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City developers turn lenders chasing profits in construction boom

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New York developer Silverstein Properties Inc. built a $4 billion pipeline of real estate deals just weeks after starting. None of the money was for buildings it will own.

The developer of prominent New York city skyscrapers such as 3 World Trade Center has jumped into property lending as demand for financing grows and yields are more attractive. Silverstein set up its first lending venture earlier this month and already has a slew of potential deals going to projects in New York City. Others, including Oxford Properties Group, also have big plans to finance other builders.

“Supply and demand characteristics in New York and throughout the country are good—we think that there’s years to run in this cycle,” Michael May, president of Silverstein’s new lending venture, said in a telephone interview. “In New York, the dollars are big enough and Silverstein’s footprint here is big enough that I think we could run the entire business just doing New York if we wanted to.”

As big banks have pulled back, a flood of more lightly regulated non-banks has rushed in to fill the void across industries. In real estate, that includes debt funds, mortgage REITs and developers, often backed by private equity or other institutional capital. Property research firm Green Street Advisors LLC estimates that U.S. originations by these lenders surged more than 40 percent in 2017 compared with the year before to almost $60 billion, and should rival that of life insurance companies and commercial mortgage-backed securities this year.

The opportunity is partly due to what Silverstein sees as a “gap in financing” that has its origins in the 2008 financial crisis. Since then, large banking institutions have faced heightened regulation and become more stringent in underwriting projects. That has taken a toll on their ability to lend to the construction industry, where there tend to be more risks and higher costs.

“You end up with accounting treatment reserves and with regulatory capital treatment on a lot of these asset classes, which has become extremely challenging for banks,” said May, who had previously worked at Credit Suisse Group AG and Cantor Commercial Real Estate Lending LP, overseeing the origination and distribution of real estate products. “We can be more nimble, move more quickly and we’re not impeded by an overlay of rules and regulations that challenge our assessment of risk.”

Silverstein hasn’t closed on any lending deals yet. The company is also looking at financing projects in other U.S. markets including Los Angeles, Seattle and Boston.

Big money
Blackstone Mortgage Trust Inc., managed by a subsidiary of Blackstone Group LP, the biggest private-equity real estate investor, originated a $1.8 billion construction loan earlier this year for an office tower in Manhattan’s Hudson Yards.

Silverstein’s lending platform is backed by a sovereign wealth fund and a pension fund with “deep pockets” and has no maximum loan amount.

Then there’s Oxford, the property unit of Canadian pension fund OMERS, which has invested more than $3 billion in loans and plans to more than double that amount in three years.

Ares Faces Onslaught of Rivals After Pioneering Direct Lending

A key opportunity for Silverstein is lending to projects that are too pricey from an equity perspective. The returns they get are still attractive, but less risky, May said.

“There’s a lot of demand for capital and there’s a lot of good quality assets being built, but maybe at pricing that we think is higher than we would want to operate,” May said. “Those projects need capital, in a spot where we’re very comfortable lending.”

Foreign investors have also been betting on higher-risk loans to developers as increases in Libor, a major benchmark for global interest rates, make yields on U.S. developments more attractive, and help add liquidity to the debt market — more than “at any point in this cycle,” said Aaron Appel, Jones Lang LaSalle Inc.’s vice chairman and head of New York City capital markets debt & equity.

“Despite the political environment, the U.S. is still the most stable place to invest globally of any country.” He added that national property rights laws and federal efforts to elongate current economic growth have also favored foreign investment.

“If there’s a decline in asset values, the lender is more protected than the equity investor,” Dave Bragg, managing director at Green Street, said by phone. “The incentive for many players is the perception that returns on debt are higher than what one could underwrite on the acquisitions of real estate today.”

Construction boom
The growing number of lenders has resulted in a market where capacity outweighs demand, especially for assets that already are generating income, Bragg said. Yields for riskier construction loans are higher and there are fewer lenders competing to provide them. Banks are still the primary source of that financing but are limited by regulation because of the longer time line and and larger amounts of capital required.

“Construction is one of the few spots where you can get to double-digit yields in this market as a lender,” Silverstein’s May said, adding that the company has a competitive advantage because of its experience as a developer and better understanding of the underwriting risk. Oxford’s head of New York and global credit Kevin Egan also sees a gap in construction loans and high-yield loans and plans to make more.

Lenders in real estate have for the most part been prudent, but as more lenders rush in to capitalize on this opportunity, there are concerns that could lead to a decline in lending standards and a construction glut. The non-bank lenders are more lightly regulated, which means there is less transparency, said Peter Muoio, chief economist at Ten-X Research.

“Most real estate cycles ultimately reach a period of excessive construction,” Bragg said. “If that happens in the cycle, the debt funds and mortgage REITs would be contributing to that and would ultimately lead to weaker fundamentals and perhaps lower asset values several years down the road.”

Source: https://www.crainsnewyork.com/real-estate/city-developers-turn-lenders-chasing-profits-construction-boom

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DealBook Briefing: WeWork Might Be Too Big to Fail

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In just eight years, WeWork has become a titan of the real estate market, snapping up pricey leases around the world. Critics have long scoffed at its business model, and many think that it will face a reckoning in an economic downturn.

