This week's guest: Victor Sozio, Founding Principal, Ariel Property Advisors

0:00 Speaker 1 Good morning. This is Mike Stoler for the Stolely Realist. They’d report on the catch roundtable. So what’s happening in the world of investment sales? Our building’s being sold, our apartments being sold. Is retail doing better these days? I don’t know the answer. So today I brought a founding principal and founding partner, Fixsozio of the Aril Property Advisors

0:21 to tell us what’s happening in the market.

0:24 Speaker 2 Good morning, Michael, thanks for having me my pleasure.

0:27 Speaker 1 So, since I wanted to know what’s happening in the market, I look recently at some of the press releases in other projects. Let’s talk about some of the new deals that you’ve worked out and the leverage and everything else on the deals. Let’s talk about Coney Island, the Noble Avenue property in the Bronx and so on.

0:45 Speaker 3 Sure, well, you’re touching on a few different product types there, and we could expand on that. But as it relates to the c Park deal, what we did in Coney Island and closed in twenty twenty three, I think that’s a good example of a large institutional type of asset that is really categorized as affordable housing with a capital

1:03 A and with that type of product, we still have a good depth of interest from many different types of buyers and including institutional equity providers and investors. And part of the reason is that A you have buckets of capital that are mission driven and are seeking these assets at all times. But even from the private and high

1:24 net worth and family office side of the market you have interest. And part of it is that in a world that’s changed so dramatically in the last five to ten years, these affordable housing assets still provide opportunities to add value through different initiatives and business plans that are still available to these operators while also preserving the assets

1:46 and preserving their affordability. And what we saw in c Park was a perfect example of this. This was a former Mitchellamba project that opted out in the early two thousands, got a complete rehab and an allocation of tax credits.

1:58 Fast forward to today, the buyer, which was a group that was led by Treadway, found a way to preserve it VISA via new tax benefit of four twenty C tax benefit, A commit to different levels of low and very low income AMI brackets and preserve the assets while continuing to add value, and that’s something we still see

2:22 in the affordable housing asset class. The one on Noble Avenue is a little different of a story that was a fully rent stabilized asset. While it was also a former Matrolama building, it was a fully rent stabilized asset without any tax benefits and really not categorized as affordable housing as much as workforce housing. And that’s a tale

2:40 of a different market, right. Rent stabilized, I think it’s fair to say is probably the product type that is stressed the most in New York City, and especially after the HSTPA regulations in twenty nineteen and how they change the laws, and also by rising interest rates and exploding insurance costs and other line items. And this is unfortunately

3:03 an asset that lost a decent amount of value from when we sold it in twenty fourteen. Originally it was about a thirty percent plus loss in value. And I would say it’s fair to mention that the buying the more competitive buyers profile or buyer profile for this type of asset tends to come more from the high network and

3:24 private capital, family office, a group or someone that has a longer term horizon that can speculate that something is going to change in the next five to ten years, that the status quo that we’re currently in, and especially as it relates to rent stabilized housing, is not sustainable.

3:39 So you know, they’re able to rationalize a purchase even if it’s a sub seven percent cap rate, which is really negative leverage and a rent stabilized asset that has relatively static income growth per RGB guidelines.

3:51 Speaker 2 But it is a very good basis.

3:53 Speaker 3 And again, if you do have that longer term horizon and if you are confident that the status quo will not continue forever, then that’s how they’re able to rationalize the purchase.

4:03 Speaker 1 Let’s talk about the six to ten amendment.

4:06 Speaker 3 Yes, very front of mind for a lot of affordable housing operators and actually a good example of pragmatic legislation in our city and something that’s needed much more of. So at the end of twenty twenty two, the Senate passed a bill send it in. The Assembly passed the bill Senate Bill seven two three five, which worked its

4:26 way into the terminology at the agency level the city and state agencies, is what’s called a six ten amendment. Six ten being the section in which it’s covered in the Private Housing Financial Law. And what that six ten amendment or what this law really says is that if you have a building that’s subject to a regulatory agreement,

4:43 really affordable housing in New York State, you’re able to go and seek and obtain what’s called a six ten amendment amendment from the governing agency. So if you have a reg agreement with HBD, you go to HBD, if you have a reg agreement with HFA, you go to HFAHD ARE, whatever the case might be. What that’s extent.

5:02 Once you obtain that sixtent amendment, what that allows you to do is rent to tenant based vouchers and supersede or go above and beyond the legal rent constraint for that unit. And what that really provided Mike is a lifeline for these affordable housing projects that were floundering Otherwise.

