Why Island Capital’s Andrew Farkas Encourages Taking Risks in Times of Distress

While many shy away from risk in times of distress, investors willing to take chances might just find themselves with a wealth of opportunity.

Andrew Farkas, founder, chairman, and CEO of Island Capital Group, shared this personal insight with Partner and Regional Real Estate Industry Practice Leader for New York Metro and South Florida at Citrin Cooperman, Meyer Mintz, on “Coffee with Citrin Cooperman,” a video series hosted by Citrin Cooperman and produced with Commercial Observer.

Interviewed at Island Capital’s New York City headquarters, Farkas said that times of distress can actually be some of the most beneficial for investors.

“The truth of the matter is, distress always provides opportunity,” said Farkas. “Most investors will often fear distress or shy away from it. The truth is, when there’s distress, you should lean in and take a little bit more risk. It appears to be more risk — it’s actually not. In distressed markets, you’ll find opportunities coming in no small part from lenders who’ve had to exercise remedies and take back assets. Those types of opportunities are attractive because lenders provide their own financing, so you don’t have to go out and find new mortgages.”

Farkas also noted that forgiveness of indebtedness is “the largest source of equity capital under those circumstances,” and that New York is rife with opportunities of this sort.

He then said that, in times like these, banks seek new sponsors that have a deep knowledge of the asset class they are dealing in, are well capitalized, and understand the particulars of handling distress.

The largest investments Island Capital made over the past 18 months in New York were the Sheraton Times Square, which it just refinanced, and The Lexington Hotel. With 2,500 hotel rooms in total, Island Capital was able to pay less than 50 percent of what the previous owner paid because both hotels had closed during COVID.

“That type of investment requires some fortitude, no question about it,” said Farkas. “But if you lean in and have a plan, you’ll find that value is created. That’s definitely happened here. In New York City during COVID, around 10,000 hotel rooms were taken out of circulation forever. These two assets were also Marriotts. Those Marriotts are among the only Marriotts in those particular corridors right now, and the Marriott hotel reservation system provides a constant flow of potential occupants. So both of those assets have averaged 90 percent occupancy.”

Mintz also asked Farkas for his expectations about interest rates and inflation, and what he expected regarding their effect on commercial real estate in 2024.

Farkas responded that the recent interest rate environment was perhaps too unusually beneficial for anyone to expect it to last.

“Most people don’t remember that around the late ’70s interest rates were 18 percent,” said Farkas. “So, the fact that we’ve had around three percent interest over the course of the last decade or so, that’s made people look smart. But more often than not, it helps people be lucky. I think four percent is a thing of the past. I would like to see things settle out at around eight percent.”

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