One of the biggest investment-sell deals in New York City since the pandemic began occurred last month. It was then that Scott Rechler’s RXR Realty acquired a 42 percent stake in hundreds of Manhattan rental units from Gary Barnett’s Extell Development. RXR valued the two buildings at $ 800 million, a 20% reduction from their pre-Covid valuation of $ 1 billion.
But while the pandemic emptied New York offices and strained landlords, tenants and landlords, it did not trigger the flood of distress selling experts predicted from the start. This is largely because banks have offered extensions to borrowers and government action has prevented mass seizures.
And Rechler said he now sees “huge pent-up demand” in the market.
Sellers have also been reluctant to cut prices because they know investors have billions in dry powder.
“There’s a ton of capital on the sidelines and sometimes too much capital creates a self-fulfilling prophecy of modest distress,” said Richard Mack, CEO of Mack Real Estate Group, a major investor and mezzanine lender on development projects.
There is certainly some stress, but a lot of rescue work is happening behind the scenes, in the form of debt and equity placements rather than direct sales.
“The biggest news is the activity [which] the market won’t see easily because it’s in the capital pile, ”said Jay Neveloff, who chairs the real estate group at New York-based Kramer Levin law firm. “You won’t see it, it will be under the kimono.”
Alternative lenders are also looking to find ways to foreclose properties in default or bring in new management to take over struggling projects.
CIM Group and Mack Real Estate – through their credit divisions – have sought to take over properties in Foreclosure of the Uniform Commercial Code, a process that bypasses state courts.
That’s exactly what CIM did in February, when it ruled out junior mezzanine seats linked to four from HFZ Capital Groupcondo conversion projects in Manhattan. This move gave him control over blue chip development properties on which CIM claims to have approximately $ 90 million in debt.
Mack could also take control of half a Luxury rental project in Brooklyn, The Denizen, from struggling developer All Year Management through a UCC foreclosure. Silverstein Properties has made an offer to pay $ 200 million for the the other half of this project, which would constitute a substantial discount. All year, directed by Yoel Goldman, had valued this part of the complex at $ 313 million before the pandemic, according to a valuation report from the Tel Aviv Stock Exchange.
In another project involving HFZ, the hedge fund Children’s Investment Fund sought to get Zeckendorf Development and Suffolk Construction to take control of XI, a $ 2 billion hotel and condo project in Chelsea. Children’s originally gave HFZ a $ 1.25 billion loan to complete the development designed by Bjarke Ingels. In January, the children filed a complaint, alleging that HFZ was on the hook for at least $ 160 million in unpaid interest payments.
Homeowners who can choose to hold onto their properties until the market stabilizes and prices become clearer, according to Jonathan Adelsberg, a real estate group partner at New York law firm Herrick Feinstein.
At this point, they can “assess the level of damage” caused by the pandemic, Adelsberg added.
According to a year-end report from Real Capital Analytics, Covid will cause $ 146 billion in pending and existing debt in commercial real estate.
“Bank premises hold everything together,” said Lisa Knee, tax partner and co-head of the national real estate division of the accounting firm EisnerAmper. But when the banks start to cut back on their loans, there will likely be more distressed sales.
The current wait-and-see strategy deviates slightly from what followed the Great Recession.
RXR – which Rechler founded in 2007 – made a name for itself buying massive commercial buildings in New York City, as the economy was just emerging from the depths. In 2011, it acquired the 2.3 million square feet Starrett-Lehigh Building at West Chelsea for $ 900 million.
Two years later, RXR partnered with Walton Street Capital to purchase a 1.2 million square foot 237 Park Avenue of Lehman Brothers Holdings in payment of $ 810 million. The Midtown office building was valued at $ 1.3 billion in 2017, according to Trepp, which tracks mortgage-backed securities.
Today, some companies are looking to invest money as a form of rescue capital, including in the struggling hospitality industry. Last month, Acore Capital said it already had raised $ 1 billion for its hotel fund to provide financing to hotel borrowers who are no longer offered extensions from their lenders through preferred stock or mezzanine financing across the United States.
But Michael May, chairman of Silverstein’s mortgage arm, said injecting equity into troubled projects wouldn’t always help solve the problem.
“Most often, unfortunately, the reason why the project is in the situation [it is] it’s because the property is dysfunctional, ”he said.