Tue 27 Jul 2010
Posted by John Cicero under Out in the Streets
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We’re out and about the streets of New York all the time, and every so often something interesting catches our eye...
I recently toured the Saatchi building at 375 Hudson Street, a beautiful building that oozes hip. I especially liked the employee’ health club with rooftop running track. (Kind of reminded me of a cruise ship!) The views from the roof were spectacular…the new Trump Soho building…a rooftop swimming pool…and of course, the Hudson River with Jersey City in the background. I do love my class C loft building in the garment district, but a private running track would be a very nice touch…
Tue 20 Jul 2010
Posted by John Cicero under Appraisal
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With the recent passage of the Financial Reform Bill (a.k.a. the Dodd-Frank Wall Street Reform and Consumer Protection Act: HR 4173), everyone’s eyes are on Wall Street and the Banks. The Bill, however, may have the greatest impact on the appraisal profession since FIRREA was enacted in 1989 in the aftermath of the S & L debacle.
A recent webinar presentation for members by the Appraisal Institute laid it out. Most of the new rules are aimed at correcting the havoc created by HVCC, but some may have a profound impact on commercial appraisers as well. My favorite is the requirement that the appraiser is paid “customary and reasonable fees” for his or her work. According to the Bill,
“Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys…”
This is clearly intended to address the reduced fee to residential appraisers after the appraisal management companies (the AMC’s) took their fee off the top. I have no idea if this will impact the commercial guys. Is there a “reasonable and customary fee” for appraising a $1.2 million square foot office building in Midtown Manhattan? My only experience with “customary and reasonable fees” is with going to an out-of-network doctor on my health insurance plan, and those fees deemed reasonable and customary are usually a fraction of what I was actually charged!
Another provision in the Bill requires two appraisals is the property was resold (flipped) within six months. There is mandatory referral to state boards for USPAP violations and these Boards are to be better funded to deal with enforcement issues. Also, the Bill clarifies that professional designations can be considered when hiring an appraiser, in addition to education and experience levels. (This was always confusing to Banks in the way it had been written in the past.)
Not sure what any of this means yet, and if it means anything at all to commercial appraisers. But historically whenever the fed tries to “fix” the appraisal process with more regulation all hell breaks loose.
My solution: Two appraisals for every transactions over a certain threshold. If they are more than 10% part in value they must be submitted for mandatory review by some independent agency, sufficiently staffed to respond within 7 days.
Thu 15 Jul 2010
by Tyler King, Resident Hipster
Back in November, I mentioned a new condominium called the Allan Building that had just listed a handful of units for sale. At that time, the asking price of these particular units hovered around $657 per square foot. Well folks, closings have begun at the project and it looks like all the units are now spoken for. Brownstoner.com reported the building 100% in contract in April, indicating an absorption of almost 8 units per month. That kind of sales velocity is a story unto itself, however it was not until the trusty public record starting letting the whole world know exactly what these units had been selling for that things started to get interesting. Because remember kids, an asking price means nothing.
For some reason, the usually reliable Streeteasy.com is missing a handful of the closings and I put on my data suit and took a dive into the public record myself to fish out some additional closings. The numbers are pretty interesting after you do a little digging. Including all 26 closings, the overall average price was $683/SF with units selling for about 1.6% off the asking price. However this is a bit misleading because 15 of those units sold with a parking space (with one buyer purchasing two parking spaces (boy, is he going to be disappointed when he realizes he wont be able to convert it into a second bedroom!). Sometimes the parking space was a concession and in some instances it appears the buyer paid slightly over asking for the space. If the 11 units that sold without a parking space are analyzed, the building averaged about $656/SF with units selling at an average discount of 3.2% off the asking. Conversely the other closed units sold at a premium, with an average price of $715/SF, a function of both having parking spaces and including two penthouse units that sold for $739/SF and $813/SF, respectively.
So what does this mean? Well, it shows the continued pattern that the new baseline in terms of pricing in Williamsburg is around $650 per square foot. It also means that if priced correctly, units are flying off the shelves. Also, and less importantly, it looks like I was pretty much dead-on back in November about pricing in Williamsburg.
