Purchasing in a New Development

Gary Malin and Jodi Stasse join Jamie to discuss the latest on the New Development pipeline, including the flourishing office space to residential conversion segment.

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Jamie: Hi Gary.

Gary: We have my rockstar, Jody, in my office.

Jamie: We do. For those of you who don't know, Jody, you head up new development over at Corcoran? Correct?

Jodi: I am the executive vice president of new development at Corcoran, which oversees a luxury rental and condominium portfolio and then a senior managing director at Corcoran Sunshine.

Jamie: Nice. What are you seeing if you were to compare right now to this time last year?

Jodi: We've definitely seen improvement in the market, I think across all price points. There were some really important introductions in the new development space last year with 5, 25th Avenue being one of them. But we've seen these buyers that have been on the fence actually get back in the market and are very focused on transacting. And for the product that's over $5 million and even the product that's over $8 million, a lot of those transactions are people that have been coming back over the past 12 months. So we do see some new people jumping in the market that are looking to make a decision, but I think the messaging behind this discussion would be a little bit of how important that follow-up is and staying in touch with those buyers that are really trying to understand if it's the right time.

They've been paying attention and watching to what's happening over the market for the past 12 months and now we're seeing them make some decisions and in this situation have even lost the opportunity to buy maybe their first choice but really want to be in a certain building and location and are realizing that as the inventory is starting to absorb that,

Jodi: It's kind of now the time if you want to jump in to really start to explore making a decision moving forward with the purchase. And we've seen that happen across all price points in the portfolio.

Jamie: Gary, I mean obviously you're sort of at the same end of it, but anything that you want to kind of add to what Jody's saying?

Gary: I think there's optimism back in the marketplace which fuels transactions. I think since October of last year we've seen a lot of strong interest in the sales market. Again, more than we've seen for quite some time. I think the election is behind us, good, bad or indifferent depending on your vantage point, but more importantly the fact that interest rates are what they're going to be and people have gotten to the point where they understand that whether they like it or not. I understand that they'd like it to be lower, but at a certain point in life you need to move forward. You need to move to a different location. You want to downsize, you want to upsize. You just want something different than you currently have. And I think at this point people have just gotten to the point where now is the time to act and it's nice to see, and Jody and team at Corcoran Sunshine and Corcoran New Development, we're just seeing a lot of healthy activities. So it's great news to see.

Jamie: Yeah, I mean I'm definitely seeing that too. I'm curious, Jody, so you guys have the benefit, you have the rental and you have the buy side. Are your tenants coming in and becoming your buyers now, on the new dev side of things?

Jodi: There's definitely a significant increase in the renter that is in a private residence that is paying a very high rent that has been on the sidelines for a little bit and have decided now is the time to purchase. We've even seen some of that happen in the existing buildings that we're selling where there may be renting from a private owner and have decided . Actually, we've had three of those happen in the last 60 days. There's definitely a moment in time that I think when somebody has maybe even over the years wasn't sure about a location, wasn't sure if they were going to be able to settle into a certain area in the city, are renting in that location, kind of really put down the roots. They are comfortable, they've got their routines. I think that has been very successful and helping us move those renters into buyers where they're already within the property.

Jodi: But we're also seeing a lot of those renters that are coming out of these very, very high-end rentals and large residences. And during the past probably three to five years, the quality of that renter has really changed and they are absolutely buyers in the market, but had decided maybe that they wanted to take a pause, see what was happening across the city, focus on the interest rates even at the $5 to $7 million price point. We're seeing more mortgages where they are now starting to think that it makes more sense for us to make a purchase or we want some security in where we're living and we don't want to be in a situation where we're renting from a private owner that may not renew our lease or may decide now that they're going to sell as inventory is absorbing.

So we're seeing more of those people absolutely jump into the first sale market and make some buying decisions. I think that goes back to the importance of staying in touch with these prospects that show interest because as leases continue to move through those annual six months, eight months, they start to really start to consider what they're going to do next. So I think when you have somebody that you know is qualified and is showing continuing interest, we're able to bring those people back in and get them to transact.