5:18 These were projects that were barely breaking even if they were breaking even. And this was a pragmatic piece of legislation that allowed and also serves multiple purposes. Right.

5:28 Speaker 2 Not only does it.

5:28 Speaker 3 Allow the operator and the project to get into the black instead of to read, it also helps incentivize owners to continue to rent out to voucher based tenants, you know, whether it’s NIHR, HBD, or whatever the case might be.

5:41 Speaker 2 And it’s something that’s been very well received.

5:43 Speaker 3 Unfortunately, you know, with the staffing levels that the agencies, it’s still taken a while to to really realize this increases in income and if there’s a backlog of applications for this, and even once you obtain its backlog to get those vouchers marked up. But it was a really really helpful piece of legislation and if, frankly, if something

6:04 like that can be replicated in the rent stabilized world, it should be replicated in the rent stabilized world. It’ll give those assets a similar type of lifeline.

6:11 Speaker 1 Speaking of about that, is there any legislation on the rent regulated side to increase rents above these stabilization rates.

6:20 Speaker 3 Nothing meaningful that I saw in bill form yet. I mean, keep in mind that both the House and the Center are just finishing up their budgets, so I think we’ll have a better lens on what’s going to be hotly negotiated and discussed in the coming month or two. But nothing that really jumps out as a big revenue driver

6:40 like six ten Amendment. Was this was a clear driver or potential to drive revenue. There are some pieces of decent pieces of legislation that are out there. One of them relates to discriminatory practices in the insurance market as it relates to affordable housing and workforce housing. I’m hearing decent things about that. I don’t have any clue on

7:00 how it’s going to be inforciating.

7:03 Speaker 1 Let’s go to another topic which is highly interesting, the conversion of office buildings to residential. What’s your thoughts about it. You’ve been quoted that you’re not a major proponent on.

7:14 Speaker 2 That have I don’t know.

7:16 Speaker 3 I don’t even remember where that was, but I think it could be Look, it would be great if we can find out a feasible way to do it, and I don’t think it’s going to happen without substantial amount of incentives. These buildings are old, they’re inefficient. Not many line up perfectly with the core and the light and

7:31 air in order to do it in a cost effective way. I know there’s some developers that this is their business and their core competency, but if you speak with those developers, they need a basis that’s close to two hundred dollars of foot and frankly, I don’t see a tremendous amount of those opportunities where everything fits perfectly for that. At

7:49 the same time, there’s clearly a big incentive and push on the city level to do it, so much so that they have specialists that you know are sitting waiting to help feel these type of questions and help them get through it. But I just haven’t seen anything that to me stands out as a meaningful, scalable way.

8:06 Speaker 1 To do this or anybody seeking to IO office buildings in New York City today, especially B and C as opposed to potentially in a I.

8:15 Speaker 3 Think short answer is yes, you know, that’s not our core market per se, but we do see it, and you know what’s interesting, it might end up becoming more of our core market a little more because I think some of the institutions are shying away from that too, and and you’re seeing some of the high network family

8:30 office private buyers start to make plays in that space too because they see the long term value. You know.

8:37 Speaker 3 That said, I do think these B and C assets have a ways to go until they get to a good resolution, especially if they’re not close to a major transportation hut.

8:46 Speaker 1 What about hospitality assets.

8:48 Speaker 3 Hospitality have assets have definitely rebounded. I think, you know, the lack of inventory, the legislation relating to Airbnb, you know, has has helped propel it. I think, you know, all the statistics are pointing to tourism being up, and you know, certainly as it relates to it. And keep in mind also there’s been a decent amount of units filled with

9:05 migrant housing you know, around the city, so that’s also constraining supply a little bit and pushing up average daily room rates. So we definitely seen it. We have seen a resurgence of interest and if you look at the data, the values and the transactions that have occurred in the past six to twelve months are definitely up.

9:23 Speaker 1 Vacant land last question. Vacant land.

9:26 Speaker 3 Vacant land depends on where, you know, what we’re finding in workforce housing outer borough locations, values really haven’t dropped too tremendously because, frankly, the execution was always affordable on the large scale projects and in order to absorb and capitalize it correctly in good locations, they have come down considerably, and that’s primarily because there’s no real four to twenty

9:53 one A successor out there now. The projects that were vested and extended or have the ability to get a CFO by the end by mid twenty twenty six are flying very close to the sun right now. So it’s really a condom market. You know, when you talk about prime areas and those values are down considerably, I would say,

10:12 you know, twenty thirty percent plus. Okay.

10:14 Speaker 1 I’d like to thank vic Socio for being here and I’ll see you next week.

10:17 Speaker 2 Thank you. Michael