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Return to the Fray – NY Times
Real Estate Developers Adopt New Approaches
By ROBIN FINN
In a bear market, most developers are not inclined to hibernate like bears as a strategy for self-preservation. Be they a Macklowe, Zeckendorf, Trump or Barnett, their modus operandi borrows from feline superstition: if they have nine lives, they’re going to spend them all building or go bankrupt trying.
Topping their last act is their next act. Setting records for per-square-foot sales falls someplace between their holy grail and an addiction. No wonder that everybody and his brother wanted in on the development contagion that overtook New York City, and much of the nation, midway through the last decade: fortune, if not fame, seemed a sure thing, and unlike many other lucrative professions, developing buildings required no special diploma.
“Every Tom, Dick and Harry had this grand vision of being a developer and wanted to get into the game,” said Kelly Mack, president of the Corcoran Sunshine Marketing Group, “whether their background was law or construction or media or medicine. And there was no velvet rope to keep them out. Cash was easy to come by, inventory was being absorbed at miraculous rates, and irrational exuberance was the order of the day. And then the market fell off a cliff overnight.”
Some amateur developers and would-be developments went with it, while many fledgling projects intended as condominiums switched categories to easier-to-finance rentals, contributing to a severe decline in inventory of marketable Manhattan residences, which this September dipped to its lowest level in 13 years. Now, some residential developers who weathered the recession are bringing new projects to market that could begin to mitigate the inventory shortage.
Data compiled by the Corcoran Sunshine Marketing Group show that in 2007, a boom year, 8,052 new units opened in the city as planned, but that by 2009 — also known as the Year of No Building — just 497 units opened and a daunting 1,348 were canceled or postponed. In 2012, Corcoran Sunshine calculated that 58 percent of the projects it was working on were conceived before the 2008 market meltdown.
But one developer’s setback morphed, as the recovery began, into another’s strategy for scrambling back just in time to deliver a finished product to an inventory-starved market: according to Corcoran’s data, last year 1,132 new units hit the market, with just 136 postponed or canceled, and the projection for this year is 2,500 new units and no cancellations.
The correction to hyperproductivity is traceable to September 2008, when the Lehman Brothers crash made it clear that business without margins, with credit strewn around like candy to builders and buyers, was not sustainable. Construction loans were rescinded. Investors beat a retreat. The equity-rich major players, many of them members of dynasties, took a pause: they could afford to. Some developers left skeletal construction sites in their wake like urban ruins.
“I saw too many bad developers with no real expertise get into the business out of greed,” said David Ennis, a principal of the Daten Group, which specializes in turnaround projects — resuscitating other developers’ deals. “But you’re not in a game where there are no consequences. When you’re the developer and it all falls apart, the fingers are all pointing at you. The bankers who wrote the bad loans? They shut off the lights and hid under their desks.”
The tactics Mr. Ennis and others adopted to remain solvent and relevant while they waited out the crash were twofold: they dialed back their own dreams and focused on rescuing orphaned projects. “The term ‘vulture real estate’ got thrown around,” Mr. Ennis said. “Nobody quote-unquote ‘likes’ a developer, because of the perception that we’re just in it for the money, but a failed project is like a canvas left unfinished. There’s nothing worse than a vacant project sitting in your neighborhood; it can turn into blight.”
The recovery took four years, and Ms. Mack noted that 7 of 26 actively selling developments that went dormant in 2009 returned with new development teams at the helm (like One Madison Park, taken on by Related Companies and HFZ).
“The developers that survived the downturn unscathed were probably lucky,” said Jonathan J. Miller, the president of Miller Samuel, a real estate appraisal firm. “The ones that were ‘first in’ during the last boom were probably more likely to have seen less impact, since they were busy finalizing their initial wave of projects when the party ended. Late adopters of the development trend were more likely to be crushed by the market.”
“Developers develop until they can’t develop anymore,” Mr. Miller observed.