Jamie: Historically, in new development, there's some concessions depending of course, how many units are available, whether it's that line or that size. Are your developers offering any incentives right now where they just don't need to?

Jodi: I think we've seen adjustments happening across the markets to pricing over the past probably 24 months more significantly. I think that those adjustments where the developers have adjusted to meet the market with their pricing, there's very little negotiability or incentives. In a situation like Hudson Yards, we're not negotiating on price at all. We're able to offer transfer tax, not much more than that. It's a very strong position for the sales team to be in and to help guide the brokers that are representing their buyers on where we're at based on the adjustments that have been made over time. I think the one thing that is important for us is to continue to educate the brokers on how the pricing has adjusted, right? Because I think the buyers tend to react to the last available public price and want to continue to push or negotiate from there. And there's a lot of buildings across the city that are positioned perfectly in the market today and are offering an incredible value. And I think it's that education process that's been able to get people off the sidelines.

Jamie: Gary, I know that you have something to add to that.

Gary: Listen, I think that the ultimate thing is experience and knowledge are one thing, but having a team that are closers, a team that understands the business, has a great relationship and rapport with ownership, that's providing them with the information that they need to hear, not necessarily what they want to hear, are the sites that are doing really well because ultimately speaking, it's always a partnership, a collaboration, whatever the proper word is between the onsite sales team and ownership. When you have a team that's coming from position of strength that has a good working relationship with owners that provides real data, it informs the seller, in this case, the sponsor to price their units accordingly. Not all units are created equal, not all locations are created equal, but when you have data and you have information, it drives deals. And I think having a team behind you like Jody and everyone that she works with is an added value that just gets things moving and creates the expectation.

Gary: And listen, every buyer wants to buy low, right? That's what they want. No one knows where the bottom of the market is until we're past the bottom of the market and it's on its upswing. So to me it's always like, what are your reasons for moving? When do you need to move? Does this home resident suit your lifestyle? If the answer is yes, trying to find every last nickel, as Jody said, all of a sudden, someone came in and bought something that you wanted so much and you're going to regret it. So it's important to really also, whoever you're representing you on the buy side is equally as informed because that'll make a transaction cleaner.

Jodi: I think that is also such an important point to make when you've got these dedicated onsite teams, whether they're agents, whether they're onsite sales teams that are working for one sponsor at one building -- they are there really to guide, inform, so that the brokers and the buyers can make good, informed decisions. And most of the time, almost always, if those sales teams are coming back and saying that there is no negotiability, or we're not negotiating on price, or not paying transfer tax, that really is providing some information so that the broker and the buyer can go back and understand what it's actually going to take to transact at a specific building.

And it's different all over the city. Based on what you're looking for, the stage of where they're at in the sales cycle, what they have left, that experience is going to look and feel a little bit different. I think that's what is so important for the brokers to understand when they're working with their buyers that what they're experiencing from one building, what we see happen is they try to bring that and maybe apply it to a negotiation in something totally different and they really are not aligned.

Jamie: Just curious. And I don't think that the market's at this place now, any developers offering financing from the developer, from the ownership?

Jodi: I haven't come across that. I mean I think there's been some programs to buy down rates, which honestly at some of these higher price points, it doesn't even make sense. It doesn't make sense for the developer or really it's not that impactful for the buyer. So we haven't really seen those programs I don't think take off.

Jamie: I don't think it needs it right now either.

Jodi: That's right. We are seeing more mortgages at these kind of higher price points, which is interesting, like $5 to $7 million and they may be only financing 50%, but there's definitely more of that happening in the marketplace over the last six months.

Jamie: From what I'm hearing from clients on the higher end of it, they're able to borrow against their own money, and then be able to get the rate down. So instead of paying six and a half, they might be getting something in the fives, which is really gives them the ability to make money on it. So I am seeing that as well.

