Happy New Year! And Here is our New York City Real Estate Outlook and Predictions for 2014...

by Vlad Sapozhnikov17. December 2013 12:23

 

As 2013 draws to a close and 2014 is right around the corner (literally a few hours at this point, Happy New Year to everyone!), there is quite a bit of chatter over news media outlets, online forums, and real estate industry related websites about the U.S. and global economic recovery - especially as it relates to the state of the real estate market and mortgage interest rates - how far up will they go? We at Oneworld Property Advisors have researched and examined many of the 2014 predictions out there in regards to the residential and commercial real estate sectors in New York City. Herein are our thoughts and findings.

First, let’s begin with breaking down The Real Estate Board of New York (REBNY) Luncheon at the Roosevelt Hotel in Midtown East where a series of predictions on 2014’s commercial and residential real estate markets occurred. The Panel was full of real estate thought leaders and mover and shakers, such as, Robert K. Futterman, Founder, Chairman & CEO of Robert K. Futterman & Associates (RKF), Neil J Goldmacher, Vice Chairman at Newmark Grubb Knight Frank, Woody Heller, Executive Managing Director and Group Head, Capital Transactions Group; Simon Ziff, President of Ackman-Ziff Real Estate Group. And Mary Ann Tighe, CEO of CBRE’s New York Tri-State Region, moderated the panelists of real estate heavy-hitters.

GOLDMACHER PREDICTION

Photo via nyrej.com

Goldmacher predicts densification will become a new trend in the New York City commercial real estate. What exactly does this buzzword mean? It means companies are reassessing how they utilize their office space and want to do more with less. And when it comes to New York City real estate, it means putting more people into less space. He also foresees that big box tech companies and sectors will be looking for office space in Midtown Manhattan, which in effect, will force current tenants to move downtown. Note: We at Oneworld Property Advisors don't see eye to eye with Goldmacher on this prediction. Firstly, there is plenty of vacant office space in Midtown Manhattan to accommodate tech companies moving in. Secondly, tech companies tend to not go for the Midtown Manhattan office buildings because of the 70’s/80’s style architecture. (Cookie-cutter spaces, low ceilings, layouts are less open and more constricting, and less diversity in culture and neighborhood options). Lastly, from an anecdotal standpoint and experience, we see tech startups and mature firms (such as Kickstarter, Facebook, Foursquare and Microsoft) going downtown or even to Brooklyn for office space. But time will tell. And office leasing still remains a tenant’s market with generous concessions.

Goldmacher said as the tech companies that got the New York start in Midtown South mature they are also more willing to look downtown. “It used to be, we want a great block of space as close to Google as possible,” he said. But we at Oneworld would question this viewpoint. Google’s NYC Headquarters is in Chelsea, which is not Midtown Manhattan or “Midtown South” as Goldmacher stated. It seems there is a discrepancy on defining neighborhood boundaries even in today’s transparent, online real estate data-driven landscape. And we would further suggest these tech companies (start-ups or mature) rarely had/have Midtown Manhattan as their top pick to move their offices to in the first place.

FUTTERMAN PREDICTION

Photo via New York Times

Futterman’s main prediction was that the retail side of NYC commercial real estate is strong and will continue into 2014. He also went on to define a downtown Futterman also predicted a strong year for 57th Street – East to West – as well as the area north of Madison Square Park.

Additionally, a Manhattan neighborhood will get some renewed attention from the real estate industry – the Lower East Side. Futterman said, “You're going to see a lot more money and development there as investors and developers realize they've overlooked that last sliver of Manhattan between Downtown and Williamsburg.”

Oneworld would agree that the Lower East Side could have a bit of an uptick on the retail side. If what Mr. Futterman is truly referring to when he says Lower East Side is Chinatown, then we can see that prediction to be spot on. And we would like to add to this prediction that Greenpoint & Bushwick Brooklyn and Ridgewood Queens are where real estate visionaries are already looking and buying up real estate assets and developing projects. These neighborhoods have great potential for retail. Oneworld also agrees wholeheartedly on an issue Futterman said in that “The nice thing in the retail business is new neighborhoods emerge.”

HELLER PREDICTION

Photo via nyrej.com 

Heller continued on with his thoughts on the New York City real estate commercial market by suggesting that institutional investors will continue to look to Williamsburg as an important piece of their portfolio, a must-have, if you will, for any New York City investor. He referenced the sale of 111 Kent Avenue as an example. This Williamsburg residential rental building has set record rental prices and the area continues to grow – right into Bushwick, might we add. Heller also added that “Land is the best indicator of what’s going on in the market and the highest and best use we’re seeing for land today is clearly residential.”