Anbau Enterprises, a Manhattan-based firm, reluctantly adopted a pre-emptive stance and pared three enticing Manhattan prospects down to one, the 29-unit Citizen condominium at 124 West 23rd Street in Chelsea. The theory was, better to complete one than to overreach and take the risk of foundering with all three. “The worst thing you can do, if you’re a developer, is to lose a property you own,” said Barbara van Beuren, a principal. “Having a vision for a property is great, but what good is it if it sinks you?” Anbau signed the contracts on the $52 million Citizen the day Lehman collapsed: “Everybody was freaking out, and the closing took all day.”
According to Ms. Mack, today’s market “has little or nothing in common with what went on before, and that’s probably a good thing.” She explained: “It brought an end to gimmicks; credibility is being rewarded, and although we’re seeing a new generation of development trading for the highest prices ever, it’s rooted in a rationality that didn’t exist in the last cycle. People understand that in a market with so much more transparency and such tighter lending restrictions, only the best developers are still able to play the game.”
The best are not necessarily the biggest or the most prolific: Anbau Enterprises, Daten Group and Brookland Capital, three niche developers that struggled through the recession, shared their disparate strategies for negotiating a moribund market and a hostile lending arena.
Brookland Capital
There was a grim period in 2009 when Boaz Gilad, an actor-turned-landlord-turned-founding-partner at Brookland Capital, which now has $100 million invested in condominium conversions in Brooklyn and projected sales of $180 million, envisioned himself bankrupt and blackballed. After the company completed five small conversions, his main investor, Banco Popular, abruptly withdrew financing on the two in-progress condo projects he was staking his reputation on: Emory Street in Jersey City, which he lost, and 659 Bergen Street in Prospect Heights, Brooklyn, a pet project he refused to lose and yet wound up completing after the bank sold his note to a new owner who agreed to let him finish the construction. “I basically became my own contractor,” he said, “and it was a huge loss for me, but I’ll admit it, we’d completely messed up.”
The Jersey City site, a 33-unit gut renovation, was Mr. Gilad’s sixth and largest project, and his first and last in New Jersey. “It was one of the biggest failures of my life,” he said. “The bank came in, reappraised it, and told me it wasn’t worth half of what they’d lent me, so I walked away and gave them the keys.” The big surprise came when the bank did the same thing at Bergen Street, where there were already units under contract in the $350,000-to-$400,000 range.
“When 2008 hit,” added Mr. Gilad, 42, “we had 120 units in different stages of completion at different sites and it’s taken us five years to clear our table.” This year he stabilized his business, gaining a partner, Assaf Fitoussi, and opening a Bedford-Stuyvesant office. His payroll, which dipped to single digits, now lists 32 employees.
“I lost almost everything, sold my brownstone in Park Slope, and I guess I represented every problem there was when the market tanked,” he said, “but for me, in the end it was like the best M.B.A. I could ever ask for. It turned my beard gray, but it turned me into an old-timer in the way I do business. When I buy land, I pay cash. I only build condos. And I only buy in Brooklyn, because Brooklyn is what I know.”
Mr. Gilad, unable to get bank financing during the recession — ”I think I reminded them of a bad relationship,” he said — scraped through by buying up small houses in short sales, remodeling them, and reselling at a small profit. He ultimately found a foreign benefactor in an Israeli private-equity fund, Upreal, that was eager to invest in Brooklyn. “I went where the money is,” he said, “and now we’re bringing 461 condo units to market.”
The company has over a dozen projects in the works in Brooklyn, including one in Williamsburg at 156 Broadway, a nine-unit renovation of a cabinet factory, and one in Bushwick, the conversion of a church.
Anbau Enterprises
Stephen Glascock, an architect with a master’s in real estate development, and his wife, Barbara van Beuren, also an architect, opened Anbau Enterprises in 1998 with the intention of making design elements as pivotal a driving force as financial returns. Their early projects were conversions, and their first ground-up development was the Harsen House, a 60,000-square-foot building at 120 West 72nd Street: the units sold out five months before completion in 2008, with sales exceeding projection by 20 percent.
