Matthew Garcia

(646) 472-8741

mgarcia@besenassociates.com

 

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October 2014

Investment Sales: Finding value in a heated market

Pricing metrics have continued to rise sharply throughout 2014. Even as cap rates continue to compress, in some cases at least 150 basis points, the competition for certain deals has been unrelenting.

 

An investment that's offering a 4% yield with little or no upside or no true value-add component is most likely not going to generate overwhelming competition. Investors have a watchful eye towards anticipated interest rate hikes sometime during 2015 as unemployment numbers continue to decline. However, when the property offers growth potential, the demand is there from sophisticated investors.

 

I was recently involved in a multifamily assemblage transaction in Kips Bay, where the deal had enough "hair" on it to make Chewbacca look like he was going bald. The initial yield was sub 2% and there were numerous issues related to lack of DHCR registration, legal tenant status and a non-conforming use. Beyond all those issues, there were multiple scenarios available for an investor to achieve the highly sought after, value-add component. This particular investor worked aggressively with our firm and we completed an assemblage of five contiguous properties, which unlocked a 100,000 s/f development opportunity. The price per buildable square foot was roughly $400, which offered tremendous value for an avenue property in Manhattan.

 

Extending to the outer boroughs, we've completed similar value-add transactions on a smaller scale. I recently closed on 30-unit multifamily transaction in The Bronx, where the building previously had a fire resulting in excess of 200 HPD violations. While this type of deal isn't for everyone, the experienced investor who is willing to maintain flexibility in this environment can prevail. The buyer for this property agreed to significant escrows with their bank, in addition to fixing two of the units gutted by the fire post closing. Their reward was a property that traded below a Gross Rent Multiplier (GRM) of 7 and less than $80,000 per unit, again representing significant value in today's market.

 

Savvy investors are being more discerning in today's market. However, despite the increase in pricing metrics across the board, there are still opportunities offering tremendous value. They may require more patience and a few more rounds of negotiation, but good deals are still out there!

 

Matthew Garcia is an associate at Besen & Associates Inc., New York, N.Y.

 

 

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