New York hits new heights

A property development and investment boom in the city is solving the land shortage problem by building upwards, reports Christopher O’Dea

If you thought the first step in a property development project in New York City was to secure some land, you’d be wrong. It’s a common mistake. 

Land is an essential component in most property developments. But this is New York. And the City That Never Sleeps would also never let a simple thing like a shortage of land stand in the way of a big development project.

From Hudson Yards on the historic river’s shore and Brookfield’s all-sector Manhattan West complex in Midtown, to H&M’s mammoth store in Herald Square and Brooklyn’s Marine Park, New York City is in the midst of a property development and investment boom that is literally taking it to new heights. Some of the biggest projects in Manhattan are being built on air rights, there being no available surface area in the parts of the city where people want to live and work. 

The transformation taking place displays the boundless ingenuity of New York’s developers, who are giving a new meaning to the idea of an investment platform. 

The boom also reflects New York’s unique status as a safe haven for global capital. Despite record-low cap rates, institutional investors from around the world are allocating record amounts of capital to projects in New York, with some investors returning to the city for the first time in 20 years. 

Much of the foreign capital is seeking a safe haven as Asian and emerging markets weaken. But owners of large assets are reluctant to sell because there are few attractive alternatives in which to redeploy the proceeds.

Property types are performing well, albeit with rental rates dipping as inventory comes on and off the market in various neighbourhoods, and what some participants say is a shortage of capital for office projects as investors pursue higher returns on residential buildings. 

Covering 28 acres on the Far West shore of Manhattan, the Hudson Yards project is the largest private development in the nation’s history, comprising 33 projects within a special district the size of downtown Boston that was made possible by zoning changes enacted in 2005 in connection with New York’s bid to host the 2012 Summer Olympics. Encompassing 17m sqft of commercial and residential space, it is a joint venture formed in 2010 between New York-based Related Companies and Oxford Properties Group, the property investment unit of the C$70bn Ontario Municipal Employees Retirement System. 

Oxford says that as co-general partner, the firm “is actively involved in every aspect of development, leasing and funding” of Hudson Yards. Tenants are a who’s who of the global retail and commercial elite. The first tower that will be completed, 10 Hudson Yards, will be anchored by fashion brand Coach, with a separate lobby for other tenants, and serve as new headquarters space for cosmetics giant L’Oréal and technology firm SAP. 

It was reported that 85% of the tower, which was started in December 2012, was leased as of August. In June, vertical construction began on a 1m sqft retail complex at Hudson Yards that will be anchored by luxury retailer Neiman Marcus’ first New York City store. Vertical construction also began on 30 Hudson Yards, a tower that will be the headquarters for media giant Time Warner when completed in 2018.

“The live, work, play trends are strong, led by technology and new media companies”
Brian Kingston

Vertical construction is a major milestone for each tower of Hudson Yards. The development is rising on two massive platforms, the first of which will span nearly 14 acres and cover the site’s 30 active train lines. The platforms are anchored in bedrock by caissons carefully placed around the existing tracks to avoid disrupting train service during construction.

Building major projects on platforms is essential because ground-up development is difficult in New York, says Brian Kingston, president and chief investment officer of Brookfield Property Partners. Brookfield last November completed its own platform, creating 2.6 acres of new buildable surface area on air rights it owns over rail lines into Pennsylvania Station, the terminus for the rail lines running through Hudson Yards several blocks to the west. The platform will hold Manhattan West – Brookfield’s largest project to date – on which construction started in the second quarter. The development will comprise 2.1m sqft of office space. The first tower, scheduled for completion in 2018, recently signed global M&A law firm Skadden Arps as a 25% anchor tenant, Kingston says. Manhattan West will also include a residential tower, to capture the trend of locating urban office and residential space in the same area. “The live, work, play trends are strong, led by technology and new media companies,” says Kingston. 

Oxford’s participation in Hudson Yards and Brookfield’s Manhattan West are high-profile examples of foreign capital at work in New York City. But it is just part of a flood of global investment in Gotham in 2015, according to an analysis of capital inflows to New York from non-US sources prepared for IPERE by Real Capital Analytics. From January to September, RCA reports that capital from the 10 countries with the most active investors in New York City totalled US$29.7bn – nearly triple the US$8.8bn invested in all of 2014 and the US$8.1bn invested in 2013. 

