4Q12 Investment Sales Will Be Epic

Thanks to capital gains tax increases, expect sellers to scramble in fourth.

BY: Robert Knakal

Put your space helmet on, strap yourself in and get ready for what is sure to be one of the wildest rides in the history of New York City’s commercial real estate investment sales markets.

Yes, the fourth quarter of 2012 is likely to go down as one of the most active periods in the last quarter-century for property sales in the Big Apple.

Changes in tax law often spark activity as market participants rush to beat the deadline, as we saw most notably in 1986.

Robert Knakal.

The looming threat of substantial capital gains tax increases next year has the market poised to see a huge spike in transaction volume. We began alerting clients at Massey Knakal to this possibility back in January, as it was clear at that time that the capital gains rate, which is an integral variable in determining the after-tax proceeds of most commercial real estate sales, was vulnerable to change. Record deficits, lower-than-expected tax revenue and an economic recovery that is moving at a snail’s pace have members of Congress scratching their heads for solutions.

With government spending as a percentage of GDP extraordinarily high and revenue as a percentage of GDP unusually low, a balanced Simpson-Bowles type approach would seem to be appropriate, but the inertia exhibited in Washington leaves little consensus thus far. On the revenue side, the capital gains rate is most vulnerable, given that it is broadly considered to be a “rich person’s tax” by those who favor raising revenue.

We observed the same political rhetoric in 2010 as we approached the midterm elections. It created a dynamic in which property owners, who were considering a sale of their property in the short-term, elected to sell prior to the year’s end, fearing that a capital gains tax increase in 2011 would erode their after-tax proceeds. In October 2010, I wrote that the investment sales brokers in the city should “clear their calendars” and suggested they “don’t plan on taking much vacation time in December,” as it was clear that 4Q10 would see a whirlwind of activity. And it happened. As a result, of the approximately $14.5 billion of Gotham’s 2010 total sales volume, about $5.4 billion occurred in 4Q10 alone. This was, at the time, the highest quarterly total in 10 quarters.

This year’s threat is even more likely to become reality, as Congress would have to take action—not to make the rate rise, as it would have had to in 2011, but to keep the rate down. As we have seen recently, getting Congress to do anything would be surprising. To the extent it doesn’t take action, the Bush tax cuts will sunset on December 31, automatically raising the capital gains rate from 15 percent to 20 percent. On January 1, the component of Obamacare that implements a covert 3.8 percent increase in the capital gains rate kicks in, meaning that, without government action, the rate will rise to 23.8 percent beginning in the new year, a nearly 60 percent increase. And this assumes that, if the president is re-elected, he does not fulfill his quest to initiate a minimum 30 percent tax rate, which is likely not to include the health care surcharge. That would bring the rate to 33.8 percent.

The impact on after-tax proceeds from sales would be tangible. At Massey Knakal, we have already closed on the sale of dozens of properties whose sellers were specifically prompted to sell in 2012 because of the potential increase in the capital gains rate. Additionally, we have an even greater number of properties presently under contract for sale that are due to close in 4Q12, which will save our clients tens of millions of dollars if the increase does come to pass.

Participants in New York City’s investment sales market can look forward to extremely robust activity this fall. It would not be surprising to see more than 1,000 buildings sold and more than $10 billion in sales in the fourth quarter. Both of these totals would be seen for the first time since 2007.

Three, Two, One …

Source: Commercial Observer

Rezoning Done Right Putting Downtown Brooklyn on Map

The first phase of City Point is completed

The rezoning of Downtown Brooklyn has dramatically revitalized the area over the last several years and made it more desirable for people to work and live there.

This rezoning plan has brought, since 2006, more than $3.9 billion in private investment, and 8.7 million square feet of development, including 607,000 square feet of retail space; 297,000 square feet of office space; 5,900 residential units; and 1,000 hotel rooms.  Along with the redevelopment of Atlantic Yards and the soon-to-open Forest City Ratner project of the Barclays Center, Downtown Brooklyn will be one of the City’s great success stories for the first half of the twenty-first century.