Jodi: There's also always that education and that discussion around that you can refinance. When somebody is really, they really want to make that purchase. I mean the rate is the rate today and we know that it is going to fluctuate. So there are probably opportunities that the rate improves to revisit your financing structure. I think that's all part of that education process, especially a first time buyer. I mean I always laugh because I've worked all over the United States, but we talk about first time buyers in New York at $2 and $3 million. It's such big numbers, but still it's an investment in real estate and they're really trying to wrap their head around that total monthly expense.

Jamie: And what's actually probably good on the new development side, there's generally speaking at least one of the commercial lenders that has that first time buyer’s product. I know Citizens had it, I think it was like $10,000 off or whatever it was, but there's some stuff out there. Any new developments that haven't even been built yet or first coming up that you have in the horizon right now?

Jodi: There is a lot in the pipeline I think across the city. All different types of product that we are working on across the portfolio. I think that we're going to see that happen in the next, really the stuff will be in the market for sale, probably looking like 12 to 18 months it feels like based on the timing that we need to be in the market. There's some great properties happening around the city that I think we're really excited about. It's probably not the right time to announce what they are, but I think you're going to see product entering that $2 to 5 million price point, which I think we've really absorbed a good amount of that across the city. I think that's an important introduction of for sale product that the new development world needs to look at. And then you've got some incredible towers that are planned across the city that are going to continue to deliver that ultra luxury lifestyle as they continue to evolve.

Jamie: Are these new ones that are going to be coming up in the next 18 months, are they with affordable housing or no tax credits,

Jodi: No tax credits.

Jamie: Gary, do you see new things coming up at all in the horizon with an affordable housing component to it?

Gary: Yeah. Jody and I are going to be working on some very large office to resi conversions that are going to have that component to it. I think that aspect of the rental side of the world is very exciting and intriguing because as opposed to the call it somewhat standard building process for new developments, you're going to have a lot of conditions in these conversions. They're going to offer very unique opportunities for really different types of apartments and different amenities and size and scale. So I think in those areas the answer is yeah, I think there's a lot of opportunity for that. The city's trying to do whatever it can do to entice people to do that. Unfortunately, some of the regulations that came down like City of Yes, most renters buildings that's under a hundred units on the new side, simply because the requirements of wages doesn't make it financially affordable. Everyone's going to look to see what they can do, but I think on the larger scale projects it's going to happen because it's going to need to happen. I think you're going to see a lot of really exciting introductions in the rental side over the next few years just because their office conversions are going to start to really accelerate rapidly over the next 12 to 18 months.

Jamie: That is interesting and exciting.

Jodi: We are exploring, there are a couple of situations where we do have some condo that is in that planning and design stage that is looking at how they could potentially add additional FAR with the City of Yes. And there's not a clear understanding of what that means. And some of those discussions have been like we may have to introduce some affordable for sale in a condo building and what does that look like and how do you apply that program? In some situations it could be two affordable units that actually will give us maybe enough FAR to create something special at the top of more of a mid-rise building across the city. We're in that kind of exploration period right now with a couple clients and trying to actually understand what can be built and what those ratios start to look like on the for sale side. It'll be the first time that I'm actually dealing with that on the condo side in the city

Jamie: And I imagine that there's going to be a tax abatement or something that's going to be presented that we don't even have yet.

Gary: Listen, housing needs to be built, and it needs to be built in a way that developers can afford to take on the risk and the city has to understand it's a give and take between both sides of the equation. I think everyone's for affordable housing, everyone wants to make sure there's affordable places for people to live, but at times if you drive too hard of a bargain, you're not going to get the result that you're looking for. So the office conversion stuff's great. I mean, way back in the day, we did so many conversions down in the Wall Street area. It was like every other day we would feel like we were doing another building and I think we're going to enter into that phase that some of these obsolete old office buildings that people historically never would've considered for resi conversion, they will and some will be 300-400 units. Some will be over a thousand units and I think that's going to help bring housing to the city and I think hopefully smarter heads prevail and they find ways to have a relationship on both sides. It's a win-win. I always tell people, you don't need to walk away killing every negotiations if feel like you've won. If everyone walks away a little bit unhappy / happy, then it's a win/win for everybody. I think the city is trying. I think some of the things aren't going to work and then they'll have to reimagine how to make it work.

