Ariel Property Advisors’ Shimon Shkury on the Struggling NYC Investment Sales Market
Shimon Shkury remembers the feeling of nervousness and self-doubt that crept in when, as a young man in his late 20s, he found himself in a reception room at a top American university, awaiting a graduate school admissions interview.
“I’m looking around at the waiting room, and you see people dressed sharply, reading The Wall Street Journal, who seem to have a lot of confidence and experience,” Shkury said. “And I’m scratching my head thinking, ‘What am I going to bring to the table?’ ”
For the Israel native who grew up on the outskirts of Tel Aviv and had only been to the United States once before in his life, the nervousness was short lived.
“I thought, ‘You know what? When I was 18, I was recruited to the army; I’m 27 or 28, I have pretty good experience in life, and that’s what I’m going to bring to the table—I’m going to bring my Israeliness to the table,’ ” he said. “And that was the attitude. From almost being threatened by not having the language, the culture, the know-how to the extent that others do, I’m going to take what I do have—which is a lot.”
Shkury subsequently studied at the Wharton School of the University of Pennsylvania, where he would earn dual master’s degrees in business administration and international studies through the university’s Lauder Institute program. After a brief stint at New York investment bank SG Cowen (now Cowen and Company), Shkury landed a job as an investment sales broker at Massey Knakal Realty Services (now a part of Cushman & Wakefield).
Over eight-plus years, he helped build up the firm’s presence in the uptown Manhattan and Bronx markets, eventually earning himself a partnership. In January 2011, Shkury and several Massey Knakal associates left the company and formed Ariel Property Advisors, where he now serves as president. The firm and its 55-person staff focuses predominantly on the New York City multifamily investment sales market, and has helped facilitate roughly $750 million in transactions across more than 120 properties over the past 12 months.
Shkury, 46, lives with his wife, their 8-year-old son and 5-year-old daughter on the Upper West Side. He recently spoke with Commercial Observer at Ariel Property Advisors’ offices near Grand Central Terminal about his life and career, as well as the state of the New York City commercial property market.
CO: Your first job out of Wharton was in investment banking, at SG Cowen. How did you pivot into real estate? Was it something you had an interest in previously?
Shkury: I graduated in 2001 and had a few job offers; one of them was [Cowen]. If you remember the time, it was right after the recession of 2000, and right after that was Sept. 11. I spent about six months at that bank and got laid off. In January 2002, I’m trying to figure out what do I do next? Nobody’s hiring for investment banking or consulting anymore. The fact that I couldn’t get the jobs I could get before led me to wanting to be more entrepreneurial.
Real estate was always something I wanted to know more about but never did anything with. I think a lot of Israelis are like that; there’s this fascination with land and with building. One of my friends from business school said that if you want to do real estate, that’s great—figure out platforms that sell real estate, that’s the easiest route to get in. And as I was looking, I was introduced to Massey Knakal, and I really liked what I saw—because they had a focus on small to midsized buildings, because they carved out the city into territories so that each one of the agents had their own thing within the business.
I really wanted to focus on uptown and Harlem. I thought that if you want to do building sales below 96th Street, it’s extremely competitive. If you want to do it above 96th Street, still on the island of Manhattan, there’s no reason for that area not to grow.
Was it a challenge at all to move from a finance-oriented world into the realm of deal-making?
The first thing I understood is that it’s an information business. The minute I got that, I think everything came a lot easier to me. When I went to a client, it wasn’t about selling them something, it was about giving them something in return for a meeting or a call: “Here’s the information, and here’s what you can do with that information—you can sell, you can refinance, or you can hold. Here’s what’s happening in the neighborhood.”
Looking back 15 years, there was no PropertyShark; CoStar existed, but it wasn’t relative to our business. The first thing you do when you join a company like Massey Knakal is you catalogue an area. How did you do that? Well, you take an Excel spreadsheet, you take a “blue book” [compiled with property information], you open it like you’re playing the piano, and for weeks you sit there and type in addresses, names, phone numbers. There was email, but nobody was using it for business then. The second thing you do is you go out and walk the streets and take a picture of every single building in that area. Three to four months into it, you didn’t make one phone call, but you’ve built a database, and you’ve built expertise in that location. And then you start canvassing, sending information out, calling people and, slowly but surely, get listings.
