Investors Wary of New Rent Laws; Looking At the Suburbs for Growth Opportunities

John Jordan | November 2019

global economic, US real estate, Mitch Roschelle, PwC, ULI, Emerging Trends in Real Estate 2020

NEW YORK—A panel of veteran real estate investors, financiers and brokers took a deep dive at the Global Real Estate Summit NYC 2019 on the health of the New York City metro markets and who will be the sources of needed capital for new development projects.

The panel, moderated by Eric Zollinger, president-elect of the New York Northeast Council of the FIABCI, featured Adam Altman, partner, the KABR Group; Paul J. Massey, Jr., founder of Massey Knakal Real Estate Services and CEO of B6 Real Estate Advisors; Seth Pinsky, executive vice president, RXR Realty; Debra Tantleff, founding principal of New Jersey-based Tantum Real Estate and Pierre Albert Winter, vice president, Stillmam Development International.

Zollinger began the wide-ranging discussion by noting that foreign investment in the New York City region has fallen off recently. Zollinger, who is the executive manager of sales with Douglas Elliman Development Marketing, said that while the U.S. is still one of the top markets for foreign investment, presently “we just don’t see it trickling down to some of the buyers.”

In terms of new development, he noted, “Gone are the days of the pre-sell-outs when you launched a building two to three years before the TCO (temporary certificate of occupancy) and actually sell-out before the TCO.”

The one major change in the once heady New York City new multifamily and condo development markets is the drop in foreign buyers. He particularly noted that Chinese investment has tailed off due in part to the trade war and currency issues that now exist.

While he said that at new developments his firm represents, he still deals with some Chinese buyers, he admitted that due to currency constraints that now exist, “it is challenging to work with them, even when you come up with creative financing.”

Massey agreed that the currency issues with Chinese buyers, along with a skittish approach by some global investors, has reduced foreign investment deals at his firm to about 6% to 7% of the brokerage’s business, as compared to average years of 7% to 8% and 12% to 13% in the recession of 2008-2009 when foreign investors sought out “safe” deals in New York City and Washington, DC.

“Foreign entities are around, they are here, they are backing local developers and sponsors and I think that will continue,” he said. While foreign-based firms are investing in all types of real estate, they are most active in the office market, Massey added.

Some of the more active foreign players are from the European markets, particularly the United Kingdom and Germany, he related.

Winter said that while in the past his development projects have secured equity from British and Chinese sources, its most recent project in Times Square received some funding from Korean-based investors.

Pinsky related that RXR Realty’s business model has been to attract both domestic and foreign institutional investment. In the past, the firm has secured capital from entities in Canada, Europe, the Middle East and the Far East for its new development ventures.

RXR is developing new multifamily and mixed-use projects in the boroughs of New York, Long Island, as well as in Westchester County (Yonkers and New Rochelle)., and Fairfield County, CT.

He said that foreign institutional players all believe New York is a very good market to invest, “but it is a very idiosyncratic market where if you come in from the outside without local knowledge you run into lots of problems.”

Pinsky said that interest in the New York City region from Chinese firms, has fallen dramatically due to currency issues as well as due to “concern about the long-term relationship between the United States and China.”

Overall, both domestic and foreign investment in the NYC region are strong, although some foreign investors are at least taking pause wondering if and when the bull market of more than a decade will come to an end.

“There is some feeling among some foreign investors and others that they are insulating themselves against that,” Pinsky said.

Both Tantleff and Altman agreed that the recently enacted rent control and other rent regulations enacted by the New York State Legislature have fueled an exit of real estate investment capital from New York City to locations in New Jersey, including Jersey City.

Altman said that the new rent regulations have “scared” a lot of investors away from the multifamily sector, who are now turning to the office and industrial markets for opportunities in the region.

Later in the discussion, Pinsky said that his firm is still seeing foreign investor interest in multifamily developments in New York City and the surrounding area once they are informed that the new rent regulations largely do not impact new projects in the city.

“There certainly is concern that if the state could change the rules with respect to older inventory, could they do it going forward with new inventory? That is a legitimate question,” Pinsky said. “But, at least so far it has not scared people away.”

Pinksy said that it has become easier to convince foreign investors about the merits of new projects in the New York suburban markets. He said that as renters begin to be priced out of Manhattan and the boroughs, demand for new development has followed the PATH commuter line in New Jersey and now the Metro North line into Westchester County and Fairfield, CT. he said.

He noted that other development firms have now moved forward with new projects in the suburbs based on investor and renter demand.

“As New York City’s politics become more complicated, the idea of being in the New York market, but not in New York City is of greater interest to investors than it was before,” Pinsky said.

John Jordan
Editor, Real Estate In-Depth