Jamie: I don't know how long it's going to last, but there's going to be a burst of it coming. I'm sure.

Jodi: We're actually working on quite a few of them and I'm so excited because number one, we can't have these empty city blocks across the city. We can't have these buildings sitting there vacant. I think it's so important that they're repurposed. There's so much waste in the new development business. So being able to go at these from a design perspective where we can maybe try to repurpose what's there, make it meaningful, create great residential, have an important affordable component, and try to navigate what they've put in place with these new programs, I think is critical. And some of the guys out there such as a Nathan Berman with Metro Loft and Van Barton, they've really kind of mastered the equation on how to approach them and make them meaningful.

And if anybody had the opportunity to see any of the stuff that's new down in FiDi 55 Broad, they just launched 25 Water St. I mean these are incredibly impressive buildings and they've brought this important real estate back to life. I'm really energized by the attention that the office to resi market is getting right now. I wish more of it worked as a condo. Most of it only works as a rental, but I think it's really an important part of the progression of the new development you're going to see happen over the next three to five years.

Jamie: I wonder if this could happen, but there are so many older owners, and when I say older, I'm talking about just businesses that have been around for so long, whether it's the Dursts or lots of office space that's probably like C Space that at best right now, is three quarters vacant. In those situations, it would seem that it would behoove everybody to do something. And while they might not want to sell, why not do a lease on it, go lease it for 150 years and let it go back to your family?

Gary: It all depends on the building, what zone it's in, what's feasible, what's not feasible, air and light. Not every building is ripe for conversion. There's very strong segments of the office market right now. The class A stuff has done extraordinarily well. So now that that's being eaten up, the step below will start to get more activity, but there's always going to be a segment of the office market that's probably not going to be highest and best use anymore. If they can convert it because it's within a zone and it makes sense, I'm sure you'll see people doing it because in the end they'll drive really good prices.

Jamie: The one thing I'll say is I think that we might actually be seeing things that while we think we haven't seen it before, we really have. So take SoHo for example. You can go into an apartment in SoHo that is literally a three or four bedroom and it doesn't meet any light or air. And they've managed to get in there during the time of when they were doing these conversions and they were subject to either joint living work orders or A.I.R. and they just got in that way. You have them where they're in the middle of buildings, they don't even have windows and somehow they get bought and sold. And I do think that we're going to see more of that happening as long as it's safe, and no fire issues. I think that they'll have to, it's better than spending $80,000 per homeless person to be able to put them up somewhere.

I mean, that's what it costs. That's what they're calculating. I represent a ton of the affordable housing market and it's amazing to me. And now what's really nice and you're probably going to see with your developers too, is it's not just the city stuff anymore. The private CPC is coming back in there and doing the loans, giving the private money on it and still being able to participate in the programs. It's great that you're in it now because I do think the entrance will stop soon. I mean there's not that many of them on, I don't want to say maybe more luxury market that really has that. What is it? It's First Service, C+C, LWL... it's a good niche to get into.

Gary: There's lots of opportunity. Everyone's investigating what's feasible, and what's not feasible. And that's why I hired Jody. Right, Jody? Because you're going to make it feasible.

Jodi: Every building that we tackle is very interesting and challenging and this whole process of the conversions has become such an education for myself and our team. And the key there is to move with speed and get them into construction as quickly as possible. Understanding how do you approach the things like unit mix and depth of these floor plates and circulation and lifestyle. How do you make that all work with the affordable components that you're delivering and what the city needs on both sides? I really admire these developers that have jumped in very quickly because it's important work that needs to happen and not everybody can stomach it. I mean, it is a difficult process to move through.

