Developments

Investment in The Bronx

2007-03-31T16:55:00.000-04:00

I was born and raised in The Bronx, as was my mother. My grandparents moved here some 50 years ago when the northern half of The Bronx was all new construction. It was pleasant enough to grow up here, but the problem The Bronx has is that the minute you grow up and go to college there is not much for you here and you basically must leave in order to go forward in life. There were so many times when I would come back from college or when I visited from Tel-Aviv and I would be looking for products and services that were just not available in The Bronx. As a result, I am forced to conduct all of my business and leisure in Manhattan and occasionally Brooklyn. I practically live on the express bus.

One day a couple years ago as I made my way into Manhattan on the Bruckner Expressway, I looked closely at the buildings surrounding the highway, especially towards the waterfront area and the swath of Port Morris between the Triboro and Third Avenue bridges and saw all these "For sale" signs on charming but run down brownstones. I thought, "Wouldn't it be great to buy all this up, rehabilitate it and make some nice housing out of it?" We could attract services into the area so that I don't have to commute an hour into Manhattan for every little thing. The Bronx could become a destination and not a place from which to escape. I stumbled upon the Clock Tower building and the antique shops surrounding it and thought "We could make this into the next Tribeca" (little did I know at the time that Adolfo Carrion, the Bronx Borough President, had the same idea and that this area was part of his plan for revitalizing the South Bronx).

For at least the past year I have been bouncing redevelopment ideas involving The Bronx off of people in the real estate industry to mixed reaction. Hearing the President of Real Capital Analytics say the smart money was in the Bronx was a major shot in the arm and since then people have been more enthusiastic. Later on, I spoke to someone else there who is from the Bronx and we had a nice discussion on which types of real estate would be best to invest in now and why the Bronx has been neglected for so long.

An interesting thought I had is that perhaps people's fear of living and working in The Bronx creates a squeeze in the other boroughs, pushing up rents. If we consider that people looking for apartments who are not too constrained by their budgets usually want to live in Manhattan, Brooklyn and maybe Queens, as everyone crowds into these boroughs, it will drive prices there up. If more people went into The Bronx, it could have a moderating influence on prices, making housing as well as commercial space more affordable across the entire city. In short, the underutilization of The Bronx is likely costing everyone in New York City and perhaps the surrounding metropolitan area money. Whether or not this is true and if so how much money is it costing New Yorkers is a question for an economist.

Now that I have been taking classes at NYU in Real Estate development and financing I am learning that real estate investment is not totally out of reach for me, especially for a smaller deal. I went on a little real estate scouting trip in the Concourse/Highbridge area. I saw an empty brownstone for sale for some $550,000 but to get it to where I want it to be it would require a lot of renovation that I do not feel ready for. It has even been suggested that I be more ambitious and buy, say, an already occupied apartment building with an established rent roll so as to make it easier to get a loan. The missing ingredient is to find an equity partner.

And so the networking continues, changing focus here and there as the project evolves. Meanwhile I seek employment and have finals for my classes looming.

Following are some articles about real estate in The Bronx. I just hope that by the time I can get in that the market won't be saturated.
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Bronx Multifamily Portfolio Trades for $136M

By Katie Hinderer

Eastchester Heights(incidentally, this is not too far from where I live)NEW YORK CITY-Taconic Investment Partners and ING Clarion Partners has bought the 1,416-unit Eastchester Heights apartment complex here in the Bronx. The JV paid $136 million for the property.

Urban American LP and City Investment Fund jointly sold the portfolio which consists of low-rise, moderate-income housing at 1400 Hicks St., 3485 Corsa Ave., 3444 Fish Ave., 3438 Wilson Ave. and 3437 Eastchester Rd., according to David Berger, senior managing director with GFI Realty Services. Berger together with colleagues Aaron Jungreis and Jay Davidson represented the buyer and seller.

Berger tells GlobeSt.com “Taconic was interested [in the deal] as they have recently come back into the multifamily arena and this was a large, well maintained complex which rarely becomes available. They moved very quickly and aggressively to wrap up the deal, with a large deposit and a fast closing.” The purchasing JV plans to keep Eastchester Heights a rental community for middle-income families and will continue an interior unit renovation process that the previous owners began.
“Not so long ago, in the 1990s, this was a very troubled property, and because of that situation, the entire surrounding community was in danger of sliding downhill,” says Ari Shalam, director of acquisitions for Taconic. “But the preceding owners performed a heroic task in restoring the complex, physically and socially, to its current vital state. The entire Eastchester community is now a stable middle-class community on the upswing.”

Rents at the property average $14 per sf, but Shalam says he expects the rents to gradually increase as the area continues to improve. “This is an investment in the future of a Bronx community that’s been restored to life.”

This purchase is Taconic’s second recent foray into the middle-income housing sector. Last fall Taconic teamed with Apollo Real Estate Advisors and purchased about 1,000 apartments at Fairfield Towers in Brooklyn for $90 million. The JV is pouring $40 million into renovations to turn the property into a middle-income condo property.
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Mott Haven's real estate ascension is an uphill climb

A mix of promise and problems make future development prospects an iffy proposition in South Bronx neighborhood

By Alison Gregor

With an ample supply of empty industrial buildings and a smattering of picturesque town homes, Mott Haven in the South Bronx would seem to have the qualities needed to be the next Williamsburg. It has a booming, though tiny, antiques district and a section of residential apartments along Bruckner Boulevard near Lincoln Place, the result of a five-block rezoning done almost a decade ago.

Just north of that is a concentration of about 250 townhouses built in the late 1800s that have landmark status and currently sell for at least $500,000 each.

There's also some celebrity cachet – Mo Vaughn, former first baseman for the Mets, announced he is reviving two neglected Mott Haven housing projects.

But most importantly, say developers, Mott Haven has the location, location, location that is so important in real estate development. It's a short ride on the Lexington Avenue subway line from Midtown Manhattan, but also allows city residents easy highway access to the rest of the Northeast.

So why isn't this South Bronx neighborhood taking off?

"It's just not Williamsburg," said Sid Miller, a neighborhood real estate broker and founder of the Haven Heights Group. "The problem with Mott Haven is there is not enough supply of warehouses and brownstones in relation to housing projects, subsidized housing and five-story walk-up tenements."

Crime rates have dropped, as they have throughout the city, but the neighborhood remains highly segregated by race, ethnicity and class, residents say. While those fleeing Manhattan are doing so because they can't hack the borough's high rents, they still earn enough to push up Mott Haven prices – much to the chagrin of locals.

"It's a no-win situation," said Javie Diaz, who works as a bartender at the Bruckner Grill, a favorite watering hole for Mott Haven's newer residents. The bar opened two years ago in the antiques district. Diaz said he moved to Mott Haven almost a decade ago with his mother, who lives in the housing projects.

"Everyone who moves here likes it," he said, "But if you're going to move to this neighborhood, which doesn't have any amenities, you want to pay reasonable rents."

That's why he left his former apartment. Diaz said he recently moved from his cramped quarters at the Clock Tower loft building, a former piano factory converted into about 150 living spaces by Brooklyn-based developer Carnegie Management Corporation. The first spaces became available in 2002.

"In three years there, rent went up drastically," said Diaz. "A two-bedroom apartment is now $1,300 or $1,400 a month. That's way overpriced."

Other two-bedroom apartments in Mott Haven's antiques district offer more space for much less, about $900 a month, he said. Also, though the Clock Tower loft building was portrayed in several news articles as a bellwether of Mott Haven gentrification, it has been tied down in litigation from former tenants.

That negative publicity may also be hobbling Mott Haven's revival in general.

"No matter what it becomes, this neighborhood will still be the South Bronx," Diaz said.

The area's newest residents tend to live around Bruckner Boulevard or 133rd Street, except for those who purchase one of the townhouses, located in three small historic districts pocketed between 133rd and 144th streets. Some of these landmarked blocks look like they might have dropped out of Greenwich Village. Miller said he paid $50,000 for his four-story brownstone on 138th Street back in 1990. Now, it is probably worth about $600,000, he said.

"What do you get for half a million in Manhattan? A walk-up studio," he said. A row house in Mott Haven might have 12 rooms.

"What a great way to raise kids," he added.

But, ironically, that property appreciation is driving away many hardworking Hispanic families who have lived in Mott Haven for decades, even if they are cashing in on the increasing property values. For example, Jose Noyola, who runs a streetside clothing stand, put his four-story town home at 142nd Street and Willis Avenue on the market for $600,000 after buying it as a fixer-upper 12 years ago for $250,000.

"This is a poor neighborhood that has been improving, because there are some new houses," Noyola said. "But now, old-time families can't afford it."

Noyola's home, where he no longer has to pay down a mortgage, is registered as a church, so he doesn't have to pay taxes on it. Still, climbing prices for utilities have sunken him. "The utilities are so expensive, we can't afford to live here," said Noyola, who plans to pack up his family as soon as he sells out. "We're moving to Miami."

Some families bought townhouses for as little as $15,000 back in the 1960s, said Miller, and the properties have remained in the family since then. There is very little available in vintage townhouses for a purchaser who wants to move into Mott Haven.

But developers say there has been some new home construction. Still, the area north of 133rd Street in Mott Haven is dominated by government-subsidized housing projects that are decades old and might scare off some potential homebuyers.

"The problem is the quality of the housing stock there is very old," said Michael Schwartz of Equity Realty and Consulting Corporation, which does a lot of multifamily development in the Bronx. "At night, when the commercial and industry is gone, it's very barren. It's not a prime residential area."

In the meantime, neighboring communities like Port Morris are being rezoned to promote commercial and residential uses in largely abandoned industrial space, which may steal some of Mott Haven's thunder. Hunts Point is also seeing some urban in-fill home construction, developers say.

North of Mott Haven, near the Hub as well as around Yankee Stadium, along with neighborhoods like Melrose and Morrisania, residential development, almost all of it subsidized, is more widespread.

Schwartz said he believes only larger-scale construction of apartments may eventually allow rejuvenation to take a firm hold in Mott Haven.

"For it to be a prime area, there would have to be some concerted effort to develop a pocket or area with a major group of buildings, perhaps 300 or 400 units in four or five developments," he said. "Everything would then feed off that."
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A market-rate future for The Bronx

Development replaces demolition as borough stabilizes

By Alison Gregor, The Real Deal, October 2005

(top) A rendering of the new Yankee Stadium, which will anchor a new commercial hub in the South Bronx; (above) Mario Procida has developed 1,000 housing units in the Bronx and recently finished a strip mall. The recent history of Bronx real estate is a tale as much about demolition as development, but the future looks like an era of change.

A borough of stark contrasts, its northern section, which includes Riverdale, has always been ritzy and is now staving off large-scale development with restrictive zoning regulations. While the borough's less expensive areas have traditionally served as the steady source of housing for much of the city's working class, the South Bronx conjures up two principal images: Yankee Stadium and urban decay. Full of government-subsidized housing, the South Bronx is finally seeing the first tentative steps toward creation of market-rate condominiums.

As Bronx real estate prices rise, the question real estate professionals consider is simple: how high?

"There has been a steady stream of investment in the Bronx for the past two decades," said long-time Bronx developer Peter Fine, head of Atlantic Development Group. "We have done primarily rentals. But because the borough has increasingly stabilized, especially over the past five years, it's more viable today to try to do some kind of for-sale model."

The Bronx is hard to quantify as a potential ground for development, but some figures are clear. According to U.S. Census Bureau estimates, the Bronx is the city's second fastest-growing borough, behind Staten Island.

With almost 1.37 million people living in the Bronx, according to 2004 data, residential development has risen slowly and steadily. City building permit records show the rate of construction for apartment buildings is ahead of single-family houses.

Anthony Perez Cassino, chairman of Bronx Community Board 8, said the entire borough is undergoing a building revival. "I don't think there's anywhere in the Bronx that's not a good area to develop," he said.

Nowhere are the good times more evident than in the Riverdale and Kingsbridge neighborhoods in the northern Bronx, where zoning regulations were put in place to contain high-rise development in the swanky neighborhoods full of elegant single-family houses.

"This is the most development we've seen in Riverdale in several decades," said Bradford Trebach, an associate broker with Trebach Realty, which has operated in Riverdale for 33 years. "Most of these are luxurious condominium developments."

While the borough's northern environs duplicate an environment similar to surrounding posh Westchester County suburbs, the southern part of the borough is starting to blossom as prospective buyers get priced out of Manhattan.

While southern Bronx neighborhoods, such as Mott Haven, Port Morris, Melrose and Morrisania have seen their share of single- and multi-family homes in the past, they've also been home to large housing projects. Development of government-subsidized housing continues to this day, despite a legacy of problems with public housing, including crime, poor local schools and multiple generations of families living in poverty.

But developers have begun testing the market in the South Bronx with market-rate housing. The Jackson Development Group is putting up 28 condominiums in seven row houses near Yankee Stadium, which itself will be the site of a massive redevelopment effort that will see a new stadium next to the House That Ruth Built, as well as a hotel and convention center.

It remains to be seen if these market-rate units, with three-bedroom apartments reportedly going for $235,000 and two-bedrooms selling for $195,000, will actually find a market. Some developers say they are skeptical -- though it's not out of the realm of possibility.

Some, including former Bronx borough president and Democratic mayoral nominee Fernando Ferrer, call for a balance between market-rate and affordable housing.

"While the resurgence of the Bronx has had a significant positive benefit on the borough," Ferrer wrote in an email to The Real Deal, "we must continue to be mindful of the effects a quickly rising market can have on the less fortunate New Yorkers. [But] the construction of new apartments does not necessarily mean the loss of housing families can afford. We can strike a balance by providing incentives for developers to include affordable housing units in their projects."

Mario Procida, head of Procida Construction Corp., has developed about 1,000 units throughout the Bronx since he began working there in the mid-1970s. His firm was one of the first to collaborate with the city's Partnership New Homes Homeownership Program.

"That has largely been the generator for the redevelopment of the most underserved areas of the city, like the Bronx," Procida said. "People may call it affordable housing, but it's really housing that meets the needs of the market."

Procida is working with L & M Equity Participants, Nos Quedamos and Melrose Associates to build a mix of 324 residential units of cooperative housing, rental apartments and multi-family homes in Melrose that will be affordable for people earning low to moderate incomes. He said that even with the cheap cost of land in the Bronx and increasing real estate prices, it's still not possible to do market-rate housing.

"It's very difficult to do anything here without government assistance," Procida said.

Martin Dunn, president of Dunn Development Corp., which has affordable projects going up in Morris Heights, Morrisania and Highbridge, agreed. He also said that, like everywhere else in New York City, the Bronx is seeing a shortage of land for development purposes.

"It used to be land was the last of our worries," Dunn said. "The obstacle used to be getting housing subsidies. But now, finding land is a significant hurdle."

As recently as 1999, Dunn said he bought a piece of land in the South Bronx at city auction for $4 a buildable square foot. Within a couple of blocks of that site, the price of land has more than quintupled to $25 a buildable square foot, he said.

"Land prices have just been jumping and jumping," Dunn said.

Other developers are a bit more optimistic. Ron Moelis, principal of L & M Equity Participants, said that besides the collaboration with Procida in Melrose, the company has about seven projects going on in that neighborhood, among others throughout the borough. L & M projects include two low- and middle-income rental projects at 156th Street and Melrose Avenue and 1011 Washington Avenue.

"There is starting to be more middle-income, even upper-middle-income housing being developed since the Bronx is more affordable than other parts of New York City," Moelis said. "Neighborhoods are gaining commercial infrastructure, and I think that will help."

Besides the new Yankee Stadium, there is other commercial development stabilizing the Bronx. BTM Development, a unit of the Related Companies, has plans for a 1-million-square-foot shopping mall called Gateway Center to go up at the former Bronx Terminal Market near Yankee Stadium. The Hutchinson Metro Centro in far-flung Pelham Bay increased the borough's Class A and B office space by 25 percent when it opened in June 2004 with nearly 500,000 square feet. Following the project's initial success, there are now plans to add another 650,000 square feet at the site.

A new mall of at least 200,000 square feet will be going in this year at 230th Street and Broadway in Kingsbridge, and Procida said his company has just completed a 14,000-square-foot strip mall and other commercial space at the Hub.

All of this new commercial development adds services for a borough that has been drastically underserved through the years, property developers say.

"There hasn't been much commercial real estate development over the past 20, 30 years," Fine said. "Since the population has stabilized and there is more solid housing stock, I think developers are feeling more confident there's a demographic base to do commercial development."

