The Stoler Report: The State of the Residential Rental Market in New York City

The Stoler Report: The State of the Residential Rental Market in New York City


♪ [Theme Music] ♪ STOLER: Finding an affordable
apartment in New York City is like finding a needle
in a haystack, the rental market in New York City is on fire.
The investment sales market is on fire. The
financing market is on fire. Thank God I’m not here with
a fire extinguisher but the market is doing well. So
today I’ve assembled this group of people to discuss the
residential rental market in New York City. My guests
today include Aaron Jungries who probably is the leading
guy in multifamily investment sales who is the
president of Rosewood Realty. Laurent Morali who is the
managing director for acquisitions and capital markets
at the Kushner Company, is one of the most active
players. Danny Benedict who is the president of the Benedict
Realty. And then last but not least Chad Tredway who
is the head of northeast for Chase Commercial Term
Lending and probably one of the most active lenders
today. So in your career have you seen this market
as explosive as it is today? JUNGRIES: Never, I’ve never
seen anything like it. I get deals where literally I
get a deal in the beginning of the week and by the end of
the week a deal will be signed. STOLER: I mean I read a
statistic yesterday that the study, for the month of
October, this October compared to last October sales for
multifamily were a 151% higher and I still remember a year
ago when I felt that sales were this way. Now you’re a very
active buyer. How do you see the market, how could
you buy into this market today? MORALI: I think we focus on you
know off market opportunities, we tend to look for the
areas, the neighborhoods of growth in New York City. Several
neighborhoods in Manhattan and Brooklyn, Astoria, Queens
and by working closely with them you know they’ll call
the brokers and friends like Aaron you know that’s how we
make it we make it work in our ability to work quickly. STOLER: Here, here’s the
question. There are a lot of bankers and there are a lot of
players in town but there are a couple banks who have
come to as they would say, have come to the top of the
market. Chase has done and I think a great deal due to
Chad is they’ve really made a bigger mark over the last
year. You as a borrower how do you see the banks today with
regard to their financing. MORALI: I see new players in the
market, every quarter there’s one or two new player, names
you’ve heard before but they start being aggressive
in multi-family. But what I see is that as aggressive as they
are they are always very cautious and they stay focused
on certain underwriting criteria. You know they
are always going to look for the top sponsorship, the right
amount of equity in every deal. So you don’t see the excess
that in my experience you saw in pre-2008. STOLER: Right because
you’ve come from a banking background you
remember those days over there. How do you see it is
a borrower today? BENEDICT: I remember
the days when we walked out of a closing with cash in our
pocket because the banks would lend us a 110% of the closing
cost and that’s absolutely gone. These days are gone banks
are much smarter in their underwriting and every
deal gets done now with a substantial amount of equity,
I think that you’re right Chad has changed the mentality
or the entire outlook at Chase because they are understanding
the market better and their adapting to the market, that
doesn’t mean that you’re over lending or that you’re
putting your bank at risk it just means you’re smarter and
you understand what the needs of the market are, we have a lot
of lenders which are active and I think that
you’re right there are no, we don’t see the gross mistakes
and excesses that we saw in 2004, ’05, ’06 when they
just wanted to grow their balance sheet and banks where
were really chasing deals at numbers which make no sense. STOLER: You’ve been in this
market yourself, the bank has been here originally
through WaMu, I mean everybody knows Chase but how do you,
how has the market changed and the underwriting
and the borrower relationship changed over the last year? TREDWAY: Yeah you know Chase
has been in New York City for over a decade, which
I think sometimes people are surprised to hear but what
we’ve really done this year is focused on the borrower.
Right, so we want to talk to our customers, we want to
know what their plan is for how they’re going to build and
maintain wealth over time. I think the other thing is real
estate is a really localized business, so we’re out kicking
the tires, were with our borrowers at their properties.
