Northeast Real Estate Business

NOV-DEC 2015

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

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50 • November/December 2015 • Northeast Real Estate Business California loans will be made pursuant to a Finance Lenders Law License from the Department of Business Oversight. Commercial Real Estate Finance POWERING YOUR PROSPERITY Steven DeFrancis Cortland Partners Avid Dad Walker & Dunlop borrower since 2009 School Drop-Off, Atlanta, GA $37.5 billion, $29.3 billion of which is targeting North America, Preqin says. Opportunistic funds grabbed more than $28 billion of the dry powder in the quarter, which was four times the amount of opportunistic capital raised in the second quarter of 2015. Mean- while, 78 percent of global investors surveyed by Preqin in the second quar- ter planned to increase their allocation to real estate over the next 12 months. Among other activity, CBRE Global Investors in July announced that it had closed a value-add fund after attract- ing $1.3 billion from 26 institutional investors in the U.S., Europe, Middle East and Asia. With leveraged pur- chasing potential of $3.3 billion, the fund already has shelled out $2.5 bil- lion for assets. The portfolio includes two renovated downtown Philadel- phia offce buildings that the invest- ment manager acquired from TIER REIT for $190.8 million in May, accord- ing to TIER REIT fnancial statements. In a statement announcing the ac- quisition, Vance Maddocks, president of strategic partners U.S. for the in- vestment manager, said that Philadel- phia is projected to be a "top 10" rent growth market over the next fve years thanks largely to limited new supply and a downtown Class A offce va- cancy rate of around 9 percent. CBRE Global Investors plans to upgrade base building systems and perform addi- tional cosmetic work, among other im- provements, the statement said. German real estate fund sponsor Jamestown is also pursuing value-add projects. The frm partnered with Bel- vedere Capital and Angelo Gordon in 2013 to purchase a stake in Industry City, a 16-building, 6 million-square- foot industrial complex in Brooklyn. The venture is transforming the 19th century behemoth into a mixed-use project for retail, entertainment, manu- facturing, technology and creative ten- ants, and it is seeking zoning changes and subsidies for an anticipated $1 billion rehabilitation that will include the addition of a hotel and conference center. "In the past, a lot of cross-border capital solely looked for the best of the best properties — a safe, Class A type of investment in typically the apart- ment, offce or retail sectors," Epstein says. "This go around, we see the abil- ity for that capital to look for value- add situations, either on their own or through sponsors." Development-minded Other investors, particularly those from Asia, are pursuing similarly ag- gressive strategies, including making bets on new development. Earlier this year, for example, China Life Insurance Co. and Ping An Insurance Co. claimed a major stake in Tishman Speyer Prop- erties' $500 million residential condo- minium and offce project in Boston's Seaport District. In the spring, Kuafu Properties, a New York investment manager backed by Chinese capital, agreed to acquire One MiMA Tower, 151 residential condos on the top 13 foors of Related Cos.' 63-story mixed-use project near Hudson Yards. Kuafu plans to convert the rentals into for-sale condos. (Re- lated had originally planned to sell the units as condos when it began devel- oping the project in 2008 but switched to apartments amid the recession.) "The condo development market in China has slowed down considerably over the last couple of years, so Chi- nese developers have come here and want to replicate what they've done there," Murphy explains. "That's very high on the risk spectrum." Other foreign investors are tackling development through debt, albeit indi- rectly. The Qatar Investment Authority in mid-September paid almost $350 million to acquire common and pre- ferred shares in publicly traded Apollo Commercial Real Estate Finance, a New York-based mortgage REIT that invests in frst mortgages and other debt instruments in a variety of prop- erties. Thirty percent of Apollo's port- folio is located in the Northeast, and New York City accounted for 26 per- cent of that share as of June 30, accord- ing to the company. In one of its more recent deals, Apol- lo provided JDS Development and Property Markets Group a $325 million mezzanine loan for the construction of a $1 billion luxury condo project at 1111 W. 57th Street in Manhattan. The property is being billed as the tallest residential tower in the Western Hemi- sphere and will feature roughly 60 con- dos and 52,500 square feet of retail. Residential development could be- come riskier considering that inves- tors are focused on building luxury product and that the cycle is moving into the late innings, observers sug- gest. Even so, Manhattan condo sales in the second quarter spiked 54 percent to more than $1.2 billion over the frst quarter, according to Brooklyn-based residential brokerage MNS. Similarly, the median price per square foot for Manhattan condos in the second quar- ter ballooned 34 percent to $1,877 from the prior year, the organization says. "There is some concern that certain parts of the market are being over- built," Murphy says. "But developers are quite rightly underwriting deals based upon today's values as opposed to forecasting signifcant apprecia- tion." More conventionally, foreign inves- tors continue to hunt for hotel prop- erties, particularly in New York, say Sharga and Sierra. "The hotel business is strong right now — occupancy rates are high and daily rates are going up," Sharga says. "The properties certainly give foreign buyers a stakehold in the market." Among other transactions, the Abu Dhabi Investment Authority earlier this year paid Marriott International $343 million for the New York Edi- tion Hotel at 5 Madison Avenue as part of an $816 million transaction that involved two other Edition hotels in London and Miami Beach. Addition- ally, in May German real estate fund manager Deka Immobilien and Ash- kenazy Acquisition Corp. bought the 655-room Marriott New York East Side Hotel from Morgan Stanley for $270 million. "The reality is that in New York, peo- ple will call their travel agents and say, 'Find me the nicest room available,'" says Sierra, whose frm advised Deka in the Marriott East Side deal. "Then you have times like when the Pope is in town where they'll ask for just a In the past, a lot of cross-border capital looked for the best of the best properties. This go around, we see the ability for that capital to look for value-add situations. — Jon Epstein, Principal of the Capital Markets Group at Avison Young

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