As you'll see downtown, it's fun to walk some of the buildings that were done maybe over the past couple years and then see the conversions evolve in just the way that they're using the space and the lifestyle they're creating within the apartments and then within the lifestyle spaces of the amenities. The whole experience of those buildings, you forget that you're walking into what was an office building at one point in time, even as they're repurposing important components like a lobby or an elevator bank or things like that. It's been amazing to be a part of that over the past six months.

Jamie: Yeah, I don't know if they're going to be doing it in the office ones, but I know in general these affordable housing developments, whether it's subject to an article, whether it's United Finance Agency or HBD or HTC, they do make these little communities within the building itself. They try to, which is actually really nice, whether it's having the store or having just the medical, they do try. So it is really nice. What are you seeing in terms of the actual design development? If we were to say, flashback to COVID when we all were creating a certain way. Are we back to pre -COVID in terms of design?

Jodi: I think we've learned a lot over that period. I think one of the biggest misconceptions is this kind of hybrid work schedule that everybody is experiencing. And the reaction as we start these early sessions, these pre-development sessions, is: people are working from home and they want a place for a proper office or a desk. And that may be true, but just because the hybrid work schedules are probably here to stay in a lot of different industries, it doesn't mean that their income has changed much. So yes, we all want more space in New York City, but I think it becomes that affordability factor.

So trying to be very meaningful with how we plan for those spaces within these apartments I think is a focus of ours, where we're able to create space for furniture but not necessarily create extra rooms that are just adding to the square footage and the overall rents, but understanding the importance of health and wellness and creating spaces that will give people the opportunity to live better within their buildings including communal spaces to create those kind of community environments.

It's giving people coworking opportunities outside of their apartment. If two people are living together and somebody has to be on a call, it's creating these zoom rooms that are multipurpose but are actually fun to be in and places you could reserve for the day and make sure that you've got a place to come and go and be able to conduct the meetings or calls that you have to do throughout the day.

I think really being purposeful about what that experience is like within the building has been probably a lot more top of mind than it was I think pre-COVID. There was always a big focus on amenities, but now we're saying what are the important amenities in these buildings? What are actually going to get used? What are things in apartments that people can't live without or that they absolutely need? Furnishability, for instance....storage... things we take for granted but can be very compromised as you're moving very quickly through a pre-development process. So I think we're much more in tune to how these buildings feel, from the minute you arrive to what your life is like within your apartment.

Jamie: Are you expecting or taking into account a foreign market or are you assuming that we're just doing much more domestically now?

Jodi: I think there's a lot of people moving around and upgrading throughout the city. We're definitely seeing that right now. We still are seeing people that are looking for bedroom counts. So somebody that would be looking for a two, three, or four bedroom apartment in the Upper East Side rentals, that can rent what they need in space but probably couldn't purchase what they need in space. So there's that market in pockets of the city that really needs some attention. And you're seeing that happen on the Upper East Side with the Duchess, which is one of the buildings we just launched recently.

But I think across the city in general, I think that we want to be more meaningful with how people live their lives in these buildings. On the new development side, we tend to get a little bit disconnected and we talk about everything in price per foot and absolute rent, but people are living their lives in these buildings and we really have a focus right now on trying to make that the best experience we can.

Jamie: There's a bunch of buildings downtown, you were talking about FiDi. Prior to maybe six or eight months ago, they were having a lot of problems. The buildings were not selling, there's a whole bunch of them, we all know what they are, but all of a sudden I'm hearing there are more deals going on. What do you guys equate that transition to, from "we can't sell 77 Greenwich" to now "we're doing deals"? What is it that changed that brought more deals down there?

Gary: It's timing. People needed to transact, people needed to move forward. There's only so long in life you could stay in neutral. And I think at a certain point, life happens and when that happens, you want to go outside, you want to look and see what's available, you want to see what's suits your lifestyle: location wise, price wise, amenity wise. I just think it's a reflection of what's going on in the overall market. We're seeing more transactions because people are more optimistic.

People are ready to accept the rates where they are. If you're financing and accept the circumstances that they are what they are. You can only live somewhere you don't want to live for so long. And I just think it's a sense of the time is now and if prices have not really yet increased, if you get a lot of activity over the next 3, 4, 5 months, then you're all of a sudden going to think what you were saving, you're not going to save anymore.