The company was very supportive of what I did, and at the end of the day I helped build that portion of the company [focused on uptown Manhattan and Bronx investment sales]. About a year later, I said to [company founders] Paul [Massey] and Bob [Knakal], “Look, I really want to do more—maybe I can build a division.” I did that together with another partner, Marco Lala, who’s at Marcus & Millichap today; they gave us equity in the firm, and we became partners in 2004.
At the same time, I also hired, between 2003 and 2005, three people who were instrumental to my team and today to Ariel Property Advisors because they’re partners in the company: Victor Sozio, Michael Tortorici and Ivan Petrovic. So we were basically growing a sales team and a division that continued to do well until 2010 or so, when I felt that it was about time for us as a team to do something different.
It must have been an exciting time to be working in the uptown Manhattan and Bronx investment sales markets given the sheer upside of those neighborhoods.
I think it’s still extremely exciting in a different way. Everything’s relative; if you look at upper Manhattan, the Bronx or any other area [in New York City], everything has appreciated. Still, if you look at those areas, it’s still cheaper.
But what did change, which I think is exciting, is the flow of information. That revolutionized the way real estate is being done today. Although people say the real estate industry is lagging behind on technology compared to other industries—which is true—it has still made a huge leap compared to what it was 15 years ago. The level of sophistication that buyers are asking for is on a different level.
Leaving an established firm like Massey Knakal and starting your own shop is no small task. What motivated that decision?
Massey Knakal was a fantastic platform. I’m very friendly with both Bob and Paul; I owe them a lot from a professional perspective. It was me—I wanted to build something. It was something that I desired to do and felt that I could do very well. And my current partners, then-team members, felt the same.
Part of the vision for this company was that the territory system works—that’s great, let’s implement that. What we thought could be better is a centralized research and sales support arm that services the company and, in addition, leverages a data platform—in our case, it’s [cloud provider] Salesforce that we’re working on—to do a few things. The first is to accumulate information that we need for New York City, or anywhere we service our clients, with regards to building data, ownership data, relationships between ownership and capital and so on. And then, internal communication within our teams about that information.
We have our research and sales support centralized, so each broker can tap that resource regularly. Every month, we produce a multifamily market review [report], every quarter more elaborate reports, and our clients receive asset evaluations from us on a regular basis about their buildings and portfolios. So we do about $10 billion worth of valuations for our clients a year, and that eventually gets us assignments on the investment sales and capital markets side.
There, we actually start our relationship with clients. A lot of clients will call us up and say, “We just bought a portfolio a year ago—we need an evaluation.” We’ll put it together, present to them, and that leads us to becoming one of the brokers considered for an assignment down the road. The research advisory is a cost center—it’s not generating revenue for us, but it services our clients and our brokers.
On the capital services side, the firm has done some work advising clients on the Israeli bond market, which has become an increasingly popular vehicle in recent years for U.S. real estate firms to raise debt at lower borrowing costs. What’s your take on the market, and are you still advising clients looking to raise money in Israel?
We’re not doing this as much at this point. I think the companies that will go [to Israel] moving forward are two types: those that already issued [bonds] and those that are extremely high-quality companies. You just saw another company, CIM Group, tapping the Israeli market on a preferred equity structure, which was the first time that was done. You’ll see more of that structure—not just bond issuances.
You’ll also see money coming from Israel here to invest; I think there’s a lot of reception both ways. Israeli investors are looking for quality first, so if you have a quality product, a quality platform and the ability to produce deal flow, you will be able to go to Israel and raise money—be it bonds, be it mezzanine debt for the right deals, be it other structures. The cost of capital there is less expensive, and the access that local operators here provide to deal flow is interesting for that capital. It’s a win-win.
Yet, Ariel Property Advisors also released a report earlier this year showing that Israeli capital investment in New York City real estate had slowed down considerably. Is that still the case?
The market has slowed down in general, especially for bigger deals, so you see less flow of capital out there—from international capital, but all capital in general. We’ve seen some international investors actually cashing out this year as well, selling some properties and waiting on the sidelines. They didn’t forget about New York City—they love New York City. They just want to see what’s going to happen next.
We are now working on a major recapitalization that we’re doing for one of our clients, and we’re speaking to every [type of] capital provider—family offices, insurance companies, private equity funds, high-net-worth individuals, sovereign wealth funds, you name it. Some of them are extremely cautious when it comes to equity, but they want to play—so they’ll play on the preferred equity side, they’ll play on mezzanine debt, they’ll invest in different ways in the capital stack. Some of them are sitting on the sidelines and waiting for the right opportunity to put their money to work.
