New projects in New York City are stalling as developers struggle to stitch together deals, experts said onstage at a Bisnow event this week.
Interest rate hikes and recession fears are undermining proposed projects across asset classes, and the result is fewer deals, more partnerships and joint ventures, and more complex capital stacks as the industry tries to wait out market volatility.
“Money is pain right now,” Arielle Frost, a member attorney at law firm Rosenberg & Estis, said during Bisnow’s New York City State of the Market event at etc.venues’ 360 Madison Ave. space. “Everyone needs investors, everybody needs capital.”
The pace of dealmaking for building financiers has slowed dramatically as the Federal Reserve has continued to pile one 75-basis point rate hike on top of the next. Sales have also slowed as a result, as buyers have a harder time making the math work on valuations largely predicated on pre-rate spike assumptions.
“We've definitely seen a slowdown in acquisitions. It's more difficult to make things work. And anytime there's a fast market movement, there's a larger gap between bid and ask with sellers,” Meridian Capital Group Senior Managing Director Morris Betesh said. “The longer this interest rate environment hangs around, the more likely they'll come around to reality.”
But sellers hoping they can wait out market volatility might find their properties are worth less than in previous years, according to Fairstead Managing Director David Murstein.
“Appraisals right now are still looking back into a period of time where markets were strong,” he said. "But once more distressed or realistic trades start happening, you're going to see appraised values come down, loans come down … it's going to make it hard to refinance.”
In the meantime, experts said, financing deals are getting harder to come by, and projects that are getting loans approved increasingly belong to big-name developers.
“From the commercial debt side, I’ve seen a real slowdown on the commercial bank side,” Naftali Credit Partners CEO Glenn Grimaldi said. “Many of my own colleagues that I've actually recently been in touch with in the commercial bank finance side, they are quote-unquote, 'hitting the pause button.' That's the phrase du jour.”
Of the sparse collection of deals that have gone through in recent months, a Bisnow analysis found that most have featured well-established names in NYC — names like A&E Real Estate, Extell Development, Toll Brothers, the Vanbarton Group and RXR.
MetLife is one of the firms poised to benefit from the demand for established players, said Sara Queen, the firm’s head of real estate equity.
“On the buy side, one of the things that is helpful about being such a large institutional player is that as other deals fall out, we're getting calls about, ‘Hey, do you want to step into this deal?’” she said at the event. “So we're starting to see some opportunities that way.”
But established financial backers, too, are increasingly working together to provide loans for projects, experts said.
Earlier this month, a consortium led by InterVest Capital Partners — formerly Wafra Capital Partners — and Rexmark, together with Pacific Western Bank and Harbor Group International teamed up to provide $425M in construction financing to Extell for a medical office tower at 1520 First Ave.
This week, Wells Fargo provided a $111M construction loan to Related and Hudson Cos.' Roosevelt Island development at 430 Main St., but that financing was combined with additional private sources and equity from Related and Hudson themselves. In August, Santander and City National Bank worked together to provide a $134M construction loan to Lonicera Partners for a 314-unit project at 15 Hanover Place in Brooklyn.
Part of the reason for the increased volume of partnerships is an extra layer of comfort for everyone involved in the deal, said Ester Reizes, CEO of investment manager Esther Reizes & Co. There have been an increasing number of players entering the joint venture space in recent years, she said, but the tried-and-tested names offer additional reassurance amid financial volatility.
“Knowing how difficult the lending market is, we want to make sure that who we're bringing in on the JV side is someone that's additive to the structure in the minds internally, as well as in the minds of the lender community,” she said. “When you go looking for financing, you just want to make sure you have the most powerful team, including your LP investors.”
These dynamics are also leading to more complicated capital stacks, and some lenders and developers being willing to accept conditions that they wouldn’t have in previous months, Asland Capital Partners Managing Partner and CEO James Simmons said.
“People are willing to look at structures that were not in favor just recently — [preferred equity], high-cost mezz, some combination of the two,” he said. “I've seen people much more open to structures with a much higher cost of capital.”
But overall, lenders with less capital to deploy amid volatility will hurt CRE unless there’s some normalization soon.
“I think we're all very hopeful that some things will reset and the new year,” Queen said. “But right now, things are quite challenging.”