Presented By: Victor Sozio, Ariel Property Advisors
Ariel Property Advisors’ Victor Sozio: Investment Sales, Opportunity Zones and Politics Oh My!
Victor Sozio, Co-founder and Executive Vice President at Ariel Property Advisors, a New York City investment real estate services and advisory company, shares his valuable insight about the current state of the commercial market, affordable housing, Opportunity Zones, politics and the year ahead.
1) How has the New York City investment sales market fared so far in 2018 and what areas offer the most opportunity?
In general, the market in 2018 has been moderately active, yet a little inconsistent. In some cases, values are on the decline and yet, multiple deals are still being consummated at close to record-breaking pricing. By the end of the year, New York City is on pace to have close to the same amount of sales as 2017. From January through September, New York City recorded 2,006 transactions, not far from last year’s 2,096 sales, according to Ariel Property Advisors’ Investment Research Division.
However, dollar volume will most certainly be higher this year, due primarily to the reappearance of larger, institutional transactions, which were nearly non-existent in 2017. In fact, in the year through September dollar volume stood at $28.5 billion, 38% higher than all of 2017.
Values are down across-the-board, by around 5-8%, but certain areas and product types continue to achieve premiums. For instance, a value -add opportunity anywhere in Manhattan can currently command an extremely low capitalization rate if the basis is perceived as being well-below market. Development sites in the outer-boroughs have also fared relatively well, with record pricing seen on many sales that closed in The Bronx, Northern Manhattan, and areas in Queens.
When it comes to areas of opportunity, Inwood certainly stands out. The neighborhood is seeing a lot of new interest from high-quality developers. Recent rezoning makes it one of the only areas in Manhattan where a developer can secure a site and comfortably underwrite a rental building. Workforce housing areas in Queens and Brooklyn have also experienced some strong momentum this year, specifically in Brooklyn’s Flatbush and Bedford-Stuyvesant and Queens’ Flushing, Jackson Heights, and Forest Hills.
2) You are one NYC’s leading brokers of Affordable Housing properties. How has the market changed over the past 10 years?
Since last decade’s recession, the national and local landscape has changed significantly. A decade ago, a capital stack on a transaction categorized as “affordable housing” typically included a cocktail of subsidies from various government agencies and minimal equity from the affordable developer or operator. Now, we are witnessing transactions occur with much more traditional or creative financing structures, which includes various profiles of equity investors. New entrants have become attracted to the downside protection and scalability of owning an “affordable” portfolio, especially when they have the ability to take a long-term approach in owning the asset.
3) In recent years you have brokered some of the largest multifamily sales in NYC. What deals were the most rewarding for you and why?
Regardless of the size of the transaction, completing deals that have a host of challenges and complexities provide me with a great deal of personal and professional satisfaction. This is particularly the case when we work as a team and use all the blood, sweat, and tears that is necessary to get a deal done. Nearly every transaction is a companywide effort. The transaction usually starts with the analysts in our Investment Research Division, continue with the graphic designers, Public Relations and Marketing Department, and finally the Investment Sales team. When everyone is accountable, it shows in the high-quality results we deliver to our clients. This collaboration is truly the most rewarding aspect of a sale for me.
4) What are your thoughts about the government’s tax incentive for Opportunity Zones?
Without question, this is a very unique time for the real estate industry, both nationally and in New York City. All signs seem to indicate that this will be a lucrative investment incentive with wide-reaching implications. That said, we still lack clarity on how to execute within the framework of this program. In the short-term, these incentives will result in premiums for sellers in certain areas and new sources of capital seeking to invest in these opportunities. In the long-term, it is imperative that investors plan for the liquidity necessary to pay taxes on the deferred gains prior to 2026 because that is when it may get a little messy. All things considered, it will be a great investment vehicle, which will drive new interest in many emerging markets.
5) The mid-term elections are around the corner. How will this impact the NYC market?
The mid-term elections add some uncertainty to an already fragile market. One of the largest market concerns relates to how the election results may further impact NYC rent regulation. Over the past few years, landlords have attempted to adjust to the changes in law, as well as the increased scrutiny and enforcement that come with it. With the recent end of the Independent Democratic Conference and the very real possibility that Republicans may lose control of the NY Senate, some investors foresee a more progressive agenda as one of the biggest challenges to profitability, especially in light of increasing expenses and interest rates.
6) What is your outlook for the investment sales market in 2019?
Our expectation is that transaction volume will stay consistent or even increase in 2019. Sellers will continue to face increasing pressure relating to refinancing in a higher interest rate environment, rising expenses, and heavier regulations. Those who initially underwrote an exit in 2020 or 2021 may expedite their timetable in hopes of avoiding macroeconomic factors that can impact their values. Also, the market for development sites and conversions will experience a nice boost related to the previously discussed Opportunity Zones. Groups that have flexibility in the asset class they pursue and where they can participate in the capital stack will likely be the most active in 2019.