Lenders Are Still Chasing Deals, But Sky-High Costs Will Keep NYC Development Slow In 2019
There is still an abundance of capital chasing real estate deals in New York City, but despite the eagerness of lenders to give construction loans, the realities of building in New York in 2019 mean not many projects will make economic sense.
Tishman Speyer scored one of the biggest finance transactions of 2018 when it nabbed a $1.8B construction loan from Blackstone Mortgage Trust in April for a Hudson Yards office tower, for example, and the developers of an enormous mixed-use, entertainment complex known as TSX Broadway landed a $1.1B construction loan from Goldman Sachs last month.
At the lower end of the market, the New York State Housing Finance Agency provided $77.1M for Starrett Corp.’s planned rental project in Coney Island this week, and S3 Capital Partners loaned $75M to CGS Developers for a brand-new rental on the South Bronx waterfront last month. That same lender provided a $46M acquisition and construction loan for Brooklyn North Capital and RiverBrook Equities’ Kips Bay condo building project.
Experts said the lending market is liquid with capital increasingly coming from nontraditional sources, both trends expected to continue through 2019. But overall, they said, construction financing is still down from the peak of 2013-2016 — an indication more of the challenges of building in the city rather than the amount of capital chasing deals.
“The market's healthy right now. Regardless of what’s happened in the last month with the equity markets, [we’re] not seeing a pullback yet,” Newmark Knight Frank Vice Chair Dustin Stolly said. “The primary lenders this cycle have been finance companies and investment banks — that’s driving competition for projects. The list of lenders isn’t infinite, but most construction projects are certainly getting a fairly deep bid across different leverage profiles.”
Naturally, not all parts of the market are seeing the same level of activity. Luxury condominiums, which have flooded the market in recent years, are not attracting attention, sources said, although there are exceptions.
Deutsche Bank provided Harry Macklowe with $750M last year for his office-to-residential conversion One Wall Street. Extell Development landed $530M for its Brooklyn residential development at 138 Willoughby St. from a group led by M&T Bank.
“The hardest to capitalize would be a ground-up residential deal — because some lenders are concerned about depreciation in the asset class,” Stillman Development International President Roy Stillman said at Bisnow’s 2019 Forecast in December. “It has to be great story and something that captures the imagination.”
HFF Senior Managing Director and co-head of the New York office Michael Gigliotti said the $1.1B construction loan Goldman Sachs provided to L&L Holding Co., Maefield Development and Fortress Investment Group for the development of TSX Broadway is a prime example of the kind of project that will pique lender interest in this environment.
The project, which Gigliotti likened to a media deal as much as a real estate deal, will feature a 669-room hotel, 75K SF of “flexible retail space” and the only permanent outdoor stage in Times Square.
The deal was notable because Goldman Sachs did the transaction alone and without syndication, he said, whereas in the past lenders would typically want to partner with four or five other banks before the deal was closed.
He expects there will more single lenders financing deals this year, which is a boon for borrowers and has a trickle-down effect on pricing on the rest of the market.
“They are taking bigger exposure. But they are getting compensated for that … [And] the market really likes it,” he said, noting that smaller banks that would have previously taken pieces of large-scale loans are now more aggressively bidding on the smaller multifamily developments.
“Bank of the OZK is a big part of that, they don’t syndicate anymore. They will do partnership with Starwood and Square Mile, but they don’t then call a SunTrust bank, and say, ‘Hey, want a piece of this?’" Gigliotti said. "It’s very good situation for borrowers.”
Financing brokers said that earlier in the cycle, banks like JPMorgan Chase, Wells Fargo and Bank of China were all major players in the market. Now outfits like Mack Real Estate Credit, Square Mile Capital, Starwood, Deutsche Bank and Otéra Capital are stepping in.
Plus, developers are continuing to move into the lending space. Silverstein Properties expanded into debt in 2018, and made its first transaction in a $240M mezzanine loan on a 1,000-foot-tall, ground-up mixed-use building. Slate Property Group also formed a lending arm last year, with a goal to offer $500M in its first year.
“It’s hard to buy real estate in New York right now,” NKF’s Stolly said. “The perception is from a lot of these folks is that we are late cycle and that if they can invest strategically as a lender … if something should go wrong, they have the ability to step in and fix any problems. Not necessarily as being predatory, but they have expertise that a traditional construction lender doesn’t have.”
Greystone Bassuk President Drew Fletcher said he wouldn’t be surprised if more developers establish lending arms this year, though he thinks it is now reaching a point of saturation.
“If you look at the spread where capital is priced, where the nontraditional lenders are pricing their capital versus the banks — that spread has narrowed considerably,” he said. “There is an oversupply of capital. All of the same groups are competing for the same deals.”
Fletcher is arranging $415M in debt for Douglaston Development’s planned 931-unit apartment tower at 601 West 29th St. near Hudson Yards, where construction is slated to begin in April.
He said that, while there has still been robust construction activity in the city over the last 18 to 24 months, there has been a drop in the amount of new financing originated.
Though there is significant capital available, he said, the trifecta of the high cost of land, construction prices and rising interest rates is slowing ground-up construction across the market.
“I think we are going to continue to see a trend in 2019 where the majority of the financing activity will be traditional bridge loans and permanent loans,” he said. “We are seeing that across the board. At the end of the day, it all comes back to what it costs to develop in New York City. Sellers have not reduced their prices, and we also haven’t seen a material drop in construction costs.”