2007 Outlook for Real Estate

2007-01-14T16:40:00.000-05:00

This week I went to a panel discussion organized by the ULI on the Economic outlook and trends in the Real Estate Industry for 2007. Both panelists, Mark Zandi, Chief Economist of Moody's Economy.com and Robert White, President of Real Capital Analytics, gave utterly and totally amazing presentations, Zandi on the residential market and White on the commercial market. The following are my notes from the event, with particularly interesting things bolded for emphasis. My comments will follow at the end.
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Mark Zandi, Chief Economist, Moody's Economy.com

GDP growth was about 2% this past year, which was below potential, as we need 3% GDP growth to sustain a stable rate of unemployment.

Housing construction was off 30% with housing price declines of about 14% nationally.

This slowdown in housing has shaved 1% off of GDP growth, so the housing sector is then really pulling the economy down.

There have been measurable housing price declines in: Boston and DC because of affordability issues, Michigan, Ohio and Indiana due to a rather bad economy in these areas, Florida because investors are leaving the luxury condo market and Denver, Phoenix and San Diego, most likely because of overbuilding.

The Metro NYC area (defined as: the 5 Boroughs, Bergen, Passaic, Westchester and Putnam counties) sees an economy that is better now than it was in the late '90s/early '00s.

Fed tightening of interest rates is less likely.

On affordability - housing affordability is beginning to improve as prices soften, set to improve so that 1st time buyers can get in - HOWEVER, lenders are getting tighter, so people may be less likely to get loans.

Real estate flippers are exiting the market.

On overbuilding - some 500,000 - 750,000 new houses need to be absorbed by the market before housing construction can continue. Still, supply is less than demand, so housing starts are likely to keep declining.

Housing construction will be lighter in NYC.

Wall Street accounts for 12% of jobs and some 25% of income in the NYC area.

Risks
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Bond market trends (an inversion of the yield curve) portend recession (bond markets predict recession by 1 year). Before every recession since WWII, there has been an inverted yield curve.

A housing market correction could be more substantive than initially thought - spillover could be substantive in the rest of the economy.

BUT...the stock market isn't concerned (so far) with these risks. The stock market usually falls prior to recessions, so according to the stock market there is no more recession but stock markets predict recessions by 6 months.
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Bob White, President, Real Capital Analytics

The correction in housing markets is not really affecting commercial real estate markets.

The average price of a hotel in Manhattan is $650,000 per sq. ft. per key.

Real estate prices in NYC are some 3 - 4 times the national average (apartments are getting into $1000 per sq. ft.)

Prices are being driven nationally (by stock market speculation, financing).

Sales volume is very strong in the office (both Central Business District and suburban) and retail (but not so much regional malls).

Trend towards increasing deal size (Peter Cooper Village/Stuyvesant Town deal and the Mall of America deals, for instance). Mall of America deal 2nd largest deal in the country.

The table below lists the largest real estate transactions of 2006.

click on the image to enlarge

2006 saw $43 billion in activity, mostly in the office sector. Manhattan saw 72% of sales volume in NYC Metro area. Outer boroughs saw huge increase in activity ($3.7 billion or 8% of the market). The smart money is going into the outer boroughs. .

The NYC market has twice the sales volume of the LA Metro Market, the 2nd largest in the country.

Cap rates have generally been in decline since 2003, mortgage rates have increased during 2006 (more of an impact outside the NYC area). All property prices are up in inverse proportion to cap rates, equilibrium between the two earlyish in 2005.

There have been rising construction costs over the last couple of years. Also huge surges in land prices (~ $366 per buildable sq. ft.).

Continued inflow of capital into NYC Metro area also driving up commercial real estate prices. 2006 Market consisted of:

34% private in-state buyers
23% institutional buyers
12% fund buyers
11% foreign capital
11% REIT/Public buyers

The NYC Metro market sees a lot of volume, with people both buying and selling buildings

Investors smelling opportunities in the San Francisco metro area.

3 million sq. ft. of Manhattan office space was converted to residential space last year.

Average cap rate in NYC Metro area ~4.6%

Are prices in Manhattan too high? Yes, but not as much as we think - still less than replacement costs. Capital still floods into Manhattan commercial real estate market despite price increases.

Very bullish on Manhattan and NYC Metro area. Get used to higher prices in NYC.
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From Q&A Session

Smartest money in the outer boroughs. The Bronx, especially the South Bronx, is the best deal. Best bet is mixed use near transportation.

Increase in self-employed/small business growth - not as easily captured by economic data - look at tax revenue fir data on self-employment and small business growth.

[The self-employed and small businesses could drive further demand for low-cost office space]
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My Comments

When Bob White said the smart money was in the Bronx, especially the South Bronx, I gasped with shock right there at my table. How long have I been saying this? How many times have I bounced the idea of building low-cost office space for small businesses in the South Bronx, everyone was so skeptical, saying that there's too much of a stigma, not enough services, too far from the center, etc., etc., etc. That this man said this in front of some big players in the industry in New York City, means that things might very well definitely be on the upswing in the Bronx. There is already a lot of housing construction in the Bronx and on my ride home on the Bruckner nearish Hunt's Point I counted THREE construction cranes within an area that is probably only a few square blocks. Then there are the recently finished projects and a project I heard about when a local green developer did a presentation during one of our last REAP classes.

After the panel discussion I spoke to this Bob White briefly and told him I have had similar ideas for some time. He said that the whole borough is actually a good investment, not just the South Bronx. He specifically mentioned the eastern flank of the Bronx as well (a lot of waterfront space there. I have heard that luxury high rises are going up in Throggs Neck, for instance).

This has emboldened me to look into this development project again. As I have bounced the ides off of some people I have gotten tips on where to get funding.

Moreover, since the passing of my father in October, I have received a small (very small, but significant enough, at least to me - under $100,000) inheritance that enables me to contribute a small amount of equity.

I just need to get myself around some people who can provide me with some support, both moral, financial and operational.

Through the interviewing I have done over the last 6 months I have learned a lot about different players in the industry and now know of a couple small consulting firms I could contact for help on things that scared me away from this idea beforehand - like zoning, construction, architecture and financing issues.

I will still continue my search for opportunities as well as some further study at the NYU Real Estate Institute.

A lawyer I know socially who practices in regulatory enforcement (or something like that) and works with a lot of investment banking firms said that an idea for equity that will be less risky to me is to find a company willing to be an anchor tenant and then find and develop the space for them with me contributing my little bit of money and sweat equity. He really likes my idea.

AAREPNY (African American Real Estate Professionals of New York) had a similar event two days later sponsored by a major pension fund. I approached one of their people (whom I had met a couple years ago at a National Black MBA event) who mentioned that they are starting a socially responsible investing group whose sole purpose is to take in new real estate investment deal ideas.

Socially responsible real estate investment in the Bronx is a great thing and it's good to see the business community play its part in the revitalization of distressed areas not just as charity but as a core part of their business.

Israeli Investors Buying Up Bronx Real Estate

2007-01-13T03:45:00.000-05:00

I swear I had nothing to do with this. I wish I did, though. The fact is that the Bronx is getting increasing attention in the real estate scene (which I will allude to in a subsequent post), but it is all the more encouraging to me as someone who has been talking about the Bronx for the past year and meeting resistance and cold feet. What is significant here is that these investors see real potential for profit and are less affected by the stigma that has kept locals away. Locals had better get in soon before they lose out on a lot of money.

It would be interesting to find out where in the Bronx they bought these apartments and how much they think they will make as condos.
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Israeli real estate group buying New York flats

by Naama Sikuler Published in Ynet.com (Yediot Aharonot): 01.12.07

Eldan-Tech Ltd., an Israeli real estate group controlled by Yossi Bodenstein, is purchasing an additional 329 apartments in New York for USD 24.2 million.

The acquisition will bring the number of flats owned by the group in the Big Apple to 700.

Last summer Eldan-Tech purchased 372 apartments in the Bronx for rental purposes for an estimated USD 24 million.

In the current deal the real estate group is buying eight buildings – seven in the Bronx and one in Manhattan. The rate of return on 93 percent of the apartments that are currently being rented out stands at 12.4 percent (gross), and is expected to reach 13.6 percent within a year’s time. The net income is expected to reach USD 360,000 a year. [Note: 329 Apartments at $24.2 million is $73,556.23 per apartment.]

The buyers will receive a loan worth 80 percent of the total investment from an American bank.

“We also expect capital gains on the investment due to the increasing demand for apartments in New York in general and for low-cost apartments in the Bronx in particular,” Bodenstein said.

“In the future we will consider a plan to convert some of the buildings into condominiums in order to sell them at prices that would yield capital gains.”

Return

2006-12-20T14:35:00.000-05:00

I know it has been a while since I last posted. Much has been going on, in particular some intense family issues. I also have been doing quite a bit of interviewing, requiring constant preparation and follow-up. However, I will be back, I suppose after the holidays.

Happy Holidays to all and see you in 2007!

Market Stats Indicate Strong Growth in Outer Boroughs Office Market

2006-09-16T18:17:00.000-04:00

In an attempt to do something new I grabbed some numbers from the Real Capital Analytics site and tried to make my own report of market trends instead of downloading other people's material. This is what I could find (not being a paying client):

First, the sales volume numbers for the New York Metropolitan area office market indicate that sales volume for newly offered properties (in which I made the assumption that this meant newly constructed properties) is declining, with newly offered property sales volumes being 68.9% of the volume sales volume of closed properties (which I took to mean properties that had already been sold). A notable exception is the outer boroughs of New York City with newly offered property sales volumes at an astonishing 292.9% of the sales volume of closed properties. Northern New Jersey's sales volume was stable with newly offered properties at 96% of the sales volume of closed properties.

There has also been a general decline in the number of properties sold in all markets except, once again, the outer boroughs of New York City, which saw the number of newly offered properties sold at 200% of closed properties and interestingly, Stamford, Connecticut, where 20% more newly offered properties were sold despite sales volumes of newly offered properties at 17.8% of the sales volume of closed properties.

Average prices showed a general upward trend, most notably in Manhattan, which saw prices for newly offered properties at 159.8% of prices for closed properties. Notable price declines were seen in Westchester, with prices for newly offered properties at 15% of prices for closed properties and Stamford, Connecticut with prices for newly offered properties at 14.8% of prices for closed properties.

The data confirms the tightening of the office market in the New York metropolitan area and in Manhattan in particular, as described in reports from around the industry. The trend towards expansion into the suburbs is also indicated through lower sales volumes for newly offered properties in most markets except in the outer boroughs of New York City, where well known construction projects are taking place with sales of space probably outpacing construction. The relative stabilization of sales volume and prices in Northern New Jersey indicate that space is being sold at about the same rate that it is being offered to the market. Meanwhile, steep declines in Westchester and Stamford, Connecticut likely reveal office space that has been occupied with little new space being constructed and/or offered to the market at the moment.

Studley: Rents Forge Ahead While Activity Pauses

2006-07-05T02:26:00.000-04:00

I went to visit a company called Studley and found this company very interesting. Aside from their small size and more collegial, forward-thinking culture, they also distinguish themselves with a focus on the tenant, especially law firms.

Reading their Market Report on Q1 2006, a couple things have come to mind. First of all, all the focus that other companies might put on the highest end of the office leasing market where rents are as much as $175 and $200 per square foot, serves property owners and puts pressure on tenants at the negotiatiating table. Secondly, many of the major firms that put out market reports must then be serving property owners. Not an unexpected state of affairs.

With Studley's focus on the tenant, I notice in their report more realistic and wholistic analysis of the market, showing more average rental rates of about $50 per square foot, give or take a few dollars in either direction. This corresponds with something a mortgage lender told me at a recent networking event. It also identifies how tenants can win, for instance by moving Downtown or to the suburbs. They also mention how leasing activity slowed by some 25% in the quarter - likely in reaction to the sharp drop in availability rates and subsequent upward trends in Manhattan office rents.

The report is in .pdf format, so the direct link is: http://www.studley.com/blockTools/block-file.ww?id=155&class=ResearchDocumentBlock&propertyName=document&mimeType=application%2Fpdf

Finally - Analysis of the Office Market in the Outer Boroughs

2006-06-24T18:04:00.000-04:00

So now I have finally found a market report (from Grubb & Ellis) for the NYC Office market that includes development in the outer boroughs, which they describe as "booming.". They focus, of course, mostly on Long Island City in Queens and Forest City Ratner in Brooklyn.

The average vacancy rate for outer boroughs office space is 8.6%, as opposed to Manhattan's overall 7.7% vacancy rate (though some submarkets within Manhattan have vacancy rates of less than 2%).

Prices per square foot are dramatically lower than in Manhattan. Brooklyn is the most expensive for $36.54, while The Bronx is cheapest at $28 per square foot. The Bronx also has the second least amount of office space available after Staten Island.

Interestingly, there are 30,000 square feet of office space being built in Staten Island.

It might be nice if someone could build office space in the South Bronx somewhere, but the issue would be space - where would you put it? Can you build decent office space in or very close to a place that is not the hottest place to live just yet? If one were to build a nice office building in the South Bronx, would it spur development of higher end housing and retail?

A Table follows from the report:

Click on image to enlarge

For such a project, one would need a rather daring, creative development firm. The parts of the South Bronx that everyone has had their eye on does not have the greatest public transportation options. I would guess that the office and any associated or nearby housing complexes could just have a van service within it linking to subway stations in Upper Manhattan, the South Bronx and even perhaps Queens.

If I don't get picked up by some firm (as I really prefer to be), I might be tempted to try to gather some funds and develop it myself.

Manhattan Office Rents Continue to Skyrocket

2006-06-22T03:28:00.000-04:00

I had a brief meeting with a Property Manager with a noted national real estate management firm. I met him briefly at a networking reception back in April and he called me last week asking if I wanted to explore Property Management.

Property Management doesn't turn me on so much, but I thought I'd check it out one more time. The Property Management unit in our class was full of a lot of technical details about elevator and HVAC systems. The instructors were great but the presentation was long and made my eyes glaze over (as well as most of the class). I am more into the business end, negotiating leases, thinking up new ways to boost revenue and minimize expenses. I'd rather outsource all of the technical stuff to experts, whom they said we would need to surround ourselves with anyway. I suppose I could do it if I had limited choices, but I'd rather confirm that my choices are limited before I do something like that.

Anyway, one thing that grabbed me was that he gave me a short tour of the building, including a space they want to lease. I told him that they should be able to lease it quickly as office space is in such demand (especially as this was on Park Avenue). He told me that they were asking for $175.

Last I heard (from an article in The Real Deal), office rents had reached a record of $125. I was wrong, $175 is that record.

But that's not all! He said that another building was asking for $200 per square foot.

It occurred to me that in a couple of years, if not right now, it might be worthwhile to get into the construction industry. Or better yet, buy stock in a construction or construction related company. Another senior analyst at a major financial firm with a real estate group that if current trends continue, a construction boom will begin in about 2 years that will help moderate office prices in Manhattan.

According to another guy I know who is a construction manager, the construction boom has already started
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IT'S GOLDEN GULCH IN OFFICE RENTS

By LOIS WEISS

June 19, 2006 -- Rents for the top floor of the city's two premier office towers have just hit the sky-high price of $175 a foot, becoming the nation's priciest office space.

Brokers say the tab for entrÃÂ©e into the 50th floor of both 9 W. 57th St. and the GM Building is $25 a foot more than space at competing Park Avenue properties including Lever House and the Seagram Building.

These buildings are among about a dozen skyscrapers dubbed the Country Club Buildings for the lavish company they keep.

"Even entertaining inflation, it's a remarkable price," said Scott Pudalov of CB Richard Ellis. "It's the pinnacle."

Both buildings are filled with elite players in the business world, from Ron Lauder and, soon, Joseph Perella at the GM Building to Bill Mack's Apollo at 9 West.

The available 6,000-foot suite at the GM Building at 767 Fifth Ave. comprises a portion of the penthouse floor.

"This is the best building in the best location and is also the best managed building in the city," building agent Ken Friedland of CB Richard Ellis said.

The 30,000-square-foot spread at the swooping white and black 9 West 57th St. encompasses the entire floor at 57th Street and has unparalleled views of Central Park.

"They made it very clear, the asking rent is the taking rent and if you don't want it, you're not the right person for this deal," said one broker who asked not to be quoted.

Peter Turchin of CB Richard Ellis, who could not be reached for comment, has recently taken over the office assignments at the tony tower owned by Sheldon Solow.

Solow has been holding off renting spaces until the market reached his expectations. "He understands the future and holds the space off knowing it could be two or three years, and then the rent is higher," said Pudalov.

Richard Farley, senior vice president and director of leasing for RFR Holdings, which represents the Seagram Building and Lever House, is now pitching the two top floors of Lever House, which are 10,400 feet each, at $150 a foot.

