Pioneering Purview: How Eric Margules Maximizes Value in Underserved Properties
- Oct 03, 2017
Sporting first-rate credentials that include an MBA in real estate and finance from the University of Pennsylvania’s Wharton School of Business, Eric Margules seemed primed for a successful career. After graduating in 1986, he secured a job at the venerable and now defunct securities firm Kidder Peabody, but his time there was cut short when the stock market crashed two years later. While Margules had already realized he wanted to pivot to a real estate career, what followed were several difficult years of taking jobs both inside and outside the industry until he regained his footing.
“When my son was born in 1991, I was working as a waiter at TGI Friday’s. … I didn’t have any money,” Margules recalled. Luckily, his father, Herman, had dabbled in real estate—converting several small buildings in Manhattan into co-ops—and offered to help his son build a career. With a $30,000 loan from his father and $475,000 raised from friends and family, Margules made his first acquisition in 1992: a $2 million purchase of three walk-up buildings on 26th Street and Eighth Avenue in Manhattan’s Chelsea neighborhood. With that purchase, Margules Properties Inc. (MPI) was born. Since then, Margules has built his investor base and multifamily portfolio, focusing on long-term investments in value-add properties. Today, his portfolio includes some 50 assets across Manhattan, Queens, Brooklyn, Long Island and Jersey City, N.J., about 60 percent of them rent-stabilized.
How Margules grew his firm from a one-man shop to a real estate investment firm with some $300 million in assets and a stable of 400-plus investors is a testament to his business savvy and determination, noted David Waronker, founder & president of development and investment firm CBD Real Estate Investment LLC and a longtime friend.
The two met in 1976 while working as lifeguards in New Jersey, and prior to founding MPI, Margules was involved with CBD on several development projects and helped recruit investors.
Waronker recalled an investor seminar they hosted for high-level executives in 1990, when the two were just starting out in real estate. When Waronker started to struggle with the presentation, Margules quickly jumped in “and used his Wharton background to throw numbers and theories into the discussion, which amazed the investors and got them to understand they were dealing with some well-educated businessmen who could handle their investments.”
Margules has applied these skills to his own business, convincing investors along the way that MPI would be a success. One such individual was Roland Wolfram, a Wharton classmate who has invested with MPI since its founding.
“I knew Eric was very smart and very hungry, and he would be focused on making sure the deals worked,” Wolfram said.
He remembers scraping up barely enough money to meet the minimum investment in MPI’s first acquisition, under the LLC Chelsea Partners, and he doesn’t regret the decision.
“I wish we could have (invested) 10 times more,” he said. With an estimated value of $40 million, the asset is still operated and managed by MPI “and has had fabulous returns.”
But like the success of that initial investment, the growth of MPI was a slow process. For the next half-dozen years or so, MPI acquired just one building annually as the Manhattan real estate market went through a rough patch in the early to mid-1990s.
Even though multifamily prices were low, “you couldn’t get new bank financing, and it was hard to get new investors,” Margules recalled. On subsequent acquisitions, MPI had to inherit the seller’s bank financing and raise the balance from investors. “There was a lot of resistance on every end—investors, banks, borrowers, sellers—so it was very tough to put together a deal,” he said.
Building a base
Working solo out of his one-bedroom apartment, Margules realized he needed to bring in reinforcements to help him get MPI off the ground. His father used his accounting background to help raise money and put in financial controls at the company. In late 1994, Margules’ then-wife Leah Carr decided to quit her advertising job and join the company in late 1994 as a property manager.
Their daughter was born on a Wednesday night in June 1995, and his wife was back on the job the following Monday. “It was just the two of us—we couldn’t hire anybody—so she’d be talking to tenants while she was feeding our four-day-old baby,” Margules recalled. Carr is currently managing director & acquisitions director at MPI.