In general all the panelists agreed that the hot retail market in downtown Manhattan and prime Brooklyn neighborhoods will continue to make an impact on investment sales in 2014. Moreover, we couldn't agree more with Heller on one of his statements: “You have an incredible number of national retailers who want to come into this market,” he said. “The island can get taller, but it doesn't get wider. So your supply is quite finite but the demand is quite strong.” Tighe also chimed in on this topic and said that 2013 has seen land in Manhattan trading at prices in “uncharted territory.” And the panel agreed that the prices have mainly been driven by residential real estate development. And prices had doubled since 2007 alone – the price of land is skyrocketing!

ZIFF PREDICTION

Photo via ackmanziff.com

Ziff expressed more caution for the New York City real estate market and the direction it’s heading in 2014. He used the term funky debt, which is on the rise; and he believes this is not a good thing. With so much equity in the NYC real estate market, leverage is high in some deals, which is very reminiscent of how deals were done in the pre-Lehman days right before the economic downturn and recession took hold. Ziff keeps seeing “three or four people in the capital stack of a particular deal.” And he also added, “I have not seen this since ’06, ’07.”

Of course, these all of these predictions are speculation and no one has a crystal ball, but because of the experience and expertise of the panel, these predictions do make one think and carry some insight into the NYC real estate market of 2014. Time will tell and test these real estate luminaries.

ONEWORLD PREDICTIONS & TAKEAWAYS

For the New York City real estate industry, 2013 was quite a year where price records were demolished in the NYC commercial and residential real estate sectors. One may not realize or even see this looking at the current economic challenges still out there. But we see some strong trends emerging that give us a more certain and positive outlook than back 2013 and even 2012.

REAL ESTATE DEVELOPERS AND INVESTORS

Over the past few years Real Estate Developers and Investors have shunned away from large New York City condo developments and projects, but we saw a change in 2013. Developers and investors began to enter back into this market in greater numbers, and we predict more will in 2014. “Real optimism has emerged as a key theme in the real estate market for 2014 as trends are progressing significantly through the economic and real estate recovery cycles,” said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. “The steady economic recovery and job creation has created ‘tailwinds’ that have propelled the commercial real estate market forward, and momentum of this recovery seems powerful enough to weather spikes in interest rates that may be inevitable.” Yes, of course, there is concern in the New York City real estate market that once again pricing is getting too high. However, this does benefit the rental real estate market and hotel sector the most. And we feel these two sectors have some of the most promise for 2014. And can work together to bring more prosperity to the Big Apple.

We also see the tech sector coming to New York City in droves. For instance, Cornell University’s Roosevelt Island Tech Campus just named two developers, Hudson Companies and Related Companies, for the joint venture. For many years, New York City has been known as the city where companies leave when they need to expand and can’t justify the higher rent and salaries. But we are seeing the contrary happening today and expect it to continue into 2014 and beyond. We recently spoke with a high level tech executive who also mentioned; “being closer to the big money and funders” is also alluring to startups and burgeoning tech companies.

OFFICE MARKET & HOTEL SECTOR

There is a high-rate of vacated office space and insufficient hotel vacancies in New York City, especially in Midtown Manhattan. According to CBRE Economic Advisors, Midtown Manhattan is at 26% vacancy rate while New York City’s hotels are at a 96% occupancy rate – basically completely booked! This is where “Office Densification” prediction appears to be off. There is quite a lot of prime office space that is sitting empty to long periods of time. This is where we see opportunity to fill these empty spaces, boost a building’s presence, and bring more tourism to New York City. It sounds so easy. Simply put tourists or New Yorkers who need a bed for a couple nights or a couple weeks into the vacant office spaces – enter the idea of Pop-Up Hotels.

A Copenhagen based company, Pink Cloud, is trying to solve Midtown Manhattan’s abundance of vacant office space and the lack of hotel affordable rooms. It also won the 1st Prize: Radical Innovations in Hospitality in June 2013. And they would be the first in NYC, although the idea has been around for a couple years. Some of us probably know it as “Glamping” or Glamorous Camping and Snoozebox. We also saw Airbnb try to tackle this problem but now it is pretty much done in New York City and tied up in the court system. But there is opportunity here. But bureaucratic red tape can be quite impossible to overcome.