But WeWork has said that it is the largest real estate tenant in New York, London and Washington. And in his latest column, Andrew argues that the claim may ensure the company’s continued success:

WeWork has gobbled up leases for so much space in so many cities, there’s a compelling case to be made that its landlords wouldn’t be able to afford for it to go under.

Because of WeWork’s size, “they have more power in a down market,” said Thomas J. Barrack Jr., the longtime real estate investor and founder of Colony Capital.

We’ll get a close look at the state of WeWork’s finances later today when it releases third-quarter earnings.

Source: https://www.nytimes.com/2018/11/13/business/dealbook/wework-too-big-to-fail.html

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NY State Kicking In $1.5 Billion-Plus for Getting Amazon HQ

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Amazon stands to get more than $1.5 billion in grants and tax breaks from New York state in exchange for bringing at least 25,000 workers to a new campus in Queens, a record-setting incentive package that was both cheered and jeered Tuesday by elected officials in the city.

At a celebratory news conference, Gov. Andrew Cuomo acknowledged that the economic development plan offered to Amazon to move to Long Island City was the richest in state history.

The company would get city and state help settling into a site along a boat basin on the East River, now occupied by a gritty mix of private industrial buildings, parking lots and city-owned properties. Amazon would invest $2.5 billion of its own money to create the campus, and if it hits its hiring and building targets, the company would get $1.2 billion in tax credits over 10 years plus a cash grant of $325 million.

New York’s incentives were nearly triple those offered by Virginia, which also landed 25,000 Amazon jobs in the Washington suburbs.
But Cuomo, a Democrat, insisted it would pay off with $27.5 billion in new tax revenue. He said that amounted to a $9 return for every dollar of public funds spent.

“This is a big moneymaker for us,” he said. “It costs us nothing – nada, niente, goose egg. We make money doing this.”

The plan was immediately assailed by others as a corporate giveaway.
Alexandria Ocasio-Cortez, a Democrat newly elected to Congress from Queens, said on Twitter that her constituents were outraged that the company would be getting so much public support “at a time when our subway is crumbling.”

“We need to focus on good healthcare, living wages, affordable rent. Corporations that offer none of those things should be met w/ skepticism,” she wrote.

City Council Speaker Corey Johnson said he was skeptical of the plan and couldn’t understand why a company as rich as Amazon would need any public support. State Sen. Michael Gianaris and City Councilman Jimmy Van Bramer, Democrats who represent the Long Island City area, also condemned the deal.
“We are witness to a cynical game in which Amazon duped New York into offering unprecedented amounts of tax dollars to one of the wealthiest companies on Earth for a promise of jobs that would represent less than 3 percent of the jobs typically created in our city over a 10-year period,” they said in a joint statement.

More powerful city Democrats, though, lined up in support of the project, which represented a rare moment of close cooperation between Cuomo and Mayor Bill de Blasio, a fellow Democrat but frequent political rival.

De Blasio, who campaigned for office on a promise to give more thought to regular New Yorkers than big corporations, called the deal “an extraordinary day for Queens.”
The opportunity to create 25,000 mostly well-paying jobs outside well-off Manhattan, he said, trumped concerns about whether the project would overburden the neighborhood’s subways, schools or sewers. He promised it would benefit even residents of a nearby public housing development, one of the nation’s largest.

Part of the deal involved setting aside part of expected new tax revenue for projects that would benefit all of Long Island City and western Queens, not just the area being taken over by Amazon, he said.

New York’s inventive package would give Amazon roughly $48,000 in benefits for every job it created in the state, compared to $22,000 for Virginia and $13,000 for Tennessee.
Amazon vice president for real estate John Schoettler said the company, which already has a large presence in New York City, planned to start hiring next year.

Securing part of Amazon’s second headquarters represents Cuomo’s biggest economic development project, topping his “Buffalo Billion” initiative in western New York.

Some of his other initiatives haven’t panned out as hoped. The construction a Tesla solar panel manufacturing plant hasn’t created the number of jobs Cuomo expected. His top economic development adviser was convicted of corruption charges linked to the project.
“It certainly appears New York is being overwhelmingly generous,” said David Friedfel, director of state studies for the Citizens Budget Commission, a nonpartisan state government watchdog group. “And we have a history of providing economic development benefits that don’t pan out.”

Source: https://www.nbcnewyork.com/news/local/Amazon-New-York-Tax-Breaks-Grants-Long-Island-City-Queens-500440991.html

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Amazon Plans to Split HQ2 Between Long Island City, N.Y., and Arlington, Va.

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After conducting a yearlong search for a second home, Amazon has switched gears and is now finalizing plans to have a total of 50,000 employees in two locations, according to people familiar with the decision-making process.

The company is nearing a deal to move to the Long Island City neighborhood of Queens, according to two of the people briefed on the discussions. Amazon is also close to a deal to move to the Crystal City area of Arlington, Va., a Washington suburb, one of the people said. Amazon already has more employees in those two areas than anywhere else outside of Seattle, its home base, and the Bay Area.