Downtown Brooklyn is the city’s third-largest central business district and was rezoned in 2004 to accommodate greater density consistent with the Department of City Planning’s goal of fostering transit-oriented growth and channeling new development to transit-rich areas. The Real Estate Board of New York supports this type of rezoning which allows both commercial and residential development that positively impacts the city’s economy.

The Special Downtown Brooklyn District (SDBD) where this rezoning occurred borders the neighborhoods of Brooklyn Heights, Cobble Hill, Boerum Hill, Bridge Plaza and Fort Greene. It encompasses an area generally bounded by Tillary Street, Flatbush Avenue and Atlantic Center, Atlantic Avenue; and Clinton and Court Streets.

Retail space has boomed with new shopping and amenities transforming Fulton Street with the opening of Shake Shack, Aéropostale, GAP factory store and ALDO Shoes to name a few and has new leases for T.J. Maxx, Raymour & Flanigan, H&M and Century 21, among others. Office space has transitioned from back office use to front office with more media, advertising and technology companies moving to Downtown Brooklyn.

New residential developments offering thousands of new units in Downtown Brooklyn include; Avalon Fort Greene, residential/retail by Avalon Bay; BKLYN Gold by Lalezarian Development; The Brooklyner, residential/retail by Clarett/Equity Residential; DKLB, 80/20 residential/retail by Forest City Ratner Companies; Toren, residential/retail by BFC Partners; 14 Townhomes (Phase 1) by Time Equities/Hamlin Ventures; Schermerhorn House/Common Ground, mixed income/mixed use by Common Ground + Actors Fund/Hamlin; as well as  Two Trees Development’s mixed-use project 194 Atlantic Avenue and the residential project 110 Livingston Street, which redeveloped the city’s former Department of Education headquarters.

The rezoning plan also brought 1,000 more hotel rooms with an expansion at the Marriott, a Muss Development project, and new additions of the aLoft Hotel, Hotel Indigo and the NU Hotel/The Smith.

Last year, a $15 million Fulton Mall streetscape project was completed which implemented new sidewalks, bus shelters, lights and a new plaza called Albee Square, located at the base of the historic Dime Savings Bank of New York and City Point, a sustainable mixed-use development. Other streetscape project improvements were added along Adams Street and Boerum Place as well as along Flatbush Avenue, which softened the Downtown Brooklyn boundary with Fort Greene.

There are several new projects in the pipeline.  The first phase of City Point is completed and the project includes over 1.5 million square feet of local and national retail as well as affordable and market-rate housing. Mixed-use projects include Steiner Development building 324 Schermerhorn Street; 388 Bridge Street by Stahl Real Estate Company; Avalon Bay Willoughby by Avalon/UAL; and 210 Livingston by Benenson Capital Partners. Others are Muss Development‘s project of 2 Floors in 345 Adams; Oro 2, a soft site by Lalezarian; 75 Schermerhorn, a soft site by Edison Properties and 9 Townhomes (Phase III) by Time Equities/Hamlin Ventures.

Changes to parking may also be coming to the SDBD. The city recently proposed to modify the parking requirements to reflect the reduced demand for accessory parking. This proposal would reduce by half the amount of parking that new residential developments are required to provide to better reflect the actual parking demand in Downtown Brooklyn, which features some of the best transit access in the city.

It would also encourage affordable and mixed-income housing by eliminating parking requirements for affordable housing units as well as simplify the parking regulations in the SDBD, which would provide more opportunities for additional public parking for residents, employees and visitors, according to the city. A public hearing on this proposal will be held by The City Planning Commission on September 19, 2012.

This proposal demonstrates that the City continues to make changes in zoning to reflect actual conditions and help reduce the cost of development.

Source: Real Estate Weekly

Getting Dirty

 
208 East 14th Street

Industry analysts continue to debate whether the New York City real estate market has recovered, but there’s no question that land prices here have. In some cases, development sites are trading for close to — and even exceeding — the levels they hit just before the 2008 financial crisis.

