Takeaways from a trip to New York City

From a ‘less uncertain’ 2013-14 to the mass purchase of foreclosed homes by REITs

The Counselors of Real Estate meet twice a year. Last week, we met in New York City. We started with a tour on Sunday afternoon of the High Line, a 1.5-mile elevated rail line that brought freight operations to the lower West side that has been turned into an urban park. While this is easier said than done, the end result is an impressive mini-park overlooking the Hudson River and a handful of old piers. When next in the city, if the weather is nice, definitely take the time to walk it (an hour if you are in a hurry, or two if you are not).

The “development tour” is always the initial session for the CREs, whichever city we are in. Then the opening cocktail reception, and on Monday, the sessions begin. This year we had the treat of a breakfast speech by Marty Markowitz, the 11-plus year borough president of Brooklyn. He plans to build a world-class soccer stadium (in his remaining eight months). Among other things, Brooklyn is the most populous of the city's five boroughs, and the incredibly high prices of Manhattan are driving residential development in the borough.

My favorite parking lot in downtown Brooklyn, a block off Flatbush Avenue, was grabbed up last week for a $260 million mixed-use development. For the past nine months, I have been helping a nonprofit social service agency find and tee up three welfare-to-work service sites (86,000 square feet). It is scary when a hick from New Hampshire knows his way around the Bronx, Queens and Brooklyn!

For two days, we were inundated with global and U.S. economic and real estate trends. The general consensus is that 2013 and 2014 are “less uncertain” than 2011 and 2012. Several presenters felt a small/short recession was likely in the next six to 24 months (defined as two consecutive quarters with negative or no growth), then the U.S. economy should have a solid, multi-year run. Some even suggested equal to the 1946-1970 surge.

There's still more global capital seeking investment than there are good investments to buy. The top “A” markets hardly felt the downturn. Asking rents in midtown Manhattan, the nation's hottest office market, with less than 4 percent vacancy, are currently increasing $1 per square-foot each month.

One of the takeaways from the CRE meeting was that the big “A” markets are so pricey that capital will start to flow to secondary markets in 2013-14 – including Austin, Texas, Louisville, Ky., Raleigh-Durham, N.C. They do not include Manchester, N.H., Portland, Maine, or Burlington, Vt. These are tertiary markets that will continue to rely on traditional community bank commercial mortgage financings.

REITs at home

Larry Silverstein, owner and developer of the World Trade Center, told his story. If you have driven to, through or by the city in the past year, you have seen the skeleton of One World Trade Center going up. Last week, they put on the last piece of the communications tower, making it well over 1,776 feet high – the tallest structure in the United States and the fourth tallest outside of China, Malaysia and the United Arab Emirates.

Another eye-opening session was titled “Turning Singles into Homeruns,” the story of REITs funding the acquisition, refurbishment and leasing of newer (foreclosed) single-family homes. We are not talking 10 or even 50, but thousands of homes. The largest player, Blackstone, has 25,000 of them.

These are newer homes (typically less than 10 years old) in grossly overbuilt markets (Phoenix, Las Vegas, etc.). They are purchased for less than $250,000 (often much less). They get $15,000 to $50,000 of renovations and are leased (usually for a two-year term) and often to the former owners, who had been maintaining the property.

From the investor's perspective, with the low cost of funds, even a $300,000 basis can pencil out for rents of less than $2,000 per month. Ultimately, the tenant is deemed to be the future buyer when the markets settle down and the tenant’s credit is repaired. Very interesting! Note: We do not see much of this in New England.

Bill Norton, president of Norton Asset Management, Manchester, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at wbn@nortonnewengland.com.