Interview with Sean Kelly partner, Ariel property advisors

0:00 Speaker 1 Good morning. This is Mike Stolen for the Stolar Real Estate Report. What’s happening in Brooklyn? It’s my favorite borough, especially since I was born there. I grew up there, but unfortunately I didn’t stay there because the property values have gone up so much over the years. So to discuss what’s happening in Brooklyn, I have one of the

0:17 partners of Ario Property Advisors, Sean Kelly, to tell us the results of what’s happening in Brooklyn, especially any effect come from the election.

0:28 Speaker 2 So nothing imminent from the election.

0:30 Speaker 3 Interest rates is the obviously the biggest concern these days. But what’s going on in Brooklyn? And just to say, by the way, I was also born in Brooklyn. Both of my siblings were born there. My parents were born and raised.

0:40 Speaker 1 But do you live in Staten Island and I do.

0:41 Speaker 3 Live in Staten Island. When people were fleeing the city, my family moved to Staten Island, but we maintained roots in Brooklyn. My mother worked in Methodist Hospital for forty five years. And I only wish to your point that instead of fleeing Staten Island they bought brownstones and ark slope or warehouses in Red.

1:02 Speaker 1 Hook It’s the comment I get from my wife. You should have, you should have, you should have, no question about it. So what’s happening, especially you know today, in addition to the election, Wall Street Journal had an article about office space in Brooklyn. The lentis is two trees.

1:20 Speaker 2 Yeah.

1:21 Speaker 3 So the office market has struggled in Brooklyn for a long time, outside of greater downtown Brooklyn, where you’ve got the courthouses, in metro tech and the financial institutions. I was never a big believer in the office market unless you were in very certain markets.

1:37 Speaker 2 Right.

1:37 Speaker 3 The office market in Dumbo always performed well. It’s a supply constrained market. It’s a market unto itself. Now the office market in Williamsburg actually performs pretty well. David built a Class A, you know, a few hundred thousand square foot office building. It’s a little bit different than the product that people in Williamsburg are accustomed to, where you

1:59 had more loft style office spaces and smaller buildings or old loft buildings. Those autsets have performed well. But going back sort of ten years ago, Michael, if you remember, you know, people started buying these multi story industrial buildings from Sunset Park to the Guanas to Clinton Hill to Long Island City and even in the Bronx, and those

2:21 buildings never performed the way people.

2:24 Speaker 2 Had hoped they would.

2:25 Speaker 3 But you just think about Brooklyn, from Bay Ridge to Clinton Hill, there’s fifteen million square feet of essentially government owned real estate. One of it’s private right with Belvidere Capital and Industry City. But the rents in those buildings are fifteen dollars a foot, twenty dollars a foot.

2:43 Speaker 1 As compared to sixty eight to seventy dollars.

2:45 Speaker 3 A foot correct, And the tenants were getting in Brooklyn, our younger companies, smaller companies, startups where it might start off with two or three people, and those you know, those spaces have the ability for those penants to grow in into larger sizes.

3:01 Speaker 1 So let’s talk about the multi family business in Brooklyn. What’s happening in.

3:04 Speaker 3 So the multi family business in Brooklyn is performing really, really well, and there’s a bunch of different buckets of capital. So you’ve got the likes of KKR and Carlisle buying class A new construction four twenty one A apartment buildings and buying them at really aggressive yields, and they’re buying it in North Brooklyn, so downtown Brooklyn, Williamsburg. You’ll start

3:27 seeing some stuff in the guanas.

3:30 Speaker 2 Then you have.

3:32 Speaker 3 The affordable sector, right which is a very very different bucket of capital. We’ve sold a couple of big portfolios of affordable packages in Brooklyn and we’re actually on the market now with four hundred units. Then you have sort of your smaller family office that’s looking at multi family, newer construction, multi family higher rents and saying, you know what,

3:52 we’re going to buy these buildings at six caps seven caps because the sponsor can’t refinance and get all their equity out right there, buy those buildings and they’re just buying them in long term holds and really good, good locations.

4:03 Speaker 1 What about the stabilized tenants?

4:05 Speaker 3 So the stabilized apartment building is the most difficult market for any asset class in New York City right now, other than community facility condominiums. It’s a very very difficult, difficult market, very very select buyers. The buildings have to the people that are buying these they’re buying buildings that are in really really good condition, really good collections, and

4:28 they’re looking at it and saying, if I can buy this at one hundred and fifty basis points above my debt.

4:33 Speaker 2 I can be a long term holder at this.

4:35 Speaker 3 So if my debt’s at a five and a half or six, I got to buy the building at a seven to a seven and a half cap. I’ll cover my debt service, I’ll make a couple of bucks. I’ll hope that the laws change over time, but long term holders.

4:45 Speaker 1 What’s happening on development sites?

4:48 Speaker 3 So, development sites like anywhere in the city, have been kickstarted since the renewal of or since release of four to eighty five X. What’s really really interesting is how selective developers have become for four eighty five X sites.

5:02 Speaker 2 And what am I talking about?

5:04 Speaker 1 So explain to my listeners what are four eighty five xes?

5:08 Speaker 3 So forty five X is a new tax abatement legislation where the taxes are essentially locked for thirty five years, okay, and in certain locations and for certain project sizes. So for example, if you’re building more than ninety nine units, you have to build to one level of prevailing wage.

