Meringoff's Black Swan Warning
With rents through the roof and a resurgent economy, it’s a heady time for landlords and developers. But confidence invites hubris—will unwary investors get crushed in this rush to the party?
With almost four decades of experience as a real estate investor, Himmel+Meringoff managing partner Steve Meringoff has witnessed his share of cycles. Now is different—and it might cause carnage, he warned attendees at Thursday's 5th annual Bisnow NYC Construction & Development Summit at The Roosevelt Hotel. “There will be a correction, the question is when and how severe. But I don’t think people are really planning for it,” he says. A combination of excessive new development, rising interest rates and a black swan event means there could be "blood in the streets."
The market upswing has been faster and more aggressive, Steve told the crowd of 300.
Steve joined moderator Maury Golbert, a tax partner at Berdon, and Invesco senior director Todd Bassen (above) on our repositioning panel. Given the prices out there, you have to be creative in order to have an edge, says Todd. Ultimately, prudent investment means being a pioneer as well as a realist; it's no use being a vanguard developer if you don’t have a firm grasp of demographic trends, the market cycle and the zeitgeist, our panelists say. “You've got to strike the right balance and create real estate that can generate returns at different parts of the cycle," Todd says.
Savanna managing partner Chris Schlank (right, with TOWN Real Estate SVP Anna Zarro, also on the repositioning panel) predicts there will distressed opportunities down the road. "If you can't make sense of a building without being kooky or slicing and dicing, you're not going to make money," he says, particularly with land prices at $1k/SF. (Todd adds you'll do better if you're able to buy a building at that basis.) It's a constant struggle for residential developers, who are seizing every bit of available space in their buildings, says Anna, who's leading the leasing push for residential and mixed-use projects like SoHo's 496 Broadway and FiDi's 20 Exchange Place. Overall, people who are being mindful about development will come out unscathed if there's a downturn, she says.
The importance of due diligence cannot be overstated, says Masterpiece Construction principal George Liakaris (far right, with attendees Perry Incantalupo of Atlas Capital, ASK Electrical's David Kleeman, and MG Security's Joseph Anderle and Thomas Hill). If you don’t do bullet-proof planning on the front end and build a strong development team, projects can easily get out of hand, he warns. “At the outset, you need to pencil down hard numbers that will work and have everyone in lockstep."
One of the hottest investment vehicles in NYC right now is EB-5 financing, say NES Financial EVP Reid Thomas and Homeier and Law managing attorney Clem Turner, who gave a special presentation on the subject. There's a large pool of capital with "quiet and patient" investors who will accept low returns. EB-5 financing first started gaining traction in 2010, Reid says, and we've seen a 1,080% increase since then in the Northeast. In NYC, the typical investment is $20M to $70M, with the interest rates averaging around 5% and a term of five years. Among developers using it: Forest City, Extell, Related, Silverstein Properties, Lexington Realty Trust and hotel giants like Hilton, Marriott and Starwood. Stay tuned for more coverage from our shared workspace case study and ground-up development panel tomorrow.