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Northern NJ-Based CRE Investment Firm Active in Metro NY Area and South Florida
ROCHELLE PARK, N.J./MIAMI, FLA., May 30, 2019 – Are warning signs on the horizon signaling a pause in multifamily? What do real estate investors need to consider in today’s market and what sectors should investors with a higher risk tolerance focus on? In the following Q&A, Sanford Herrick, founder and managing principal of Case Real Estate Capital, LLC (Case), addresses these questions and a range of others. Founded in 2013 by Herrick, Case is a northern New Jersey-based commercial real estate investment firm with discretionary capital.
Q. What do investors need to consider when they’re looking into real estate opportunities in today’s market?
Real estate investment opportunities are not all homogenous, so begin by examining a variety of asset classes and consider how they’re doing. Once you’re comfortable with the asset class, look into the track record of the developer, paying particular attention to their experience and their returns in tough times, as well as boom ones.
Q. Multifamily housing has been attractive, especially as millennials move into urban areas. Is that segment still robust?
We’re seeing some warning signs that could indicate a pause in multifamily. One important indicator, multifamily housing starts, was flat in March according to recent figures from the National Association of Home Builders (NAHB). This trend toward a pause was reinforced by a forward-looking indicator – permits for the construction of multi-family homes – which fell during the month according to the NAHB.
We think that was spurred by a combination of oversaturation in some areas – other than the New York metropolitan market – along with less of an appetite on the part of banks, since they may be concerned that multifamily loans represent too much of their portfolio.
Still, we’re not bearish on the entire multifamily segment. Some sub-categories are still healthy, particularly in developments that appeal to millennials and Gen Xers. We believe that investors may wish to look for opportunities in communities featuring a wide range of high-end amenities. Across demographics, apartments with upscale kitchens, developments that are close to transportation hubs, and municipalities with walkable downtowns also tend to attract tenants.
Q. Where has Case been active lately?
We recently funded a $4,175,000 first mortgage bridge loan with an extension option, secured by a 1,875 square-foot lot and in-progress five-story townhome in the Park Slope neighborhood of Brooklyn, New York. It is slated to be completed and listed for sale in the midsummer.
This is the first ground-up construction project for the borrower who possesses extensive investment analysis expertise and has completed numerous smaller scale renovations in the metro New York area. The sponsor was over budget on construction costs and will utilize Case’s funding to pay down the first and second mortgages and to complete the remaining 20 percent of construction.
The property is in the vicinity of the Barclays Center, and the Park Slope neighborhood features a mix of popular restaurants, interesting shops, and a nightlife that caters to a variety of tastes. The site also benefits from its proximity to Prospect Park and its easy access to roadways like the Prospect Expressway, as well as public transportation.
Q. What kinds of asset classes are performing well now?
The relatively robust economy has encouraged companies to expand – look at the record-low unemployment numbers we’ve been seeing – which has increased the demand for office space. Consequently, that asset class continues to do well, while a subcategory, co-working spaces, is posting particularly good numbers. In late 2018, for example, WeWork became the largest private occupier of office space in Manhattan.
Q. Any recommendations for investors with a higher tolerance for risk?
Some investors may want to look into the retail asset class. In the New York area, this segment has experienced some challenges, mainly because of the march to e-commerce. But some property owners have adapted by marketing their space to professional service and other providers.
We’re also seeing an increasing number of e-commerce providers taking a hybrid approach by leasing physical space in the New York metro market. A recent commercial real estate report highlighted the fact that a record number of e-commerce retailers opened permanent stores last year in New York City, while an additional 850 are expected to open up there during the next five years.
Q. Are you seeing any signals that could impact the wider real estate market in a negative way?
There had been some concerns that the Fed was inching toward even higher interest rates this year, but that’s looking doubtful now. Even if rates do creep up, we believe the underlying market demand is strong enough to overcome that kind of drag.
But, the frenzy of construction that we previously saw could come back to haunt the market – or at least pockets of it – particularly if political policies are adopted that inhibit construction and investment activity and if economic shifts occur that could spook investors. Underwriting quality may be another concern.
Q. What kind of general advice would you offer to investors?
The ‘sweet spot’ of Case Real Estate Capital involves lending against complicated transactions, and we think investors profit when they follow a core strategy – pay close attention to market conditions so you can understand them, anticipate them and profit from the shifts. Also, be aware of your risk tolerance and let that guide you. Investors and developers alike that keep these approaches in mind will be better positioned to find opportunities in a variety of environments.
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