City brokers are still astounded at the fast and furious pricing for the better buildings.

"It is amazing that $125-a-foot-and-up rentals make other Midtown rents at $75 a foot sound cheap," said Studley CEO Mitchell Steir, who represents only tenants.

Bullish on Israeli Real Estate

2006-05-26T02:34:00.000-04:00

I love to see articles like this. For all the Israelis buying up commercial and residential real estate here in New York, it is good to see that investors believe that Israeli real estate is a good investment, too.
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"I’d jump into Israeli real estate with both feet"

CIBC’s Benjamin Tal: People understand the gap between how Israel looks on CNN and the real Israel.

Roy Meltzer 21 May 06 17:01

“I’d jump into Israeli real estate with both feet. I now see in it the same economic signs we saw in the US and UK a few years ago, and I think that the present situation is just the beginning of a recovery in Israel’s real estate market,” CIBC World Markets chief economist Benjamin (Benny) Tal told “Globes” in an exclusive interview.

Tal is in Israel to attend today’s CIBC conference with leading Israeli companies listed on Wall Street. His assessment is based on his perception of “economic developments that affect the real estate market. I’m talking about convenient interest rates, competition in the mortgage market, and the market’s inflexible demand. I read the exact same figures five years ago in other markets, which is why I believe that we’ll see an annual 10-15% increase in housing prices in Israel over the next five years.”

As a regular participant in international conferences, Tal says the people marketing Israel are doing good work. “I can tell you that Israel’s name now has a positive connotation as a good place to do business. People understand the gap between how Israel looks on CNN and the real Israel, so they invest here.

“In my opinion, what we’re seeing in Israel now is just the beginning of a positive economic period. The economic policies we’ve seen in recent years are driving this process forward, and I think that if these same economic policies are maintained in the coming years, we’ll see further rapid growth. The biggest risk I see at the moment to the Israeli economy is a possible slowdown in the US market, which could affect exports, as well as political factors that are hard to analyze.”

Published by Globes [online], Israel business news - www.globes.co.il - on May 21, 2006

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006

More on the 421-a Tax Abatement Program

2006-05-24T16:25:00.000-04:00

I found this on Crain's website. The City Comptroller says the 421-a tax abatement has benefited mostly luxury housing in Manhattan. One suggestion instead of scrapping the whole program is to change the mix of affordable to market rate housing required in order to receive the tax abatement.

Good idea.

We saw a presentation from Forest City Ratner regarding the Atlantic Yards project in Brooklyn. They apparently have 50-50 ratio between market rate housing as well as middle and low income housing. The impression is that this is very progressive for such a huge development in New York City.

Perhaps the 421-a tax abatement program might be revised to require that future housing construction conform to a similar formula.
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May 23, 2006

Luxury buildings gain from tax break: report
by David Jones

A tax incentive program designed in the 1970's to spur new housing development has mainly benefited luxury buildings in Manhattan, said city Comptroller William Thompson Jr.

An analysis of the property tax savings generated under the city's Section 421-a program shows that most of the subsidies went to some of the most expensive housing in the city, according to the comptroller's report, released Tuesday.

The 421 program provides tax exemptions to developers to build new multi-family housing and requires that recipients in the Manhattan "exclusion zone" -- between 14th and 96th streets -- must help finance affordable housing.

The "exclusion zone" was created in the mid-80s in response to critics of the 421 program who said the city was giving away money to developers. In accordance with the "exclusion zone" requirements, developers have to agree to provide a substantial amount of affordable housing if they want to build within the defined area.

The comptroller said that, in fiscal 2005, Manhattan developments got 78% of all 421-a benefits, yet accounted for only 48% of the units that received the benefits. Outside of Manhattan, the pattern was reversed, with the percentage of units receiving the benefits exceeded the percentage that of total value of the exemptions.

Mr. Thompson suggested possibly extending the exclusion zone, reevaluating the affordable housing contribution required in the zone, devising other methods of determining which projects must contribute to affordable housing among other options.

A Major Change in the Works

2006-05-10T18:30:00.000-04:00

Last month I mentioned a tax abatement program that is being reconsidered. Now I know what it is: the 421-A Tax Abatement Program. It is defined as follows (from the nyc.gov site):

The Section 421a Program is administered by the NYC Department of Housing Preservation and Development (HPD) to promote multi-family residential construction by providing a declining exemption on the new value that is created by the improvement. The 421a benefits vary depending on location in the City, whether construction is carried out with substantial government assistance, and whether requirements for affordable housing have been met.

HPD determines eligibility for this program, and Finance implements the benefits once HPD approves your application. Please refer to the HPD site for further information on eligibility and on applying to this program.

Once approved, you will receive a Certificate of Eligibility from HPD, which you can then return to Finance along with the 421a application.

The tax abatement was created in the '70s as a means of trying to spur development at a time when people and businesses were leaving New York City. The tax abatements phase out according to this schedule (from the 421-A application form):

click on the image to enlarge

Very generous indeed. Some say that this tax abatement is used more often for the construction of luxury high rises than for the more affordable (i.e. non-luxury housing as opposed to what is usually understood as affordable housing which is often at least partially subsidized by the state).

The main issue is who is allowed to used this abatement and if the purpose of the housing development is submitted to some kind of test of intent by the authorities or if anyone who wants to build a residential complex can apply for the abatement.

An article appeared about the abatement last summer in The Real Deal:

A taxing head scratcher

City's tax break provisions a boon for new developments Â if they can be deciphered
By Alison Gregor

Benjamin Franklin wrote that death and taxes are the only things we can be certain of, but Ben didn't live in New York City.

Savvy city real estate brokers know that paying property taxes Â and more importantly, getting a break from them Â are anything but certain in this metropolis.

For real estate professionals, that's nearly as big a source of frustration as it is to homeowners, because the way property taxes are calculated can be crucial to marketing real estate.

For many, it comes down to one key number: the 421, a provision of the city tax code intended to spur new residential projects, which can significantly lower an apartment buyer's taxes for many years. It's indispensable for brokers marketing new developments. The 421a provides tax breaks for new construction, while the more limited 421g provides tax breaks for conversions in Downtown Manhattan. There's also the lesser perk of the J-51, covering rehabilitation or conversion projects outside Downtown.

But while the 421a is as well-known to most New York City property owners as the 1041 is to federal income taxpayers, it doesn't mean that navigating the tax system is simple.

"I'd just like to see something that's consistent across the board," said Shaun Osher, who recently founded Core Group Marketing after spending many years marketing new development at Prudential Douglas Elliman Real Estate. "The value of two properties may be the same, but the real estate tax numbers will be completely different. It's very confusing."

In one recent example, the New York Times reported that 650 West End Avenue on the Upper West Side, a condo building, saw an increase in valuation of 400 percent in one year Â extraordinary appreciation even in New York City's turbocharged real estate market. The tax implications were similarly turbocharged, and disproportionate to other buildings in the area, according to the condominium board president, who hired a lawyer to contest the assessment.

But what irks some real estate agents more than perceived inconsistencies in valuations are complicated tax calculations, some of which favor ground-up construction over building rehabilitations, which are easier and cheaper for developers.

In the past decade, the routes to tax breaks for apartment building rehabilitations or conversion projects have shrunk, to the real estate industry's unhappiness.

"The overtaxing of conversions is a negative trend," said Steven Ganz, executive vice president of Core Group Marketing. "You could have 80 cents per square foot [of purchase price] being just your taxes."

Meanwhile, a 421a for new construction can mean a difference of thousands of dollars in monthly taxes to buyers.

When a development gets the tax break, most brokerages feature "421a" prominently in their real estate listings, and call it a valuable marketing tool.

"We encourage developers to apply for the 421a tax abatement when doing new construction," said Patricia Cole, senior vice president at Corcoran Group Marketing, the new development division of The Corcoran Group.

The savings can be large. For projects that don't have a tax abatement, common charges and taxes used to total $1 or $1.25 a square foot monthly. "But now, taxes alone come in close to those numbers," said Cole.

But not every new development can get the 421a tax break. Construction in a Manhattan exclusion zone, between 96th Street and 14th Street on the East Side and 96th to Houston Street on the West Side, does not qualify for 421a benefits unless the developer has some sort of affordable component or concession, or government assistance.

Developers converting commercial buildings to residential apartments in Downtown Manhattan can get a hefty tax break called a 421g, but for those rehabilitation or conversion projects outside of that neighborhood, there is only the J-51, a less substantial perk.

The formulae for calculating these three types of tax breaks are complex, and even city officials had to think hard to determine which tax package hands apartment buyers Â and thus brokers Â the best deal.

"It's hard to say, because it's all relative to the amount of money you put in," said Lisa Yee, director of tax incentives programs at the city's Department of Housing Preservation and Development.

Yee's boss, Margot Sklar, the department's associate deputy director of tax incentives programs, agreed, pointing out that location also plays an important role. But she said that, when the dust settles, purchasers of rehabilitated or converted apartments end up getting a lesser deal.

"Under J-51, for a market rate condo you wouldn't get nearly as much," she said.

But it's not all bad news for conversions. Some real estate brokers still aren't aware of an amendment to tax legislation passed by the New York State Legislature in August 2003 that enables more development projects to qualify for the 421a. A project no longer has to be 100 percent new construction to meet the criteria, as long as more than half the project consists of new construction, Yee said.

That should make marketing partial conversions much easier, Ganz said.

"Sometimes you'll have a five- or six-story building being built up 10 more stories, and before you couldn't get a 421a, which does affect your sales price," he said.

Ganz pointed out that most Manhattan buyers are informed and savvy, and if they don't know the details of a 421a, they know it's a tax break for them.

"I'd say 80 percent of buyers I deal with know the tax terminology," he said.

In a more complicated twist, the city's Department of Finance also offers a tax break called the Condominium and Co-op Tax Abatement Program. Instead of spurring development, the perk is supposed to equalize the disparity in taxes paid between certain types of homeowners (namely, those in single-family homes and those in apartments).

Any condo or co-op building can apply for the abatement at any point in time, but receiving the 421a or 421g makes them ineligible. However, in some cases, a building receiving a J-51 tax break would be eligible. That abatement will expire in 2008, but will most likely be renewed, as it has been in previous years, city officials said.

Sound confusing? It is. And brokers trying to guide their clients through the tortuous world of New York City real estate are sending up signal flares Â especially when they consider that the taxes paid are paying for the bureaucracy to assess more taxes.

Most find another way to present the situation to potential buyers, focusing instead on the city's high reading scores at public schools and excellent social services, among other assets.

"Yes, we do pay high property taxes here," said Richard Ingenito, manager of the new Bellmarc Property Management Sales Group. "But people are getting something back for their taxes, and they're deductible on the federal level."

On one hand, the city loses a lot of money from the abatement. On the other hand it also seems to stand in the way of the development that needs and is bound to to happen which is the conversion of old office space in Lower Manhattan to residential space (in that the downtown area which gets a less fovorable - but still healthy - tax break). If the tax abatement is abolished, some developers will lose money as their apartments become more expensive from the added tax burden, but on the whole development of housing could be spread out more evenly to the greater benefit of the city as a whole.

The Cheapest Cement in the World

2006-05-10T18:18:00.000-04:00

Many things in Israel are as expensive or more expensive than they are in the US. Part of the reason is because so much is imported. Apparently, cement, along with kosher meat, is an exception.

Study: Cement in Israel is cheap

27.4.06 | 13:55 By Sharon Kedmi

Israel has among the lowest cement prices in the world: about $59 per ton, according to a Cement Review study.

The journal compared cement prices around the world and found that cement is cheaper in Israel than in the U.S., Europe and in other Mediterranean countries as well.

The Nesher cement works commented that although its costs of production have climbed a great deal, mainly because of the constant increase in energy prices, it continues to absorb most of the increase.

The price of cement comprises 2.6% of the price of materials for builders, Nesher said, adding that the cost of cement is usually only about 2% of the cost of the average apartment.

Gateway Center at the Bronx Terminal Market Approved by City Council

2006-04-17T02:58:00.000-04:00

The article doesn't say so, but this City Council approval for the Bronx Gateway Project happened in about late January of 2006. I will bold things that I want to emphasize.

Suffice it to say that the Bronx does not appear to be left out of the area's development plans as much as fewer people are talking about it. Part of the reason for this might be that such projects lack the populist drama of the Forest City Ratner project in Brooklyn. Why the lack of drama? Because many people are happy to see development in the Bronx, especially the South Bronx, which has been ignored for decades.

As for the possibility that it will only bring low wage jobs to the area at the expense of local businesspeople, as one respondent in Brooklyn or Queens said to a Wal-Mart surveyor said, "There are a lot of low income people around here who want and need the kinds of jobs Wal-Mart (and retailers like Wal-Mart) have." Moreover, the Gateway project will very likely be an opportunity for local entrepreneurs of color.

In any event, if you follow the link to the article you will see pictures of the proposed project.
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Gateway Center at the Bronx Terminal Market Approved by City Council

One of the Largest Private Investments Ever in the Borough Will Revitalize the South Bronx

In a move that bodes well for the future economic vitality of the South Bronx, the $400 million Gateway Center at the Bronx Terminal Market - one of the largest private sector investments ever in the Bronx - received approval from the New York City Council last week.

The Gateway Center at Bronx Terminal Market will transform a blighted series of dilapidated warehouse buildings into a vibrant, job-generating retail center. The development will house a mix of national and local retail stores, offering quality shopping venues for Bronx residents - 76 percent of who regularly shop outside of the borough.

Working with the borough's Council delegation and the office of Borough President Adolpho Carrion, the project's sponsor, BTM Development Partners (an affiliate of The Related Companies), forged a Community Benefits Agreement (CBA) that ensures the neighborhoods surrounding the development will share in the economic benefits generated by the project.

Per the CBA, the development will participate in programs sponsored by the Bronx Overall Economic Development Corporation, such as "Buy Bronx First" and "Bronx at Work." BTM Development partners also committed to an aggressive minority/women business enterprise program, as well as to offering local residents with job training and assistance in job referrals. BTM Development Partners also will be advising future tenants of the Gateway Center to participate in these programs.

"The residents of the South Bronx will soon be able to enjoy the same shopping opportunities that residents in the rest of the City take for granted," said Glenn Goldstein, Executive Vice President of Related Retail Companies. "Furthermore, the Gateway Center will provide thousands of jobs in a community with high unemployment. I am grateful that the City Council today affirmed the position of the Community Board and the Borough President and offered it support for what we view as an essential component of the boroughÃ’s continued revitalization of the Bronx."

The Gateway Center will contribute to the resurgence of the Bronx by generating approximately $21 million in annual tax revenue to provide city services such as hiring teachers and firefighters, buying schoolbooks, and repairing streets and sidewalks.

Among the amenities provided by the new Gateway Center at the Bronx Terminal Market will be:

* Top national retailers, as well as space for neighborhood stores and local dining options.
* An attractive, environmentally-friendly design that will beautify the area.
* Restoration of public access to the Harlem River waterfront.
* Revitalization of the neighborhood with clean, lively, well-lit sidewalks that are safer to travel.
* A powerful magnet that will encourage other businesses to invest in the Bronx.

Borough President Carrion, the Bronx delegation of the City Council and the NYC Economic Development Corporation all played crucial roles in the approval of the Gateway Center. Their leadership and determination to revitalize the South Bronx were important to the project's successful navigation of the city's land-use review process and in drafting a community benefits agreement.

"The redevelopment of the Bronx Terminal Market with the Gateway Center is yet another milestone in the resurgence of the Bronx," said NYC Economic Development Corporation President Andrew M. Alper. "By transforming a market that suffered from years of neglect into an outstanding retail development, the South Bronx can experience terrific economic opportunity, job growth and potential for future investment."

Related Retail Corporation is an affiliate of The Related Companies, one of the most active real estate development, management and financing companies in the nation. Other recently completed projects of the Related Retail Corporation include Gateway Center in Brooklyn and Clifton Commons.

International Facility Management Association
1 E. Greenway Plaza, Suite 1100, Houston, TX, 77046-0194 USA
Phone: 713-623-4362 Fax: 713-623-6124 webmaster@ifma.org

Brownfield Development: New York City Leaves its Industrial Past

2006-04-17T02:44:00.000-04:00

I read this white paper from Newmark and thought "Oh, my G-d. I want to be this Peter Kozel when I grow up." Such thorough and far reaching analysis - it just blew me away. Most other reports of this nature focus on money changing hands, how much and sometimes between whom if it's a notably sized deal.

It has been a long time since I read anything so lucid about such otherwise voluminous and complex material. It was almost like reading Michael Poter . It just blew me away.

