Building Through the Downturn: BCN Chief on Great Recession Construction, Financing Beyond Mezz and More
Jotham Sederstrom Dec. 1, 2010, 11:05 a.m.
When Craig Nassi founded BCN Development in 1994, the city’s landscape was a whole lot different. At his peak, the chief executive and his group were investing in $300 million projects, including 315 Park Avenue South, where Credit Suisse is headquartered. As a reaction to the downturn, BCN adjusted its ambitions by focusing on smaller projects. As a result, the group is among a shrunken pool of firms currently developing right now. Mr. Nassi, 41, talked about his strategy, making changes in a tough environment and the advice the part-time professor gives students.
The Commercial Observer: BCN Development is among a small pool of developers that are actually developing in New York City. How are you making that happen?
Mr. Nassi: Well, we’ve been around for about 16 years, and in 16 years you see how trends consistently move; and the directions they’ve moved in today, for developers, is that you need to find deals that have an upside that can be nontraditionally financed. And what I mean by that is, it used to be where you could go to a bank if you found a deal, and you say: ‘We’ve got a great deal. And we want you to finance 85 percent of it, and we’ll put the rest in.’ Or the rest will be mezzanine above that, with a small piece of equity.
Today it’s different. Today, what we’re doing is we’re finding deals that we can go to our investment groups and investors with and say, ‘Hey, look, we found a deal that’s manageable to do with all equity, and we can get it done in a 12-month period, and be in and out of there, make some money and move on.’ So the days of big, huge mega-deals that take five years to do … Those days are over.
It seems counterintuitive to be building in this economic climate.
Not at all, because in New York City–specifically in Manhattan neighborhoods–it’s not a matter of the market being bad or good. The market is actually good in New York. We’re still seeing $2,000-, $3,000- and $4,000-a-square-foot sales in New York City for residential. We’re seeing $700- and $800-square-foot sales on large office buildings in Manhattan. We’re seeing retail rents at $300 and $400 and $500 a square foot. So New York City is really not in a recession. In fact, it’s just getting stronger and stronger every day we move through the national recession, in that our inventory is getting absorbed daily and there’s slowly but surely becoming a lack of product types.
Are you seeing some of your peers in the development world following suit?
There is a lot of niche development happening. If you drive around any given neighborhood, you’ll see that people are doing six- and seven-story buildings. They’re doing renovations. They’re doing stuff that’s not as complicated and crazy as the stuff you saw happening four or five years ago.
BCN Development’s strategy has been focused on smaller projects. Was that the idea from the outset, or did you downsize in the past several years?
We went from doing 100 and 200 and 300 million dollar deals to now doing niche developments that are from $3 million to $40 million.
Did you shift your building strategy right at the downturn?
Yeah, the last two or three years we’ve been doing this. We found our way into it because we were at a roadblock for finding investors and financing for bigger projects. Bigger projects just aren’t happening.
How are you financing these projects? You mentioned investment banks earlier.
Mezzanine is a word that has almost vanished. It was a relatively new word in the dictionary about 15 years ago, and came about and was very hot for a while, and now it’s a word you really haven’t heard in many peoples’ vocabulary in three years.
Right now a lot of people are taking advantage of refinancing. Are you?
Yes, we have. We’ve refinanced some things and we’ve taken advantage of the extremely low interest rates. But, again, banks are very cautious and they’re not fast to refinance and get deals done the way they used to. So a refinance today could take four to five times as long as it used to.
You’re about ready to begin construction on an additional 43,000 square feet at an existing building at 45 East 33rd Street in Manhattan. What’s the status on that project?
That’s a project that we felt the market right now wants–smaller units at a price point under $1,000 a square foot. And that kind of thing is financeable today. So when we’re selling these things to people, people have a true vehicle to finance these things through. Construction begins in the middle of next year.
That’s a residential condo project. Is that your focus now, or are commercial projects equally as lucrative right now in this economic climate?
We’re not really looking at commercial as much. There’s a lot more commercial office space in Manhattan that could be considered maybe a little like a flood. We feel a little more comfortable with niche residential than we do commercial.
Before the downturn, were you focused more on commercial development?
Well, in 2006, we bought 315 Park Avenue South, and that’s a 330,000-square-foot building that is Credit Suisse’s United States headquarters. We bought it because it had great tenancy, but we specifically bought it because there was great financing for it. That, again, was a time when they were doing amazingly leveraged financing on AAA assets like this.
What is the status on the building? Is it all leased up?
The status is that it’s all leased up. It’s 100 percent occupied through 2017. And we’re very excited about the building and the possibilities in 2017, and maybe turning it into a world-class condominium asset or a hotel. It’s a great neighborhood for that.
What, right now, would be an ideal commercial opportunity for you?
I think an ideal commercial investment is in the Rockefeller Center core. I think the Park Avenue core, from the Pan Am building to 57th Street, is great commercial. I think also the core of midtown south is really coming back strong as well, which is where our building is at right now. I think people really like that area right now.
You’re a part-time professor at N.Y.U., teaching a course called Real Estate Development. What advice are you giving students right now in this climate?
I always tell any young, aspiring real estate person that you have to look for assets out there that have value-add to them. Which means, buy something vacant where you’re willing and able to put some sweat equity into it by repositioning it and getting brand-new tenants in there who will pay the price–market or even above-market–for having great finishes, new finishes, new lobbies, new entries, cosmetic jobs that make the asset look nice. These are the kinds of things they should do.