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Manhattan Apartments Lure Investors Seeking a Foothold in Surging Market
By Oshrat Carmiel - Mar 18, 2011

When UDR Inc. (UDR) agreed to pay $260.8 million for a tower in Manhattan’s Financial District, it was not only the borough’s biggest apartment sale in almost three years. It was also the company’s first foray into New York City.

The deal this month by Highlands Ranch, Colorado-based UDR is the latest by a multifamily property investor trying to establish a beachhead in the borough, as apartment demand climbs and rents recover from last year’s lows. Several new players are finding opportunity as city mainstays such as Equity Residential, which bought three prime high-rises from developer William Macklowe in 2010, turn their attention to less-costly acquisitions outside New York.

Manhattan “has everything going for it from a multifamily perspective,” said UDR Chief Financial Officer David Messenger, whose company is the third-biggest publicly traded U.S. apartment owner. New York has a great economic base, financial center of the world, extremely high propensity to rent, low home affordability.”

Eight apartment buildings below 96th Street in Manhattan were sold or went into contract this year, not including converted or stalled condominiums, according to Real Capital Analytics Inc., a New York-based property research firm. The three largest by price, which are also the most recent, went to buyers who are dropping a multifamily anchor in the borough.

Sagamore, Elektra In February, LaSalle Investment Management, a Chicago-based private-equity firm, agreed to buy Related Cos.’s 265-unit Sagamore building on the Upper West Side, beating 15 other bidders. The company also has purchased multifamily properties in Los Angeles and Washington, D.C., in the past year, according to Real Capital.

The Elektra, a 166-unit apartment building in the Gramercy neighborhood, also went into contract last month, to buyer Invesco Real Estate, Real Capital said. The Dallas-based company hasn’t owned a multifamily property in the borough since 2004, said Bill Hensel, an Invesco spokesman.

“For several years leading up to the credit crisis, Equity Residential and Archstone were the dominant buyers of rare, large, trophy, luxury multifamily Manhattan offerings,” said Doug Harmon, senior managing director at Eastdil Secured LLC in New York. Harmon represented the owner of 10 Hanover Square, the Witkoff Group, in its deal with UDR, as well as the sellers of the Sagamore.

“These days the playing field is a little more open and a little less predictable,” he said.

Market History The newcomers aren’t “clouded by their knowledge of history” of the market, which might make them more hesitant to strike a deal, said Robert Knakal, chairman of commercial property brokerage Massey Knakal Realty Services in New York.

“Sometimes you have investors who have been around for decades who turn transactions down, who say, ‘I could have bought that building decades ago for $30 a square foot, why would I pay $700 a square foot today?’’ he said. ‘‘It prevents them from making a move.’’

Longtime apartment owners haven’t abdicated the borough, according to UDR’s Messenger, who said his company competed with Equity Residential (EQR) on several deals last year.

‘‘We still see all the common players at different sites as we’re entering a building and they’re leaving a building,” Messenger said. “We know that they’re around and they know that we’re around as well.”

Cap Rates Demand for Manhattan apartment properties has pushed up prices and lowered the yield for investors. Capitalization rates on multifamily buildings in the borough averaged 5.1 percent in the fourth quarter of 2010, compared with 6.6 percent nationally, according to Real Capital. Cap rates, a measure of investment yield, are calculated by dividing a property’s net operating income by its purchase price.

Invesco’s contract to buy the Elektra for $125 million implies a cap rate of 4 percent, according to Real Capital. Invesco’s Hensel said the company doesn’t comment on sales that are pending.

UDR bought 10 Hanover at a cap rate of about 5.3 percent, after capital expenditures and management fees are included, Rob Stevenson and Nicholas Yulico, analysts at Macquarie Group Ltd., estimated in a March 11 report. Over time, UDR may seek to have 10 percent or more of its portfolio in New York City, which would have “a material benefit on the stock’s valuation,” wrote the analysts, who have a ’neutral’ rating on UDR shares.

Rent Growth “Cap rates for Class A apartments in Manhattan have returned to near-peak levels,” the analysts wrote. “Buyers are betting that a rebounding New York City job market and lack of new supply in 2011 will drive 25 percent cumulative rent growth over the next five years.”

The average monthly rent for a one-bedroom Manhattan apartment increased 8.6 percent in February from a year earlier to $2,535, according to brokerage Citi Habitats. Rents for two- bedrooms climbed 9.6 percent to $3,597, while three-bedroom apartments had an average increase of 12 percent to $4,874. Average rents for apartments of all sizes have recovered 11 percent from their January 2010 low of $2,914.

The apartment vacancy rate declined in February to 1.18 percent from 1.54 percent a year earlier, Citi Habitats said.

Rent Vs. Own

While rents are climbing, New York is the No. 1 U.S. city where leasing an apartment is more affordable than buying a home, according to property website, which compiles data from 50 markets.

At least two high-end Manhattan buildings came to market last month. Developer Gotham Organization is selling its Upper West Side high-rise, the Corner, just a year after construction was completed. Africa Israel USA expects to fetch about $250 million for 88 Leonard St., its tower in the TriBeCa neighborhood that began leasing in 2007, Chief Executive Officer Tamir Kazaz said in an interview last week.