Eager developers, encouraged by lenders with a newfound willingness to write loans for construction projects, are acquiring development sites across the city, pushing up land prices. According to data compiled for The Real Deal by real estate research firm PropertyShark and the commercial brokerage Massey Knakal, the gains in price and volume are being driven by a flurry of activity in Manhattan and Brooklyn.

In fact, the surge in appetite for land has some developers worried that a bubble is imminent.

“I’m starting to feel that it is going out of control,” said Miki Naftali, CEO of the Naftali Group, which last month closed on a deal to buy an interest in a development site at 33 Beekman Street in the Financial District.

The asking prices for some properties are twice what they were just 12 months ago, noted Naftali, though he declined to reveal what he paid at 33 Beekman.

Closed sales data doesn’t show increases quite that steep, but prices are clearly on the rise.

For Manhattan development deals so far in 2012, the price per buildable square foot is $323.43, up from $308.32 last year, according to data from Massey Knakal Realty; in Brooklyn, it’s grown to $117.71 from $113.24 in 2011.

Activity, too, is on the rise. In the first six months of 2012, there were 275 sales of vacant properties (including parking lots) in New York City, according to PropertyShark. If that energetic sales pace continues as analysts expect, the year will conclude with some 550 land buys, the most since 2008, when the city saw 620.

“The level of activity indicates that people are buying land again, and there’s no question there’s been improvement in pricing,” said Teresa Nygard, a land appraiser for Manhattan-based KTR Real Estate Advisors.

 

Manhattan deals
 The uptick in land sales, experts said, is partly due to the greater availability of construction financing.
“Without a construction loan, land is worth nothing,” said Abraham Hidary, president of Hidrock Realty, which paid $27.9 million, or around $200 per buildable square foot, in March for a vacant lot at 133 Greenwich Street. Along with partner Robert Finvarb Cos., Hidary said his team plans to build a $100 million, 320-room hotel on the site, which is slated to open in 2015.

That deal was one of 27 vacant Manhattan land buys in the first half of this year, according to PropertyShark. If that activity keeps up, 2012 will see more activity than last year, when the borough had a total of 46 deals for vacant land; 2010, when there were 41; 2009, when there were 23; and even 2008, when there were 37.

And that doesn’t include sites with existing structures that will likely be converted to new uses, or razed for new buildings. According to Massey Knakal, which does track those sites, Manhattan has already seen 44 deals for development sites in the first half of the year, worth $809.4 million. That puts the borough on track to far exceed last year’s 54 total transactions. The strong residential market is one of the main forces driving more investors to buy land. The average monthly rent for a Manhattan apartment, for example, hit a record high of around $3,400 this spring, according to data from the brokerage Citi Habitats. Prices for new condos in some areas, meanwhile, are now hovering around $2,000 per square foot, brokers said.

That may explain why the priciest land deals of the year are those that are slated for use as new condominiums. The priciest Manhattan development deal per square foot so far in 2012, according to Massey Knakal, was the sale of a parking lot at 24 Varick Street, also known as 11 North Moore. That deal closed in June for $47.7 million, or $707 per buildable square foot. As The Real Deal has reported, VE Equities, headed by Zach Vella and Justin Ehrlich, is developing a 20-unit condominium there.

And at 105 West 57th Street, JDS Development Group purchased the controlling interest in a lot owned by Starwood Capital Group for $40 million. The price for the site, which can accommodate a skyscraper, comes to $617 per buildable square foot, according to Massey Knakal.

JDS — the developer of the Chelsea condo conversion Walker Tower — plans to build a 100,000-square-foot, 50-story condo on the site, which is already zoned for residential.

Sites like these, which are “shovel-ready,” tend to fetch top-dollar from developers, explained Ofer Cohen, president of the commercial brokerage TerraCRG.

Other development deals that fetch top-dollar are often those with existing structures that are ripe for conversion to residential uses.

In April, for example, a 10,446-square-foot factory and garage building at 37 Great Jones Street sold for $7.5 million. According to Massey Knakal, the seller, Great Jones Street Property LLC, paid around $633 per buildable square foot for the site. The landmarked building is being converted to five residential lofts and the project, developed by DIB Management, is currently seeking approval for its plan from the city’s Landmarks Preservation Commission.