5:27 If you’re building more than one hundred and fifty units, the prevailing wage requirements increase. So developers are hyper focused on projects where they’re going to build ninety nine units or less, or they’re looking for larger sites where they can subdivide it and build three or four buildings.

5:45 Speaker 1 But they’re effectively reducing the amount of number of units that they could be building.

5:52 Speaker 2 Well, they’re not.

5:53 Speaker 3 In essence, if you can build four hundred units in one building, they’re going to try and build four hundred units in four.

5:58 Speaker 1 Buildings buildings correct as opposed to you could have had twelve hundred units.

6:05 Speaker 3 No, you would have if you could build four hundred units before forty five x right in one building. If you had a four hundred thousand buildable feet and you’re gonna build five hundred units, you’re now going to build three or four different buildings on the same footprint, right and break them up and have each building be less

6:22 than one hundred.

6:22 Speaker 1 So for an owner, it’s pretty good if he’s trying to sell development sites.

6:27 Speaker 3 If if you’re less than one hundred thousand buildable feet right now, yes, or if you have the ability for your site to be divided, yes.

6:35 Speaker 1 Hey, let’s talk about retail.

6:37 Speaker 3 So retail is interesting, So I think you have to look at different pockets of retail and right Now the Williamsburg market, this little pocket, you know, North six Bedford Barry Wythe it’s performing like Soho performed ten years ago.

6:52 And it’s institutional capital. It’s the likes of Empire State Realty Trust and Acadia and Akadia just picked up up a couple of buildings. They paid thirty three hundred dollars a foot for those buildings, so it’s probably three to four times.

7:07 Speaker 1 As they will say, there’s not much land in Williamsburg.

7:09 Speaker 3 There’s not much land in Williamsburg. They’re not making anymore. And that Williamsburg pocket is super, super dynamic and they attract world class tenants. Now, if you go into other markets, if you go into Park Slope and you go on Fifth Avenue, fifth Avenue, sixth Avenue, if you went to sort of other Brownstone Brooklyn, we’ve got Carroll Gardens and

7:30 Cobble Hill, and you went to Smith Street and in Court Street, smaller spaces, not big buildings, mostly infill mixed uice buildings. But also the retail performs really really well. And I’ll give you an example. This was just after COVID, we got haired to sell a building on Court Street and it was a restaurant tenant fourteen hundred square feet

7:50 on the ground floor. They had prep space below below grade. They were paying twenty thousand dollars a month two hundred and forty thousand dollars a year in rent. They got a five thousand dollars credit during COVID. That restaurant’s been there for fifteen years and it’s still performing. So in those markets, retail has been really really performing. Well.

8:10 Speaker 1 What about East New York.

8:12 Speaker 3 East New York’s affordable housing, right and hopefully, and it’s going to take it’s going to take some time. But most of what you’re seeing is you’re going to see more government agencies, I think, move out there, and you’re going to see more affordable housing and look what happens.

8:27 And I think the intention of public private partnerships in markets like East New York or call it Jamaica Queens is just what happened in downtown Brooklyn, right. Most of the initial development in downtown Brooklyn were public private partnerships.

8:42 Speaker 2 It was city on.

8:43 Speaker 3 Land and they put out RFPs and they had income restricted buildings where they did mixed income fifty to thirty twenty.

8:49 Speaker 2 That’s what’s going on in East New York.

8:51 Speaker 3 But what’s also good to see and is you have quality developers, institutional cal development caliber. The developers like Gotham Organization right, who’s essentially building a small city in a great partnership with a faith based organization.

9:08 Speaker 1 Right. With regard to hospitality, hotels.

9:13 Speaker 3 Hotel market struggled and the biggest challenge in the hotel market is who’s occupying it? And it’s not visitors, it’s not tourists. Right now, we have a homeless crisis in New York City and we have a migrant crisis, and that’s who’s occupying. I think the stats are about twenty five to thirty percent of the hotel rooms and we

9:31 I don’t know, it’s probably five seven years ago. We eliminated the ICAP tax ofbatement, which incentivized developers to build hotels throughout New York City. Now you have to get a special permit if you’re in an m zone district.

9:45 We haven’t created any more hotel rooms and pricing’s going up.

9:50 Speaker 1 Okay, casino in Brooklyn, do you think in Coney Island?

9:55 Speaker 3 I would love it. I love going to Coney Island. They visit there a couple of times this summer, go to a ball game. I take my kids to the beach. It’s a great scene. I just don’t know if it’s going to happen. I know Joe Sid from Thors stopping at the bit and it would be it would be remarkable, right.

10:10 I think we had one there one hundred years ago.

10:13 Speaker 1 It may have been a different casino. So in general, how do you see the end of the year going.

10:18 Speaker 3 Yeah, look, I think a lot a lot hinges on interest rates right now. I think we’re going to have a strong end of the year. I’m excited about going into the first quarter of next year. But still we have a lot of things that have to work their way through the system. Given where the capital markets are,

10:34 we still really haven’t seen, you know, the likes of the Signature portfolio play out right, or some of the bad debt that lenders had on rend stabilized buildings. That’s a sort of a different a different sector of the market, and I think that’s going to take another year year and a half to play out. But I’m excited about

10:51 the development market, and I’m excited about new or capital coming back into the New York City market.

10:56 Speaker 1 I’d like to thank Sean Kelly for being here today and I’ll see you next week.

11:00 Speaker 2 To see him. Michael, thank you for having me