Rate Hike Anxiety and Related’s Big Appetite – Commercial Observer

“We’re not even close” to being in a recession.

So declared Moody’s economic prognosticator Mark Zandi earlier this month at the National Multifamily Housing Council’s 2022 fall meeting in the nation’s capital. Hopefully that should put us all somewhat at ease, because we’re still in uncertain economic waters.

To wit, this week the Fed announced a 75 basis point increase in benchmark interest rates. (It’s the third hike since June and the fifth since the beginning of the year.)

“Borrowing essentially has become two times as expensive since the beginning of the year,” Lisa Knee, partner at EisnerAmper, told CO.

And these borrowing costs have been doing predictable damage to the single-family market, according to a report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, which found that permits to build single-family homes were up only 3.5 percent in August. In comparison, the number of permits for multifamily dwellings increased 28 percent.

“Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households,” National Association of Home Builders Chairman Jerry Konter said. (The NAHB had its own dire report earlier in the week.) “In another indicator of a weakening market, 24 percent of builders reported reducing home prices, up from 19 percent last month.”

But this is kind of what the Fed is shooting for.

“Housing prices were going up at an unsustainably fast level,” Fed Chair Jerome Powell said when announcing the rate hike. “For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace, and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place.”

But, pain of dealing with a correction aside, there are reasons to be optimistic about the long-term future.

One indicator is in the land market. In Manhattan, it had been going crazy over the summer. While price per square foot is not what it was at the top of the market (circa 2015 and 2016) dollar volume for land sales are on pace to be 103 percent of what they were last year, according to JLL’s Robert Knakal.

“The activity has been precipitated by the consensus that inflation and higher rates are a shorter-term dynamic, and three to four years from today, when what is being purchased for construction will be coming online, broader economic indicators will be back to relatively normal levels,” Knakal wrote in his CO column.

In Related news…

You know what region needs more housing? Southern California. And do you know who’s been answering this call without any misgivings or second thoughts? Related Companies.

The mega-developer just announced plans to turn the 41-acre Metro Town Square in Santa Ana, Calif., into 4,000 units of housing that they’re planning on calling Related Bristol.

California was bursting with plans last week; the New York-based East End Capital filed plans for a project with 10 new soundstages, three flex spaces, offices, a four-level garage and more in Glendale.

The Sullivan family (best known for the Toyota of Hollywood dealership) proposed a major redevelopment of 6000 Hollywood Boulevard that would include a new 35-story multifamily tower, a six-story office building and multiple low-rise residential townhomes for a total of 350 units.

And a retail center in Lancaster (more than 60 miles from Downtown L.A.) also changed hands last week. Merlone Geier Partners traded the 35-acre, 715,000-square-foot Valley Central mall to Bridge33 Capital for $45.3 million.

Speaking of retail

Along with Valley Central there was interesting mall activity this week. A joint venture between The Meridian Group and Martin-Diamond Properties acquired five J.C. Penney stores in Virginia, Maryland and Delaware comprising some 900,000 square feet for $53 million.

Investindustrial, a private equity firm, put down $200 million for a majority stake in Italian food hall chain Eataly, with plans to open new flagship Eatalys around the world.

And there were interesting retail leases as well.

The indoor golf company Five Iron Golf scored a 30,000-square-foot, 15-year lease at H.J. Kalikow & Company’s 101 Park Avenue. (It’s the golf company’s sixth location in New York.)

Grimoire Group signed a 10-year lease for a 6,721-square-foot Asian fusion restaurant at 31 Penn Plaza.

A few blocks west we learned that Wild Ink is out and sushi bar BondST is in at Hudson Yards. (It’s BondST’s second location.)

And (maybe it’s not retail but it’s certainly retail adjacent) e-commerce marketing firm Yotpo subleased 30,688 square feet from Flatiron Health at One SoHo Square, aka 233 Spring Street.

Not everybody had a great week

In case you didn’t hear, ex-President Trump has legal problems. In addition to the unfavorable ruling he got from the court-appointed special master on the top-secret documents he was hoarding at Mar-a-Lago, the former president’s real estate business was hit hard by New York Attorney General Letitia James.

In a 214-page civil suit, Trump, his organization and three of his children were accused of fraudulently manipulating property valuations for tax and loan purposes. The suit is asking the Trump Organization to repay $250 million and would bar Trump, Eric Trump, Donald Trump Jr. and Ivanka Trump from making commercial real estate acquisitions in New York for five years, and from serving on the boards of any New York firms.

Of course, Trump wasn’t the only one to have a bad week.

The remaining $126.8 million balance of Citigroup’s commercial mortgage-backed securities loan to Cohen Brothers Realty for its Midtown skyscraper at 750 Lexington Avenue — aka International Plaza — has been put into special servicing.

And Tishman Speyer is swatting away a lawsuit, launched by the watchdog group Housing Rights Initiative and a current tenant at Jackson Park in Long Island City, claiming Tishman Speyer skirted the rent stabilization laws. (The tenant in question claims that their rent went up 58 percent from 2021 to 2022.)

We’ll always have Florida

Florida had a pretty good week, real estate-wise.

Related Companies — again with Related Companies?! — is proposing a 25-story, 456,000-square-foot office building in Downtown Miami that they’re calling 515 Fern, a block from the Brightline train station and featuring some 15,000 square feet for retail.

They’re not the only big New York-based real estate company to broaden their South Florida plans. Jim Zboril, previously of Tavistock Development Company, was tapped last week to be CEO of the West Palm Beach-located L&L Development Group with plans to expand the firm’s presence across the Sun Belt.

Heck, the Magic City is even doing flex office leases. Quest Workspaces just grabbed more than 26,000 square feet at CP Group’s One Biscayne Tower.

And now for some quiet Sunday reading

Another developer who has seen his future in multifamily has been William Macklowe (better known as Billy).

Macklowe is in the midst of developing one of the most exciting (and excoriated) Park Slope projects in years at 120 Fifth Avenue. Macklowe sat with CO to discuss Brooklyn, multifamily and the future of the five-day workweek.

To those who observe, have a sweet new year.