NYC’s Biggest Developers & Investors Discuss Mixed-Use Residential Properties
NYC’s Biggest Developers & Investors Talk Mixed-Use Residential Properties
September 2015 Issue | August 19, 2015 | Home & Real Estate
Top developers and investors talk latest trends in mixed-use residential.
Not long ago, New Yorkers wanted neighborhoods free from the hustle and bustle of commerce, and lobby-level storefronts were forbidden at the poshest addresses. Today, developers actively seek the “right” commercial presence to enhance their properties (e.g, the Park Hyatt anchoring the billionaire condo at 157 West 57th Street). As new parts of the city are targeted for growth, the most successful builders are focusing on neighborhood needs to curate the right commercial mix rather than allowing retail, as panelist Doug Steiner put it, “to drive the train.”
With land at such a premium, does a mixed-use project have a better chance of being built now than a straight residential one?
Laurie Golub: The question you ask is really one about risk: Does doing mixed-use decrease the risk of your project? I think the answer is so site-specific. Lots of buildings have retail or hotel or offices on the lower floors because it’s required by the zoning. As a developer, you always look at what the neighborhood needs and the synergies between different uses. So if you’re trying to do five-star luxury condos and you want to partner with a hotel that is a five-star brand, you can probably have a stronger pricing for your residential than you might if you went with retail or office space on the lower floors.
Guthrie Garvin: As we build higher and higher, I think that demand for retail is going to grow. You can typically build only the first floor or two for retail. So as the population increases, as long as the neighborhood and the location call for it, those first floors are certainly going to see higher rents than a residential rent.
Adam Rose: Projects are getting larger and more complicated. Those that used to be in the $150 million to $200 million range are now in the $500 million to $600 million range, and at that size, it’s incumbent on the developer to have other plans for portions of the building to reduce the risk. Rentals have low returns and take a long time to mature, and to reduce exposure, having a portion of it as a hotel, or some other use, or maybe a user who is taking a chunk of the space, is a great play. The world’s best example of that is where we’re having lunch now, Time Warner Center. [When the project was announced] I said this is going to be a disaster. Vertical retail in Manhattan? But this job was obviously a home run for Related [Companies]. They had the foresight and the brilliance.
Doug Steiner: A lot of developers use retail to monetize or create equity necessary for the project, and they sell it forward. We’re doing a lower triple building in Brooklyn, opposite the Brooklyn Academy of Music, and we made a conscious decision to make it residential first and foremost; whatever’s left over, we’ll design, we’ll do retail, but we wouldn’t let that drive the train.
In terms of financing, talk about the market for mixed-use rental apartments versus mixed-use condos.
GG: With land going for north of $1,000 a square foot, it’s very hard to build rentals. A lot of the families that have owned [land] for a long time will often build rentals. But if you’re actively buying and building today, the economics speak very clearly to condos.
AR: At 70 Pine Street, which is a million-square-foot, mostly rental building, it’s going to be a slow return, but we’re doing it with another family, and it’s a long-term investment. Regarding land prices, with rental jobs we’re teaming up with other families who own the land. We did the Chelsea Landmark with the Locker family, we’re doing it right now at 210 Livingston in Brooklyn with the Benenson family. There are families who own big pieces of land that they don’t necessarily want to develop themselves.
Michael Shah: Or have the expertise…
AR: Or need help on the equity side, or all the above. Or can’t sign guarantees, or get construction loans.
MS: Or don’t want to.
AR: And so it’s a great opportunity for us. We never own, we don’t land bank. In previous cycles, we have seen very deeply financed entities completely vanish, getting wiped out on owning land in a downturn. We’re very conservative.
Michael Weiser: So you are not land banking in the process?
MS: Land banking at a peak is generally poor strategy.
MW: Don’t you find, though, that lenders are factually holding back on the financing for condos? They’re looking at exit prices. They’re getting concerned, certainly with hotels as well. That’s going to ultimately lead to more people being forced to look at rentals, and ultimately new rentals. Everybody wants to do a rental, but like you said, it just doesn’t make sense.
