NYC Real Estate Developers Are Infallible, That Is Until They’re Fallible!

By | October 17, 2017

No matter the endeavor there are times when simply playing the game is enough to ensure success…At times commercial and residential real estate ownership and development are no exception!

In other words when prices in a specific real estate market are steadily headed in one direction, up, there is no specific trick to making money. You buy or build and over time the investment will likely pay off. That, at least in their own minds, makes everyone an expert.

Unfortunately these straight-up markets are cyclical and, using the financial crisis beginning around 2006-2007 as an example, often making money or rather losing less of it in real estate became much trickier if not impossible!

As a non-real estate anecdote, I remember during my time working on a bond trading floor at one of the major Wall Street firms, watching traders actually kiss sell tickets after making a quick point ($10,000 per 1,000 bonds) on a trade. If you had asked these traders at the time, they would say that they could do no wrong.

Of course when markets became more volatile and less one-directional they came back down to earth and there would be many a sell ticket that did not receive the same type of affection.

The moral is that when you make money you’re not the smartest person in the room and when you lose money you’re not the dumbest.

Commercial Real Estate In New York City or Rising Tides Lift Most Boats

The commercial and residential real estate markets across the country have experienced an unprecedented period of price appreciation since the financial crisis, with some incredible numbers having been registered through closed transactions. Over the past year or so, however, in NYC there has been a palpable softening in real estate prices for both residential and commercial properties.

historic US commercial real estate price chart

Source: Green Street Advisors U.S. Commercial Property Price Index

Compounding the problem of softening markets for some building owners is that some of what had once been the creme de la creme of addresses, are often now facing competition from new construction that’s coming online.

An example of this might be Manhattan’s Hudson Yards going-up against buildings that were once considered a must-have address, like 666 Fifth Avenue.

In other words when an A+ building becomes A- or worse, somethings got to give. And that something will typically be price!

This brings us to an interesting NYC current events story about the desire by a commercial building co-owner to keep an address relevant through ground-up redevelopment when a more conservative rehab might be the more logical step and the desire of the other owner.

What makes this story even more interesting are the players involved. Vornado Realty Trust that’s against ground-up redevelopment and the Kushner Companies, run by Jared Kushner until moving to the White House, that’s desiring starting from scratch.

From an article at Bloomberg:

An ambitious plan by Jared Kushner’s family to recast its indebted Fifth Avenue office building as a luxury architectural trophy is collapsing, setting off a chain of events that may imperil the Kushners’ ownership of a property central to their real estate empire.

Their partner, Vornado Realty Trust, is telling brokers to plan for a much more mundane renovation that would leave the property as an office building, according to three people familiar with the matter. Vornado Chairman and Chief Executive Officer Steve Roth was never enthusiastic about the Kushner plan although until now he hadn’t stood in its way.

Putting an end to the Kushner effort — to salvage their overpriced investment by turning it into a Midtown jewel with expensive condos, a hotel and five-floor mall — could have profound ramifications for the family. Vornado, which owns 49.5 percent of 666 Fifth Ave., is unlikely to invest further in the property without first being reassured of its future, said three people familiar with Roth’s thinking. That means returning to the negotiating table with lenders — a battle that could result in Kushner Cos.’ losing control of the building, said the people, who asked not to be named discussing private deals…

Read the rest of the article at Bloomberg here.

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