Of the almost 150 would-be buyers who inquired about the property, which includes a fireplace lounge and an outdoor communal whirlpool, many were companies that don’t yet own apartments in Manhattan, he said.

Potential Buyers “A lot of them are domestic, outside of New York -- Chicago, Atlanta, California,” Kazaz said.

Chicago-based Waterton Associates LLC, which bid on the Sagamore, will probably “take a run at” 88 Leonard, co-founder David Schwartz said in a telephone interview. The investment firm, which owns and operates more than 15,000 apartments in 12 states, has a new $500 million fund that will be leveraged to buy $1.5 billion of apartment assets, the company said in a March 8 statement. Manhattan is one of its targets, Schwartz said.

Waterton Associates entered the New York market in December, when it bought the senior construction loan and mezzanine debt of downtown Brooklyn’s 271-unit Addison apartment complex. The borrower will complete construction on the property and retain ownership, Schwartz said. Waterton will be paid a “preferred return” from the rental profits.

“We have no presence in New York and we felt structuring a debt position in this case was fine for us,” Schwartz said.

‘Tremendous Competition’ “We’ve always been an opportunistic buyer and New York is difficult in that there’s tremendous competition, extremely savvy local players,” he said.

UDR’s purchase of the 493-unit 10 Hanover Square is the largest apartment deal in Manhattan by price since August 2008, when New York University bought the 304-unit Gramercy Green complex for $275 million, according to Real Capital data. LaSalle’s agreement to buy Related’s Sagamore for $140 million is the biggest transaction since last March.

“Both recent deals demonstrate a growing institutional appreciation for Manhattan’s resiliency and the current positive imbalance between demand and supply, which will no doubt lead to strong rental growth over the foreseeable future,” said Eastdil’s Harmon.

UDR has been considering acquisitions in Manhattan for at least two years, according to Messenger. It reviewed the Macklowe collection of three buildings that went to Chicago- based Equity Residential, the largest publicly traded U.S. apartment owner, for $475 million, he said.

UDR officials are “walking up and down the streets looking at different assets,” and plan to buy several more properties in Manhattan soon, Messenger said, declining to specify how many or when.

“You’re going to see us continually monitoring the market,” he said. “One asset isn’t going to be enough for us.”

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By Oshrat Carmiel - Mar 18, 2011

The Ascent of the Little Guys
By Hilary Stout - March 11, 2011

THE “A” in A.C. Lawrence & Company stands for Anthony, as in Anthony DeGrotta, who co-founded this upstart real estate firm in 2006. The “C” doesn’t stand for anything — Mr. DeGrotta and his partner, Larry Friedman, just thought it sounded good. “Lawrence” is for Mr. Friedman, even though his name isn’t Lawrence; it really is just Larry. The overall effect that the now-35-year-old co-founders were striving for is a name that suggests experience, longevity and venerability.

“We wanted the firm to sound like something that passed down through the generations, started by Grandpa,” Mr. DeGrotta said.

Something must be working in the name or otherwise, because in less than five years, A. C. Lawrence has grown from five agents in a tiny Chelsea office to more than 100 in swankier Midtown digs on East 45th Street. The founders say the company stands out for its attention to training and low agent-to-manager ratio of seven or eight to one, and for its transparency. “There are no pocket listings within our company,” Mr. DeGrotta said. “If an agent knows of a listing, they don’t keep it to themselves” for competitive advantage. “They put it into our proprietary data base.”

The firm’s expansion — which took place during the rockiest property market in decades — raises an interesting question: Could we be heading toward an era of the little firm in New York real estate?

Big firms like the Corcoran Group and Prudential Douglas Elliman, with thousands of agents, still dominate the market, of course. (Elliman says it sells 33 homes a day.) But whether the clout of little firms is growing is an important question for buyers and sellers, as they decide between a highly visible name with vast listings and resources, and a smaller firm that promises to shower the client with individual attention, in many cases focusing on a particular segment of the market, like new downtown condos, prewar Classic 6’s or East Side brownstones.

Back in 2005, none other than Barbara Corcoran, the queen of big firms who built the multibillion-dollar Corcoran Group from a $1,000 (borrowed) investment, declared in a Business Week interview, “I think the future belongs to small brokers.”

She acknowledged that not many people held that view but went on to argue that while the big firms were richer and had more resources, the little ones were more creative and nimbler, having far less bureaucracy and layers of management. “We need to be responsive to a changing market,” Ms. Corcoran said. “And more often than not, the little guy can move. The big guy is still thinking about it.”

Reached last week, Ms. Corcoran, who sold her firm in 2001, stood by her pronouncement. “Definitely,” she said. “On the Internet everyone is equal. The small agent can look as classy as the big agent.” She added, “Ten years ago, if you wanted your property noticed you were far better off with large brokerage firms because they were the big buyers on the print ads. That’s out the window now.”