It's back to the little concept like you should make informed intelligent decisions of course, and you need to understand what your economic bandwidth is. But ultimately speaking, sitting on the sidelines for too long isn't healthy for you or anybody else. Whether it's selling or buying, the simple fact is you want to move forward and get transactions moving. I think that's why you see it in the new development market.

Obviously, new developments are no construction, right? You're moving into something where you the buyer most likely does not need to do work other than cosmetic work. I think that's very appealing in today's day and age. Not everyone wants to take on a construction project.

Jamie: I've been writing off the older co-ops for a really long time now, and granted they sell because you can get the space, not the amenities, for a cheaper price.

Gary: Forgetting about whether you like or dislike the co-op process, let's just push that aside. There are people that want to live in co-op buildings because that suits their mentality. So if you're forgetting about the structure, you're talking about, in many cases, a different type of product that is being built than today.

So depending upon what your taste is, what kind of building you want to live in, depending on what location you want to live in, whether you love the co-op concept or not, it might be the only opportunity that actually meets or checks all of your boxes. I think you owe it to yourself always to go and look and see. But some people just, they can't handle it, right? They're not in the mood to be part of something that restrictive. Others love it being that restrictive. So I think it's really depending on who you are as a potential purchaser, how long do you plan on living there and what is your take?

Is this something you're going to plan on living in permanently? Is it something you want to rent out? I mean there's a lot of different decisions to make. I think the inventory type definitely appeals to a certain subset of buyers where the new glass towers that other people just die over and love, it doesn't appeal to them. Like I always say, not all real estate is created equal. People look at things differently and I think that's the beautiful aspect of living in New York City. There's so many different ways you can live. It's just choosing the one that suits your personality best.

Jamie: What do you think the developers are looking to do more of right now as we get into 0 25 through 26 and then next couple of years ahead? Are we looking to do the conversions from the rental buildings? Are they looking to just build more rental buildings or are we looking to do more co-op condos.

Gary: Economically speaking, if it pans out as a condo, there's condo builders. They will never touch a rental building if their life depends on it because that's just not their philosophy. Their philosophy is build, buy, hold. Then there's rental developers who love the rental business and they're going to stay in the rental business. So I think everyone's looking for opportunities. I think there has not been a lot of opportunities for people that they felt penned themselves out properly.

The City of Yes is certainly trying to push things forward. The office to resi is certainly pushing things forward. I think depending on who you are and what your outlook is, people are looking at both sides right now. There are a lot of opportunities on the office conversion. I think you're going to see a very healthy amount of those converted and if there's good deals for condo developments, there will be. But those are a different economic risk.

Jodi: I mean Gary kind of hit on it is getting the numbers to work. I mean I probably look at a deal a day. It is been that active probably since, I would say before Thanksgiving. There are people looking at every possible scenario. Whether it's an assemblage or conversion or a ground up, it's trying to get the numbers to work, you know...assembling the air rights, how high can we go, what are the exposures? Is it the right neighborhood?

The conversions, like I said, most of them don't pencil well for a condo at all. And they all are seeming to fall into the rental bucket. It's well over 5,000 units I think that are already in process in the pipeline for the next say 24 months. And then the condo product, we almost always look at them both ways, unless it's somebody, like Gary mentioned, that truly just wants to buy the rental and hold it within the portfolio. It's very hard to make these deep floor plates be meaningful as a condo. And usually the office buildings are not in those neighborhoods that will easily translate to convincing somebody to purchase.

I think there's a lot of flexibility when people are considering to rent. So I think that that is also driving a lot of the decisions on where these condo buildings fall into the conversion space versus the rental inventory.

Jamie: Good stuff. Well, I hope we'll get to have you on again, Jodi. And Gary, of course.

Gary: Alright guys. Thank you Jamie. I appreciate it as always.

Jamie: Thank you. Great information.

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