We want to understand how they see value and so
I think we’ve really adapted to focusing on their needs and
also on the local market here in New York City. But
I would say with all the lending that’s going, on banks of have
maintained their underwriting standards so we’re not seeing
banks really look at projects, projections of all they’re
underwriting and we’re seeing then stick to
fundamentals that we think are favorable as we
continue to grow through 2015. STOLER: These properties
have been transitioned over the last couple years. One person
bought the property three years, they thought it
was going to be value added, now Laurent is buying the
property, it’s already three years the last buyer
had changed it. How do you see, how do you how do you tell
people is it a value added deal the or is it that the rents
are going up on the market and you know what
goes up just can’t drop down. JUNGRIES: I think there really
is a value added component they bought a deal from me in
Queens, in Astoria. And a few people had looked at
it and they felt that they could switch the one
bedrooms to two, and the two bedrooms to three
bedrooms and they’re going to do it, right, I mean that’s
their plan. And because a story is sort of like the East
Village in Manhattan, it’s funky and cool they’re
going to get these young people, it’s right near the
train who are going to move there and their rents are
going to grow in line with the purchase price. STOLER: Why wouldn’t you look at
that deal as a value added in Astoria, you have
plenty of properties in Queens, in the Bronx. BENEDICT: He didn’t show it
to me. He went straight to Kushner with it. But I think the
value-add is a very elastic concept and it’s become
way too generalized today, when you think that new
property which was built or which was leased up two
or three years ago is being marketed now as a
value-add deal, it’s inconceivable and it makes
absolutely no sense. Value-add is a deal which
has excess square footage or air rights or you can
convert it to a conversion co-op to condo. STOLER: Well what basically
Aaron said if you can take a one bedroom and make it a two
bedroom, that I can understand it’s a true value add but I
can’t understand that if the apartment’s have already
been configured. The only value-add is the
question that the rents could increase over there. BENEDICT: Well the market, rents
have been increasing although I think that that, that concept
of the value-add having increases in rent is
kind of, is very dangerous. We’ve seen increases in rent
of 70% over the last five years, 70% and I’m not making- most
statistics showing but 70% since 2008. And
paychecks have not gone up 70%. They have not, they have
not gone, I don’t know 15-20%. So there is a limit to how much
rents can continue to climb. And the value-add component
which is just a function of the rentals continuing to climb
like it did the last few years is a very, very difficult
and dangerous concept. STOLER: But the population
there is increasing, so even though these people
salary can’t go there are, there’s being a transition
of new tenants moving in there, someone else is coming
there all these students are coming, all these other people
and they need apartments. You know at one time people
wanted to be you know anything that’s in the transit oriented
development I believe is selling well, right Aaron? JUNGRIES: Yeah. STOLER: Because you know the
access to the train. The bigger question is if
we’re talking about like Brighton Beach or Coney
Island which is a distance from the city how are they
doing today? JUNGRIES: They’re still renting
at higher rents than they thought they would get, there
are some young people and you also have a lot of the Russian
immigrants some of their kids who are professionals are moving
in, back into the neighborhood. The ones who are wildly
successful buy a house in Manhattan beach or go to Staten
Island or go to Long Island. But the ones who are
professionals and doing well, making low six figures they are
actually renting apartments in Brighton Beach, still
mainly an older population. So it’s doing well. BENEDICT: I think it’s more
for a trickle down factor, as rents climb everywhere else
than it has to climb everywhere else because you’ve got nowhere
to go, but the percentage of increases in a place like that
has been a lot smaller than in many of the other
neighborhoods. STOLER: Now, how do you, Chad
look at the five boroughs, I mean everybody you know
everybody loves Manhattan, Brooklyn has become the
second love. And Queens is probably the third love.
Correct. How do you look at the Bronx and Staten Island? TREDWAY: Well you know so I
tell you first of all to Danny’s point which is right, is you
know high tide rises kind of all boats, I think rents
across the board have been going up. Manhattan
tends to be where we’ve done the majority of our deals this
year, a lot of our borrowers own properties in Manhattan,
we’ve seen Brooklyn just become white hot. Right. And
so we’ve seen rents there rival what we see or even sometimes
surpass what we see on the Upper East Side, which has
been interesting. But yeah in the Bronx we’ve seen rents
increase but definitely not the same levels that we’ve seen
in Brooklyn or in Manhattan. I think some of that, some
of the demographics there, the interesting thing there
though is our vacancy rate there is the lowest. STOLER: In the Bronx? TREDWAY: In the Bronx. As
we look at our portfolio, while the appreciation
there hasn’t been what it’s been in Manhattan and Brooklyn. STOLER: Have the two of you
bought properties in the Bronx? MORALI: Not recently. STOLER: And why not? MORALI: Because I think
that we find pockets of growth opportunities in Manhattan
and in Brooklyn and I mean for us we find there is no
reason to go to the Bronx if we can find those great
deals here in Manhattan or Brooklyn or I would
add by the way Jersey City, which I know is not one
of the five boroughs officially but one would argue that. STOLER: I think you bring
up an interesting thing, a number of years ago I was
speaking at Baruch and Josh Muss and I were on a
similar panel and I said Jersey City the sixth
borough and Josh said it’s not the six borough, but
in reality Jersey City has become the sixth bar or
really the fifth borough because Staten Island,
Jersey City has the Path, Staten Island’s negative
you know you can take the bridge or you could take
the ferry but they take time and they’re also expensive,
but I do believe the Jersey City is a market. Have
you in your lending program gone to Jersey City to lend? TREDWAY: We are lending in
Jersey City, I think people see it as an extension of Manhattan,
it’s a more affordable option. So we’re saying our owners
go there and we follow them to Jersey City as well. STOLER: What about you
have you I mean, you know you’re pretty New York City
centric as opposed to. JUNGRIES: Yeah, the four
boroughs. STOLER: The four boroughs? JUNGRIES: Right. Bronx,
I love the Bronx very busy there. Queens. STOLER: You don’t think a place
with a new ferris wheel, the wheel and the cities
first discount outlet is going to do well? JUNGRIES: All the activity’s in
the Bronx, Manhattan, Brooklyn and Queens so that’s where I
stay. If the action comes to Staten Island I’m
going to run there. STOLER: So here’s a question.