On the investment sales side, there’s a lot of talk about the drop-off in transaction activity and dollar volume this year. Even though broader economic indicators now look positive, the city’s investment sales market hasn’t followed suit. What’s going on?
You hit it on the head. [Transaction dollar] volume is down about 40 to 50 percent [in 2017] compared to the year before, especially in the first six months of the year.
2015 was the year; there were about $70 billion worth of real estate transactions, and 2016 fell much short of that. What happened at the end of 2015, and throughout 2016 and 2017, is that land values got hit hard. It started somewhere in 2015 with discussions about the ultra-luxury apartment market, lenders that stopped lending, [the expiration of] 421a at the time—all of that. Land traded in 2016 at maybe a third of what it traded in 2015, [and that] trickled down to multifamily, office, etc.
But 2016 was still a great year with bigger deals that were done. Right after the election, however, we got into some kind of uncertainty. Mortgage rates went up about 75 basis points overnight, and I remember that we had multiple contracts out with buyers who looked at their quotes from a day or two before, didn’t understand how to price it again and didn’t want to sign contracts. To be fair, the majority of these contracts were signed, but it took longer; so if something was supposed to be signed in November or December , it signed in February or March . These three- to five-month delays delayed everything. That, the continuation of land not trading and the continuation of uncertainty led to [owners saying], “I’m not putting my building on the market today.” That was the first six months of 2017.
Compare that to the last quarter or so, we’re in a much, much better place. I’m not saying we’re out of the woods; I think that you will continue to see low volume in 2018 as well. Maybe at the same level as ‘17, maybe a little higher or lower, but more or less the same pace.
Our expectation is that prices, depending on location, will either stay flat or go down a bit. If it’s prime locations—if you’re along the 7 train in Queens, in Flushing for example—we actually see price increases as a result of stronger fundamentals. But our predictions for 2018, absent an event—if there’s an event, all bets are off—with interest rates still low, we think the market will see more or less the same volume and same pricing, with land pricing going down.
Multifamily investment sales make up a majority of your business. Given all the talk about rent growth stagnating and landlords being forced to provide heightened tenant concessions at market-rate properties, is there cause for concern?
If you look at fair-market [or market-rate] buildings throughout the city in good locations, [such as] Manhattan below 96th Street, fair-market and new buildings have suffered from rent concessions. In Brooklyn, too, because you have to give rent concessions to compete and to absorb tenancy, and that affects everything.
We’re in a period of absorption that will end at some point; it’s hard to say when. In terms of brand new construction, what we find hard to do is project rent growth for the next two to three years. It’s just very hard for us to tell you, as an investor and an owner, [whether] we think one-month concessions will continue for two years, three years or four years. It’s natural, it’s O.K., it’s oversupply for a period of time. All of that is going to be absorbed. [But] it affects this period of time.
In terms of rent-stabilized or affordable [properties], the rules are becoming harder. Yes, you have to operate buildings by the book—which means you have to have receipts if you rehab, or otherwise you’re going to get audited and have the state or the city after you. But, if you’re an operator who knows how to go about managing a rent-stabilized building that needs upgrades and has the tenancy to upgrade it with, that is an opportunity.
I think that anybody [investing] in this market today should look at a longer-term horizon than three to five years; it’s probably five to seven years [now], and that’s a big change. The rate of return is probably lower than three years ago, and the capital needs to adjust for that.
What neighborhoods are you seeing the most activity in across your business? You mentioned Flushing and the positive fundamentals you’re seeing along the 7 train in Queens.
We sold a few buildings this year in that neck of the woods. You bring an apartment building to market in these locations, and the demand is amazing. You just don’t see enough product in these markets. The fundamentals are extremely strong—the rental market [in Queens] went up 10 percent in 2016, whereas in other places it stayed flat or went down a bit. In Brooklyn, different areas are doing extremely well: Bushwick is still doing well, Crown Heights is doing well, Williamsburg is doing well. You’ll see some new rental construction still coming online, which I think is worth watching.
[As far as] Manhattan below 96th Street, I think there’s going to be more activity on the Upper East Side; the Second Avenue subway helps, and Cornell Tech on Roosevelt Island helps. And we’re always big on upper Manhattan and Harlem—that hasn’t changed. You have the whole corridor of 125th Street, which is still in development but already has some new buildings that will change the face of that neighborhood. The South Bronx is an area to look into; we need to see more buildings coming up, but the transportation is there, the zoning is allowing it, and land has sold [there] recently. Overall, New York City I think is going to be fantastic in the next decade.