Presented By: Eastern Consolidated
State of the Market Report: A Q&A With Eastern Consolidated’s Peter Hauspurg
Founded in 1981, Eastern Consolidated is a prominent full-service real estate company with three core and complementary service lines—investment sales, retail leasing and capital advisory. Eastern focuses on both market and off-market transactions and with a diversity of local, national and international owners, investors and sources of capital. In recent months, the firm has arranged several significant transactions, including the sale of the Bulova headquarters in Queens for $25.2 million, a $130 million loan for the conversion of a five-building medical facility into luxury rentals in Morningside Heights and a $121 million debt and equity package to finance the construction of a 45-story, 526-key hotel at 140 West 28th Street in Chelsea.
We spoke with Chairman and CEO Peter Hauspurg for a market overview of the current investment sales and retail leasing and financing environment.
The investment sales market took a hit in 2017. What does this mean for the market moving forward?
Peter Hauspurg: Manhattan investment property sales peaked in 2015 with dollar volume close to $60 billion, declined to around $39 billion in 2016 and dropped further to just over $23 billion in 2017, which is the lowest level since 2010 when sales totaled $14 billion.
This slowdown reflects a turning market, and when a market turns there tends to be a lull in sales activity as buyers and sellers adjust their expectations.
In my 36-plus years selling commercial real estate, land is always the first asset class to take a hit and that’s been the case in this cycle with land values dropping 25 to 40 percent from the peak, depending on the location. Our Manhattan research report, “View From the Street,” shows 57 development/land sales in Manhattan in 2017, down 18.6 percent from 2016, with the aggregate value of those trades down 17 percent to $2.2 billion.
Last year, we arranged the sale of several development sites that reflected the new pricing environment. These included an assemblage at 30-36 East 29th Street for a condo development with 170,000 buildable square feet that sold for close to $100 million and another development site at Broadway and 96th Street on the Upper West Side with a zoning floor area of 125,880 that sold for $80 million.
Manhattan multifamily and office properties held their value in 2017, which is encouraging, although the pace of activity declined. Last year, Manhattan recorded 190 multifamily trades, down 29 percent year-over-year, but the aggregate value of those trades was $3.3 billion, a 50.7 percent decline from 2016. Meanwhile, Manhattan recorded 61 office trades in 2017, down 29 percent from the year prior, with the aggregate value of those trades at $12.3 billion, a 33.9 percent decline year-over-year.
Is New York City still attracting foreign investment?
Foreign investors really pulled back in 2017, which contributed to the overall decline in sales last year.
International investment in Manhattan properties declined from 42 percent of total purchases in 2016 to 35 percent in 2017. Chinese investment in Manhattan dropped 62 percent year-over-year. We haven’t seen major purchases by Chinese investors this year, but HNA Group sold 1180 Sixth Avenue for $305 million and reportedly plans to dispose of other assets.
In 2017, we also saw a 64 percent year-over-year decline by German investors in Manhattan properties, a 74 percent decline by Israeli investors, and a 19 percent decline by Canadian investors.
International investors are still a substantial part of the market, but they all cut back their purchases. The real question is whether the decline is a temporary or permanent trend.
What are you forecasting for the investment sales market for 2018?
The crystal ball for 2018 is a little cloudy. The great unknown is how the new tax law and rising interest rates will affect the market this year.
Our firm started the year stronger in 2018 compared to 2017, and our activity seems to be mirroring the market. Data for the first two months of the year show that investment sales volume in Manhattan increased to $3.76 billion, a 40 percent jump compared to the same period last year, and we can only hope that this trend continues. Institutional investors were the most active buyers during this period.
In addition, Google just closed on its $2.4 billion acquisition of Chelsea market, and Maefield Development and Fortress Investment Group’s plan to buy out their partners in the Marriott Edition Hotel at 701 Seventh Avenue for over $1.5 billion.
What is happening in the retail leasing market?
The demise of retail has been overstated. In particular, there’s still a very strong market for neighborhood retail such as restaurants, health and wellness concepts and entertainment. At Eastern, we continue to close about two leases a week and are marketing some interesting warehouse spaces in Brooklyn and Queens.
We found a 20,000-square-foot space in Industry City for a client that plans to open Japan Village, a Japanese food hall, and we’ve identified several locations in Manhattan for Shape House, an urban sweat lodge that has become the latest celebrity health and wellness craze.
We also recently arranged a lease for Wanyoo Café, an international brand with 850 locations worldwide that offers electronic sports stations for gamers. The cyber sensation is moving into the ground floor and lower level of 4 St. Mark’s Place, an East Village townhouse with an interesting history because its original owner was Alexander Hamilton’s son.
As for high-street retail, we’re seeing more realistic rents and increased deal activity as a result. Tenants have gone from very short-term pop-ups to signing one- to three-year leases with options for long-term extensions if sales are strong. That model limits risk for both landlords and tenants.
Is the financing market still strong?
Yes, but with some changes. We’re seeing lower leverage from banks for construction lending and more alternative lenders in the market to fill that void. Lenders are still willing to finance all asset types, but the quality of the sponsorship is paramount. Projects with inexperienced sponsors or at a high basis will struggle to obtain attractive financing.
We’ve been fortunate to work with an array of experienced clients, and as a result, our Capital Advisory Division arranged more than $1.3 billion in financings in 2017, a 77 percent jump compared to the previous year.
Some of these deals included a $130 million construction loan for Delshah Capital to finance the conversion of a five-building medical facility into a 205-unit, 200,215-square-foot luxury rental complex at 30 Morningside Drive in Morningside Heights. Our team previously arranged a $60 million first mortgage bridge loan to finance the acquisition of the property.
We also arranged a debt and equity package totaling $121.35 million for Sam Chang to finance the construction of a 45-story, 526-key hotel at 140 West 28th Street in Chelsea. Contrary to market trends, in the last 24 months we’ve successfully placed $723 million in hospitality financing for 10 projects with about 3,000 hotel rooms.
What are you looking forward to for Eastern Consolidated in 2018?
Capital Advisory already has about $1 billion in financing projects in the pipeline including a $350 million condo project. Retail leasing activity remains robust, and our brokers continue to expand into the outer boroughs, particularly by marketing warehouse spaces. We recently closed the sale of the Bulova headquarters in Queens, and the new owner tapped our leasing team to lease it. We’re also very excited to be marketing for sale the Ko-Rec-Type Williamsburg Portfolio, which includes seven contiguous properties with conversion and redevelopment potential on nearly a city block on the waterfront in Williamsburg. It’s a rare opportunity and one that, once sold and redeveloped, will further transform the neighborhood.