, Levy says.
“There is always concern that it is too high, or too low, but there are many protections in place,” Levy says. Still, at the end of the day, “there is always going to be a judgment call”.