Lender Counts on New York Metro Comeback to Be Quicker Than Expected: Q&A
Slate Property Group Co-Founder & Principal Martin Nussbaum on opportunities in the transitional loan market.
SCALE Lending, the lending affiliate of Slate Property Group, provides customized financing solutions in the transitional real estate space with a strong focus on the New York metro area. Leveraging Slate Property Group’s $5 billion portfolio, the lender has found a niche within the construction senior lending market.
In recent months, SCALE has closed nearly $500 million in multifamily loans and condo deals.
“There’s strong confidence among the industry in New York City’s recovery,” said Martin Nussbaum, co-founder & principal of Slate Property Group. In the discussion below, he shares why deal volume is picking up and what’s next for the New York metro multifamily sector.
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What’s been happening in the transitional real estate space in the New York metro area since the onset of the pandemic?
Nussbaum: With cities beginning to recover and reopen, the apartment market is very active at the moment. It will likely take one to two years for rents to fully recover to pre-COVID-19 levels, but we’ve seen a positive trend of people returning to the metropolitan area.
There’s a flow of new tenants coming into these areas, rather than moving within their current submarkets or switching buildings. We see that as a positive sign leading into the summer and anticipate the next quarter to be active.
How are lenders approaching new opportunities in the tri-state area?
Nussbaum: Lenders are starting to underwrite a slow recovery in urban markets, whereas three to four months ago they would only look at in-place rents. This is across all asset classes.
The key factors we focus on when underwriting a loan are true construction costs that we can properly vet, net effective rents vs. gross rents and realistic expenses. These key metrics allow us to solve a comfort level on loan proceeds that achieve a debt yield or loan basis we feel good about.
What are some of the most sought-after financing products you’ve worked with recently?
Nussbaum: In the past few months, we’ve closed on nearly $500 million in loans for multifamily and condo deals. We’ve focused on deals at a minimum of $50 million, but more typically $75-150 million for ground-up rentals or condo developments. Prior to COVID-19, we saw more loans on the smaller end of that bracket.
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Are there certain types of transactions you favor?
Nussbaum: At Slate, we’ve found a real niche within the construction senior lending market and concentrated our efforts in that space for the last three years.
These transactions have pulled back and allowed for us to become a leading alternative for someone who is looking for a more conventional loan-to-cost loan that isn’t as available with traditional banks, which are currently around 50 percent to 65 percent. There is a huge opportunity for a development timeline in this space, as we allow the market to come back and banks step back a bit.
How has deal volume shifted since the early days of the crisis versus more recent months?
Nussbaum: Overall, we’re seeing an increase in deal volume this quarter compared to the beginning of the pandemic. There’s strong confidence among the industry in New York City’s recovery and that’s reflected in the high deal velocity we’ve been seeing.
Slate has closed on a few transactions across the metropolitan area, including a $120 million construction loan for 618 Pavonia Ave., a 27-story multifamily development in the Journal Square area of New Jersey; a $55 million construction loan for The Nova, a 95,000-square foot condo in New York City’s Long Island City neighborhood, that allowed the developer to finish construction on the project; and a $59 million construction loan for The Enclave, a 113-unit multifamily development in East Harlem in New York City, with 30 percent of units set aside as affordable.
SCALE has more than $1.5 billion in loans closed and signed term sheets spread across 4.2 million square feet in ongoing developments, and we anticipate many upcoming deals through the summer.
What are some of the determining factors that will shape the multifamily lending market going forward?
Nussbaum: Two factors will play a big role in terms of multifamily developments: land prices and construction costs. Land prices aren’t where they were pre-pandemic but have only gone down by 15 percent to 20 percent and are not dropping further, creating greater competition in the market.
We’ve also seen the majority of land being purchased for condo developments rather than rentals, and construction costs have increased. Moving forward, these are two things to keep in mind that have a direct impact on the multifamily lending market.
Looking ahead, what does the recovery process look like for the New York metro multifamily sector and where do you see opportunity in 2021, and beyond?
Nussbaum: The recovery process isn’t something that will happen overnight, but I think it will occur sooner than people think. The multifamily sector has been an asset class that historically has been very resilient. It will remain largely in demand as people not only return to the city but move here from different parts of the country and world.
We’re already seeing an opportunity in the senior lending space and the market has been quite active. I think we’ll see even more increased market activity this summer and through the remainder of the financial year.