Another high-profile Manhattan land deal, which closed in 2011 but also seems to reflect the land-rush trend, is a weedy vacant lot at 208 East 14th Street, which has sat vacant for years with no apparent interest among developers to build on it. It was nicknamed the “mystery lot” by Curbed.

A partnership of New Jersey-based Ironstate Development Company, Abe and Scott Shnay, and CB Developers bought it last year for $33.2 million and is now beginning to build an eight-story, 82-unit condo that is scheduled for completion in 2013.

Brooklyn boom

Brooklyn has seen an even more dramatic spike in activity.

Last year — Brooklyn’s most active since the financial crisis — some 206 vacant properties traded hands in the borough, according to PropertyShark. That’s more than the 195 that traded in 2008.

Naftali is currently constructing a 104-unit apartment building on an empty lot in Park Slope, which he bought seven months ago for around $100 per buildable square foot. Today, with demand rising, he said he believes he could sell the property for $200 per buildable foot.

“The market is moving so fast,” he said.

The borough’s high level of activity can be traced to a sudden uptick in supply: Many development sites that were stalled during the recession and then tied up in litigation are now coming to market.

“A huge vacuum opened,” Cohen said.

Simultaneously, Brooklyn’s popularity has grown throughout the downturn. Cohen estimated that residential rents in Brooklyn have been growing by about 10 percent per year.

Illustrating the new thirst for Brooklyn land is one of the borough’s priciest land deals this year: the sale of a stalled site at 242 Bedford Avenue in Williamsburg, where a Whole Foods will soon be opening, the New York Post reported. Michael Cayre’s Midtown Equities, along with Aurora Capital and developer Alex Adjmi, closed on the purchase from landlord Yahuda Backer in March. According to Massey Knakal, the site traded for $21 million, or around $222 per buildable square foot.

The partners’ 150,000-square-foot development will also include luxury rental apartments, the Post reported.

In another deal with a high price per square foot, an 8,150-square-foot Brooklyn Heights building at 174 Montague Street, formerly the home of Eamonn’s Irish pub, traded hands in May for $12 million, or $240 per buildable square foot, according to Massey Knakal. The Brooklyn Eagle reported that the new owners are Eli Stoll and Charles Dayan, and that the existing two-story structure will be replaced by condos.

Also in May, 313 Gold Street in Downtown Brooklyn traded for $19 million. Since the site can accommodate a skyscraper of up to 40 stories, that works out to only around $81 per buildable square foot, according to TerraCRG.

The vacant lot, at Johnson Street — located next to the now sold-out Oro condominium — was supposed to be the site of Oro’s sister building, but developers appeared to have scrapped those plans when they put the land on the market this year. A group called Brooklyn Princess LLC was the purchaser, according to city records.

And in June, at 61 Park Place in Park Slope, a 5,000-square-foot building owned by the Catholic Church was purchased for $5.75 million, or $357.50 per buildable square foot, the priciest per-square-foot deal this year in Brooklyn. According to filings with the city’s Department of Buildings, a demolition permit for the site has already been issued.

Other boroughs

Outside Manhattan and Brooklyn, however, land sales are still far below their boom-time levels.
In the Bronx and Staten Island, activity tumbled after the financial crisis and has stayed roughly the same since, according to PropertyShark.

In Queens, the number of land trades has decreased every year since 2008. There have been 49 sales of vacant properties this year, on track to finish the year at about 100, less than last year’s total of 126, according to PropertyShark.

PropertyShark’s Calen Onet attributed the sluggishness to lenders’ view that Queens is “the NYC borough with the most foreclosures.”

The one exception was the massive deal in February by Victor Elmaleh’s World-Wide Group, for a 25,000-square-foot lot on 24th Street in Long Island City.

World-Wide bought the lot for $28.9 million from the Criterion Group, according to city property records. Elmaleh’s plans for the site are unclear, though. He did not return a call for comment, nor did Criterion.