Shaun Osher, a top-producing broker at Douglas Elliman who left in 2005 to start his own firm, CORE, relies heavily on social media to get his firm’s name into the public eye, sometimes in subtle ways. Mr. Osher has a blog,, where he sometimes muses on matters that range far afield from real estate. Last month, for example, he posted a video interview he had done with the designer Nicole Miller during New York Fashion Week.

The conversation touched only tangentially on real estate — but the interview went out on Twitter to all Ms. Miller’s followers (as well as, of course, Mr. Osher’s), and was picked up by numerous fashion blogs and other sites outside of the real estate realm.

Mr. Osher has also taken advantage of reality television, taking part in the HGTV reality show “Selling New York.” CORE, which started with four people, has grown to 50 agents and 16 staff members. The company focuses on new residential developments, many in downtown Manhattan.

One of the main things that any small business — whether an independent bookstore, a corner toy store or a neighborhood hardware store — would have customers believe is that service is better and personal attention greater at a little firm. Whether that is true in real estate depends — because the company name may be ubiquitous, but the client’s relationship is usually with a single person.

Nevertheless, Solomon Asser, the principal of the Tecny Group, a design-and-build firm, who would probably get a high level of service no matter where he went, said he thought there could be advantages to smaller firms like Leslie J. Garfield & Company, which currently has two of his listings, including a $26 million Upper East Side town house. “Dealing with a smaller firm goes with faster answers to things, quicker resolution to things,” Mr. Asser said. “You don’t need to get an answer from someone else to get something done.”

Inexperienced players can find smaller brokers less intimidating. When Kelly Snyder and her fiancé, Darien Ward, began hunting for their first home, they had trouble reaching the Elliman broker they were dealing with in Harlem.

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By Hilary Stout - March 11, 2011

Wealthy U.S. Individuals Invest in Commercial Property in Quest for Yield
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By Margaret Collins and Oshrat Carmiel - Mar 9, 2011

When Sumeet Parekh bought a retail property in Manhattan’s TriBeCa neighborhood in January, individual investors provided about a quarter of the financing.

Morgan Stanley (MS) put up a little more than half of the $6 million purchase price, and Parekh contributed about $1.25 million. He got the rest from wealthy investors, who contributed increments of $100,000 to $625,000 in hopes of a 10 percent annual return and a portion of the building’s appreciation, said Parekh, a principal at San Diego-based HP Investors, which owns and invests in commercial properties.

High-net-worth individuals invested $2.1 billion in commercial real estate last year, up from $579 million in 2009, according to Real Capital Analytics Inc., a New York-based research firm. Apartments were the properties most sought after by investors last year, accounting for 32 percent of deals they were involved in, according to Real Capital, which has tracked more than $5 trillion in global sales transactions since 2001.

“Commercial property looks damn attractive versus other asset classes right now,” said Dan Fasulo, managing director at Real Capital. “Everyone’s looking for some form of inflation protection. They’re buying gold, they’re buying oil, or you can buy property. It has inflation protection characteristics, plus it gives you a check every month.”

Prices for commercial property have dropped 42 percent since their peak in October 2007 through December, according to the Moody’s/REAL Commercial Property Price Index. The index posted gains in three of the last four months of 2010 as individual and institutional investors including the Hartford Financial Services Group Inc. bet on a rebound.

Apartment Demand Demand for apartment buildings has risen as the foreclosure crisis forces more people to rent and the children of baby- boomers move from college dorm rooms to their first residences. Rents climbed 4.3 percent in the last three months of 2010, the most since the third quarter of 2006, according to Dallas research firm Axiometrics Inc., while U.S. homeownership rates in December remained at a 10-year low, according to data compiled by Bloomberg. Axiometrics projects a 6 percent increase in U.S. rental revenue by the end of 2011 from December 2010.

“There’s a lot more equity that wants to get in the real estate market, particularly from high-net-worth individuals,” who want the higher returns without the onus of managing a property, said Robert Knakal, chairman of the New York-based commercial property brokerage Massey Knakal Realty Services. “They don’t want to get a call at four in the morning that something is broken, or there’s a fire or the toilet is stuffed up,” Knakal said.

Low CD Yield Low yields on other investments are driving investors to real estate, said Knakal. “Look at what your options are: Are you going to buy a CD and get 50 basis points on your money? Or buy a 10-year Treasury and get 3.46 percent?” he said.

The average capitalization rate on commercial properties excluding hotels was 7.2 percent as of the fourth quarter last year, Real Capital data show. Cap rates are a property’s net income divided by the purchase price.

Investment-grade U.S. corporate bond yields were 4.01 percent as of March 7, according to the Bank of America Merrill Lynch index. Rates for 10-year certificates of deposit averaged 1.48 percent as of March 7, according to Market Rates Insight, based in San Anselmo, California.

Clients from athletes to entrepreneurs have moved 3 percent to 5 percent of their cash into real estate deals in the last year as a way of adding assets that may protect portfolios from inflation and stock market volatility, said Rick Flynn, head of the family office group for Rothstein Kass, an accounting and advisory firm in Roseland, New Jersey, serving those with a net worth of at least $10 million.

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