Canadian investors have ranked first or second as capital sources for New York City property transactions in each of the past three years, RCA reports. Canadian sources invested in seven transactions totalling US$1.6bn in 2013 to rank second, rising to first in 2014 with 13 transactions totalling US$1.97bn. RCA tallied individual property and portfolio transactions with a value of US$2.5 million or greater. In 2015, Canadian sources have showed a marked uptick in their appetite for New York City property, investing in 27 transactions totalling US$7.1bn through September, almost as much as the 10 largest foreign capital sources invested in the city in 2014.

Despite a dip to number seven in 2014, with seven deals totalling US$461m, Chinese investors have consistently been one of the largest sources of capital for New York City property. In 2013, RCA says, Chinese capital was the top source for New York property, investing a total of US$2.13bn in four transactions. So far in 2015, Chinese capital has been invested into 22 transactions totalling US$5.56bn, second behind Canadian sources.

Inflows from Asian investors have been increasing, with Japanese capital becoming one of the top five sources so far in 2015, with US$1.2bn placed in 10 transactions. Flows from Asia, in particular from Japanese investors, are likely to continue to increase, says Christopher Okada, founder and president of Okada & Co, a New York City-based property investment firm that focuses on Japanese investors.

Japanese investor interest in New York City reflects expectations that a correction in developing country property markets will take place, Okada says. Many Japanese property investors have invested across Asia for the past five to 10 years because it was to Japan closer than the US and presented better valuations. “Now the situation is that Asia is going to be first to have a correction,” he says. “A correction in a developing country could be a lot more aggressive than in a developed market,” he adds, so investors who have “made money in the recovery want to protect the capital”.

 Origin of capital

New York City is an appealing safe haven, Okada says. Cap rates on quality New York property are running in the 2.5% to 4% range, and while that is historically low, it represents a significant edge over the 3% cap rates common in Tokyo, he says. 

Okada advises clients to negotiate carefully in New York City transactions. “Now everyone has capital, and many things are expensive,” he says. There is also a bias against selling, he adds. “In the current market, owners have to ask, ‘what are we going to do with that capital?’” Large property funds with performance goals or limited lifetimes, he says, are more likely to be sellers, but typically don’t hold the Class A office property that Japanese investors are seeking, while REITs with Class A property are also holding such assets in the current market.

Property specialists are spearheading the new wave of Japanese investment in New York, Okada says. Among recent transactions by Japanese investors were a US$247m purchase of an office building at 370 Lexington Avenue by Tokyo-based Unizo Holdings, and the purchase by Tokyu Land Corporation of a stake in a 47-story office tower being developed at 425 Park Avenue. The US unit of Mitsui Fudosan Group, a Japanese real-estate company that has maintained a long-term presence in New York invested US$258m for a 90% stake in the 55 Hudson Yards tower.

In tandem with foreign interest in New York, renewed interest in living and working in cities is driving demand for housing and office space. At present, more capital is being allocated to the residential sector. “One thing we see in cities like New York is that companies that have been in the suburbs are moving back downtown,” says Kathleen McCarthy, chief operating officer of the real estate group at Blackstone Group. “This demand is not met by new construction, largely because developers prefer the returns from condo projects.” In Midtown Manhattan, where several condo towers are being built, new office supply isn’t keeping pace, “so you kind of have this residential crowd-out at a time when there’s healthy office demand”, she says.

In the office market, McCarthy tempers concerns that mega developments like Hudson Yards could have a negative impact on Midtown office prices. “While certainly that’s a lot of new supply, it’s catering to a particular type of tenant that needs a lot of space, and we don’t feel that it’s an overall threat to the core of Midtown, for example,” she said.

Ultimately, it is also New York’s position as a global leader in cultural, artistic, fashion, media and finance industries that makes it a top destination for investors seeking a secure long-term base for significant amounts of capital. “People want to come to New York City,” Okada says.

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