How to Make Money in New York City: Part 2

With so many opportunities already taken, how do you generate returns in NYC commercial real estate—today? That central question is why we're holding the Bisnow NYC Capital Markets Summit on April 9. Our preview continues below, and you can check out Part 1 here.

4) Take the repositioning risk

Core NYC product is going for a 3% cap nowadays, but greater returns are out there for investors willing to take on repositioning risk and be creative around the capital stack, says NGKF equity capital markets expert Garett Stoffels, who will speak at our event. Take the Brill Building. Invesco bought it in '06, but nothing came of its plans to turn it into condos. So in '13, Garett’s team came in with a buyer that pictured a few floors of retail (since it’s near the Times Square bow tie) and tech/media-friendly modernized office space. Garett says the new vision offered opportunity for outsized returns across the new capital stack: Brickman and Allied Partners on equity, Square Mile on preferred equity, and Starwood Property Trust on debt.

5) Help the smaller guys

Garett's team also has found opportunities in originating institutional debt for middle-market investors. In October, he and his colleagues arranged $42M in bridge financing for the acquisition of the Hyatt Regency Denver Tech Center (above). And back in New York, it recently arranged the sale of a Lower Manhattan hotel that could use a freshening up. It’s being redeveloped from a mass-market flag to a boutique-style hotel. Creating “new” hotel rooms in NYC is definitely a money-making play now, he says, considering insatiable demand from both business travelers and tourists.

6) Buy financeable assets

Madison Marquette’s Arvind Bajaj (whom we snapped over drinks at Mulligan’s Pub in Murray Hill with colleagues Katie Shaw and Ryan Colbert) tells us his firm, well-known as a placemaker in DC and making a push in New York, uses its big checkbook and foreign money JVs to buy properties that lenders will sign off on. That enables the company to close acquisitions quickly and get on to what it does best: boosting returns. Arvind and Ryan also spent Dec. 31, 2012, New Year’s Eve, together at Mulligan’s, working on the 11th-hour closing of their acquisition of LIC's $100M Center Building. (You didn't miss much... a lot of people got drunk in the cold, and Ryan Seacrest pretended he was Dick Clark.)

Thinking like a finance guy comes easily to Arvind, who started in CMBS at Morgan Stanley and moved on to head Credit Suisse’s European real estate finance group. (We’ll also accept his expert opinion, then, that London’s tea is better, but the US wins at coffee.) The amount of leverage Madison Marquette uses depends on each deal's co-investor. Hedge funds go for three-year holds and thus are OK with 70% to 80% debt, Ryan says, while sovereign wealth funds and pension funds have horizons closer to seven years and thus minimize risk, preferring 50% to 60%.

NYC makes up less than 1% of the company’s portfolio, but they’re market-defining projects. After the 445k SF Center Building, it paid $60M in January for the 40k SF of retail in the base of Williamsburg’s Edge waterfront condos (above). In its quest for emerging-market destination properties that need a little love, Madison Marquette also is looking into a Bronx retail and office building.

7) Listen to the Girl Scouts

MHP Real Estate Services CEO Norman Sturner tells us people have asked him for 20 years how he makes money in NYC, “and the answer is always the same.” Be selective, know your product, have enough capital to see through the downturns, creatively enhance the property, and improve the tenancy (the Scouts always say to leave a place better than you found it).

Norman says his company’s game plan is the same as always: "buy inside the apple” (meaning Manhattan), shine it, improve it, and sell it. After two years without an acquisition, MHP has found something it thinks it can shine up. Norman tells us the company has a contract on a Times Square property. Its most recent acquisitions are 2010's 509 Fifth in 2010 (sold two years later) and 2012's 530 Fifth (we snapped the property, which MHP purchased with Jamestown, Rockwood, and Crown, this morning). What has changed is MHP’s financing M.O., thanks to a change of thinking among the company’s investors. It’s going with lower LTVs (55% to 65%) and longer holds: three, seven, and even 10 years.