We know who we have here as owners and borrowers,
who else is coming here. Are we having the people from
China going into the multi family business or do we seeing,
I know Galil Real Estate, a number of Israeli
investors have been here. Where, who, who else are
these guys competing with today to buy property? JUNGRIES: You have Chinese
people who are coming here, absolutely. I’m selling a deal
right now on the Upper East Side to a Chinese
family, they’re in a 1031. You definitely have the Israeli
investors but most of the buyers are still guys like Danny
and Laurent who are local funds or companies or families
that are buying it’s still predominantly those
type of guys. STOLER: You know as opposed to
playing inside baseball because many people watch my
show from around the world, they may not understand
what a 1031 was, who would like to
answer what is a 1031. BENEDICT: A 1031 is a tax
free exchange where selling a property allows you to defer
the taxes on the profit you made by owning and selling
that property and reinvesting it in different property,
so in essence you’re buying, you’re paying a lot of money
for the next property but you’re using the IRS’s money or the
money you would have paid in. STOLER: So why as an owner if
you, if you might believe that you’re buying in to a higher
price why wouldn’t you pay the taxes and say look I may,
I want to defer the taxes but you know what in the end it
may be more beneficial because I don’t know when
the market’s going to reach the peak. BENEDICT: Well because if the
equity we invested originally in the first deal is only the
earning you so much right now but you can sell it,
multiply it by, by an incredible factor and
reinvesting it even at a three or four cap, but it’s ten
times your original investment so you’re making
30% on your money. STOLER: Here’s the
bigger question. This year the House and the
Congress have been playing with a curtain of
questionable tax deductions, you know there was the
excess depreciation for the half a million dollars which now
they’re talking about fifteen year changes, what happens and
I’m relating to acquisitions and also you, if the 1031 rule
was no longer there? Aaron? JUNGRIES: That would be a
disaster, because people wouldn’t sell. Or unless
there was and death or some tax reason, that
would be a disaster for the market, I think it
would have a major effect. BENEDICT: That’d be the
greatest blessing in the market because people like
us would be able to buy again and not compete with
other buyers which are using in essence tax
deferred money to buy it. So I hope Congress passes
the changes. STOLER: So you’re in favor of. BENEDICT: Yeah I
think it’s been- STOLER: But aren’t you also
going to be paying for that. He just brought up the fact
that you’ve made appreciation and you’ve done well. BENEDICT: We’re long term
holders, work our properties, maintain them well and
after a certain amount of years refinance them and we’re
able to at this point at least hopefully the
Congress doesn’t change that, but get access to
refinancing proceeds tax free. STOLER: Speaking of refinancing,
how do you look at the, at the market I remember
banks you know I heard from the beginning conversation
that banks are becoming you know they’re not giving a 110%,
they’re not doing this. But in a case that since
the values are going up the prices are going up, certain
people are able to cash out, in certain aspects, certain
lenders, okay have this position that you don’t want
the borrower to have no money in the deal. How
does Chase look at this? TREDWAY: You know I think again
we’re very sponsor driven so we look at the whole picture
as we look at refinancing properties. But I tell you as
Danny and other borrowers look for property, sometimes
it’s difficult to find something to buy something to 1031in
to or something that’s just on the market and so they’ll take
the opportunity and refinance a deal with Chase or with
another bank at a lower rate and recapitalize their
portfolio. But I think for us we look at the whole picture before
we make a determination on how much equity we need in
the deal or who the borrower is. STOLER: If we did the show
seven years ago, which I did seven years ago you
know the funds were, were very involved and
they were out there, they were very active and then
what happened was the funds who received a lot of their
money from state pension funds got penalized because they
said you were being abusive to your tenants. Do you see
the, are funds back into the, in the multi-family business
yes? JUNGRIES: Yes, not as strong
as they were in ’06, ’07 but they’re definitely coming back. MORALI: I think they’re
much more conscious about all the regulations that come with
New York City residential from the DHCR to J-51 and