 

By C. J. Hughes

http://therealdeal.com/issues_articles/getting-dirty/

Uncle Sam I Am: America’s Favorite Allegory Flexes Its Muscles in the Latest Issue of The Economist, But is Economic Prosperity Really So Close?

( Commercial Observer) - The cover of last Friday’s The Economist bears an image of Uncle Sam.

That is not unusual in itself, since he is one of the magazine’s most consistent allegories. In his most current incarnation, however, he departs significantly from Uncle Sam Wilson of Troy and from the Uncle Sam imagined by J.M. Flagg for his 1917 war recruitment poster. In keeping with a more contemporary sartorial standard, the updated version has lost his familiar coat. He is now shirtless and buffer than any economist you are likely to encounter. As wide as his guns, the title above him reads “comeback kid,” implying a rebounding recovery.

Is the Economy on the Rebound? Or is it Reinvention?



The suggestion that we may be on the cusp of a new growth spurt seems ill timed. June’s employment report seemed confirmation enough that something is wrong. As it turns out, a contrarian assessment is not what the venerable journalists of St. James’s Street intend to convey. They agree that the economy is “in a tender state,” but also posit that things are better than they appear. The private sector is positioned for growth. Pointing to politics and the public sector as curbs on our potential, their advice to the next president beckons to the Hippocratic Oath: do no harm.

Rather than rebounding, the economy may be reinventing itself. We should expect no less. After all, decline and reemergence from recession are necessary processes of creative destruction. In the current cycle, the destructive forces have razed the unsustainable positions of the housing market and financial system. It is plain to see that these forces are still at work. What requires substantiation is the notion that a new, stronger order is emerging quickly or to a degree that negates the increasingly profound structural impediments to long-term prosperity in the United States.

Minutes from the June Federal Reserve Board and Federal Open Market Committee meeting, released last week, show a constrained assessment of the economy’s health. In its necessarily tempered language, the Fed observed that economic and labor market activity has slowed since the first quarter. That is rather euphemistic when considering that January’s private sector net job gain was the strongest in almost six years.

Commenting on the current policy juncture, Dennis Lockhart on Friday offered that “with each apparent change of the pace of activity, policymakers as well as business planners, government planners and forward-looking consumers had to ask whether the new trend is likely to be transitory or persistent.”

Our inability to establish a sustained trend has had a dampening effect on behavior, even during those brief periods when the data have improved. At the year’s halfway point, we remain constrained. Absent momentum in the labor market, income growth and spending by households have softened and consumer confidence has retreated from earlier highs. Small business optimism has seen a full reversal of the year’s earlier gains.

Apart from the immediate European threat, U.S. fiscal policy is expected to weigh more heavily on the outlook in the approach to the election. No matter who wins the election, budget politics will maintain a high profile in 2013, even if the reality of our spending imbalance does not come to roost. Reflecting the possibility that domestic indecision or external shocks will reverberate through the global economy, Fed officials have restated their commitment to accommodative policies. The unfortunate reality is that monetary policy has largely exhausted its known potential; it might even be argued that recent moves by the Fed have been ineffectual if not counterproductive inasmuch as they distort incentives for risk-taking.

Opting to forgo a clear and regular message regarding monetary policy’s limits, the Fed risks feeding volatility as it is thrust into the political arena and as markets grow ever more dependent on central bankers’ attempts to offset failures in the fiscal realm. For the time being, that means the interest rate environment will remain exceptionally accommodative. Impairments to the transmission mechanisms of monetary policy mean that commercial real estate investors must remain on alert. The flow of capital is supporting property prices; it is not fomenting a commensurate improvement in the economic underpinnings of value.

Sam Chandan, PhD, is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.

http://commercialobserver.com/2012/07/uncle-sam-i-am-americas-favorite-allegory-flexes-its-muscles-in-the-latest-issue-of-the-economist-but-is-economic-prosperity-really-so-close/?utm_source=Sailthru&utm_medium=email&utm_term=The%20Commercial%20Observer%20NOW&utm_campaign=CO%20NOW%207%2F18