Debt helps New York condo market hit sky-high levels

Lenders back wave of apartment towers as prices reach new highs, reports Al Barbarino

50 West Street, New York City
50 West Street, New York City

After clinging to a development site at 50 West Street in Downtown Manhattan for nearly three decades, in August 2013 Time Equities founder Francis Greenburger landed a $400m financing package to jump-start the 63-storey, 200-unit luxury condominium scheme 50 West.

The pipeline for New York condo finance began to open up in mid 2013 as the city’s economy continued to grow. At the time only a few privileged sponsors had obtained big financing packages on condo schemes.

“For most people who needed a construction loan, there just weren’t any,” Greenburger recalls. “The opening up of that market was pivotal for us.”

Greenburger, like many developers, set his condo aspirations aside when that market collapsed in the recession. But a confluence of factors, including Downtown’s commercial real estate rebirth, allowed him to move forward when he scored the financing.

The Libor-based, $288m loan – priced at around 4%, with a 60-65% loan-to-cost ratio – came from a PNC Bank and Union Bank-led syndicate, including Wells Fargo, M&T Bank, MidFirst Bank and Emigrant Savings Bank. Hedge fund Elliott Management supplied a further $100m in equity.

“At the time condo loans were harder to get than rental loans and the maximum participation was $75m, even with some major banks in this group,” Greenburger says.

Lenders have since backed a flood of new condo schemes and several other big projects are coming out of the ground, fuelled by demand for apartments following a dearth of development between 2009 and 2012.


Jaw-dropping pricing

So far the decision to build is proving to be a wise one. Apartments with jaw-dropping prices are selling to homegrown and foreign billionaires looking to park cash. Hedge fund manager William Ackman recently bought a $90m penthouse at Gary Barnett’s One57, while a triplex penthouse at Zeckendorf Development’s Upper East Side 520 Park Avenue recently became the city’s most expensive listing, at $130m.

At the low- to mid-range, foreigners seeking second homes have joined a growing pool of New Yorkers who are more confident about planting roots in Manhattan.

“There’s a fixed amount of land and opportunity to build here, so if you can put up a well-located tower in New York there’s a lot of demand for residences,” says Dave Karson, an executive managing director with Cushman & Wakefield’s equity, debt and structured finance group, whose team arranged the financing for 50 West.

The building, rising at two floors per week, won’t open until autumn 2016, but since June, Time Equities has pre-sold 40% of the scheme, at prices ranging from $1.65m for a one-bedroom unit to $18m for its largest apartment.

Francis Greenburger
Francis Greenburger

“We’re way, way ahead of our projections,” Greenburger says. “We didn’t expect this level of presales for another year.”

As yields on core, core-plus and even transitional properties fall and land prices rocket, condos have become a favourable alternative for both lenders and developers.

Average pricing for Manhattan residential development land (rental and condo) has soared from $233/sq ft in 2011 to an average of $500/sq ft in 2014, according to data from Cushman and Wakefield, and data and analytics firm CoStar.

“Condos are the only place you can get internal rates of return from high-teens to the 20s in the city,” says Chris Moyer, a director with the C&W team that arranged the 50 West deal. “Even if you buy a 50% vacant office building, you’re only going to underwrite to a 12-13% levered return. Banks lend on condos because on a 60% LTV loan on offices, you only get Libor plus 150-160bps. For multi-family rental, you get Libor plus 200-225bps, but you get Libor plus 300bps on a condo construction loan”

Banks have raised their stakes and are now willing to contribute up to $150m, or even lend at 75% LTV ratios on large deals, according to sources. But a host of new lenders – mortgage REITs, insurers, private institutions and hedge funds – have entered the space and are willing to lend much more on large-scale developments.

“Eighteen or 24 months ago there was a very shallow pool of potential lenders on large construction financings,” says Peter Nicoletti, executive managing director with JLL’s capital markets group. “It would typically be commercial banks and they would have to syndicate the deal.”


A cracking pace of development

The change has created a pace of condo development never seen before, with schemes such as the super-tall One57 and 532 Park Avenue, both south of Central Park, under way. Last year, as Greenburger fished for financing, Larry Silverstein’s 82-storey skyscraper at 30 Park Place in Tribeca, including condos and a Four Seasons hotel, landed a $660m loan from The Children’s Investment Fund Management.

While banks usually give developers the best pricing, they are typically choosier and some sponsors might not qualify financially for a bank deal, particularly if partial recourse is considered.

A bank syndicate is still an option. “When there are three to six lenders you make those deals work,” Karson says. “You spend the extra time and effort, because you end up with better pricing.” But as every bank has its own requirements and potential complications, the single-lender solution can be worth the premium for some developers looking at 10 or more banks.

In October, Children’s Fund shelled out another $450m construction loan against Zeckendorf Development’s 520 Park Avenue.

An affiliate lent $400m on Macklowe Properties’ and CIM Group’s 432 Park Avenue, touted as the tallest in the western hemisphere. Other big deals include Ian Bruce Eichner securing $340m from Goldman Sachs’ Broad Street debt fund for a 777ft condo tower at 45 East 22nd Street.

The Children’s Fund and Silverstein Properties CEO Marty Burger declined to comment, but multiple sources say the 30 Park Place deal carried a 9% or 10% interest rate. That premium outweighed the headache of having to deal with some 15 or 20 lenders, sources said.

“Children’s fund might charge two or three times more than a bank, but for really big loans a lot of developers would rather save the four months to put a syndicate together, even if costs an extra 500 basis points on my interest rate,” one source said.

“We lost that business,” says one lender. “We were in a multiple party dynamic and [Children’s Fund] came in at the tail end and provided a comprehensive solution, so they did a great job and will be rewarded.”

For others, single-lender solutions do not make sense, but it’s a far cry from the lack of options before the market revived.

“A single lender can be a lot easier than a bank group, but they obviously charge a bigger rate, so that would not have been attractive to us,” Greenburger says. “If it’s 25 or 50 basis points more I would probably say give me a single lender, but maybe not if it’s 200 basis points.”


Could high-end units be reaching the top?

The expanding range of new lenders playing in New York’s condo sector over the past six to 12 months has brought concerns that the market could be overheating.

“Today the market would be 50 to 100 basis points less expensive than when we got our loan [on 50 West],” says Francis Greenburger, founder of developer Time Equities. “But banks are becoming cautious about the amount of construction under way. Although pricing may be slightly cheaper, availability [of debt] is still quite constrained because of growing supply and banks have already taken exposure on several projects.”

Greenburger says the cheapest units at 50 West have sold out, which could feed concern that the high end of the market is losing steam. “Some clients developing very high end units say they may have started to see some slowing down for $20m to $50m condos,” Karson says. “The pace of sales up to $5m still reflects very good demand from New Yorkers.”

Greenburger notes that the natural buying pattern is for families to wait until six to nine months before a building opens to buy their homes, so it could be that foreigners seeking a pied-a-terre have bagged all the smaller units.

Census data published in New York Magazine showed that since 2008, about 30% of condo purchases in big Manhattan schemes were by buyers with overseas addresses.

Some complain about foreigners parking their cash while “not contributing” to society or the economy, but others disagree. “Real estate tax rates are quite high in this city and if you buy an apartment for $60m you’re getting a very significant tax bill,” one developer says. ”We don’t want to have an empty city, but we’re a million miles away from that condition.”