Tue 13 Jul 2010
Posted by John Cicero under Economy
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Seems like just as soon as it started, it ended. After September 2008 the market completely grinded to a halt and the market dropped at such a dizzying speed that everyone’s collective heads were spinning. Appraisers were challenged with estimating values in a market with few (if any) sales and there was constant debate on how much values had dropped.
Fast forward nearly two years to July 2010. Seems that the word on the street today is that the market is back! Brokers speak of “supply constraints” and “cap rate compression” and investors underwriting with rent spikes (just like 2006 and 2007)! SL Green acquired a few class A office building acquisitions at sub-6% cap rates and Macklowe sold a portfolio of class A apartment buildings at a 5.5% cap (or, depending on how you underwrite the sale, below 5%). The number of apartment sales spiked 15% in the second quarter (from the first), and anecdotally we hear of bidding wars.
The odd thing is that market fundamentals haven’t really changed. Unemployment is still hovering near 10% and the stock market remains volatile. Seems that the institutional capital was just tired of sitting on the sidelines and once one investor decided to jump in the water, all the other investors decided to jump in after them (picture lemmings jumping off the cliff!)
Doesn’t really matter is we agree that the recent sale activity is justified or not. As we learned in Appraisal 101…we don’t make the market, we just report the market. So, just when I was getting used to the old pricing paradigm, seems that everyone decided the recession is over…
Tue 6 Jul 2010
Posted by John Cicero under Retail
[2] Comments
You have to give developers credit; they often see things that we mere mortals can’t. When I look at a church, I see…well…a church building. But a church on the corner of 20th Street and Sixth Avenue, yes..the old church turned dance club…the Limelight…has been reinvented yet again. This time as a shopping mall: The Limelight Marketplace! Could the metaphor for the American “worship” of material goods be any more obvious!?
Thu 1 Jul 2010
In their 25th anniversary issue, Crain’s New York published a terrific article on 25 Big Ideas to Make New York Even Better and Brighter. The ideas came from numerous prominent New Yorkers and ranged from What to Do with Governor’s Island (Relocate the UN there; I still like my idea of a Disney theme park best!) to What to do about the Traffic (charge garage rates for on street parking to eliminate those driving around for an hour looking for a free 150 square feet for the night!) My personal favorite: Move the state capital from Albany to New York City…after all, everyone already thinks that this is the capital anyway…
Wed 30 Jun 2010
by Tyler King, Resident Hipster
As I write this, the bulls and the bears are locking horns in an epic battle of post-recession predictions. However one thing has become clear, investors have started underwriting much more aggressively for quality assets. SL Green is currently in the midst of a buying spree and is increasing asking rents for prime office spaces. Here at Miller Cicero HQ, just a year ago I was underwriting office and retail rent growth at zero in the near-term, however in the last few months rent spikes are creeping into our discounted cash flow models for prime properties. But one has to keep in mind these optimistic near-term estimates come after an unprecedented drop in rents in the city since 2008. Essentially the market is clawing back to zero.
Even after my countless broker interviews and market research (which is part of my due dilly responsibilities to our clients) the level of positive investor sentiment didn’t really hit home until, well, it hit home. The lease renewal notice for my apartment came in the mail. My landlord is asking for a nearly 20%, yes you read that right, t-w-e-n-t-y percent, increase for a new one-year lease. Bullish much?
So I did what any self-respecting real estate professional would do and hit the streets and made some calls. I live in a Class A apartment building in the Financial District. Lucky for me, the competition is relatively homogenous and within walking distance. The wife came along and we dropped in on some leasing offices to see what the other buildings were asking for similar units to mine. Sure enough, I am currently getting a relatively good deal, however I can get a much nicer apartment in a similar building for the rent the landlord is offering to renew at.
