March 31, 2014

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Developers can’t make money on apartments in Manhattan, and banks are leery of financing apartment building sales. Meanwhile, Brooklyn land prices are climbing, too. Here’s the lowdown on the fate of apartment buildings from Bisnow’s NYC Multifamily Summit this past Thursday.

JDS Development founder Michael Stern told the crowd of 650 gathered on the 54th floor of Silverstein Properties’ 4 WTC that he prefers to build apartments rather than condos, but land prices are making rentals near impossible in Manhattan. So the high-designing developer whose luxury projects include the pencil-thin condo building going up at 111 W 57th St and 800 apartments across two towers at 626 First Ave at 35th Street is switching its focus to Brooklyn (where all the men are also pencil thin but bearded like lumberjacks)

In some cases in Manhattan, land prices are higher than hard building costs, says Michael (right, whom we snapped with Naftali Group CEO Miki Naftali). That’s saying something, considering rising hard costs have themselves become an obstacle to Manhattan resi development, according to Witkoff Group CEO Steve Witkoff.

Time Equities CEO Francis Greenburger (left, with Steve) can’t figure out how to make Manhattan rentals work and isn’t even sure why he’s holding onto the ones he already owns other than sentimentality. And yet costs in prime Brooklyn submarkets aren’t much easier to swallow. During Bisnow’s event, Time Equities was closing the sale of the last of nine townhomes it built at Hoyt and Schermerhorn in Brooklyn. Even there, Time Equities ended up selling the segment of the property where it had planned rentals because land prices were too good for Francis to build them himself. Naftali Group just completed an 85-unit apartment building at 315 Bergen St in Boerum Hill, but Miki says it bought that land two years ago. Now, the deal wouldn’t work because land prices in the neighborhood have doubled, while hard building costs have risen $35/SF to $40/SF. So Naftali is focusing on prime-location condos in Manhattan and will launch 234 E 23rd St and 261 W 25th St in late spring.

The Lightstone Group is actually managing to build apartments in both Manhattan and Brooklyn, but it jumps through hoops to do so. CEO David Lichtenstein (left, with Miki and our moderator, CohnReznick Northeast commercial real estate leader Ron Kaplan) says putting up 460 apartments at 112 Fulton St in Lower Manhattan has been a task: separate acquisitions of a small parcel, three storefronts, and five sets of air rights; buying out 32 tenants; and putting up $80M cash. In Brooklyn, Lightstone is building 700 apartments, but that’s on a Gowanus Superfund site. And four weeks ago, Lightstone acquired a rent-controlled apartment building in Midtown Manhattan in an off-market redevelopment play. The company had just two weeks to decide whether to buy the $200M development site and three weeks to close

Brokers with their ears to the ground are in awe of land prices, too. Eastern Consolidated investment sales broker David Schechtman says building prices are a full standard deviation above the highest logical price. (For those who skipped math class, we’re pretty sure standard deviation is margin of error’s more well-dressed cousin.) Two weeks ago, he brought to market a 60-unit apartment building at 110 Greenwich St that can be emptied of its market-rate-paying tenants. He expects it to sell as a development site for $1,000/buildable SF—within three weeks, no less.

Massey Knakal’s Stephen Palmese just sold a ground-up development site next door to 110 Greenwich for $750/buildable SF. That doesn’t seem out of line, he says, considering Silverstein’s Four Seasons condos and the Woolworth Building residences are selling for $2,500/SF.

Meridian Capital Group CEO Ralph Herzka (with our moderator, Herrick Feinstein real estate chair Belinda Schwartz), whose company does an average of seven finance deals a day in New York, says higher prices are making financing harder. Two weeks ago, Meridian closed financing for a family paying $26M for an apartment building, 26 times the rent roll. When the appraisal came in for less than the purchase price, the bank got nervous, he says. Agency lenders like Centerline Capital Group also have been chased out of Manhattan, says the company’s Steve Cox. The mortgage banks with which he works report that their clients are looking in Philly, Florida, Tampa, and Dallas instead.

Prices aside, Ariel Property Advisors Shimon Shkury (whom we snapped with Greystar’s Doug Root) says demand backs up the pace of residential construction. Between 2010 and 2012, NYC gained 160,000 people (all of them standing in line for cronuts as we speak), and new university campuses and tech sector growth indicate many more are on the way. Stephen adds that the local population is expected to grow another one million by 2030. That’s 6,000 people a month.

GFI Realty Services president Michael Weiser (right, with Rittenhouse Realty Advisors’ Ken Wellar and Centerline’s Steve Cox) illustrated Brooklyn’s greater prominence: Back in 2008, a DC-based private equity firm asked him what Brooklyn’s demand generators were. Now, the idea that anyone anywhere in the US needs to be educated on Brooklyn’s popularity is amusing (thanks HBO), and Michael says even institutional buyers are buying eight-unit buildings in Brooklyn. And Doug says rents for Class-B walk-ups in Manhattan have topped out for now as those renters will go for higher-quality new construction in the boroughs.