The Imbalance of the New York City Real Estate Market

Pierre Bonan, Director

Converting office buildings to residential use is not a new concept in New York city real estate. However, the idea is re-emerging as a way to counter pandemic-related market shifts. There is an imbalance in the New York City real estate market. We have an oversupply of arguably obsolete office space and a drastic undersupply of reasonably priced residential real estate.

This situation has existed for some time now and the trend towards remote work resulting from the pandemic has had a significant negative impact on office fundamentals, making the imbalance worse.

For example, Yelp recently announced that it was leaving offices in 3 major US cities including two locations totaling 270,000 SF in Manhattan. In announcing the decision, Yelp’s CEO cited an employee survey that found that 86% of their workers preferred to work remotely. And explained that when they reopened these offices, utilization was less than 2%.

Kastle Systems, which measures office occupancy based on key card swipes, pegs current office attendance in NYC at approximately 40% of pre-pandemic levels.

From 1995 to 2006, a tax incentive program known as 421g enacted for Lower Manhattan enabled more than 15 million square feet of conversions from office to residential use. Under this program, the owner received several substantial property tax benefits.

Residential conversions have also been completed successfully in other markets. In 2021 alone, 151 commercial properties across the country were converted to apartment buildings.

So what are the prospects for future conversions in New York City?

Manhattan currently has 37 office buildings exceeding 100,000 SF where at least half the building is listed for lease and this only accounts for the publicly listed available space. Many of these distressed office buildings are encumbered with large mortgages. On the surface, there is no shortage of conversion candidates.

A well-executed residential conversion generally costs far less than new ground-up multifamily construction. However, there are some significant challenges to executing this strategy.

Possibly the biggest physical obstacle is that many office buildings have large floor plates that lack accessible light and air in the interior. One possible solution is to use the interior of the building for storage, home offices or other amenities that do not require windows.

Zoning is another big obstacle. Many of the city’s office buildings are located in areas zoned only for commercial uses. Earlier this year, NY State Governor Hochul proposed zoning changes that would make office-to-residential conversions much easier. However, these proposed changes were rejected by the State Legislature.

It was recently announced that 55 Broad Street, a landmarked 425,000 sf, 30 story building in the Financial District was sold and will be converted to 571 apartments. The sale price was $180 million, which equates to $425 PSF. This price is substantially lower than most other Manhattan office buildings that are currently listed for sale.

This imbalance is a big problem with no easy solution. To the extent that mortgages on these buildings are underwater, these loans may need to be sold. It will be interesting to see how this situation evolves over time.

Visit our website for more information about Loan Sales and Real Estate Sales.

Mission Capital is a subsidiary of Marcus & Millichap.

Mission Capital and Marcus & Millichap’s Q2 Joint Marketing Efforts

Austin Parisi, Associate

The joint marketing effort between Mission Capital and Marcus & Millichap contributed to the recent successful auction of a $26,000,000 Non-Performing Loan secured by a largely vacant mixed-use building in the Nomad neighborhood of Manhattan.

Visit our website for more information about Loan Sales and Real Estate Sales now.

Mission Capital, a subsidiary of Marcus and Millichap, now leverages a platform of nearly 2,000 investment sales and financing professionals in 80 offices.  These boots on the ground have made Marcus the top investment sales broker in the United States based on transaction count over the last 15 years.  The proprietary comparable sale data and market research provided by Marcus increases Mission Capital’s valuation accuracy and execution success.

The joint marketing effort contributed to the recent successful auction of a $26,000,000 Non-Performing Loan secured by a largely vacant mixed-use building in the Nomad neighborhood of Manhattan. Mission Capital collaborated with the Anton team at Marcus & Millichap, who helped to accurately value the troubled collateral by understanding COVID-19 impacted lease up timelines, rental assumptions and the lengthy judicial foreclosure process in New York.  Of course, the combination of Mission Capital’s comprehensive investor data base of institutional note buyers and the alternative capital sources that typically transact with the Anton group was powerful rocket fuel for the aggressively bid live auction conducted on Real Insight Marketplace.