So who is right? Well I am of course. Actually, we are both a little right. The market has improved, and concessions are starting to fade, however it is nothing I would call a bounce-back. I am going to counter with a 5% increase in my net effective rent. I think based on what is currently being offered at comparable buildings that is reasonable. But my experience shows that investors throughout the city truly are gearing up for positive directions in all sectors of commercial real estate in the near future. However keep in mind, there are still many real estate professionals that claim the bottom has yet to be hit and the market is currently inflated. They would call it a bubble, but that is so 2008.
Thu 24 Jun 2010
Posted by John Cicero under Parking
1 Comment
I’ve been commuting to Midtown Manhattan for the past 30 years or so, but every so often I need to trade in my comfortable air-conditioned seat on Metro North to drive in to NYC. Driving into Manhattan is always an adventure, a real balance of offensive and defensive driving. And every time I do drive in I am reminded of just how valuable 200 square feet of prime real estate can be: the parking spot!
In Midtown Manhattan a parking space can cost over $50 for the day (more for SUV’s and vans!) however, just like car sticker prices, you seldom pay full rack rate. But the rates can vary quite dramatically and it used to be very stressful for me to drive around from garage to garage deciphering the signs, trying not to get ripped off: “In by 6, out by 7″ or “Special: $9.87 plus tax for 30 minutes”, etc. And, like a hotel or an airline, a parking garage can change its rates daily, so the great deal you get one day may not be available the next.
Recently, however, I came across a web site that completely eliminated the stress: BestParking.com. It is right up there with the GPS (and Nintendo Wii) as one of the miracles of technology. Plug in the neighborhood and time of arrival and it tells you how much garages are charging for spaces that day. You may have to print out a coupon in advance, but the other day armed with my coupon I paid $14 to park when others were being charged $32 (without a coupon!) It was the next best thing to getting a free spot on the street…
Tue 15 Jun 2010
Posted by John Cicero under Land
1 Comment
I am a terrible business man. Over the past five years I must have turned down dozens of potential appraisal assignments of air rights. Air rights, sometimes called transferable development right (TDR’s) refer to the unused development potential above an existing building. In New York City a developer can expand the size of a project by acquiring air rights through a zoning lot merger with an adjoining parcel. Therein lies the problem…
In order for there to be a “market value” of a property there must be a market. With respect to air rights, the “market” essentially consists of the three property owners that abut the site: the one to the right, to the left and to the rear (admittedly, sometimes there are irregularly shaped lots that can abut as many as five or six sites). If one of those three property owners has no interest in buying your excess air rights, then they can’t be sold. If that’s the case, there is no “market!” If there is interest in acquiring the air rights the pricing all comes down to negotiations: how badly does buyer need them for the project? how badly does seller want to sell them? Just because the air rights across the street sold for 50 cents on the dollar (based on the full underlying land value) it doesn’t mean that yours will. Further, just because you my have 20,000 SF of air rights, it doesn’t mean that your neighbor will need all of them. So I explain to my (potential) client that i can’t really report a “market” value of the air rights, since the “market” it too limited, though I can help them understand their options as a consultant.
At that point they thank me for my time and call another appraiser.
Mon 7 Jun 2010
Posted by John Cicero under Uncategorized
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Over the past few weeks I’ve heard from a couple of different institutional clients that they are underwriting commercial rental growth so that rents are “cost feasible” in a couple of years. That phrase, “cost feasible”, has a nice ring to it. I like saying it cause it makes me feel smarter, but I’m not really sure what it means. On the one hand, it’s clearly a justification for building rent spikes into a model, but who is making the determination of what rent level justifies new construction, and when it is warranted? and what methodology are they using? and why should rental rates all of a sudden grow to the point where new construction is feasible? the sudden blip in the market is a function of torrents of investment capital being unleashed, but doesn’t unemployment remain high and the fundamentals of the office market remain sluggish?
I mean, I get it. Prices for office product are up and, whether justified or not, investors see this as a good time to pick up some good assets and are underwriting more aggressively than they have for the past three years. But just when I got used to saying “price discovery”, it looks like I have to switch to “cost feasible.”!
