The past year opened up with the real estate finance markets in a crisis caused by uncertainty. Without widely available vaccines or treatments, how could one realistically predict a timeframe for a return to normalcy? In the spring, however, the availability of vaccines brought optimism and, by the end of the year, with new tools and proven procedures in place, government, businesses, employers, employees and residents were successfully moving into “management mode,” an undefined next step. in our new normal.
While important questions persist, many investors view the remaining dislocations as an opportunity to make profitable acquisitions. We feel lucky to have been a trailblazer in this regard – a Singer-led partnership purchased commercial condominiums on Bedford Avenue in north Williamsburg in Brooklyn before the vaccination, getting roughly 40% off the price. pre-COVID-19 on a property we don’t believe has ever been significantly affected.
In New York City, residential occupancy and concessions quickly returned to pre-pandemic levels. A recently completed comprehensive survey of residential buildings in the city by a leading appraisal company found that rents have rebounded and concessions are low across the city, with rental rates in many luxury buildings surpassing all-time highs. historical.
For condominiums, a major brokerage firm recently told its staff that New York City will be “sold out of all condominiums” by the end of 2022, as current and pent-up demand exceeds offers new constructions. What started with intrepid bargain hunters receiving three months of concessions on a one-year lease quickly reverted to a signature race whenever a unit became available.
At the macro level, commercial real estate finance markets continue to be very liquid with huge amounts of so-called dry powder capital for transactions of all types, sizes and locations. Rates remain extremely low and even with the three rate hikes announced for 2022, many borrowers will still be able to take advantage of historic lows. As a result, we expect 2022 to be a very active and high volume year in the industry despite some challenges.
Long-term, permanent, fixed-rate funding is provided by a group of familiar figures including insurance companies, pension funds, loan agencies, intermediary lenders and banks, as well as funds from investment with a separate account from national and foreign institutions and families. desks.
Huge amount of capital is looking for both bridging deals with two to three year lease / capital spending plans – where lenders can take out a value added exit with rates ranging from 2.5% to over 9% , depending on the borrower’s agreement and characteristics, as well as Pre-Temporary Occupancy Certificate (TCO) or TCO Rental transactions. For the latter, this is particularly prevalent in the multi-family and industrial segments, where massive competition from lenders at every relative price point pushes most transactions below reasonable expectations.
However, if liquidity is abundant, it is not “easy money.” Much of the liquidity in the market is in the high octane / strong silver bridge space and many transactions will need to use this part of the market to complete. While lower cost lenders are numerous and aggressive, they are also very selective and many of today’s transactions will fall outside the current framework.
As for what lies ahead, humans have congregated in dense urban areas for millennia – and I think the reasons they do so still exist and will prevail. New York is a vibrant city that is constantly evolving, and although it has been hit hard by early closures, I firmly believe in its ability to recover and thrive. The path will not be linear, but science will take us forward.
In the financial market, as in the office rental market, 2022 will be a year of haves and have-nots. In the case of office rentals, this translates to trophy properties reaching rents of $ 200 per square foot while some midsize buildings languish with high vacancy rates. In the capital services space, the most attractive trades will be oversubscribed on the equity side and receive historically low interest rates, while some trades will either find an unfavorable response or be forced to pay much higher returns. provided that.
Given the unusual combination of massive overall liquidity and major price arbitrage, a knowledgeable broker with a wide variety of capital relationships can add tremendous value for both experienced and younger developers.
For our team, this is an exciting time where we are signing many new exclusives with strong and experienced sponsors, as well as new and younger sponsors with actionable offers.
Scott Singer is Director and Co-Head of Avison Young’s Tri-State Debt and Equity Group. He would like to thank team members Alan Schwartz, Kathleen McSharry and Ethan Blum for their contribution to the preparation of this article.