they spend a lot more time on their due diligence,
understanding their exposure than they might
have seven years ago. STOLER: Where are there
opportunities in the five boroughs or as Aaron said
there are four boroughs, okay the fifth borough
maybe be Jersey City. Where are the opportunities
and are we talking about Southwest Queens you know
are we talking maybe where the you know the Resorts
casino is, is that a market, or is the Rockaways a market
or is parts of Washington Heights opportunities. What do
you see as opportunities and also as a banker how do
you feel about lending to those markets? Danny? BENEDICT: Well I think the
opportunity is not necessarily a geographic opportunity,
you have certainly areas in neighborhoods which are
continued, which are continuing to improve and you just take
the subway stops and go to the next stop where it hasn’t
yet changed and you’ll see great opportunity. But the
opportunities in every market, you can find opportunity
in midtown Manhattan. You just have to find the
right opportunity and need for, the need for the seller to
move very quickly. There are opportunities in
every market, in a hot market, in a depressed market, you
have to just be there and be ready to, this is a game in
New York which is played very quickly and anywhere and
everywhere else in the country you have 30 days or 45 days
due diligence on a deal. Here you have three days
to sign and to put a hard deposit and you have not time
to, and 30-60 days to close, so the opportunity
is your ability to move fast, to move quickly. STOLER: So, but that’s
interesting because you’re saying here you really don’t
have that appropriate amount of time to do the
correct due diligence, to make that decision.
Now if that’s the case on the acquisition, how do, how
do you get the financing done so quickly? TREDWAY: So I’d say New
York is a market that you know speed is incredibly
important especially on purchases. But the
borrowers that we tend to bank tend to have a very
strong sub market knowledge, they really know what they’re
doing right, in the case of deals we look at, look at
for Kusnher with Laurent or for Danny. I mean these guys
know exactly what they’re doing and they have a vision
for the property. There tends to be
a reason why they buy, again the nice part is. STOLER: So then as one
might say there’s a question of faith in the borrower, I
mean the strength of the borrower is very important. TREDWAY: Right so the
borrower makes the payment, the property doesn’t. And
so for us we really ensure that the borrowers that
we’ve got understand their sub markets and what they’re doing. STOLER: So here’s a question,
so somebody comes to you and they’re from the Midwest
or they’re from China or anything else and they, and
they know, they’ve heard about the amount of business
that you do in the market. How do you vet that this
person is a potentially good borrower, buyer for
you, you know maybe buying his property, buying the other
one and the deals going to close and he doesn’t have a
relationship with a Chase or a Signature or Bank
United or somebody like that. JUNGRIES: It’s very hard. I
probably won’t give them much leeway because if Danny
came to me to sell a property or Laurent did, I would take
that so seriously that I have to perform, so I probably
wouldn’t even, he probably wouldn’t even get in the
front door I would have to see that he did a deal before
I would even give him the opportunity. STOLER: In the same manner
how do you, I mean look you know I got young guys
over here, there are a number of really guys who
over the last five years came out in nowhere and
become big players you know, the Madison boys, the Benchmark
and others you know all of these people how, you
have to take a little gamble to make sure that the. JUNGRIES: Well I actually saw
the icon there first portfolio, 35 buildings they were two young
kids in their mid twenty’s. They came to me they
showed me they were serious. STOLER: They also had daddy’s
money behind them. JUNGRIES: True, but that’s
something right, or if it’s a foreigner they have some
type of money behind them whether it’s their family or
a fund and they said the right things, they moved very
quickly that was key. And I gave them a very short
window, so if I give a foreigner who comes here and he wants
to get a chance and he moves quickly I’ll take
it to the next step and- STOLER: How do, you know
you have money from a variety of sources of people
besides the family. How do you, how do you, how do you react
so quickly for a deal that Aaron has or another
investment sales broker that you can move that quick? MORALI: Well you know we value
the fact that we’re you know sometimes given the first
look at a transaction and we have a very strong operation,