Pink Cloud's solution is to construct luxurious, temporary hotels in empty Class A Office buildings in NYC, particularly in Midtown Manhattan. It’s a sort of “killing two birds with one stone” solution. The owner of the NYC office building can pull in some rent and tourists can stay in a luxury hotel for approximately $130/night, which is far under the average rate of $350/night for most NYC hotels. And we are seeing quite a boom in the Hotel sector in New York City. However, with all of the red tape and zoning restrictions, one has to wonder if this innovative idea is actually feasible. “A traditional hotel can take five to six years to build, from start to finish. With the pop-up hotel, we see it taking two to four weeks.” - Eric Tan, Pink Cloud.

Photo via Pink Cloud

MORTGAGE MARKET AND RISING INTEREST RATES

According to Market Watch from the Wall Street Journal, the interest rate for a 30-year fixed-rate loan is currently at 4.54%, but some economists and experts have predicted that interest rates could rise to 6% in 2014, which could send bond prices tumbling.

Screenshot via Market Watch

As per several of the trade magazines and economic forecasts, mortgages should be easier to obtain because higher rates have put a damper on refinancing activity which, in effect, has caused some banks to increase their purchase lending. Furthermore, new mortgage rules taking effect in 2014 will give banks a better understanding about how much financial and sometimes legal risks a bank faces with all the different types of mortgages in the market. This new “clarity” should cause banks to be more willing to lend.

We do know this. Real estate developers, investors and NYC homebuyers will be closely watching how interest rates unfold in the first few months of 2014. And we will be watching to see whether new condo projects like One57 and 432 Park Avenue can achieve the sales prices needed to validate the high costs real estate developers paid for the land (approximately $800 price per square foot) and the recent record-breaking sales in these projects and similar ones around Manhattan. 

There is also the emergence (or re-emergence depending on who you speak with) of a concept called "shadow banking,” which is similar to traditional lending but transactions are completed outside banks so this type of lending gets around bank regulations and regulators. Borrowers will find different types of mortgages offered by family offices, wealthy families/individuals, and private funds.

To sum up, a modestly positive macroeconomic outlook (job growth, strong stock market, rising property prices, global recovery), less competition from investors moving to secondary and tertiary markets (aka “smile investing” philosophy), tech companies moving to NYC, and more access to credit and loans should all make residential and commercial real estate in 2014 less frenzied and uncertain than 2013. We here at Oneworld Property Advisors are feeling a bit bullish and optimistic. Happy New Year! 

Get the Inside Scoop on the EB-5 Visa Program and How NYC Real Estate Developers are Leveraging it to Raise Capital

by Vlad Sapozhnikov21. November 2013 15:10

 

Recently, more New York City real estate developers and entrepreneurs are leveraging the sometimes controversial Federal Immigrant Investor Program, aka the EB-5 Visa Program, to secure capital from foreign investors in countries such as India, China, England, Mexico, Venezuela, South Korea, Taiwan, Venezuela, among others. And Chinese investors accounted for approximately 70% of the total EB-5 foreign investors in 2012. Furthermore, the visa program doesn't have any restrictions on country of origin for the foreign investor, but the U.S. Federal Government does limit the number of EB-5 visas (10,000) available each year and approves each and every one of them.

Why else is the EB-5 Visa Program so popular with NYC real estate developers?

Because of the more stringent lending guidelines from the Dodd-Frank Act 2010 and the banking industries continued distaste for risk and traditional financing, NYC real estate developers are looking for other avenues for financing and raising capital for NYC real estate projects. In short, the EB-5 Federal program is a low-cost financing vehicle for New York City real estate developers and a road to permanent residency for foreign nationals; they receive two years of conditional residency while the investment is put to work – a match made in heaven. Or is it?

In the beginning of the 1990’s, wealthy foreign investors were more concerned with acquiring their green card rather than the return on investment (“ROI”). But now, with more competition, more EB-5 applications, and regional centers (more on this later) popping up across the nation, foreign investors are starting to care more about their ROI. However, as per the Federal EB-5 Visa Program guidelines, guaranteeing a return is not allowed. Furthermore, the United States Citizenship and Immigration Services does have to approve each and every EB-5 program. But an approval is not an endorsement.

Additionally, EB-5 financing has less legal hoops to jump through than most traditional financing options. For NYC real estate developers with constant capital needs, paying out the start-up costs is a smart decision because once the regional center is in place; they can use it the EB-5 capital to raise funds for other projects.

Let’s take a quick look at the EB-5 Visa Program’s historical significance and requirements for context.

Brief Overview of Immigrant Investor Program (aka EB-5 Visa Program):

U.S. Citizenship and Immigration Services (“USCIS”) administers the Immigrant Investor Program, aka the EB-5 Visa Program, and is governed by federal laws and regulations – not by any state agency; therefore, not governed by New York State law. Back in 1990, Congress created this Federal Program by passing the Immigration Act (IMMACT90) to stimulate the U.S. economy through capital investment and job creation with the help of overseas capital. These foreign investors are eligible for an EB-5 Visa if they invest or are in the process of investing the required amount of capital into one of the following for-profit business models:

·      Must create a new commercial enterprise after 11/29/1990.