It helps that this article reiterates many things I have been thinking and that others have been saying - the conversion of a lot of office space and business districts to residential areas and...of the development of the outer boroughs as well. Some highlights:

On Manhattan, the transformation of portions of the Midtown South and Downtown submarkets into important residential locations is having a powerful impact on the social and economic fiber of the area. For example, the latest Census Bureau data for 2004 show that the number of children under five years old increased by 27% from 2000. This was the first increase in forty years. Not only are abandoned and underutilized industrial and office buildings being converted to residential and retail properties, but in a few cases a quality office building is being converted for residential use.

One one hand, this is amazing. I have been thinking about the conversion of office buildings for residential space. On the other hand, he cites the Census data saying that there has been a 27% increase in the number of children under age 5 in Manhattan. What about school aged children? I know so many people who were moved to the suburbs the minute they were ready to start schools. I can imagine the same dynamic will take place unless Manhattan public schools improve markedly - unless all of these families send their children to private schools, which will soon get overcrowded if these trends continue.

He continues:

On the other end of Manhattan, Harlem Park is under construction at 125th Street and Park Avenue. This 660,000 sf mixed use project includes 167,000 sf of Class A office space, 62,000 sf of retail space a 204 room hotel and 100 residential units.

Wow, wow, wow. I don't recall seeing anything looking like major development at 125th Street and Park Avenue. I must look more closely when I am in the area.

Moreover:

Perhaps even more interesting about the surge in development is the fact that it extends beyond Manhattan to the other boroughs of New York City. This is an especially important trend because it means that Manhattan will not be literally and figuratively an island of gleaming buildings surrounded by miles of mundane and unappealing structures.

Amen. Still, he left out The Bronx, but I read something of interest that can fill the gap here. I will add that in another post.

He goes on to mention the Long Island City, Flushing Town Center Atlantic Yards and Coney Island projects and ends with:

Redevelopment and repositioning are changing the demographic, social and economic profile of New York City. These changes should result in a City that has a broader and more stable economic foundation and future.

Amazing. Just what I was thinking. Now one just needs to get into the nuts and bolts, the dollars and cents of these development projects. Many of these projects involve major infrastructure changes, for instance the extension of the #7 subway line to 11th Avenue for the development of the West side railyards. My understanding is that this project is competing with the 2nd Avenue subway line, the creation of a Long Island Railroad stop at Grand Central Station and I believe also some other subway project in Lower Manhattan near Ground Zero. They are all competing for funds from Albany who always seems to cry poor. Then there are of course the local resistance to projects like the Atlantic Yards project with Forest City Ratner.

New York Thrives in the Global Economy

2006-04-16T17:20:00.000-04:00

An excellent white paper from Newmark where they look deeper into the now oft touted tightening of the office market in Manhattan.

Here, they work trends within the larger economy and specific industries into the analysis.

An interesting thing the author notes is how here in New York assets are being converted into tradable securities and that this growth in the securities industry helps fuel demand of office space.

He also answers a question that came up in an earlier post regarding whether the fact that Manhattan is running out of office space will spark development. The author states:

To date, pace of new office development has been moderate. Land and property prices have been driven upward over the last four years, lowering the prospective returns on New York City's office sector and holding down speculative development.

The author continues that the Downtown and Midtown South sub-markets are going in the direction of luxury residential development. Meanwhile, the Midtown sub-market is being snapped up by the hedge fund and private equity industries.

All of these forces combine to continue to make Manhattan yet more and more expensive for both individuals looking to rent or buy a residence in Manhattan as well as businesses located in or wanting to locate in Manhattan.

I still think it would be worthwhile for businesses to consider the outer boroughs and for developers to consider developing these areas for office space. So far I have not heard of a compelling reason not to at least look into it.

The article is in .pdf format, so to read the article follow this link: http://www.newmarkkf.com/research/whitepapers/library/NYC_Thrives_In_Global_Economy.pdf

Inflation Station?: A Response to Jeff Lacilla on the Future of Real Estate Values

2006-04-16T17:09:00.000-04:00

Another piece from the Slatin Report, where Lawrence Fiedler, a colleague of Jeff Lacilla, comments on his article "What Price Value?" (posted here on March 9th).

What he basically says in the end is that people are predicting that inflation will go up, placing a strain on the economy (as in a recession in the next 12-18 moths) and that this will have a negative effect on the industry - unless there is some surprise in the next 10 years. With this he bolsters Lacilla's argument that real estate values are due for a decline in the near future
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FINANCE NYC 04 05 06

INFLATION STATION? by Lawrence E. Fiedler

I read with interest the article by Jeff Lacilla in the March 2nd issue of The Slatin Report, "What Price Value?" Mr. Lacilla assumes that the inflationary pressures brought about by increases in commodity prices such as oil, along with the Federal deficits resulting from the Iraq war and the war on terror, will lead to higher short and long term interest rates and consequently a reduction in property prices.

We presently are experiencing a near yield curve inversion (where short term Treasury interest rates have moved above the 10-year Treasury rate). Bill Gross of PIMCO, one of the largest U.S. bond firms, stated in Pimco's January 2006 newsletter that inversions such as what we are now going through have historically preceded U.S. economic recessions by 12 to 18 months. If history is in fact a precursor of the future, as Mr. Gross believes, then we will be seeing a substantial slowdown in our economy by the end of 2007.

The 10-year Treasury interest rate has long been the base rate for all long-term investments. Historically within that rate has been the public attempt at recovering perceived future inflation-driven asset-value losses, plus approximately a 1.5% to 2% non-risk real internal rate of return. This non-risk real internal rate of return has never fluctuated materially during the past 50 years. Therefore, the key moving element within the 10-year Treasury has been the perception by investors of the average annual inflation rate for the next 10 years.

A recent study by a major financial institution concluded that the present risk premium (the Internal Rate of Return historically being projected on newly acquired assets) in excess of the current 10 year Treasury rate (3%-4%) is very close to the historical risk premium they have projected for new acquisitions in the past. In other words, when the 10-year Treasury was 13%, risk premiums reached another 3% to 4% above that to 16% to 17%; today, with the 10-year Treasury at about 4.8%, projected Internal rates of return for new assets are now roughly 7.8% to 8.8%.

The conclusion that I draw is first that the public perception of inflation for the next 10 years is now about 2.8% to 3.3% (4.8% Treasury rate less a 1.5% to 2% non-risk real rate of return). Inflation perceptions are a result of all the current commentaries and gut feelings by investors today. The prediction of a future recession is also being taken into account today. If the value of real estate is mainly predicated on the perception of future inflation, this perception will only change if a surprise event occurs that changes the 10 year inflation expectations of the investing public. Obviously, any circumstance being discussed now has been taken into account. It is only those possibilities (surprises) that we are not aware of that will change the perception of future inflation and therefore the future value of real estate.

Lawrence E. Fiedler is the president of JRM Development Enterprises Inc., a real estate investment concern in New York City. As an adjunct professor, he taught real estate investment and finance at New York University for more than 27 years. Jeff Lacillla, who also teaches real estate finance at NYU, is a managing director at JRM Development Enterprises.

Towering Failure: An Open Letter from Peter Slatin to Gov. Pataki and Larry Silverstein

2006-04-14T04:11:00.000-04:00

The following is on open letter from Peter Slatin to Larry Silverstein and Governor Pataki.

Once again note the intersection of real estate development and politics. I feel like I see both sides of the argument, but at the end of the day I side with Silverstein. I am generally very sympathetic to building an even bigger, better tower on the World Trade Center site. Sometimes it seems as if some want to make a huge gravestone of it but this is Manhattan and we all know that this would never fly.

Not to sound hard-hearted, but people die everywhere. Sometimes along the highway you will see little shrines to people who have been killed in accidents at that place. It's very touching, but they cannot and do not last forever. Everything passes away eventually.

In Israel, little shrines would be erected at the site of terror attacks, but eventually those would fade away. If every place where someone was killed in a terror attack or war was designated a memorial site nobody would be able to live anywhere or get anything done. The trauma might stay with you for a longtime, but life must and does go on. Part of me feels like Americans haven't entirely internalized this, as they are not as used to death and destruction in their own backyards as Israelis, as well as Europeans, are I would imagine.

At the same time given the changes in the market it does seem like it would be better to think of new and better uses for such valuable real estate. To simply build another office building seems like a knee jerk reaction.

But suffice it to say, that I am of the belief that something MUST be built there. AT the end of the day it is prime real estate and will never be a memorial or park dedicated to those who dies in the attacks. Space is at too much of a premium in this city.

I do agree with critics that the name "Freedom Tower" is silly and Disneyfied (reminds me of the idiotic "Freedom Fries" thing right before we went into Iraq). The victims of 9/11 are, in the end, victims of mass murder. All they did was go to work, as they always did every day. Just like people who were on their way to work or sitting in a cafe or buying vegetables at the shuk (open air market) and all of a sudden bullets flew through the window or a bomb went off and they were killed - they were just going about their business not hurting anyone or fighting anyone.

Truth be told I don't really have a problem with the proposed design. The original World Trade Center was not beautiful. Most skyscrapers aren't. The original Twin Towers were just two tall rectangles relatively simple that I personally had never really paid attention to except perhaps in order to get my bearings. My understanding is that many people were against it when it was first built in about the early 1970's.

What is really important is the memory of the people who died there - which should be separated from the physical space if we are going to approach the matter in a rational way.
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OPINION | NYC 03 17 06

TOWERING FAILURE by Peter Slatin

Mr. Silverstein, Governor Pataki:

Wait! You're both right! But you're so wrong.

I'm not a big admirer of Vice President Dick Cheney. But he deserves quoting in this case. Let us all recall his blunt advice to Senator Patrick Leahy, and pass the same sentiment on to the governor and Mr. Silverstein.

Gentlemen, your mutual failure is our collective disgrace.

On the bright side, it also demonstrates your commitment and passion for doing the right thing. But neither party seems to have a clue what that might be.

These men have abdicated their responsibilities not only to the city, state and the entire country, but also to the memory of the victims they have each invoked countless times over the past four and a half years.

From the start, the governor has mistakenly and cynically seized upon this tragedy as a foundation on which to build a political legacy and platform for his future. He has tried to manipulate the rebuilding process to his advantage by promoting development of an ugly, unwelcome and unneeded building with a Disneyfied name while simultaneously quashing a program to disseminate ideas and dialogue that would have actually given substance to the same name. Mr. Pataki's forays to Iowa and New Hampshire while Ground Zero continued its downward spiral are a singular emblem of how he has managed to combine a lack of leadership with grandiose dreams, all leading to nothing.

For his part, Mr. Silverstein has also been pursuing a legacy as a New Yorker and a developer that had been eluding him for his entire career, despite past commercial successes. But he has also made the miscalculation of pursuing the development opportunity at Ground Zero as just that: another development opportunity, albeit one on steroids and in the spotlight. One can't fault his dedication and perseverance, but one can say that behind his eloquent, impassioned defense of his position is the prospect of enormous profits no matter what the outcome on the ground at Ground Zero.

There is no question: Freedom Tower must be removed from the discussion. This is a building that is emphatically the wrong thing to build, in the wrong place, at the wrong time. It is unloved by all, except for perhaps architect David Childs, the governor, and perhaps Mr. Silverstein, though

I doubt that. Its presence in the master plan distorts all other efforts on the project, both in design and planning terms and in the financial machinations under discussion.

Most significantly, those who see its construction as an imperative gesture of defiance to the terrorist attackers are simply wrong. Building something simply to build something, especially when it is the wrong something, is a losing proposition. With Freedom Tower, it would be an empty gesture, in fact and in figure.

Do away with it, and think more coherently and cohesively, and less opportunistically, about this site and what it offers for the future, not what it was in the past. Begin building other parcels, but don't rush the cranse. Turn over some of those parcels not to the Port Authority but rather to other developers to bring excitement and vision to the site. The Port is neither a retail nor an office developer, and it should have learned that lesson with the two white elephants that were the World Trade Center.

Today, the white elephants in the room are the governor and Mr. Silverstein. Please get out of our way.

READERS WRITE

I was two-thirds through your "Towering Failure, "mostly nodding my head inagreement, until you say the Freedom Tower should not be built. Admittedly, the name is ridiculous and should be changed to a more fitting WTC1. However, the twin towers were a powerful symbol and need to be replaced in some way. You make no mention of that glaring fact and you are just plain wrong to state the FT souldn't be built. Noone wants it built? I do, and many others who share the sentiment of rebuilding. Having given up on getting new and improved twin towers this is the best of the bad options presented to us.--AJ

Ilanot Batucha launches Israel's first REIT

2006-04-13T06:34:00.000-04:00

Ilanot launches Israel's first REIT

26.3.06 | 12:18 By Hagai Amit

Everybody has been talking about the long-awaited real estate rally, which seems to be largely confined to residential real estate at this stage. Experts are arguing over the right pricing for real estate stocks, which have risen roughly 25% from the year's start. Meanwhile the Ilanot investment group has evidently decided it can't afford to miss this bandwagon and it's launching a REIT - a real estate investment trust, the first in Israel.

But the fund launched at the end of last week isn't placing its eggs in the basket of Israeli properties. It means to invest mainly in American REITs.

REITs generally undertake to invest in commercial real estate companies, and to distribute most of their profits as dividends. They get tax breaks on their profits, as it's their investors who are liable for the tax bills.

To provide analytical services, the Ilanot REIT has recruited Ariel Even, formerly the deputy chief executive of real estate giant Gazit Globe (TASE: GLOB).

Ilanot presents its REIT as being an alternative investment to buying a 2.5-room apartment in Ramat Gan, for instance. Another phrase was that it allows the man in the street to be like the "big tycoons who invest abroad".

Office Space Trades Hands at Record Pace

2006-04-10T01:47:00.000-04:00

By the way, while we were talking about the price of office space in Manhattan...

Also, though this article I have discovered The Stoler Report. On his website, there are articles as well as hour long broadcasts of Stoler's discussions of the New York commercial real estate market with industry insiders - a sort of McLaughlin Group of real estate but with more civilized discourse. _____________________________________________________________________________________

Office Space Trades Hands at Record Pace

By MICHAEL STOLER April 6, 2006

Investment sales in Manhattan reached a record high last year. Cushman & Wakefield reported that about $20.9 billion of sales were closed last year, and $5.2 billion of sales were under contract,resulting in record sales of $26.1 billion.The high sales volume was nearly a 40% increase over a 2004 sales volume of $15.1 billion. This year may even surpass the 2005 total. The managing director at Eastdil Secured, Douglas Harmon, said, "As we sit today, there is no reason why 2006 should not continue the terrific pattern of recording breaking sales activity of 2005."

Last week, a real estate investment trust, Boston Properties, announced it is in discussions for the possible sale of two of its Manhattan office properties. The company anticipates that these properties could generate gross sales proceeds of more than $2 billion. According to the trade, one of the buildings is the 37-story, 1.1 million-squarefoot FiveTimes Square, which was built in 2002. The building is fully leased to Ernst & Young; retail tenants include Red Lobster, Champs Sports, and Times Square Brewery Restaurant.The other building is 280 Park Ave., between 48th and 49th streets. This building complex consists of two office towers,one of 30 stories and another 43 stories, with a main lobby on Park Avenue. Tenants include Deutsche Bank, the National Football League, and the Prime Grill restaurant. Insiders believe a possible buyer could be Dubai-based Istithmar, which paid $705 million in November for 230 Park Ave.

To read this article in its entirety, you must be a subscriber to NYSun.com

Signs Point to Rollback of City Program That Spurs Development

2006-04-10T01:25:00.000-04:00

Why would Bloomberg want to do this? Maybe the tax abatements hurt the city's coffers, but wouldn't taking away incentives to build more sorely needed housing do more damage to the city? Something else is at work here, but I haven't figured it out.

A cynical part of me wonders if it is to try and thwart anyone who might want to build an apartment complex on the West Side railyards where he wanted to build a stadium. This way, nothing else will be built there and he will be able to try and get a stadium there later.

This all reminds me of some wisdom passed onto us by one of the professionals who came to speak at my class a few weeks ago. She said that:

1) Politics is the single biggest driver of real estate development and that at its highest levels, real estate development is 100% politics.

2) The above is especially the case if any of the major player are Black.

3) In real estate market dynamics, the main question is what is the highest and best use of land. When the highest and best use of land is for office space, it's usually too late for the office market. What are the replacement costs? It doesn't make sense to build office space and charge less than $70 per foot.

4) "I would never be an office developer. It's very dangerous financially." When companies move it can dramatically change market dynamics and prices because they take up so much office space supply.

Most interestingly, she said...