“Our business model was to keep it small and not get overexposed like a lot of developers did in 2006 when things were frothy,” said Ms. van Beuren. But they did have three hot prospects on their drawing boards in 2007: a waterfront site on South Street, an Upper East Side site on York Avenue, and 124 West 23rd Street. With a year invested in design plans, contract negotiations and legal fees, they decided to drop two of the projects and concentrate on the Chelsea property.
“You could see the writing on the wall — there were signs of trouble,” said Mr. Glascock, who was a senior project manager for Eichner Enterprises before starting his firm. “Interest rates dropped from 8 percent to 5 percent; there was way too much cheap money floating around; land prices were going up; and developers were starting to use margins we weren’t comfortable with.” So their keeper project was the smallest, and in an established neighborhood. They chose not to take it as a bad omen that Lehman bottomed out on their closing day.
“We picked the plan we felt was the most sustainable,” he said, “and then we put it in hibernation. We had the mentality to hold on through the bottom of the cycle, knowing we’d have something solid to sell into a rising market once it came back.”
In 2009 they did demolition on the site; then they restructured their loan, waiting until 2011 to begin construction on the Citizen, which is 95 percent sold out, with the top floors selling at $2,600 per square foot, far beyond their projections. Anbau has moved on to new ground-up developments: it bought a nearby parking lot in foreclosure at 39 West 23rd Street and recently broke ground on a property at 155 East 79th Street, which they intend to reinvent as “uberluxury condos,” said Ms. van Beuren. “It sounds corny, but New York City is the greatest stage set in the theater of life, and to not make a positive contribution to that stage is a missed opportunity.”
The Daten Group
David Ennis, the principal of the Daten Group, moved back to New York from Miami in 1993 to take a job with the Blumenfeld Development Group, where he spent eight years analyzing acquisitions. “I came in during a down cycle,” he said. “They were buying up properties at 10 to 20 cents on the dollar, buying while other people were selling, which takes fortitude.”
When Mr. Ennis opened Daten in 2001, the goal was to “value-invest” in a destination neighborhood, and his first target was TriBeCa, where he bought 48 Laight Street out of bankruptcy after another developer defaulted. He built nine condos priced from $975,000 to $3 million, some with 14-foot ceilings, all nine generating enough buzz to lure buyers. He did a joint commercial venture in Harlem with Blumenfeld, but by 2006 and 2007, he was confronting land prices out of sync with his business plan and was tired of being spurned by Wall Street banks.
“The last piece of property I attempted to buy was near the High Line,” he recalled. “Our group was bringing in all the new equity on what was to be a $100 million development, but I walked away from the closing table because they wanted to restructure the terms of a joint venture, and my desire to protect our equity was greater than the need to do an amazing ego-driven development.” He, too, spent the downturn paying cash for small distressed properties and rehabbing them. Then, in 2011, he bought a five-story walk-up at 1462 Second Avenue. Where a mom-and-pop hardware store had been the anchor, there is now a Meatball Shop, with rental units above.
Ever on the hunt for a bargain, that same year he took a look at 72 Poplar Street in Brooklyn Heights, a former police precinct house for which Regal Investments had paid $9.4 million in 2004 only to grow frustrated over the years as its conversion plan failed to find approval. The situation reminded him of Laight Street; he bought the building at a deep discount and had his conversion approved in 2012. All 14 units are on target for completion in June 2014; prices will start at $1.7 million. His financing came through Valley National Bank. “They are a prudent bank,” he said. “They took a chance on me, and now we have a great relationship and we’re bringing a great product to the market.”
Mr. Ennis said he would never work with Wall Street again. “They’re like serial daters: here today, gone tomorrow.”