By Adam Pincus
Not so many years ago, mega property sales were the hot thing. That was followed by all things retail. Now, it’s finance, that’s the flavor of the day. But some say it’s more than a passing fad.
The investment sales business is down about 40 percent from the peak in 2015. For example, in New York City during the first nine months of 2019 there were about $34 billion in sales, compared with $56 billion in the same period in 2015, according to a PincusCo analysis.
Yet last month there were $9 billion in commercial loans recorded, even as there were only $3.3 billion in investment sales, an analysis of transactions of $5 million and up found.
Insiders say there is a larger shift within the industry into financing.
“The debt market is the driving influence in the commercial real estate market today,” Eli Tabak, a principal with the real estate investment fund Bluestone Group, said. He believed the influence is still growing.
The investment sales market in the city has been slowed by a number of elements, including a weak retail market, a change in rent regulations, a tepid high-end condo market, lower foreign investment. Yet there is an enormous supply of investment capital raised in funds that needs to be laid out.
“Investors would rather invest their dollars lower in the capital stack and earn a return. That’s what is creating the tremendous rush to get into the debt business. Because it’s the only opportunity to put in capital,” Tabak said.
The increase in debt activity is also driven by the steep decline in values in sectors such as multifamily, where owners are choosing to refinance and perhaps take some cash out, instead of making a sale.
Finally, investors are structuring debt in new ways. While it’s hard to say any debt product is brand new, bankers and brokers are always trying to find a new angle.
David Eyzenberg, president of Eyzenberg & Company, is structuring complex debt deals tied to ground leases. That’s a version of a formula iStar’s Safehold has aggressively used nationwide, but also in New York City for example at the BankNote building at 1201 Lafayette Avenue in the Bronx.
Other lenders are loaning money, then borrowing against that loan to increase their returns, in deals known as “loan-on-loan” financing. Though not new — they were used following the 2009 recession as a way to finance the acquisition of distressed debt — they help leverage higher returns on capital.
And, of course, just about everyone in the commercial real estate business is expecting a surge in loan sales by banks to start in the coming months, followed by foreclosures, as borrowers are unable to refinance their multifamily properties.
“Banks are preparing. They told us in six month expect a lot of defaults,” said long-time sales broker Lazer Sternhell, of Cignature Realty Associates.
With the new demand, more young people are choosing to enter the real estate industry as a mortgage broker, which in the past was often seen as dull or stodgy.
“A lot of brokers are fleeing the market, they can’t survive. We live on commission,” Sternhell said.
Some like the dependable nature of the mortgage business.
“There is constantly the opportunity to refinance a property despite where the economy is. Whereas in i-sales, you can lose a lot of that consistency very quickly,” said Samuel Greenwall, a mortgage advisor with Lev, a capital markets advisory firm, who entered commercial real estate finance two years ago.
Demand for brokers is also coming from private equity funds, which need to conform to their fiduciary requirements and present deals in a transparent process to their investors. So the firms often interview and hire third-party brokerages to structure the deals.
But while investment sales are down, they are certainly not gone.
Some look to the anticipated multifamily defaults as a future driver of sales. Or to sellers who have simply readjusted expectations. So there are investment sales brokers preparing for that day, too.
“I am seeing a lot of guys move over [to mortgage brokerage]. But I am sticking with what I know. I have a gut feeling this will turn around,” said broker Ivan Hakimian, of HPNY. He’s now competing with the larger trends, actively seeking investment brokers today, to prepare for the day the sales market rebounds.