5) Lower Manhattan's days as a business district are numbered. The buildings are outdated as office space (little IT infrastructure, old HVAC systems, etc.) and currently office space is cheaper than residential space.

Part of me thinks the jury might be out on this as the market for office space tightens and prices rise, making the development of office space more worthwhile financially.
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Signs Point to Rollback of City Program That Spurs Development

By JULIA VITULLO-MARTIN - Special to the Sun April 6, 2006

There are some indications that the Bloomberg administration is about to cut back one of the most important tools it has for encouraging new residential construction.

Mayor Bloomberg has set up a task force of prominent developers, bankers, housing advocates, community organizers, and government officials to evaluate the merits of one of the largest tax abatement programs in the city, the 421-a program that lowers the new taxes ordinarily imposed on multiunit housing developments. The group will meet for the first time on April 12, with the expectation that a report will be delivered in the fall.

To read this article in its entirety, you must be a subscriber to NYSun.com

Sample Real Estate Business Plan

2006-04-09T18:13:00.000-04:00

I met with a real estate finance executive recently and asked him about getting experience working on some deals here and there. He mentioned that many people slowly built businesses by buying properties with hard money loans, fixing them up and borrowing against them to buy more properties, etc. When these people get big enough for the major banks to notice them they need what is essentially a business plan to submit to potential investors. This could be a niche I could get into. While I am more familiar with standard business plans for technology and media companies I am unfamiliar with business plans for real estate related businesses.

I went looking for sample real estate business plans and found one on bplans.com from MSN Real Estate. There is an HTML version and a .pdf version. The URL is:

http://www.bplans.com/spv/3183/

There is a link to the .pdf version on the page.

The project is for a multifamily rental property in Oregon. From what I can see it is not ridiculously different from non-real estate business plans. It does give me an idea of what kind of information is necessary for a real estate market analysis.

The only drawback is that this business plan was written by software. I would like to get my hands on a real business plan for a real real estate project.

Argus Training Manual

2006-03-28T03:11:00.000-05:00

A couple weeks ago we had one of our counselors speak to the class, ostensibly about Spreadsheets. She mentioned a program called ARGUS that is worthwhile to learn. The only issue is that the classes are extremely expensive (at least $600 for a 2 day class).

Well, searching the internet, what did I find but a training manual for ARGUS at Kellogg's business school's website. It's from a company called Realogic Analytics, Inc.

In case the link doesn't work, the URL is:

http://www.kellogg.northwestern.edu/faculty/pagliari/htm/RED446/Realogic_%20ARGUS_Manual(%20Presentation).pdf.

The Table of Contents Includes:

* Overview of Lease by Lease Analysis
* Model Realogic Tower
* Assumptions & Abstracts Realogic Tower
* Argus Reports realizes Tower
* Apple Tower Assumptions & Abstracts
* Argus Reports Apple Tower

The manual even includes formulas for things like Weighted-Average Market Rent, Weighted-Average Downtime, Weighted Average Tenant Improvement Allowances, etc. It appears to be the closest thing I have seen to an "ARGUS for Dummies". Now I just need time to read it.

They also have on ARGUS's official website they have an online course (don't know how much it costs) where you can call: (866) MY-REALM for information.

Developer's High-Rise Plan Stirs Concern in the Diamond District

2006-03-19T17:33:00.000-05:00

It seems that one major occupational hazard in commercial real estate development is people's resistance to change. One way of dealing with this might be to look towards "change management" consultants at the major consulting firms who can help developers manage the resistance that is bound to arise when their projects are revealed to the press and any affected communities.
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Developer's High-Rise Plan Stirs Concern in the Diamond District

By CHARLES V. BAGLI
Published: March 13, 2006

Gary Barnett has come a long way since he got his start as a diamond merchant two decades ago in Antwerp. He came to New York in the early 1990's, got into real estate, and runs a business that has seven major projects in Manhattan.

But now, his plans for an eighth project Â a 30-story global diamond exchange in the heart of the city's diamond district Â have some there charging that he is undermining their well-being and betraying his roots.

A number of the landlords and diamond sellers on West 47th Street, where brokers' pockets are filled with tissue-wrapped diamonds worth hundreds of thousands of dollars and deals are still sealed with a handshake, have taken to the barricades to stop him. They fear that Mr. Barnett's tower will steal all the best tenants and leave the rest of the 60-year-old district a "ghost town," if he is successful in lobbying the city for tax breaks and other incentives.

Mr. Barnett, known in Belgium as Gershon Barnett, has asked the city for a substantial subsidy package for a state-of-the-art building that would house retailers, wholesalers, jewelry makers, diamond cutters, mining companies, shippers, banks, their safes and a high-security garage. He says the building could help reinvigorate the dowdy, low-scale block between Fifth Avenue and Avenue of the Americas, an important international diamond center that is under siege from low-cost producers, Internet sales, suburban diamond exchanges, Wal-Mart and Costco.

With the flow of cheaper diamonds from India and now China, hundreds of the cutters and polishers who worked in the small rooms above the diamond and jewelry arcades that line 47th Street have left New York or retired over the past 20 years. New York remains a distribution center, because 90 percent of the diamonds that come into the United States Â about half the diamonds sold in the world Â flow through 47th Street.

But, Mr. Barnett contends, New York's diamond district will almost certainly continue to lose ground unless something is done.

"The diamond and jewelry industry needs a center," said Mr. Barnett, 50, a dark-haired man who favors white shirts sans ties. "There have been several diamond buildings. But there's nothing brand-new, modern."

He says that New York needs the kind of government-supported central diamond exchanges that have been built in Shanghai, Tel Aviv and now Dubai.

Over the past four years, Mr. Barnett has acquired 10 five-story buildings midblock, on the south side of 47th Street and the north side of 46th Street. Tenants have been notified that demolition should start in May or June.

But Mr. Barnett has run into opposition from the 47th Street Business Improvement District, local landlords and some retailers. They say that diamond manufacturing will never come back to New York from India and China. Further, they say that Mr. Barnett's tower will upset the delicate ecosystem that exists on the street if he gets municipal tax breaks that give him an unfair advantage.

"The city's not really giving abatements to anybody," said Jeffrey Levin, the chairman of the business improvement district and the owner of Firenze Jewels. "I'm afraid of the district disappearing. He's trying to rob the other buildings of their tenants. It could become a ghost town."

The block is a rare low-slung respite of mostly five-story buildings amid Midtown skyscrapers. At street level, there are more than two dozen exchanges or arcades comprising dozens of separate booths, with the best-known getting the coveted window spots. If Mr. Barnett's subsidized tower pulls in all the best tenants, critics contend that the rest will follow, at the expense of the district as a whole.

Kenneth Kahn, an owner of what is now the premier diamond building, 580 Fifth Avenue, near 47th Street, said that Mr. Barnett's representatives have already approached 170 tenants in his building, including the industry's cornerstones: the Diamond Dealers Club, a major international bourse, and the Gemological Institute of America. Basant Johari, president of Kuber Manufacturing and a director of the Diamond Club, said the club had received a very attractive offer.

"Mr. Barnett planned to build a building for the industry that would bring in business from overseas," Mr. Kahn said. "But that's just not possible. All he's done is go around poaching tenants from other buildings. If the city wants to give benefits, give them to the whole block and enable the entire industry to benefit."

Mr. Kahn has hired a lobbyist, Fran Reiter, a former deputy mayor in the Giuliani administration, to offset Mr. Barnett and his lobbyist, Suri Kasirer.

Mr. Barnett has met several times with city officials to discuss the project, and he has invited Deputy Mayor Daniel L. Doctoroff to lunch at the Diamond Dealers Club. But so far, no deal has been struck.

"We want to make sure that if we provide incentives, the project will create new jobs, not just cannibalize existing jobs," said Andrew M. Alper, president of the city's Economic Development Corporation.

There is no question that the diamond district is in a state of flux. It is one of the few remaining industrial and commercial centers that could once be found in disparate corners of Manhattan. There is little left today of the flower, fur, printer and garment districts, but the diamond district remains, although with a different focus.

Like New York itself, the diamond and jewelry district started downtown, at Nassau and Fulton Streets, before migrating up to the Bowery near Canal. By 1940, it began the leap northward to 47th Street. At the same time, Jews fleeing the diamond centers in Antwerp and Amsterdam landed in New York, bringing an entrepreneurial flair and an expertise in cutting and polishing.

Large, expensive diamonds Â say, 3, 4, and 5 carats Â are still cut and polished on 47th Street, but manufacturing has for the most part moved on. The number of diamond cutters has declined to about 300, from roughly 3,000 15 years ago, according to Martin Rapaport, publisher of the Rapaport Diamond Report.

The reason is simple economics. If it costs $110 to cut a one-carat diamond in New York and $65 or more in Tel Aviv, it can be done in India, where there are a million people involved in the industry, for as little as $10, Mr. Rapaport said.

"Forty-seventh Street has made a huge transition from a diamond manufacturing center to a diamond trading center," Mr. Rapaport said. "The profit is in selling the diamonds. The key now is to make the transition from a secretive diamond cutter guild to being a marketing and branding center for high-value diamonds."

Before coming to New York, Mr. Barnett worked as a diamond merchant in Antwerp in the 1980's for S. Muller & Sons, a prestigious diamond house owned by his wife's family. With the help of what he described as "European investors," he moved to New York and plunged into the real estate business.

Today, he is chairman of Extell Development Company and is running seven projects in Manhattan, including the nearly completed 60-story Orion condominium on West 42nd Street, the conversion of the Stanhope Hotel on Fifth Avenue into luxury apartments and the construction of a pair of towers called the Ariel East and West on Broadway near 100th Street. But the 47th Street project provides a connection to his roots.

He said the project was about preserving "added-value jobs" in diamond polishing, jewelry and preserving 47th Street's position as an international trading center for high-quality diamonds, not about trying to revive diamond manufacturing.

"Some of the landlords are running scared," he said, "after 30 years of neglecting properties and not dealing with their tenants' and the industry's needs. With the exception of two or three landlords, this building is good for the industry."

Manhattan Asking Rents Poised for Steep Takeoff?

2006-03-19T17:22:00.000-05:00

Another market report from Colliers ABR. One thing that strikes me as significant is that JP Morgan Chase has snapped up a lot of office space in the past year and how this is likely helping to drive up rents for remaining office space as supply dwindles. It would be interesting to look at JP Morgan Chase and see where and why all this expansion is happening.

The document is a 2 page .pdf file that is followed by tables showing other noteworthy leases and sales and an overview of the Manhattan market. Most of the text is below along with a link to the full document.
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Asking Rents Poised for Steep Takeoff?

NEW YORK - February 2006

The Manhattan commercial real estate market bounced back from a tepid January with the class A average asking rent climbing sharply and appearing to pick up serious momentum, jumping 4.0% over the past month to $53.01/sf from $50.97/sf. Geographically, this increase was all-inclusive as strengthening occurred in all three major submarkets Â Midtown, Midtown South and Downtown. This is the highest average asking rent in just over four years (dating back to the $53.23/sf in
January 2002) and the largest month-over-month increase in almost six years (since between May and June 2000 when asking rents climbed 5.0% to $56.92/sf from $54.22/sf). There is certainly room for further rent increases as the record remains 16.0% higher than the current figure (topping out at $61.48/sf in April 2001 when the class A vacancy rate was just 4.9%). The class A vacancy rate improved to 7.6% in February from 7.9% in January, though slightly higher than the 7.4% in December, prior to inventory additions. Meanwhile, sublease space fell to its lowest point since May 2001 (and below the 5-mm-sf mark for the first time since May 2001 as
well). There remain a significant number of tenants (of all sizes) in the market within various industries including finance, law, media/entertainment, not-for-profit and government, not only desirous of renewing or relocating but, more importantly, expanding.

Colliers ABR Research Reports: New York Barometer Fourth Quarter 2005 Overview

2006-03-19T16:51:00.000-05:00

The whole document is pretty long and it's a .pdf file with lots of charts and graphs.

One thing that bothers me about this article is the way they just ignore the potential of the outer boroughs. They give this analysis of Manhattan and then skip straight to the Long Island, Westchester and Connecticut markets. Living in New York City, I would prefer to commute to somwehere in the 5 boroughs instead of trekking all the way out to the suburbs.
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Research Reports - New York Barometer Fourth Quarter 2005 Overview

The main conclusion which can be drawn from these comparisons is that the market in both years was driven by a strong national and local economy. However, in 2000 some of that growth rang false due to the enormous amount of venture capital pouring into many new media/high-tech firms that were grossly overvalued at the time. For 2005,
there has been somewhat more measured, balanced, and steady growth. But at the end of the day, it is very important to keep in mind how far the New York City economy has come since the dark days of 2001—and within such a relatively short period of time. For the immediate future in 2006, expect an essentially tighter market for all submarkets especially if a major anchor is located for 7 World Trade Center. There is also very little new space coming available until at least 2007. Consequently, there will undoubtedly be rent spikes in some areas of Midtown.

Maalot: Tel Aviv office rent rose 10% in 2005 to $12.30 per sqm

2006-03-19T16:23:00.000-05:00

Every day, I read the Israeli press in English: The Jerusalem Post, Ha'aretzdaily and Ynetnews (Yediot Achronot). Globes is Israel's main business publication. In Israel, I knew a couple of people who worked for their English language website.

When I lived in Israel and was looking for jobs I looked into the real estate sector and what I found was that there was no established real estate development industry like in the US. Companies built buildings and brokers sold the space in it. If they needed financing maybe they went to one of the three largest banks or used their own funds. In the case of large housing developments the government was probably involved, especially in the earlier years of the state's existence. Now with the increasing liberalization of the economy more and more financial instruments are emerging in Israel. It's a great thing to see. The past couple of years has seen the establishment of what as far as I know is Israel's first REIT. The commercial real estate industry appears to finally be starting to mature.
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Maalot: Tel Aviv office rent rose 10% in 2005 to $12.30 per sqm

The occupancy rate rose 82% in Tel Aviv and 88% in Herzliya Pituah. The average office rent reached $12.60 in Herzliya, $11.30 in Petah Tikva, and $10.30 in Haifa.

Guy Yamin 19 Mar 06 12:25

A survey by Maalot the Israeli Rating Company on Israel’s office space market has found substantial improvement over the past two years, including for income-producing properties. This improvement has been driven by a business recovery, including in high tech, a drop in the interest rate last year, higher proceeds by shopping centers, and higher occupancy rates for office and high-tech space in Tel Aviv and its environs.
Maalot believes that the opportunities for establishing real estate investment trusts (REITs) since January 2006 is selectively boosting property values, especially in demand areas in central Israel, as well as properties leased to the government and tier-one tenants.

Maalot says that, in view of these factors, as well as the plunge in building starts and completions, the positive trend in the income-producing real estate market would probably continue in the near future, especially in demand areas in central Israel. Factors behind this trend are a reduction in available office space, the improved security situation, and Israel’s emergence from recession.

Maalot stresses that there is a wide rental differential between isolated office buildings and those located in high-tech parks, with rents in the latter 10-20% higher than rents for isolated office buildings.

An analysis by Maalot found that income-producing building starts fell 36.5% in January-February 2006, compared with the corresponding period of 2005. Despite this, Maalot believes the office space market improved substantially during 2005, after a four-year slump. Both occupancy rates and rent rose by about 10% last year.

The survey found that the average office space rent in Tel Aviv was $12.30 per sq.m. per month in 2005 and that the occupancy rate rose from 73% in 2004 to 82% in 2005. The average office space rent in Petah Tikva rose 12% in 2005 to $11.30. The average office space rent in Herzliya Pituah rose 13.5% in 2005 to $12.60 per sq.m. per month, and the occupancy rate rose from 77% in 2004 to 88% in 2005. The average office space rent in Rehovot was $9.70 per sq.m. per month in 2005, and the average in Haifa was $10.30.

Published by Globes [online], Israel business news - www.globes.co.il - on March 19, 2006

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006

Groundbreaking Ceremony Welcomes New Shopping Center In The Bronx

2006-03-16T13:51:00.000-05:00

I saw this story on TV and thought that I had never seen people so happy to see a mall built in their neighborhood. This is definitely part of a trend.
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Groundbreaking Ceremony Welcomes New Shopping Center In The Bronx

March 14, 2006

After three decades of debating, a new shopping center was finally welcomed to the South Bronx with a groundbreaking ceremony Tuesday.

The mayor and other elected officials took part in the symbolic groundbreaking ceremony at the construction site for the new "Hub Retail and Office Center" that stretches along Third Avenue for three long blocks between 153rd and 156th Streets.

The two-story building will serve as the main offices for the City's Department of Finance, and retail chains like Rite Aid and Staples also plan to set up shop.

