Interviews: Robert Knakal, Founding Partner Massey Knakal Realty Services

0:00 Speaker 1 Good morning. This is Michael Soila for the Stolaro State Report. I have the opportunity of interviewing the statistician as a call on Bob Knakel who’s the head of the New York Capitol Groups.

0:10 Speaker 2 New York Private Capitol Group Private Capital Groups.

0:12 Speaker 1 Thanks so since I introduced you as the statistician. What’s happening today.

0:18 Speaker 2 Michael, I tell you it’s a really interesting market and great to be with you. As always, you know, the market has been in correction mode. I’m talking about the New York City investment sales market been in correction mode since October of fifteen, with a brief twelve month hiatus that was the second half of twenty twenty one. In

0:36 the first half of twenty twenty two, and in the second half of twenty twenty two, all of the FED rate increases started to tangibly impact the market. In September, we saw spreads really blow up and that exerted some downward pressure on value. So we’re seeing a reduction in the volume of sales because of the downward pressure being

1:00 exerted on prices. And that always happens whenever anything happens in the market to exert downward pressure on value trading stops that we’re seeing a very slow pace of sales right now. There’s downward pressure being exerted on property values.

1:16 And interestingly, each product type is reacting very differently.

1:21 Speaker 1 So let’s talk about each product type and how they’re reacting.

1:24 Speaker 2 Okay, well, we look at the multifamily market. Is very interesting. Clearly cap rates are higher based on higher lending rates, but it is remarkable to me the amount of demand that exists. The whole face of New York City multi family has changed completely in the last four years. The overwhelming majority of folks who historically had only bought New

1:47 York City apartment buildings are buying all around the country now, and a lot of people who have been priced out of their local markets are now coming to New York Because where the New York City market always used to have cap rates one hundred and fifty or two hundred basis points lower than around the country, cap rates are

2:02 fairly consistent throughout the US today, so we have a lot of new people coming in. Demand is robust and transactions are happening. In the land space, We’ve seen two different markets. There’s the residential rental market and the residential condo market. Condo land is still selling, albeit at twenty to twenty five percent lower values than we saw before

2:26 September when construction pricing really started to get very, very high, But those sites are still trading. People are still bullish about what the condo market will be like three or four years from today, but the rental land market has completely dried up. There is a big air bubble in the pipeline, and that gets to policy. And although our

2:49 politicians say they want to drive rents down for people and make New York more affordable, every single piece of legislation that’s either been passed or ignored by the legislature is doing nothing driving upward pressure on rents. And in fact, based on the budget proposals from the Governor’s Office, the Assembly, and the Senate, I think residential free market rents will

3:10 go up ten or fifteen percent within the next few months.

3:12 Speaker 1 What about the other assets.

3:14 Speaker 2 Class, Retail I think is a bright spot. Retail rents today are significantly below where they were at the peak, but it’s generally considered that they’ve stopped going down. And for the past two months or so three months, we’ve been getting calls from retail investors looking for retail properties.

3:30 We haven’t gotten those calls for three or four years, so that is a big change in the market. People of bullish about what’s happening with the retail sector, and I think if you look at office, that’s the sector that is the most opaque. It seems like new construction Class A office is doing phenomenally well. There’s demand for space.

3:52 Rents are triple digits in all new buildings, and that’s very very optimistic. Class B and C properties much more challenging. The market is much more opaque. People are trying to figure out what’s going to happen with aggregate office demand.

4:06 Are people going to get back to the office. So there’s still a lot of question marks. And everybody’s talking about converting these older, obsolete office buildings to residential. Yeah, but they the prices have not fallen to the point where it makes sense. Our legislators have not put in anything like they so brilliantly did of twenty one g’s.

4:29 We went from a market in Lower Manhattan that it had eighteen hundred dwelling units to nearly thirty thousand units, all because of the four to twenty one g or primarily because of the fourth twenty one G program that that should be implemented citywide. We have far too much vacant office space not enough housing. There has to be

4:49 a way to create the right incentives to get the private sector to invest billions of dollars to convert this unused, obsolete office space into housing. It would be great for the housing market and it would be great for the office market well.

5:02 Speaker 1 With regard to the investors, are there foreign investors back? Where are the investors from?

5:08 Speaker 2 A lot of the investors are New Yorkers that are new folks that have emerged out of New York that are starting to get active. We have investors from around the country. And on the foreign capital side, most of the foreigners we’re dealing with today are high net worth individuals and families. The institutional capital has not come back

5:28 and nearly the way we saw it in twenty fourteen, fifteen and sixteen, which is really the peak of foreign institutional capital buying in New York. So there are a few institutions that are looking around, but for the most part, the foreigners we’re dealing with our high net worth individuals and families.

5:45 Speaker 1 Okay, with regard to the dealers. Who’s providing the financing today? Are the private equity groups? Are they leading there? Is it the bank who?

5:54 Speaker 2 Yeah, traditional banks are lending, Alternative lenders are lending. There are a number of folks that are active and view it as an opportunity. Clearly, you’re seeing banks wanting to be more conservative looking at who the sponsor is, being a little more careful about the loans that they’re making.

6:12 But there is a need for capital and people are taking advantage of that opportunity.

6:18 Speaker 1 So are we seeing more people joining the lending business now?

6:22 Speaker 2 I think you’re going to see all types of people looking to fill that void. It’s a profitable business, especially today. Spreads are very, very big, so there’s an opportunity to make money in that space.

6:32 Speaker 1 So do you see traditional banks going heavy into the market or are they going to be coursed, especially in light of Silicon Valley and the Signature Bank.

6:40 Speaker 2 I think it’s going to vary bank to bank certainly. I think the larger banks have been a big beneficiary of what’s gone on over the past couple of months, and they hopefully are going to be lending more. And I think there’s an opportunity for smaller niche banks as well.

6:55 I think everyone has to find what their strong suit is and maybe specialize in one type of loan or another. But I think there are opportunities across the board, and it’s one of the things that always comes out of these challenging times like we’re in today. I think it’s important a couple of things. You have to realize the

7:14 market has been, is, and always will be cyclical. There’s always ups and downs, but particularly in the down markets, it creates great opportunity for people throughout the industry.

7:24 Speaker 1 So I think you’re very positive and as I normally were on my TV show Shape the Apple, I think that the Apple is going to be shining for the end of the year. I’d like to thank Bob Knachle Fa Belar with me today.

7:36 Speaker 2 Great to see you, Michael,