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'We're Recovered': Silverstein, Brookfield Execs On The Rush Of Investment Back Into NYC

The close of 2021 was the most active period of commercial real estate activity since the pandemic began in New York City, coinciding with the city returning to almost normalcy — subway ridership hit 3 million in early December, and it is as hard as ever to find an apartment.

Fried Frank's Michael Werner, Brookfield's Ben Brown, developer Michael Shvo and Silverstein Properties' Marty Burger at Bisnow's New York City State of the Market event Dec. 16, 2021.

Even though the omicron variant has sent the city's economic recovery backpedaling, investors in Manhattan's high-priced real estate have moved beyond the coronavirus and are competing for deals like it is 2018 again, industry leaders said at Bisnow's New York City State of the Market last month.

"Covid … is not really informing the calculus in our investment decisions today, and frankly, most of the things we’re doing are much longer-term than the next six, nine to 12 months," said Ben Brown, a managing partner and the head of U.S. office at Brookfield. "We’re starting to be surprised at the liquidity, the depth, the pricing of the best assets."

Brookfield is reportedly in negotiations to sell a 49% stake in its recently completed office building, One Manhattan West, to Blackstone at a $2.85B valuation, a deal Brown alluded to onstage.

"We’re in the midst of that right now, recapitalizing a pretty high-profile deal," he said. "And when we get to a point where that becomes a public data point, I think everyone will go, 'Wow.'"

Even though office usage is nowhere near where it was pre-Covid-19, office leasing was back at 2019 levels in the fourth quarter. Silverstein Properties CEO Marty Burger said at the event that leasing activity "has picked up 300% over the last three months."

"We’re recovered," Burger said when asked where New York was in its recovery. "There’s a lot of money chasing a lot of deals, so cap rates are down and things are happening. So from our perspective, this market is recovered. It’s just going to be different on the office side."

Fears of a mass exodus from New York City have been extinguished, replaced by amazement over how rapidly residential has come back.

Burger said his firm's Manhattan apartment portfolio, which is typically 98% occupied, hit 68% occupancy during the depths in the pandemic. Now, he said, the portfolio is 98.5% occupied, and "the concessions that we had on one of the buildings just went away."

"Our rents are about 20% higher than they were pre-pandemic," Burger said. "We’re still blown away by this because people aren’t back in the office, but they’re back in New York City."

Brookfield owns large apartment complexes in Manhattan, Brooklyn and the Bronx, and Brown said they are all bouncing back strong. 

"There’s an element of New York right now on the residential side that the rising tide is lifting all boats," Brown said. "Wallet share is growing. People’s earnings have been up, people’s savings have been up, and we’re surprised about the good in New York as a city where we’re starting to see, and we have been seeing, a resurgence of population coming back into the city, and it’s people that are renting apartments, it’s international capital that are buying apartments, and we’ve been the beneficiary of all that."

Michael Shvo was on the buyer side of a pair of "wow" deals just before the onset of the pandemic, paying $937M in late 2019 for 711 Fifth Ave., where Bisnow's event was held, and buying 530 Broadway for $382M after getting an $18M discount from the contract price, according to The Real Deal. Shvo also bought San Francisco's Transamerica Pyramid for $650M after negotiating a 10% discount.

Burger said Silverstein "has bid on so many things" over the course of the pandemic only to lose out to buyers with stronger stomachs for risk. 

"Michael comes in here and is pretty aggressive and now looks so smart because the market has kept moving up and up and up," Burger said. "So he’s done a great job of picking up some assets, and the market’s moved beyond where he’s been. It’s just been tough for all of us. We’ve been in on tons of multifamily, tons of office buildings and we’ve just been unsuccessful, not just in New York but in a lot of other markets."

Shvo said his backers in his transactions have been largely German pension funds — his partner in the Transamerica deal was Deutsche Finance — and they have been eager to invest in the wake of Covid-19, and with a longer return timeline, they can be patient waiting out the recovery.

"Peak of Covid, I get a call from one of our pension fund investors in Germany. They asked me, 'Is there blood on the streets?' Everybody wants to see blood on the streets," Shvo said. "And I said, 'Yeah, there’s blood on the streets, but not on the streets we want to buy real estate.'"

The flood of capital into the real estate sector — particularly from Germany and South Korea, Brown pointed out — has led to bidding wars too rich for even Shvo's taste.

"We’ve bid on two properties that just traded, and I’m a fairly aggressive buyer, and we lost. And I was really shocked that we lost, because we felt that we were fully priced in and priced on my eternal optimism," Shvo said. "The buyers there just have return requirements that, I don’t know how that capital is investing."

"Everyone, take note," Burger quipped in response. "When Michael is losing bids, the end is near."

The aggressiveness from investors had bled into hunger for new buildings. One Manhattan West was just one of a number of billion-dollar transactions to make headlines last month, and capital sources with equity in ground-up sites have taken notice.

A rendering of SL Green's One Madison Avenue office project in Manhattan

John Schoback, a director of asset management for Hines who covers the Northeast, said the flight-to-quality pull is so powerful that his company is confident partnering on two speculative office developments: One Madison Avenue with SL Green and 555 Greenwich with Norges Bank and Trinity Church.

"A big theme of ours throughout Covid is capital acceleration," Schoback said. "What was a lease-driven capital play is now more thought of as, 'We need to do this spec, and we need to do it now.'"

The omicron variant has led to record infection rates and is straining the local health system, and the pandemic is still a reality major property owners must face, they acknowledged. 

"There’s an element where it does feel like every time we get to the 5-yard line, we sort of get a penalty called and we’re back to the 20, and so we’re going through that right now," said Brown, who added that New York's activity, both on the streets and in the market, has surged back to the top of the class.

"The irony is, you leave New York and you go to a bunch of the other, competing gateway markets in the U.S., and forget recovered; New York feels way past where the fundamentals feel in most other markets," he said. "In terms of actual activity, people’s behaviors in terms of thinking about from an office perspective, taking new leases, committing to space, that’s well in advance of most other places."