"I'm very excited," says Bronx Borough President Adolfo Carrion. "Two-hundred-thousand square feet of office space in the South Bronx is great. This site was one of the casualties of the burning Bronx in the 1970s and the horrible thing that happened to inner city communities all over the country. And now this is a symbol of the new Bronx This is a new vitality we haven't seen in a long time."

Third Avenue used to be the shopping mecca for the Bronx and Upper Manhattan, but over the years it lost its appeal as big name stores like Alexander's, Thom McAnn's Lerner's and The Wiz moved or went out of business.

Plans to develop the site and revitalize the area have been in the works for three decades but always fell through. Year after year promises were made to develop the mall, but hurdles and setbacks continually kept the project from becoming a reality.

Members of the business district say the lack of development at the site has hurt them since the 1970s.

"It definitely hurt business,” said Vincent Valentino of the group Hub Third Avenue B.I.D. “They tore down stores about 35, 36 years ago and they were supposed to build housing but they didn't because there was no money in the city."

Related Companies purchased the property from the city for $1 million and will build a two story commercial building estimated to cost $57 million.

Related is the company also developing the controversial gateway mall at the Bronx terminal market not far away from Third Avenue.

The mayor says it's all a big boost for the borough.

"Whether it is Hunts Point or the Bronx Terminal Market or Yankee Stadium or the new business improvement district on Fordham Road, the Bronx really is open for business in a way it has not been for decades."

The local community board is overjoyed with the future jobs and business for the area.

"We did not capitulate,” said Community Board 1 chairman George Rodriguez. “We kept going on and on until it was a reality."

More than 200 new construction jobs will be created for the project, along with about 225 full-time positions once the center opens in 2008.

– Dean Meminger

Career Switchers Add New Depth to Talent Pool in Real Estate

2006-03-15T02:11:00.000-05:00

I am hoping to write an article about Project REAP for The Real Deal. When I saw this, I was nervous that maybe the REAP people beat me to it. I realize, however, that mention here might make it easier for the Real Deal to pick it up. Also, the article I plan to do is all about REAP and diversity in general, different from this article.
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Career Switchers Add New Depth to Talent Pool in Real Estate

By SANA SIWOLOP

Published: March 15, 2006

When John McCarthy, a treasury manager at Toys "R" Us, started looking for a new job in July 2005, he was not looking at commercial real estate per se, merely for a position in which he might be able to improve a company's business more directly — and be rewarded for the effort.

Marisa Manley, who trained as an architect, founded her own real estate firm.
At Toys "R" Us, Mr. McCarthy spent considerable time evaluating the real estate potential of the individual stores as the company was in the process of being acquired. But he felt that his credentials — which included an M.B.A. in finance and corporate accounting — were most suited to a job in investment banking.

He did get an offer in that field, but in the end opted for a job at Cushman & Wakefield of New Jersey, a commercial real estate firm, where he is now working on leasing both office and industrial properties.

Commercial brokerage teams used to consist mainly of people who had spend their entire careers in real estate, but lately they have grown to be surprisingly diverse, according to many industry executives.

At Cushman & Wakefield, for example, Mr. McCarthy joined several other recently hired brokers who started in other fields; they included two former lawyers, two certified public accountants and a former saleswoman for Microsoft, said Gualberto Medina, the executive managing director.

Mr. Medina himself started out as a lawyer and as a certified public accountant. Before joining Cushman & Wakefield in 2002, he also served as secretary of commerce for the State of New Jersey, handled business development for an Internet telecommunications company and was president of a biotech start-up.

In August, Mr. Medina took the helm of Cushman & Wakefield's New Jersey operations, and since then he has looked for both seasoned professionals and industry newcomers as a way of providing specialized experience or expertise to his company's clients. Lately, Mr. Medina has also been receiving more unsolicited résumés from other types of professionals who think commercial real estate offers both more interesting challenges and better compensation.

Executives at other companies confirm the interest. Some of it, they say, can be pegged to the greater number of universities that now offer course work in real estate, as well as the career restlessness that seemed to course through many industries after the Sept. 11 terrorist attacks.

But executives say that many job switchers also seem convinced that commercial real estate offers less drudgery and deskwork than other careers, like law, as well as the potential to earn large commissions, rather than simply bringing home a salary.

Michael Bush, the executive director of the Real Estate Associate Program, an industry-backed program that recruits and trains minority candidates for careers in commercial real estate, said that about a third of the 33 students who started the inaugural program in New York in January had come from either law firms or Wall Street firms.

The program, which already exists in Washington and Atlanta, meets for three hours a week in the evening and lasts for 24 weeks. Mr. Bush said the typical participant was 25 to 35 years old with several years of business experience.

Marisa Manley, the founder and principal of Commercial Tenant Real Estate Representation in Manhattan, said that when her company recently had an opening for a transaction manager, she interviewed four lawyers for the job, as well as an accountant who held both a law and a business school degree.

"The talent pool is stronger, and I'm seeing stronger professional backgrounds than I would have seen 10 years ago," said Ms. Manley, who was first trained as both an architect and as a lawyer.

Robert A. Knakal, co-founder of Massey Knakal Realty Services in Manhattan, agreed that the pool of applicants today had a wider range of talents. "The people coming into the field now have tremendous credentials," he said. "For about a year after Sept. 11, we found, to our great surprise, that the quality of people looking to get into the business had changed dramatically. In the 80's and 90's, it's very unlikely that people would have left other careers to go into commercial real estate."

Still, making the jump is not always easy, some real estate executives caution. Mr. Knakal said that while his company's efforts to bring in other professionals had allowed it to grow substantially over the last five years, his firm has also had to make a "substantial commitment" to training programs, which are taught by the company's current employees and generally run two or three months each.

Even with training, newcomers usually take a while to establish themselves in the field. "Commercial real estate is not a quick and easy game, and we are always stressing the long-term nature of this business," Ms. Manley said. "This is a business where lease negotiations can take 12 weeks or more and where 18 months is usually the minimum amount of time" to close projects of 20,000 square feet and more.

Still, some recent career switchers say they relish the change.

Earl L. Segal spent more than 30 years practicing real estate law before he joined the Washington office of Newmark Knight Frank in January as a business adviser. Last week, Mr. Segal said that while he was not necessarily reading fewer stacks of legal documents these days, he had "moved up the line" to working on a broader range of issues.

At Massey Knakal, John Barrett, one of the company's newest brokers, said he hoped eventually to use his love of problem-solving to generate high prices for properties that he is asked to represent. Before joining the company, Mr. Barrett, 42, spent more than 20 years running his own corporate and group travel services firm and then spent six months getting his real estate license.

He recently completed a two-month training program and planned to spend the next two months learning everything he could about the area that he would eventually cover — a sizable segment of Westchester County.

"I had done one thing since graduating from college, and I thought it was time for a new challenge," Mr. Barrett said last week.

So did Marjorie L. Torres, the founder and chief executive of Concrete Stories, a Manhattan company that offers real estate advice as well as brokerage and development services. Ms. Torres, 38, worked as an industrial engineer and then as a Wall Street investment banker before she was sent to Latin America in 1995 to turn around distressed properties.

There, she discovered that she preferred some of the more tangible rewards of commercial real estate. "In investment banking you do a lot of deals, but very rarely can you build something that you can actually touch," she said.

Questions to Ask for Any Commercial Real Estate Acquisition or Financing

2006-03-12T16:22:00.000-05:00

This appears to be a great "cheat sheet" to refer to as I learn more about Real Estate Acquisition. This comes from Josh Stein's amazing resource: Real-Estate-Law.com.
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Questions to Ask for Any Commercial Real Estate Acquisition or Financing

By James I. Hisiger and Joshua Stein

Briefings in Real Estate Finance: An International Journal, June 2001

Copyright © 2001 James I. Hisiger and Joshua Stein
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As real estate partners in the New York office of Latham & Watkins, the authors structure, negotiate, and close substantial commercial real estate transactions throughout the United States for institutional lenders and other real estate investors. The authors can be reached at james.hisiger@lw.com and joshua.stein@lw.com. Comments and reactions regarding this article would be welcomed and appreciated. Copyright (C) 2001 James I. Hisiger and Joshua Stein.

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When a purchaser considers acquiring a commercial real estate asset, or a lender considers making a commercial mortgage loan, either of them (henceforth, "investor") needs to obtain a wide range of information about the real estate. The process of asking the right questions, obtaining the answers, and thinking about what they mean is often called "due diligence."

Due diligence serves several purposes, depending on the circumstances and the timing.

It will affect investor’s initial decision on whether to enter into a contract or loan commitment at all. Later, it will affect whether investor decides to proceed with the transaction on the terms negotiated, or tries to renegotiate those terms -- for example, if investor cannot confirm the assumptions that supported the original deal.

Due diligence will also identify matters that require representations or indemnities from the seller or borrower and, later, identify possible breaches of those representations and warranties. Finally, it will help investor control the "costs of the deal" and obtain information investor may need to operate the property after closing.

In developing any due diligence plan for an acquisition or financing, investor will identify the categories of relevant information, and then set priorities. As a starting point for developing the due diligence plan, this article identifies the usual and not so usual categories and elements of due diligence for commercial real estate. Each is summarized, with only the briefest description. Little effort is made to explain why, whether, when, or how each item might matter or how investor should analyze it or how the various issues interact. This article is simply a practical reference tool, a cross-check, for investors when they structure their due diligence.

In each case, investor’s overall goal is to understand, value, and define (and ideally quantify) any risks and opportunities relating to the property. To the extent that any particular due diligence will substantially help investor achieve one of these goals, investor will want to emphasize that part of the process. Conversely, to the extent that the answer to a particular question cannot materially help investor understand, value, and define risks of the property -- in other words, to the extent that the outcome of such due diligence doesn’t matter -- any such due diligence is a waste of time and money.

It is always possible to identify more questions to ask, more areas to investigate, more rocks to turn over. If the decision is left strictly to the people doing the due diligence -- and if those people are instructed simply to "protect" investor -- the due diligence could go on forever. A strategic investor will instead decide, as a business matter, where its due diligence program should fall on the continuum between "pay your money and take your chances" and "find out everything there possibly is to know."

A lender may take a somewhat different approach to some of these issues. A lender may, for example, care more about confirming value and preventing unpleasant surprises than on understanding upside potential. Those differences are outside the scope of this article, as are some issues unique to lenders, such as regulatory considerations and background investigations on the borrower and its principals. Among other things, many of these issues vary widely among lenders.

In a typical transaction, investor’s principals and staff would handle many of the due diligence items listed here. Outside counsel and other real estate advisors would handle these and other matters. Defining and coordinating those responsibilities early in the process can be just as important as defining the scope of the work to be done. Planning and managing the due diligence process are just as important as completing it. Investor needs to manage and supervise its team so that investor collects, organizes, exchanges, and understands information in a timely and efficient way.

Investor will try strategically to break the process into stages, answering major threshold questions first and postponing or skipping low-value but high-cost due diligence activities, always depending on circumstances. Some information will be critical even when investor makes its initial offer or deal proposal; other information can wait. Investor will need other information at other stages.

Typically investor will not want to undertake extensive (i.e., expensive) due diligence until the basic deal terms have been resolved and, ideally, the investor has legal control of the property -- enough control to assure that if investor likes what the due diligence shows, investor cannot "lose the deal."

The goal at all stages: if the transaction dies, the due diligence bill should be as manageable and defensible as possible under the circumstances.

Although this article focuses strictly on due diligence, investors cannot treat due diligence as if it were a separate machine that grinds away in a hermetically sealed black box. The scope and nature of due diligence will depend very much on how investor negotiates the business terms of the larger transaction, and particularly on how the parties agree to allocate risks arising from lack of knowledge. The information obtained through due diligence will in turn affect the same negotiations, as well as the closing process. Thus, investors must treat due diligence, and the process of defining its scope, as a dynamic and essential part of the larger transaction.

This article reflects the expectations and practices of the New York City commercial real estate market. Expectations and practices in other markets, and even within the New York City market, will vary widely with the circumstances of any particular transaction, including its pricing, investor’s tolerance for uncertainty and risk, investor’s financial structure and participants, and seller’s reputation.

The type of property will also be crucial. Due diligence for a fully tenanted office or retail project will vary greatly from due diligence for a vacant parcel of land or a development project. Residential, commercial, office, industrial, and hotel properties each raise their own issues.

I. Development and Governmental Issues
Depending on the nature and location of the property, investor’s plans for the property, and the governmental climate, investor may want to seek answers to the following questions, as well as others driven by local issues and concerns. If the transaction contemplates any development or redevelopment at all, the matters listed here are often potential "showstoppers."

Approvals. Requirements to obtain governmental approvals, or at least make filings, under a wide range of laws. Development approvals are only the tip of the iceberg. A transaction may require approvals under laws governing such matters as antitrust, health care, housing, liquor licensing, or operating matters generally. These requirements are particularly likely for multisite quasi-operating-company transactions. They will vary widely depending on the existing and intended use of the property, as well as the size of the transaction and of the parties.

· Landmarks. Landmarks status of the property, and other similar restrictions on development or redevelopment, such as historic preservation issues and recorded development restrictions (also part of the title review process).

· Licensing. Requirements for licenses and permits, and resolution of any missing items. Any changes in such requirements that might result from the transaction. Are the licenses transferable? Operating licenses, such as those for liquor, health care facilities, gaming, and the like, may raise issues that go beyond the property to be acquired. Because they often involve some degree of governmental discretion, transfers of these licenses introduce an element of randomness, unpredictability, and hence risk that the contract must allocate between the parties.

· Miscellaneous Agreements. Any agreements with governmental authorities, whether or not recorded.

· Plaza Agreements. Public plaza agreements, particularly for issues relating to income, maintenance, operations, and repairs.

· Public Areas. To the extent that seller owns any areas that are open to the public generally, any measures that seller has taken to prevent the public from obtaining a "prescriptive easement" or other impairment of seller's title.

· Transportation. Agreements and arrangements relating to transportation, either benefiting the property or restricting its use. These might involve, for example, subway tracks and stations, rail spurs, pipelines, and tunnels.

· Zoning. Zoning analysis, including compliance, appeal rights, and availability of unused development rights, possibly culminating in a zoning opinion or advice memo. Necessity for any variance, special permit, or other dispensation. Any restrictions on the transferability of these benefits.

II. Legal Due Diligence (General)At the beginning of any transaction, investor may want to have its counsel receive and review copies of at least the following documents regarding the property.

· Brokerage. Any agreements or understandings regarding payment of brokerage commissions for the transaction now contemplated.

· Condominium or REA. If the project is structured as a condominium or under a reciprocal easement agreement structure, then copies of all relevant documents, including minutes of Board of Managers or other board meetings.

· Contracts. Service contracts (elevators, security, alarms, etc.). The level of review will vary depending on whether the contracts are cancellable, require termination payments, or are particularly important, unusual, or hard to replace.

· Employees. List of employees, length of employment, salary, fringe benefits and vacation, together with any labor union contracts and agreements with any nonunion building employees.

· Ground Leases. If the property is held as a leasehold, copies of the lease, any amendments, previously issued estoppel certificates, and any correspondence with the lessor.

· Leases. Space leases, including any leases and lease amendments under negotiation or to be signed during the closing process. Scope of review will vary depending on the size and composition of the leases and the transaction structure.

· Litigation. Pending litigation may affect seller, any of its constituent entities, or the property itself -- but the inquiry may need to go beyond those three obvious categories. For example, litigation about nearby environmental matters, entitlements, governmental disputes, Native American land claims, or other similar matters may indirectly affect a large development project being acquired. Any such litigation might not name the seller as a party and might not specifically relate to the property. Discovery of problems like this often requires local advisors at ground level.

· Management Agreement. Management agreements.

· Other Buildings. Agreements with neighboring property owners that tie this real property to any other real property for utilities, infrastructure, services, access, support, parking, roadways, operations and maintenance, or any other purpose.

· Pending Construction. Description of pending construction for both tenant improvements and any building-wide capital improvements, including contracts, budget, status, and anticipated timing.

· Telecommunications. Agreements with telecommunications or internet service providers.

· Utilities. Utilities agreements.

III. Legal Due Diligence (Lease-Related)Because rental income usually drives real estate value, and because leases and tenancies often conceal surprises, it is not enough for investor or its counsel merely to read the leases, as suggested above. One must look behind the leases, by asking for information such as the following.

· Abstracts. Abstracts of the existing leases, including any in seller’s possession or prepared by seller’s advisors.

· Antenna Leases. Antenna and other telecommunications leases, particularly to review for termination rights and nonexclusivity.

