The downturn in the commercial real estate market today is similar to the recession of the early 1990s, but more severe because we’re also in the midst of a banking crisis, according to Robert Gladstone, principal of Madison Equities.
“If you can find the money, you can find the deals,” Gladstone said. “New York is inexpensive to get into, if you can control the costs.”
Gladstone was one of four panelists at the B’nai B’rith Real Estate Group’s May 6 luncheon at the Cornell Club. Other panelists speaking on the topic Survival of the Fittest: Developers Face the Economy were Jeff Bennett, principal of R&B Development; Tommy Craig, senior vice president, New York Region, Hines; and Steven J. Pozycki, founder, chairman, and CEO of SJP Properties. Stephen Siegel, chairman of Global Brokerage at CBRE, served as moderator.
Pozycki agreed that this cycle is different because it’s a finance driven problem and that there is an enormous amount of leverage that needs to be worked through the system.
“You need equity to be in this business,” Pozycki said. “We’ll see people taking advantage of the situation. New York is a bargain and people will make enormous amounts of money in the next two years.”
Most of the office buildings in midtown are more than 60 years old, Pozycki said. Office building development today is tenant driven and tenants are demanding more amenities and services that only newer buildings can provide. While many large corporations are subletting their spaces today, as the economy recovers, they will take back those spaces, he said.
Craig said he began working in New York City in 1978. This is the fourth downturn he’s experienced, but this one went deeper and at a faster rate. New York City has always been resilient and he said he feels confident the market will thrive again.
Siegel said although the early 90s didn’t see the demise of Lehman Brothers, Merrill Lynch, and Bear Stearns as we’ve experienced in the last year, New York City is in a better position than it was in previous downturns because it’s in the midst of a quality of life boom. As a result, it’s still a desirable place to live and work.
“Quality of life matters,” Craig said, adding that his firm believes New York City’s population will continue to expand. “We feel positive that New York is one of the few winning global cities.”
Craig added that his firm is providing buildings that take into consideration quality of life because tenants are demanding it. He said the firm is committed to sustainable, environmentally friendly designs, and pointed out that in other markets LEED codes are mandated.
On the financial side, Siegel said he sees a future in commercial real estate without bridge loans and mezzanine loans and a realistic relationship between equity and debt.
Craig said with the stimulus package, TALF, and recovery in the equity markets, credit is starting to move again. But getting capital now is challenging for all real estate investors and he urged patience because real estate is still desirable. He acknowledged that volume pricing in New York City benefited from the Commercial Mortgage Backed Security market and that capital will have to de-leverage. Currently, capital is in the wrong hands.
“People have great hopes,” Pozycki said. “They’re hoping that timing bails them out. But they will have to recognize the bad assets and get those into the market and price them.”
Pozycki predicted that the market will create new financial structures to replace or supplement the commercial mortgage backed security market.
Gladstone said that real estate investors with plenty of equity can get loans ranging from 7 to 25 percent, while interest rates for construction loans are running around 10 to 11 percent.
Bennett predicted the market should improve by the end of this year, but it won’t be like it was. “It will take a long time for money to flow back in,” he said.
On the residential side, Gladstone said individuals who bought apartments before Lehman failed got loans, but that the market was quiet after and didn’t pick up again until around February. The sense of urgency to buy is gone, but business is picking up because people are getting financing, he said.
Gladstone said he believes the local market will be able to absorb the new residential developments built during the recent boom because the buildings are smaller with 50 to 60 units in contrast to Miami, which overbuilt large complexes.
Bennett agreed that qualified buyers are coming into the market to buy his firm’s condominiums in Harlem. They’re ready to buy in unique buildings that feature amenities and already have financing lined up.