an operating platform, we know what to look for
in a due diligence and we know what matters, what doesn’t
matter and we’re prepared to put our money hard, you
know very quickly. We’ve done it recent in less
than two weeks over the Thanksgiving period, we
know what we’re going to find we know what we’re
not going to find and when we go hard we have a good
sense also of what it is we’re going to be able to obtain
financing wise based on our experience, we may get
one or two phone calls to a friend and, but again
it’s all based on our experience in this market. STOLER: Here’s another
interesting phenomena which I think a lot of these you
know the let’s say the smaller buildings had taxpayer,
what we call a tax payer with a retail and apartments
upstairs. Today how does, how do lenders look at the
retail for the downstairs and in their underwriting. TREDWAY: Yeah I mean it’s just
like anything else, right so we’re looking at cash flow
and trends over time. STOLER: But I think it’s
more of this, my question is many of these older
buildings may have had tenants who have been
there for years who were paying thirty dollars a
foot or something like that and now you would
like, Aaron was saying you know you’ve got a Astoria,
the neighborhood is getting better, Long Island
City they never had anything in retail. How do you look at
those, I mean those, that is the real perhaps
value add in multifamily as opposed to
the apartment rents. TREDWAY: Well you’re right
and we’re seeing retail rents continue to increase,
so for us we just want to make sure our borrower,
borrowers will be able to withstand the storm if one
comes and so we distress some of these higher rents
to levels that we saw in the previous downturn,
to ensure that we’ll have enough cash flow and the
borrower will be able to continue to make debt
service payments as we go through any cycle. BENEDICT: I think the old
concept that banks didn’t like that, didn’t like the
retail and thought it was more dangerous and were
more comfortable with the residential tenants is
gone. I remember when I started six story walk up
was basically off limits for lenders, they took the
entire six floor and discounted all of these
rents, that’s gone too. Things have changed, the
market has changed, the market is different. You
do see bodegas in certain neighborhoods, which are
switching over to Starbucks and the rents triple. It’s
the old accepted norms from banks have changed with the
market. TREDWAY: I’d also say to,
you know the density in New York in some of these
neighborhoods is amazing so as we look at the space
we just want to understand what’s the reason that this
exists and do we think it’s sustainable in terms of rental
rates as we go forward. STOLER: One last question, what
about cell towers I remember a number of years ago everybody
was taking cell towers. Now I do know that one of the
large banks who does multifamily doesn’t even take
into consideration the rent on the cell tower at
all, they call it zero, it’s like the sixth story. How
do you look at cell tower rent? TREDWAY: I think it depends,
for us we’re typically in a situation where the building can
support our debt service without the cell tower
income and situations where we need it, I think
again it depends on the length of the tower’s been
there, the borrower, to me it’s a number of factors. STOLER: As a seller, as an
investment broker do people look at the cell tower they
say it’s here, it’s here, it could be here tomorrow. JUNGRIES: No, no, no most
people count it, in fact a lot of deals I’m doing now
people sell off the cell tower and they can be buying a
building in the Bronx for nine and a half times rent and
they’ll sell the cell tower at twelve times the rent, so
they’ll actually make a net gain and reduce their price.
I’ve seen that happen right- STOLER: Are we
condominiumizing the air now? JUNGRIES: I’m doing a deal,
New York Community is doing the loan on a deal, they won’t
take a cell tower at all, they won’t say, it’s not income,
so the buyer is selling the cell tower and New York
Community is allowing him to basically come in with 15% cash
because he’s doing typical 25% cash but he’s selling
the cell tower and in fact some people now use
it as an advantage. MORALI: It’s like the solar
panels, solar panels in New Jersey it’s the same. STOLER: You guys you know you
guys have really provided me and my audience some good
insight on the residential market. I’d like to thank
Aaron, Laurent, Danny Benedict, Chad Tredway for being here.
You can find us on Facebook, LinkedIn and Google+ and
anything and I’ll see you next week. ♪ [Theme Music] ♪

One thought on “The Stoler Report: The State of the Residential Rental Market in New York City

  1. Excellent show!

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