·      Meet capital investment thresholds by creation of an enterprise that will expand to 140% of pre-investment net worth or number of employees (note: investment capital can’t be borrowed).

·      Invest in a troubled business in which full time jobs will be created and preserved.

New Commercial Enterprise. Let’s begin with the first requirement where the foreign EB-5 investor must create a new commercial enterprise. As per the USCIS, a “commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to: a sole proprietorship, partnership, holding company, joint venture, corporation or business trust or other entity, which may be publicly or privately owned.”

Capital Investment Thresholds. The USCIS has two options for capital investment requirements for the EB-5 foreign investor. The standard capital investment, or minimum qualifying investment in the U.S, is $1 million. Capital equates to cash, inventory, property, equipment, stocks, and indebtedness secured by assets owned by the foreign investor. All capital is valued at the fair-market value of the U.S. dollar at the time of the investment. The alternative capital investment requirement for an EB-5 foreign investor in a high unemployment area, (calculated as an area with an unemployment rate that is at least 150% of the national average), or a rural area is $500,000.

Job Creation. As per the USCIS, the overseas investor must create and preserve a certain number of jobs for U.S. workers within the United States for a troubled business. The capital can go to a new commercial enterprise, a troubled business or in pooled loans through a regional center across the country. More specifically, EB-5 foreign investors must demonstrate that their capital investment will directly or indirectly create or preserve at least 10 full time (35-hours/week) jobs for qualified employees (i.e. U.S. citizen, permanent resident, asylee or refugee). Bottom line: the employee must be authorized to work in the U.S. and is not a family member of the immigrant investor. (Note: go here for further explanation on job creation and details on what constitutes a direct or indirect job).

EB-5 Visa Program Not Without Issues

No surprise that a Federal program that involves both foreign monies and immigration has created some controversy – especially in the current political and economic climate. As with many government programs, there’s the usual bureaucratic runaround, trivial paperwork and legalese that can drive a NYC real estate developer mad. Recently, the U.S. Securities and Exchange Commission (“SEC”) has been turning the heat on unlicensed “finders” who charge a fee to help NYC real estate developers locate and secure foreign capital. As we all know, only licensed brokers can solicit investors and bring parties together for a transaction. If an unlicensed finder matches a foreign investor with a NYC real estate developer and is compensated, he/she is subject to SEC and New York State fines; and could face the possibility of being banned from trading securities all together. For example, The SEC in February 2013 charged a Chicago hotel developer (ACCC) who had raised $145 million in EB-5 capital by misleading 250 investors, mainly from China, into believing they would make a substantial return on investment. But instead, he collected over $11 Million in fees and defrauded investors that believed “they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport.” Sadly, it was all a dupe. We also spoke with a high level official in the United States Department of Homeland Security and our source revealed, “There has been a lot of fraud involved in the program.”

As of October 1, 2013, USCIS had approved nearly 325 out of 439 regional centers and many of them are used for non-real estate-specific investments; approximately 27 are approved for New York as per the USCIS website list (which again approval does not signify endorsement). The site also states that, “Because regional centers can operate in multiple states, those entries DO NOT represent distinct regional centers.”

More Options: Make Your Own or Join Up

EB-5 visa applicants have two main investment roads at their disposal:

Business Formation. The foreign investors can invest in their own commercial enterprise that is more labor intensive and requires a direct managerial role (managing day-to-day operations) in the project. Direct investment (aka setting up your own regional center) is the best option for those who want more hands-on control of their investment and the New York City real estate development or project that received their investment. In addition, this choice is much more time-consuming and can cause quite a few headaches. Take a look at the timeline below:

Business Investment. The second option is for EB-5 applicants to invest in a regional center owned by others. This appears to be the best choice for those who are more interested in the immigration goals (getting that green card!) rather than obtaining maximum ROI. Regional centers are responsible for adhering to EB-5 Federal Program rules and guidelines so this takes the burden off of the EB-5 foreign investor so that he/she is not solely responsible for meeting program requirements. This option best serves foreign investors who want a more hands-off approach, where they are not responsible for the day-to-day management of their investment into the NYC real estate development or project.

All and all, the EB-5 Visa Program is a great resource for NYC real estate developers to raise capital for projects as long as federal guidelines and rules are followed both by the foreign investor seeking his/her green card and by the New York City real estate developer seeking the capital.