As Investors Hesitate, Nonprofits And End Users Seize The Moment To Buy NYC CRE

Amid sliding dollar volume and changes to real estate regulations and taxes coming from Albany and City Hall, occupants and nonprofits are taking a greater slice of New York City's investment market pie.

Last year, user buyers — which are defined as owners who take at least 75% of a property’s rentable area and plan to operate within the space — bought $2.1B worth of middle market transactions, according to a report from Cushman & Wakefield provided to Bisnow.

That figure represents the strongest total dollar volume in five years, according to the report. Meanwhile, user buyers’ share of the middle market, defined by transactions under $75M, has been steadily increasing over the last three years to reach 12.5% of total dollar volume this year.

Nonprofits are also increasingly active in the middle market, with those buyers’ transactions increasing 45% between 2017 and 2018, per C&W. These types of owners, under less pressure to deliver short-term returns, are increasingly able to compete with the other buyers.

“For the most part, investors may be a bit wary, and a lot of investment dollars are out of the game right now,” Cushman & Wakefield Capital Markets Research Associate Director Nishant Shah said. “Multifamily is not really [a] factor [because] they are waiting on what Albany does on rent regulations. Users aren’t dependent on these other factors — for them, it’s just a function of need.”

Across the board, dollar volume is down, but user transactions have not slowed as much as investor purchases in the city, Shah said. Dollar volume for investor transactions decreased 27% year over year, while user transaction is down by just 14%, he said.

What’s more, users are also paying more on a price-per-SF basis in the middle market than they were in the past, according to the C&W report. In the first quarter of this year, users were paying an average of $559 per SF — up 64% from $340 per SF in 2014. That’s compared to investment prices, which average $455 per SF.

“Right now, the most sought-after property type is industrial properties,” Shah said, noting there has been a significant increase in user purchases in the outer boroughs of the city. “A lot of industrial spaces are bought by users, so that's another reason why we can see that user activity is kind of going up.”

Some of the best-known user-oriented investments of the last few years have been Google’s $2.4B purchase of Chelsea Market and The Walt Disney Co.’s $650M deal at 4 Hudson Square — but those are considered outliers and do not fall within the middle market.

The biggest user deals in the middle market last year were Mount Sinai Health System’s purchase of 432 West 58th St. for $72M and Spanish ceramics and interior design retailer Porcelanosa’s purchase of 205 Fifth Ave. for $42.5M.

Brokers said that while there are still plenty of investors looking for opportunities, the current environment means user-buyers have a little more room to compete. Users, they said, can often take more time with elements of a deal. Closing times can be a little longer — they may need to see approvals from boards, for example.

But with some buyers more cautious, that can work in users’ favor, brokers said.

“The investment community, or anybody who you would think of as a traditional buyer, is sort of in a wait-and-see mode,” said Michael Gembecki, C&W middle markets investment sales group director. "They are still in the marketplace, and they are still looking, but the appetite to pull the trigger immediately has been somewhat dampened."

Gembecki is marketing a mixed-use building at 140 East 74th St., which has a restaurant on the ground floor, as well as a ground-floor retail co-op at 61 East 11th St., which is currently a furniture store and has received interest from other users to operate from the store.

“Users can compete in this environment,” Gembecki said. "Whereas an investor looking for a return, it becomes challenging to get to pricing."

Ariel Property Advisors Executive Vice President Victor Sozio said there has not been a “dramatic change overnight” in user activity. There is still significant investor capital chasing deals in New York City.

“A lot of times [investors and users] will compete for the same asset class. Where owner users end up having a little bit of advantage, it doesn't always necessarily need to be driven by dollars and cents underwriting based on the levels you can rent and achieve,” he said. “It becomes more about funding sources and the requirements behind that funding.”

However, Sozio said there have been recent examples where uncertainty in the market has paved the way for opportunities for nonprofits and users to swoop in.

Earlier this year, for example, Sozio brokered a deal for three rent-regulated apartment buildings in Glendale, Queens, to be sold to a nonprofit for nearly $16M.

“Changes in the multifamily market and [with the] ambiguity, certain nonprofits and certain programs and initiatives that were launched by HPD and the city became competitive," he said. “[The Glendale deal] worked out for everybody ... The buyer was able to preserve units … the seller got a market price. I wouldn't necessarily categorize it as a premium, [but] they got a market price and were able to get a deal done in a climate where multifamily has changed.”