Amazon executives met two weeks ago with Gov. Andrew M. Cuomo in the governor’s Manhattan office, said one of the people briefed on the process, adding that the state had offered potentially hundreds of millions of dollars in subsidies. Executives met separately with Mayor Bill de Blasio, a person briefed on that discussion said. Long Island City is a short subway ride across the East River from Midtown Manhattan.

“I am doing everything I can,” Governor Cuomo told reporters when asked Monday about the state’s efforts to lure the company. “We have a great incentive package,” he said.

“I’ll change my name to Amazon Cuomo if that’s what it takes,” Governor Cuomo said. “Because it would be a great economic boost.”

The need to hire tens of thousands of high-tech workers has been the driving force behind the search, leading many to expect it to land in a major East Coast metropolitan area. Many experts have pointed to Crystal City as a front-runner, because of its strong public transit, educated work force and proximity to Washington.

[Crystal City’s upsides: good transit, diverse residents, a friendly business climate and a single developer with a big chunk of land.]

JBG Smith, a developer who owns much of the land in Crystal City, declined to comment, as did Arlington County officials.
Amazon declined to comment on whether it had made any final decisions. The Wall Street Journal earlier reported Amazon’s decision to pick two new locations instead of one.

About 1,800 people in advertising, fashion and publishing already work for Amazon in New York, and roughly 2,500 corporate and technical employees work in Northern Virginia and Washington.

Amazon narrowed the list to 20 cities in January, and in recent weeks, smaller locations appeared to fall out of the running. For example, although Denver made the initial cut, Gov. John Hickenlooper of Colorado said last month, “Wouldn’t they rather have their second big hub on the East Coast?”

Amazon announced plans for a second headquarters in September 2017, saying that the company was growing faster than it could hire in its hometown Seattle. The company said it would invest more than $5 billion over almost two decades in a second headquarters, hiring as many as 50,000 full-time employees that would earn more than $100,000 a year on average.

HQ2 would be “full equal to our current campus in Seattle,” the company said. If Amazon goes ahead with two new sites, it is unclear whether the company would refer to both of the locations as headquarters or if they would amount to large satellite offices.

Picking multiple sites would allow it to tap into two pools of talented labor and perhaps avoid being blamed for all of the housing and traffic woes of dominating a single area. It could also give the company greater leverage in negotiating tax incentives, experts said.

“Even if the most obvious reasons appear to be about attracting more tech workers, the P.R. and government incentives benefits could help, too,” said Jed Kolko, chief economist at Indeed, the online jobs site. With big presences in two cities, the local governments “might feel pressure to increase the incentives they are offering Amazon, and the surprise is yet another news cycle for the Amazon headquarters process,” he said.

The HQ2 search sent states and cities into a frenzied bidding war. Some hired McKinsey & Company and other outside consultants to help them with their bids, investing heavily in courting Amazon and its promise of 50,000 jobs. Even half of that would amount to one of the largest corporate location deals, according to Greg LeRoy, executive director of Good Jobs First, which tracks corporate subsidies. “These are very big numbers,” he said.

As Amazon’s search dragged on, residents in many of 20 finalist cities worried about the impact such a massive project could have on housing and traffic, as well as what potential tax incentives could cost the community. The decision to split into two sites could alleviate some of that resistance.

Seattle has been one of the fastest growing cities in the country, in part because of Amazon’s growth. The company has about 45,000 employees in the city, and the company said it needed to hire more employees than the city could attract or absorb.

“Not everybody wants to live in the Northwest,” Jeff Wilke, the head of Amazon’s retail division, said at a conference last year. “It’s been terrific for me and my family, but I think we may find another location allows us to recruit a different collection of employees.”

Amazon gave cities six weeks to pitch themselves in a public courtship. Almost 240 municipalities responded, trying to lure the tech giant with marketing gimmicks, promises of new transit lines and, as proposals trickled out, billions in tax incentives.

The details of most bids are not public, to the frustration of even some lawmakers. A few elected officials from the short list of 20 cities signed what amounted to a mutual nonaggression pact, trying to avoid a bidding war that would give up too much from taxpayers.

But mostly, cities continued their hard sell, showing Amazon executives around their proposed sites and trying to assure the company that the region had sufficient housing and transportation. Since wrapping up visits with cities in the spring, Amazon has been almost silent on the search. That led journalists, residents and politicians to look for clues in new job postings and the flight path of the corporate jet used by Jeff Bezos, Amazon’s chief executive.

To meet its own deadlines, Amazon will need to move fast. It had said it wanted 500,000 square feet of office space — enough for thousands of employees — available for use next year.

Jay Brodsky, who lives in Arlington, Va., said about a week ago that his wife took part in a 45-minute phone survey about her opinion if Amazon moved to the area. “It was everything from, ‘What do you think about the local government,’ to ‘Are you concerned about traffic?’” he said. She received an Amazon gift card for participating.

“People are sort of on pins and needles,” Mr. Brodsky said. “It’s almost like people want it to happen, and are afraid of what would happen if it does.”

Source: https://www.nytimes.com/2018/11/05/technology/amazon-second-headquarters-split.html

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