The benefits of the Mission Capital Marcus & the Millichap team extends well beyond traditional core asset classes. Our team is in the process of selling a Single Room Occupancy, or Co-Living asset in the Mission District of San Francisco. The persistence of COVID-19 variants has led to prolonged elevated vacancies in the SRO rental market since March of 2020 as remote workers migrated to cities with a cheaper cost of living. As people begin to transition to a post-COVID-19 world, employees are returning to gateway cities, which is evident by the rebound in urban multi-family rental rates as well as increased demand for SRO assets. In developing our valuation thesis and marketing plan, Mission Capital drew on its own expertise in arranging financing for co-living assets in the San Francisco – San Jose market and Marcus & Millichap’s Taylor Flynn.  Taylor is the leading investment sales broker of Co-Living and SRO properties assets in San Francisco.

The culture of sharing market intelligence and sales expertise throughout Marcus & Millichap’s various lines of business continues to be imperative to effectively advising our clients and generating positive outcomes.

joint marketing effort Mission Capital Marcus & Millichap

Credit Facilities

Alex Draganiuk, Managing Director

Credit Facilities are a critical tool for all non-bank lenders in today’s fast paced credit market. These lending relationships come in all shapes and sizes, including warehouse lines, repo facilities, term loans, subscription lines, and facilities with hybrid characteristics.

Visit our website for more information about Loan Sales and Real Estate Sales now.

Credit Facilities are a critical tool for all non-bank lenders in today’s fast paced credit market. These lending relationships come in all shapes and sizes, including warehouse lines, repo facilities, term loans, subscription lines, and facilities with hybrid characteristics of any of the above, for both commercial and residential lenders.

A well-structured facility expands lending capacity, accesses a lower cost of funds and increases ROI through leverage.

Subscription lines and some warehouse and repo lines are designed for very short-term use, allowing aggregation of enough loans for securitization or the issuance of a CLO (with even lower costs of permanent capital). Typically, these gestation lines will be for 30 to 120 days at a time to facilitate someone’s lending business with recycling features.

Warehouse and term credit facilities also allow for purchases of pools of performing or non-performing whole loans from the secondary market, to extract loans from a lender’s own CLO or to leverage REO assets acquired via foreclosure or a deed-in-lieu.

These acquisition facilities are usually made for a 2 to 3-year term to allow a lender maximum flexibility to restructure a nonperforming loan, seasoning of the reperforming loan and subsequent redeposit into a CLO.  The added benefit is providing a borrower sufficient time to finish its business plan or conduct a sale or refinancing process to take out the existing lender.

It is critical to arrange these complex facilities when a lender CAN versus when a lender NEEDS TO.  The lender then has this tool in its quiver at when the world goes crazy due to COVID, war, political instability, or hyper-inflation.

The extra leverage of structured credit facilities provides lower cost of capital dry powder to play offense when others may be running for cover.

Why & When To Sell Performing & Non-Performing Loans With David Tobin from Mission Capital on Vimeo.

Mission Capital’s principal and co-founder, David Tobin, shares his extensive experience and insight on Why and When To Sell Performing and Non-Performing Loans.

William David Tobin is one of two founders of Mission Capital and a founder of EquityMultiple, an on-line loan and real estate equity syndication platform seed funded by Mission Capital. He has extensive transactional experience in loan sale advisory, real estate investment sales and commercial real estate debt and equity raising. In addition, Mr. Tobin is Chief Compliance Officer for Mission Capital.

Under Mr. Tobin’s guidance and supervision, Mission has been awarded and continues to execute prime contractor FDIC contracts for Whole Loan Internet Marketing & Support (loan sales), Structured Sales (loan sales) and Financial Advisory Valuation Services (failing bank and loss share loan portfolio valuation), Federal Reserve Bank of New York (loan sales), Freddie Mac (programmatic bulk loan sales for FHFA mandated deleveraging), multiple ongoing Federal Home Loan Bank valuation contracts and advisory assignments with the National Credit Union Administration.

Visit David Tobin’s team page to find contact information and more information:
https://www.missioncap.com/team/?member=dtobin

Loan Sales & Real Estate Sales
Mission Capital represents preeminent financial institutions, investors and government agencies on the sale of performing, sub-performing and non-performing debt secured by all types of commercial and consumer collateral, commercial real estate investment property and tax liens.