Eventually, Margules was able to move the firm’s office to a back room in an MPI-owned building, hire an assistant and property manager, and slowly increase MPI’s portfolio to 10 properties by 1997. Many were rent-stabilized assets in then-underdeveloped neighborhoods like Hell’s Kitchen and the Lower East Side, and were in need of upgrading.
Margules secured many of his early properties thanks to Michael Besen, president & CEO of The Besen Group, a full-service real estate firm which began as a brokerage in 1988 under the name Besen & Associates. Margules’ worked in Besen’s shop for a time prior to forming his own company, and the two have stayed in touch, with offices in the same building in Manhattan.
“We’ve had a wonderful relationship from both a business perspective and a nice personal relationship,” Besen said. “Eric is very ethical and honest, he has an easy style to him and he knows the multifamily market extremely well.”
Besen has sold more than 40 buildings to MPI, including that first property in Chelsea, and has also partnered with Margules as an investor on several deals. One that sticks out was the acquisition and repositioning of 166 W. 75th St., a Class B, single-room occupancy Manhattan hotel that they bought and converted into a Class A apartment community. Transforming 240 SRO rooms into 150 apartments posed a major challenge, but the effort paid off handsomely: Margules and Besen bought the property in 2000 for $8.5 million and sold it for $32.9 million in 2007.
“Deal by deal, Eric developed a portfolio and his success was over a few decades, it didn’t just happen overnight,” Besen said. “I give him credit for that.”
New FrontiersInvesting in Manhattan properties proved a successful strategy for Margules in the early years of his company, but when prices started to creep up in the early 2000s, he realized it was time to expand.
He set his sights on Miami Beach, at one point owning as many as 19 properties in the South Florida city, but he soon realized the market came with several challenges. “The market is very tough, the city is very hard on landlords, and the market itself is very cyclical,” he said.
While some properties were successful—a rental apartment building converted in 2004 to a condominium community that sold out in a week—others turned out to be money-losers. He gradually sold off his properties, completing his exit from Miami Beach in 2015.
Margules returned to his strategy of investing mainly in rent-stabilized assets in untapped markets in 2010, when he made his first acquisition in the Journal Square neighborhood of Jersey City. Located two blocks from the PATH rail and bus station, the 34-unit building had eight stores on the ground floor. Today, Margules owns some 14 buildings—mainly walk-ups with ground-floor retail—plus more than 1 million square feet of development rights. He plans to upgrade many of the properties to appeal to new retailers and young professionals looking for an easy commute to Manhattan.
“I think [Margules] has been very careful about trying to find the right buildings,” Wolfram said. “They really look for opportunities to operate and upgrade the properties.” He added that the company’s long-term hold strategy has also allowed it to build property management and renovation capabilities that enhance the properties and increase their value.
One Jersey City success story started in 2012, when MPI paid $9.2 million for 60-64 Sip Ave., a 64-unit multifamily building with eight retail stores on the ground floor in Journal Square. Three years later, MPI refinanced the property and used the proceeds to buy the adjacent building, 48-58 Sip Ave, for $2.5 million. Combining the buildings increased their frontage from 180 feet to 280 feet on a major street and upped the air rights from 250,000 square feet to 380,000 square feet.
“It’s doing very well and is something that has development rights attached to it, so we can definitely see the future potential there,” Margules said.
He plans to continue pursuing value-add properties in the mix of markets he’s already in, but said he’d consider other markets if he had a compelling reason—namely, attractive pricing.
He will also continue to expand his 20-person team—many of which have worked for him for 10-plus years—as MPI’s portfolio grows, and will look to bring in more investors. Margules noted that most of his investors are friends and family, and people he’s cultivated relationships with over time.
Besen cites Margules’ “patience, perseverance and persistence” in his success in building MPI and its investor network. “Eric is a very engaging, straightforward and ethical person in real estate, which I think speaks volumes,” he said. “He has great relationships and he’s very upfront. He tells you exactly what’s going on when he’s ready to move ahead on a deal…he knows how to transact—and he always closes his deals.”
Originally appearing in the October 2017 issue of MHN.