Time Inc. recently announced it is moving some of its offices to Industry City in Brooklyn. How much will Brooklyn be a competitor to downtown Manhattan for office leasing in the next five to 10 years?
DS: Brooklyn has a real shortage of office space. I think that a move for a tech or media firm to Downtown is a way station before moving to Brooklyn, because the workforce is based in Brooklyn. There just isn’t enough space to accommodate all the people that want to be there.
LG: Tech firms have an insatiable demand for space, and many have signed long-term leases in Chelsea and the Meatpacking District. There is no immediate product available in Brooklyn. The growth will still be in lower Manhattan and up the West Side.
MS: Both [residents of Lower Manhattan and Brooklyn] say they want to walk to work, it’s just that the employer won’t move to lower Brooklyn. AR: That’s interesting; it never occurred to me that those employers may end up moving across the bridge.
MW: Brooklyn doesn’t currently have, and probably won’t have at least for the near term, enough supply to compete in any meaningful way. So everything they have is going to get snapped up because of what everybody’s saying, just the huge demand for it. Name your price on rents within the next two, three years.
Let’s talk about the hotel-condo complexes being built—it seems like a win-win situation, but what are the challenges and risks?
AR: What makes it work is if it’s a real hotel brand that has a track record and credibility.
LG: The world today is so focused on marketing. Every product is branded. Real estate is now branded.
AR: What you’re seeing is every brand merging into product areas that they have zero connection to. The marketplace shows no resistance. The only factor that’s important is if it’s well known. Anyone involved in Baccarat [Hotel & Residences]? That’s a brilliant play from Barry [Sternlicht, CEO of Starwood Capital Group].
MW: I can tell you that at our Beekman project, a lot of people tried to do a hotel at the site and nobody was able to make it work because of the historic building. What we did was take an adjacent parcel and create the condos. We were then able to do the hotel in the [historic] building where everybody [thought it should be]. Sometimes it’s not about wanting to do a condo; it’s the flip side, wanting to do a hotel, and the condos are what make it work.
Let’s talk about Hudson Yards, which is going to be the largest private real estate development in the history of the United States, the biggest development in NYC since Rockefeller Center. Do you think people will want to live in such a huge mixed-use area?
LG: Absolutely. The project is going to be transformative. It will have retail, rental, condos, offices, and entertainment, where people can live, work, and play in the same place. It will bring life to the western part of midtown Manhattan, an underutilized area for so many decades. It’s the next natural frontier.
GG: I think it will be an absolute home run for Manhattan neighborhoods across the city. Long Island City, where the 7 train will be a direct feeder to Hudson Yards, is going to really benefit from what’s going on there.
AR: It will be different from what we think of as Manhattan in the way that Battery Park City is different from what we think of as Manhattan. Battery Park City has an audience and a constituency and a population who adore it, and experience the proximity to the things the city has to offer with its own sort of quieter flavor. But if there’s any expectation Hudson Yards is going to have the same flavor as what exists now in Manhattan, that won’t be the case.
LG: What’s the next frontier? Is it the Bronx, is it Queens? Unless the city is rezoned to allow much higher development, there’s nowhere to go but out. Even if they do rezone to allow more density, it’s going to take years before it can catch up to the demand.
MW: You talk about the affordability factor, and again, everybody is cognizant of this. Most residents and taxpayers in New York City can’t afford to live in the city. At the end of the day, supply is not even close to where the demand is. You’ve got fewer cranes than any major city.
AR: Michael makes a point that is always lost in the conversations about $5,000-a-square-foot condos, about how many billionaires are interested in parking money in New York to absorb extremely expensive product, but that’s a fraction of a fraction of what’s being created by most of us and what’s needed. The population growth is a multiple of the number of units that are being created. That’s a structural problem for the city, and the city needs more housing units at all price levels