· Brokerage. Any leasing brokerage agreements that will stay in place after the closing. Amount and timing of any outstanding commission obligations for any leases previously signed or now being negotiated.

· Correspondence. Correspondence with tenants regarding defaults, administration, etc.

· Disputes. Pending disputes with tenants and eviction actions.

· Estoppel Certificates. Although primarily an issue for the closing, investor’s due diligence may help identify timing problems with obtaining estoppels and any terms of tenants’ leases that relate to or limit the delivery of estoppel certificates. When estoppel certificates are delivered for the closing, investor’s due diligence would also include review of those estoppel certificates to identify and understand any problems or issues they disclose.

· Guaranties. Existence, status, and strength of guarantors.

· Rent Roll(s). Spreadsheets showing all tenants, rents, escalations, commencement dates/expiration dates, option terms, security deposits, and tenant status.

· Security Deposits. Security deposits, including letters of credit or other forms of cash and cash equivalents. Transition arrangements.

· Stacking and Options. Stacking plan, now and in the future, including future interaction of all expansion, contraction, and renewal options.

· Standard Lease. Standard form of lease, on paper and in machine readable format, including all exhibits (such as alteration rules, building rules, design criteria).

· Tenant Financing. If the landlord gave any tenants financing for their tenant improvements, then copies of all loan documents and information about the status of these loans.

· Transfers. Any assignments, assumptions, and subleases.

IV. Searches and SurveyThe public records and other sources will provide a great deal of crucial information about the property. Investor or its counsel may want to investigate and review at least the following items.

· Certificate of Occupancy. Certificates of occupancy covering the entire building, or an explanation. Status and expiration dates for any temporary certificates of occupancy.

· Designated Areas. Status of property regarding "flood plain," "wetlands," other designated areas.

· Miscellaneous. Liens, judgments, bankruptcies -- both for seller and for any major tenants.

· Municipals. Searches of municipal departments for violations, fines, licensing problems, unpaid utility charges, and similar matters.

· Survey. New survey or update of existing survey, and certification to all necessary parties. Compliance with lender's survey criteria. Comparison of the survey against the appraisal or the larger transaction, if any uncertainty or difficulty exists regarding the scope of the property (such as future development parcels or a vertical subdivision).

· Title. Opening of title insurance orders, including strategic placement of title work. Title search, including obtaining and reviewing copies of all underlying documents and assessing how each will affect future use and development of the property.

· UCC. Uniform Commercial Code and similar filings against seller and potentially other parties.

V. Financial Due Diligence
To check out the financial strength of the property, investor should not only look at the leases and lease-related information as described above, but also several other categories of information, including those listed below and the tax-related issues covered later in this article.

· Appraisal. Third-party analysis and valuation reflecting the current market.

· Audit. Audit of operating and other expenses. The intensity and nature of this audit may vary with circumstances.

· Brokerage Commissions Due. Future payments of brokerage commission for existing leases already in place.

· Budgets. Operating budget for the current year. Seller’s budget for capital projects, or anticipated schedule of requirements.

· Financial Reports. Property financial statements for the last several years.

· Insurance. Analysis of future insurance coverage requirements and likely cost, including a comparison with seller’s cost of insurance.

· Operating Expense Changes. Possible changes in operating expenses after the change of ownership.

· Percentage Rent. Sales reports from percentage rent tenants.

· Receivables. Amount, composition, and implications of seller’s receivables from tenants (part of rent roll analysis).

· Service Contract Costs. Analysis of the cost of service contracts and possible alternatives after the change of ownership.

· Staffing. Employee roster and compensation. Future staffing changes for building. Impact of union contracts, if any.

· Tax Returns. Review of seller's tax returns and underlying schedules; comparison against other financial reports and information.

· Tenants. Analysis of financial condition of tenants (particularly major tenants) and their financial statements, if available.

VI. Physical Due Diligence
Investor will typically retain outside engineers and other consultants to examine the physical condition of the property, including the following characteristics.

· Archeological. Prior uses or ownership that may create archeological issues and interfere with or delay future development.

· Artwork. Existence of any murals or other built-in sculpture or artwork, triggering possible artists’ rights restrictions under applicable law. Scope of any artwork included in the transaction. Ownership of that artwork.

· Code. Compliance with building, fire, zoning, and other codes (including Americans with Disabilities Act). Particular focus on issues of parking; the possibility of new environmental or energy conservation requirements; life and fire safety systems; earthquake compliance and seismic safety; and retrofitting requirements.

· Engineering. Engineering issues, particularly for the structure and major systems of the building. Analysis of the age and condition of building systems, façade, windows, and other components.

· Environmental. Environmental and asbestos analysis, including "Phase I" report and, where indicated, "Phase II" report. Updating of any existing reports as necessary. Identification and status of any underground storage tanks. Investigation of any new environmental concerns of the moment, such as "sick building," electromagnetic fields, poisonous insulation, other "problem" building materials. Notices or claims regarding environmental matters. Application of any state-specific environmental review procedures (e.g., New York State Environmental Quality Review Act).

· Geotechnical. Soils analysis and report.

· Local neighborhood. Compatibility with nearby uses, and likelihood of objections to any future Operations at the property or potential change of use.

· Measurement. Measurement of actual usable and rentable size of the building.

· Operational Audit. Complete audit of building operations.

· Pending Construction. Identify and deal with any pending construction work (capital or tenant related). Identify status of job and cost to complete.

· Plans and Specifications. As-built plans and specifications.

· Power. Adequacy of electrical service and availability of more power and/or competitive power. Availability of space for any new equipment that may be needed.

· Telecommunications. Access to and availability of additional telecommunications services, such as fiber optics and other data links.

· Tour. Building tour, including mechanical areas.

· Upgrades. Identify any necessary building system upgrades (more telecommunications, generators, fuel tanks, rooftop facilities, etc.) and their feasibility.

· Utilities. Adequacy of utilities, availability of any desired upgrades, physical connection arrangements, and any necessary changes.

VII. Tax Issues
Like any other business transaction, any real estate transaction may require consideration of a wide range of taxes, affecting both the asset and the structuring and closing of the transaction. Those taxes and related issues may include the following.

· Local Variations. Tax issues are particularly likely to vary from place to place. Investor may require local advisors even at the earliest stages of the transaction.

· Mortgage Recording Tax Savings. Availability of existing mortgages (including from any other property) for assignment to new lender to save mortgage recording tax in any jurisdiction with such a tax.

· Real Estate Taxes, Generally. Status of real estate tax protests and any likely or built-in increases in real estate taxes during the coming years. Copies of actual real estate tax bills for the entire property for the last three years. Agreements with attorneys hired to prosecute any real estate tax protests.

· Real Estate Tax Assessments. Likelihood of upcoming reassessments.

· Subsidized Financing. Existence and terms of any tax-exempt or other government subsidized financing affecting the property; any restrictions on the proposed transaction.

· Tax Abatements. Availability (or continued availability) of any tax abatement or incentive programs, and requirements to qualify, including timing.

· Tax Lots. Alignment of tax lot lines with property lines.

· Tax Planning. Tax planning, both for acquisition and initial structuring to facilitate favorable future operation and disposition.

· Transfer Taxes. Calculate, minimize, and allocate, taking into account local law and practice.

VIII. Contract Issues
As the due diligence discloses the exact scope of the asset and any problems with it, each piece of information will affect what the larger transaction should require of other parties both before and at the closing, and investor’s negotiation of the documents that will govern the transaction. That process, and negotiations generally, will force investor to consider at least the following issues.

· Amenities. Identify any facilities or services benefiting the property, understand ownership structure.

· Attachments. Identify exhibits and schedules to be attached, both schedules to better describe the asset (lists of contracts, leases, etc.) and exhibits setting forth the form of closing documents. Develop and review all such attachments.

· Closing Arrangements. Plan ahead for closing documents, deliveries, and events, including such matters as requirements for estoppel certificates and nondisturbance agreements; termination of service contracts; satisfying lender’s closing requirements.

· Contract Issues Generally. Wide range of contract issues, including the due diligence process itself; amount of contract deposit and use of letter of credit; representations and warranties and their survival and credit support; assignment of any existing mortgages to new lender; responsibility for costs arising from the transaction (termination fees under service contracts, severance, transaction costs, etc.); allocation of transfer taxes; survival of representations and warranties; interim operations between contract and closing; responsibility for pending construction; prorations (including timing and seasonality of percentage rent); and numerous other issues, including any that arise from the due diligence process.

· Coordination. If this transaction involves other transactions, coordination of multiple simultaneous closings, exchange arrangements, or other linkages.

· Memorandum of Contract. Record memorandum of contract?

· Publicity; Etc. Publicity and confidentiality.

· Recognition. If the property is subject to any existing mortgages, possible agreements with the holders of those mortgages to protect a purchaser’s rights.

IX. Other
The specific investor’s agenda and plans for the building may produce another set of issues, many of a very practical nature.

· Approvals. Internal approval requirements and timing for each investor in the transaction, including any indirect participants. Third-party approval requirements for the proposed transaction and investor’s subsequent plans for the asset.

· Broader Picture. Any broader trends -- not tied to the particular property -- that may indirectly affect the success of this property. Demographics, the local economy, political trends, labor problems, and other background issues that may be difficult to identify, particularly for an investor that does not team up with a local partner, advisor, or consultant. What local changes are likely in coming years? Growth restrictions? Rezoning? New development?

· Business Strategy and Flexibility. Identify purchaser's business strategy for any changes in the building - physical reconfiguration or renovation, legal structure, new amenities, circulation patterns, parking, change of use, operational, name of building, etc. Determine whether any impediments exist to those changes (see above). Analysis of cost, timing, financing, and feasibility for any changes.

· Engagement Letters. If investor hires outside contractors for due diligence or other pre-closing work, engagement letters with those contractors. Reliance letters in favor of lender.

· Insurance Recommendations. Correspondence and recommendations from insurance carriers.

· Management Files. Review of management files for possible claims, disputes, physical issues, other problems. Copies of any reports, recommendations, or projections made by management company or department.

· Management Transition. Plan for transition of management, including obtaining files and machine-readable databases and project management information. Possible retention of building management team or selected employees.

· Market. Market study, including projection of rents and vacancy, pending construction, likely future construction.

· Marketing Materials. Brochures, plans, marketing materials.

· New Entities. Naming and formation of new entities; name reservations, and availability.

· New Loan. Closing documents, deliveries, planning, and negotiation for new financing.

· New Ownership/Debt Structure. Establish, structure, and negotiate debt and equity structure for new ownership. Consider business terms, regulatory and tax structure, exit strategy, internal flexibility, agenda of multiple partners, control, ownership, management, etc. (These structuring issues and possible ways to approach them are outside the scope of this article.)

· Publicity. Press release (if any) and publicity, or prevention of same.

· Research. Research seller's acquisition cost. General research in Nexis or the Internet regarding publicity on the building and seller.

· Unique Concerns. Any special nonstandard considerations or agenda items of a particular investor ("earth friendliness," "feng shui," workforce requirements, etc.).

If investor starts from the preceding list of "due diligence" items, investor can tailor its requirements for any particular transaction to reflect that transaction’s unique circumstances and issues that are important to that particular investor. By taking this approach, investor should be reasonably comfortable that nothing should fall between the cracks, except through a deliberate decision to disregard it.

With the "due diligence" process on track and built on a sound structure, investor can also turn its attention to broader issues: identifying how to create value in the property in ways that seller and other investors may have missed; raising (or allocating) the money to close the deal on attractive terms; and negotiating the business terms of the acquisition or loan taking into account, among other things, any information that the due diligence discloses.

Top of Document

Copyright © 2001 James I. Hisiger and Joshua Stein

Manhattan Running Out of Office Space

2006-03-10T01:59:00.000-05:00

I read this and thought, "Oh, damn!" This can be good news and bad news. On one hand, landlords can and probably will get higher prices in the short run. The danger in the long term is that businesses might not just leave Manhattan but leave New York City as a whole (especially in favor of Jersey City), deflating the market. At the same time, it presents opportunities for real estate firms to develop office space to meet growing demand.

A similar article appears in Commercial Property News where they mention that "You cannot get rents that support new construction anywhere except Midtown." This is a big problem. Investors need to make a return.

This will sound a bit sinister to some, but it would help a great deal if the construction industry unions could loosen up so as to allow more and cheaper construction and enable the development of the outer boroughs. I can easily imagine the hue and cry that will arise from workers groups that evil developers are trying to bust unions in order to build housing and office space for rich white people. A PR campaign will then have to be launched to convince people that if New York City is going to remain a vibrant place to live with the many opportunities and rich cultural life that we are used to, then development like this is necessary. That being said, as developers we must be sensitive to the impact our projects will have in surrounding communities.

Every day I ride into Manhattan on the express bus via the Bruckner Expressway. I look around me and I see a lot of unused capacity in the South Bronx and in Harlem. Buildings boarded up and not being used - I see this as money wasted. The shortage of office space as well as housing space could potentially be remedied by simply making these spaces useful. I'm sure it's more complicated than it looks. Maybe the owners don't want to sell. Maybe it is not clear who is the owner. There is guaranteed to be legal and political isues in connection to zoning and getting these communities to buy in to such development projects. In any event, it is this issue which I have observed that draws me into the commercial real estate industry. I see a lot of work to be done that it seems will be fun to do. Everyone I talk to says that commercial real estate is a great business and so it makes me excited to join the industry.

Imagine for a minute - a waterfront community consisting of residential space but also some office buildings - in the South Bronx. It could be awfully cool. It could be like what they have started doing in Long Island City. I will discuss this in more depth later in a separate post. But suffice it to say that I am not the only one with a new vision for the South Bronx. Vision like this is what real estate, especially development, is all about.
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Manhattan running out of office space: report by Julie Satow

Demand for Manhattan office space will outstrip the existing and projected supply in seven years, making development in Lower Manhattan and on the west side necessary, according to a report by CB Richard Ellis.

With office employment estimated to grow by 1.4% a year, the brokerage firm projects that vacancy rates will decline to below 5% by 2008 and to below 3% by 2009. This supply constraint will push up rents, with average asking rents reaching as high as $90 a square foot by 2010. The projections do not consider economic factors such as inflation and interest rates.

Ã“With vacancy rates declining, rents increasing and few new construction projects on the horizon, our ability to keep pace with future business growth in the city is threatened,Ã” said Mary Ann Tighe, the chief executive of CB Richard Ellis for the New York Tri-State region.

The brokerage said the office shortage makes development of the World Trade Center site and at the Hudson Yards on ManhattanÃ’s west side necessary. The Ground Zero project is bogged down by the rift between leaseholder Larry Silverstein and the Port Authority of New York and New Jersey, which owns the site. Commercial development on the west side awaits transportation improvements.

In Midtown, an average of 9.1 million square feet of office leases is expected to expire annually over the next 10 years, the report released Wednesday says. That means that about 500 tenants will face expiring leases and new rents that are as much as 60% higher than they currently pay. Tenants could be forced to leave New York to find cheaper office space.

The market Ã“is strong, but that very strength could portend challenges to retaining its office employee base,Ã” said Ms. Tighe.

While demand is expected to increase, office construction has fallen in the past six years. While an average of 4.2 million square feet was constructed every year since 1950, since 1990 that number has dropped to only 1.2 million square feet a year. The rising cost of construction materials and labor, as well as a dearth of construction sites in Midtown means the trend will continue, the report says.

Excluding the World Trade Center, there are only 8 sites in Manhattan large enough to allow as-of-right construction of a one-million-square-foot office building, according to CB Richard Ellis. Considering that some of those buildings will be residential and that only two are near transportation hubs -- the Farley Post Office and Penn Plaza -- and the number of developable plots is even scarcer, the report says.

Â©2006 Crain Communications Inc.

What Price Value? - further debate on the future of real estate values

2006-03-09T03:10:00.000-05:00

A Real Estate Finance expert weighs in on the debate on whether or not we are in a real estate bubble and the subsequent inevitability of this bubble bursting. It seems mostly a study of the residential housing market, however. Commercial real estate is said to be strong, but the larger market trends Lacilla discusses have got to have an effect on commercial real estate as well.

It will probably go something like this: the slower growth, higher interest rates and higher taxes will hit all businesses. Larger businesses may just cut back on space (i.e., as they fire people to cut costs. Many smaller businesses will suffer and likely go out of business, freeing up any office space they are using. Many really small businesses nowadays operate out of peoples homes and are not using office space anyway. This then confirms the trends spoken about in the market trends article from March 4th that mid sized businesses will be squeezed out.

Anyway, a recession would obviously put a damper on commercial rents.

Hmmm. I hope I am not entering a business that is about to tank.
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WHAT PRICE VALUE? by Jeffrey Lacilla

For the last five years the U.S. real estate market has had a substantial run-up in value, despite less than stellar fundamentals, including vacancy rates that were increasing and rents that were flat or declining, which did not justify such value increases. Even though fundamentals have been improving in office rents and vacancy rates, real estate price increases are still outperforming gains in these areas. Why is this happening and what danger does this scenario present to investors?

There is a confluence of economic and capital markets variables, which many in the industry point to as reasons for a paradigm shift in pricing. Although much has been written about these, including an expanding economy, low interest rates and the poor performance of stocks and bonds, it would be more profitable here to broadly examine the economic environment that has contributed to the favored asset status of real estate and whether current conditions validate the paradigm shift philosophy or suggest that the shift is temporary.

During the past year or so, the U.S. economy has improved in large measure because of consumer spending, which has been fueled by tax cuts and even more so by home owners refinancing their mortgages and monetizing the substantial appreciation in their homes. The Federal Reserve estimates that $600 billion has been pumped into the economy as a result of home mortgage refinancing. Stocks and bonds for the past five years have fallen out of favor and are less desirable investments than real estate assets. Capital is always searching for a home, and lately real estate seems to have the most attractive prospects. There has been a huge inflow of capital into real estate that has not been seen since the tax shelter days that predated 1986 tax reform. At the time, that reform cut the legs out from under the apparatus that had fueled the flow of capital into real estate during the S&L tax shelter years. Will there be a corresponding event that proves the undoing of this boom?

Optimists abound. Norman Berger of Menlo Park, Calif., writes to The Slatin Report with this question:

"What housing bubble? The San Francisco Chronicle today (02-19-06) posted some Bay Area housing stats. From December 1987 to December 2005 the median house price grew at 7.7% per year; its resultant mortgage payments grew by 5.6% per year (mortgage rates down); Nominal GDP grew at 5.5% per year. Looks like housing in this the most desirable of areas is cheap!"

Nice point, Norman. So from 1987 to 2005, housing values went up an aggregate of 280%. Did income for people buying housing grow at the same annual rate of 7.7% per year? Probably not, but the crazy mortgage products coupled with the low interest rates makes them feel as if that has happened and thus to buy anyway.

Are the paradigm-shift believers correct or will their nescience be their undoing? I believe that the disconnect between pricing and fundamentals is unsustainable, and that the flow of capital into real estate will subside as interest rates rise and stocks and bonds once again become the investment choice of investors.

Despite sustained economic growth over the last 13 quarters, we have been running huge federal budget and trade deficits that will ultimately impact our economy. According to Anthony Downs, a senior fellow at the Brookings Institution, our GDP grew by almost 4% in 2004 to $11 trillion, but our trade deficit was more than 6% of GDP. Our growing trade deficit is also increasing faster than national income. It is expected that in 2005 the government's expenditures will have exceeded receipts by some $500 billion, or 3.5% of GDP. Our total federal debt will approach $8 trillion, or 72% of our GDP, up from 55% in 1990. Interpretation: this country on a domestic and international basis is living beyond its current means while our savings rate continues to be nil. Nonetheless, despite these deficits, our balance of payments is still in the black. That's because countries that export their goods to us are sending that capital right back to the U.S. to invest in our Treasuries, offsetting the effects of the accumulated deficits. This is a perilous fulcrum on which to continue to balance future prosperity; growth likely cannot last with a federal government that cannot control spending, and it seems as though neither political party has the will to force a course correction.. Certainly we can expect increases in entitlement programs like Social Security and Medicare as our population continues to age and we can also expect discretionary spending (i.e. defense) to increase as we fight the war on terrorism. This means that our expenditures will continue to outpace our receipts unless we raise taxes or cut spending. No other options here.

How much longer will our balance of payments be in the black? How much longer will countries send us their goods in exchange for our paper with low interest rates when the dollar value of the Treasuries they are buying is subject to value erosion because of higher interest rates?

Mr. Downs expects a further decline in the dollar, which will raise the cost of imports and lower the price of U.S. goods exported abroad. If that hypothesis proves true, the Fed will likely have to raise interest rates to protect and stabilize the dollar from declining too much even if inflation is in check. That could in turn cause the economy to slow down or possibly enter a recession. A further decline in the dollar may also cause buyers of Treasuries to shy away from such investments because their dollar denominated Treasury purchases would decline in value. Translation: our federal budget deficits will cost more because of higher interest rates, and it will slow the economy. Congress will be forced to act through tax hikes and budget cuts, neither of which they excel at, and both of which they have shown a lack of political will to undertake.

Slower growth, higher interest rates, higher taxes and spending cuts do not sound like underlying fundamentals that can sustain a real estate boom. More importantly, these fundamentals certainly do not sound like the stuff paradigm shifts are made of. This does not mean sell and stay away from real estate. Rather, it means the unbelievably low cap rates at which properties have been trading cannot be sustained.

Real estate prognosticators have become fond of calling the current market, especially for condo converters and TIC investors, a game of musical chairs. Well, whatever song is playing "Up, Up and Away My Beautiful, Beautiful Balloon" or "Oops! I Did It Again," expect a serious chair shortage.

Jeffrey Lacilla teaches real estate finance at New York University.

Balance of Trade Shift at 7 WTC?

2006-03-09T02:59:00.000-05:00

Ah, now you see they alluded to things like this this in the "Macro Trends..." article I posted on March 4th. I was talking about this with a guy from Jones Lang LaSalle the other day. I asked him if the Chinese companies come to New York looking for where to lease space or do the building owners court the Chinese companies proactively. He said that many Chinese companies are already here and can look into the local commercial real estate market whenever they need office space. What is significant about this deal is that the Chinese government is involved, has given it its stamp of approval, and is opening up the possibility of yet more, perhaps larger scale investment. Exciting stuff.
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SPACE | NYC 01 24 06
BALANCE OF TRADE SHIFT AT 7 WTC? by Peter Slatin

The shimmering clear glass of SOM's design for 7WTC nearly disappears into the skyline. A lease for the top five floors is approaching reality.
For the politicians, bureaucrats and Larry Silverstein, it was a banner day.

Surrounded by the former, the latter signed a letter of intent with Beijing Vantone Real Estate Co. Ltd. to lease 200,000 square feet in the top five floors of Silverstein's gleaming 1.7 million-square-foot 7 World Trade Center. Although Silverstein has signed two much smaller leases, with Ameriprise and the New York Academy of Sciences, the preliminary deal announced Jan. 24 was the first serious indication that the developer's Liberty Bond gamble will pay off in the long run.

It's also quite fitting that the first major commercial deal in the World Trade Center redevelopment should go to a company representing the country that is rebalancing the scales of global trade. In addition, rather than being a part of downtown's traditional Old World tenant base, Vantone represents a creative and entrepreneurial bent to China's nascent, supercharged capitalism that is reminiscent of but far more likely to persist than the technology tenants that flourished in and fled Silicon Alley five years ago. The landlord's need to reach beyond a traditional tenant base, and to rely heavily on financial incentives and political pressures from government officials indicate that enormous hurdles remain in downtown's struggle to move beyond a boom-and-bust economy. On the other hand, the out-of-the-box nature of the tenancy could presage a healthy changing of the guard in the makeup of downtown Manhattan's commercial base.

Vantone's eventual program is still emerging, though those close to the deal say it will most likely act as a facilitator and executive-suite purveyor for Chinese businesses, and that the buildout could include a club or even sleeping quarters on the top floor. The ultimate scale of its tenancy at Ground Zero is another unknown: Vantone first emerged as a potential tenant for Freedom Tower, and sources say it remains interested in that possibility as well as in additional space at 7 WTC.

While the deal is a true source of relief in the long, dry slog to heal the downtown office market, it thrusts a host of critical questions to the fore: first, is this the first wave in a surge? Silverstein spokesman Dara McQuillan thinks so, and tells The Slatin Report that the next deal is "not far off." Since the developer obtained a temporary certificate of occupancy late last year, he says, interest from potential tenants willing to accept the construction site sprawling around and in the building has grown rapidly. McQuillan declined to say whether the next deal would be for a small or large user, but said that Silverstein is targeting advertising agencies and design firms in an effort to get creative juices flowing in the building (and maybe to bring in tenants who will appreciate the huge Jenny Holzer sculpture in the lobby).

The Vantone deal also coincides with increasing talk, on this page and many others, about the tightening Midtown Manhattan market. Will the scarcity there lead tenants downtown? More to the point, it remains to be seen whether the lease, enabled by heavy lifting from all those politicians and bureaucrats, cements Silverstein's now-in, now-out, now-in role in the Ground Zero firmament.

Real Estate Valuation in Business Plan Preparation

2006-03-07T00:31:00.000-05:00

One thing that strikes me about the three methods of valuation they describe here is the greater presence of soft factors compared to the classical valuation techniques (like CAPM) for other assets (stocks, companies, bonds) as taught in MBA programs. It leads me to think that real estate values as we know them today are inexact in a way that makes me a little uncomfortable, but also, I suppose, reflect the human element inherent in real estate and its use.

I once had this disastrous temp job in the office of a mortgage broker. For every loan we did we had to print out a 20 page stack of disclosures mandated by the State and Federal Governments that had mostly to do with discrimination and financial shenanigans. It taught me that residential real estate was in the not so distant past a rather dirty business and so they were slapped with a lot of onerous government regulation in about the '70s. The paperwork was a nightmare. This is what happens to industries that behave badly. I have to admit that the relative lack of regulation is what drew me to commercial real estate.

In any event, the consideration of "soft" factors like the type of tenants and level of landlord involvement into cap rates, IF cap rates like this are used in residential real estate, could be the financial underpinnings of housing discrimination in the past, when people moved out of neighborhoods as minorities moved in for fear for their real estate values. That being said, it seems to me at first glance to be inexact. We (in Project REAP) haven't learned about cap rates yet (though I have an idea as to how to calculate it from my own readings), but it would be interesting how the cap rate formula takes into account other tenants and landlord involvement.

With this being said, I would lean towards the cost approach to valuation. I am sure all three methods have their merits and I wonder if different valuation techniques are used for different types of properties or transactions. I suppose I will find this out later when we get to the unit on finance.
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Real Estate Valuation in Business Plan Preparation

By Gary N. Chabot

Two of the major cash flow components of small business operations are the start-up capital requirements for commercial real estate and the ongoing expense of renting and operating the space which the business is located.

Whether a company leases space or invests in its own land and building, the value for the real estate is of concern to several parties. These parties include potential lenders, other partners or shareholders, the small business owners themselves and the landlords who rent space to the business. Part one of this series deals with some of the ownership value considerations of real estate, while the second part will explore some of the important areas of leasing the business location.

Ownership value considerations

Beyond the "common sense" criteria of investing in real estate for the business (price and value, location, size and utility), the business owner also must consider that determining real estate value is important when preparing business plans for financing purposes.

Regardless of how valuable the location may be perceived by a business owner, the amount of the real estate financing is directly linked to the property's appraised value from an independent third party's point of view. Typically, a conventional lender will lend up to approximately 75 to 80 percent of the appraised value of the property. This means that the business owner must have the financial capability to finance the remaining 20 to 25 percent plus the required closing costs and other out of pocket expenses involved in financing the transaction.

In preparing business plans and required cash flow projections, many small businesses fail to consider the additional working capital required for financing or buying commercial real estate.

In addition to good faith deposits and down payments, these additional costs may include bank fees and points (one point equals 1 percent of the loan amount), legal fees, appraisal costs, environmental studies, additional fit-up or construction costs, brokerage fees and deed transfer taxes and recording fees.

Determining Value

Appraisers consider real estate value from three points of view and determine an estimated of value based upon weighing the three valuation methods. These three methods are comparable sales method, income approach, and cost approach.

Quite simply, the comparable sales method determines an approx. value based upon sales of similar properties within a reasonable recent period of time. Similarities include type of property, age, location, size and other tangible criteria. Value adjustments are made (either positive or negative) for the subject property relative to the sold property. For example, if a sold property was in better condition, or newer, than the subject property, then the adjustment would be made to lower the sold property's actual value to make it more comparable to the property being appraised.

The income approach determines an estimate of total real estate value based upon the rate of return from potential net operating income from the property (assuming it was leased to a third party). In this method, an appraiser would estimate an annual income rate for the property based upon similar rated for similar users. For example, the appraiser might determine that a retail store might rent for a rate of $9 per square foot per year. This rate should be comparable to other retail spaces in the vicinity (which should be documented in the appraisal document).

Once this lease rate is determined, the property's value is estimated using a type if multiplier known as a capitalization rate, or cap rate. Historically, cap rates are subject to several factors including the strength of the type of tenant, the level of landlord involvement, economic conditions and type of industry. However, for illustrative purposes, a property with a good tenant in a good location might command a cap rate of 12 percent in a good market.

The value of the real estate is determines by multiplying the net rental rate by the reciprocal of the cap rate. In the example given, the value would be calculated by multiplying $9 per square foot by 8.3 (100 percent divided by a 12 percent cap rate). This would mean that the investment value of the real estate would be equal to $74.40 per square foot.

Often, these figures are further adjusted to consider other variables such as vacancy rates, property management costs and other investor related factors.

The cost approach evaluates the replacement value of the property by analyzing the cost component of the specific land and building. The variables involved in estimating value are contingent upon location, geographic region of the country, labor and material costs.

Factors that are considered include costs for land acquisitions, site preparation, utilities, types of building materials, tenant improvements and soft costs (architectural and engineering costs, legal and brokerage fees and other similar related costs).

Reconciliation of the three methods

All methods are then summarized, reconciled and compared to each other to evaluate their relative values.

In a perfect business environment, the three variations of value would likely produce relatively similar results. Quite often, however, each method may produce somewhat different values from one another. This occurs because all real estate is unique, general economic conditions may vary by region and time and good market information is not readily available to buyers, sellers, landlords and tenants in the real estate market (as compared to stock markets).

Because of these general principles, the valuation of commercial real estate is an educated estimate based upon several factors. These include the collective experience and expertise of the appraiser, available and relevant information in the market, the willingness of the lender to accept the estimates and the ultimate agreement of the buyer and the seller on the property's price and terms in an independent, arm's length transaction.

Â© 2002 NHSBDC
This article may be reproduced with copyright information intact.

Macro Trends Affecting Commercial Real Estate Worldwide: 2006-2015

2006-03-04T18:23:00.000-05:00

I have discovered a great information source, ResearchWorldwide.com, a worldwide Commercial Real Estate information portal. I have come across an article: Macro Trends Affecting Commercial Real Estate Worldwide 2006 - 2015

The major points are somewhat obvious to anyone following the business world over the last 5 years or so, that business activity is shifting to Asia, and with it, the need for office buildings and retail space. It also forecasts a deterioration of Western economies and standards of living, as the populations there age and demand more tax money to take care of this burgeoning population of elders, but businesses move to more tax friendly countries (with younger, more energetic populations), exacerbating Western fiscal problems.

One interesting they say is this:

Conversely, with this shift eastwards, existing commercial buildings experiencing reduced demand may require remodelling, possibly including for other uses, in order to remain financially viable.

I have been playing with the idea of learning a little Chinese.

I also have been thinking about the possibility of office space being used for other purposes. At the office equipment company I worked for near Grand Central Station, I was calling companies within our building and I found law offices listed as residences. Could ordinary people be living in an office building? It turned out that these were purely offices leased to people who were sole proprietors and doing business under their own names and social security numbers. Such a solution could have an impact on the residential market. The only issue would be pricing. Ordinary people would not be able to pay the prices that start at $40 per square foot all the way up to along the lines of $100 per square foot for many office building spaces. A new model would have to evolve to price office space and residential space in the same building. Very messy.

Lastly, they mention a squeeze of mid-sized companies that would also squeeze the demand for commercial real estate.

The article concludes with:

"These changing trends of global realignment of economic activity, aging populations requiring increases in taxation, changing consumer spending, new technologies replacing the need for expensive commercial space, scarcity of knowledge workers limiting office demand in developed economies and growing office demand in developing countries, the looming un-sustainability of the environment to cope with global economic growth, redefining corporate structures and the need for increasing sophistication to be economically competitive all have consequences for the demand and supply of commercial real estate space worldwide during the next decade"

It's a rather downbeat prognosis for status quo commercial real estate business. It is time for creativity combined with decisive action in order to "avert the evil decree."

Greenfield

2006-03-02T04:06:00.000-05:00

Let's start from the very beginning, a very good place to start. Right now I begin with REAP.

As in Project REAP, the Real Estate Associate Program here in New York.

For more info, see: http://www.projectreap.org