Remaining optimistic about the rising economy of 2004.
We predict that, as interest rates continue to rise, these higher rates will result in a shift of power to long-term investors, like ourselves, from the big-term borrowers. For example, many highly leveraged purchases were done in 2004 with 95% loans and only 5% equity. These loans were primarily done at floating rates. However, when rates rise, many owners with highly leveraged properties at floating rates will be faced with significantly higher interest costs that could ultimately end up in mortgage foreclosures. This will shift the investment opportunities to long-term owners like Himmel + Meringoff who invest with significant equity and are conservative, long-term owners of properties.
The NYC business environment is finally recovering, lagging behind the national recovery. In the last few months we have seen a significant number of businesses looking to make new leases and expand. In the first six months of 2004, we have renewed numerous tenants and signed many new leases with new tenants. For example, at 360 Lexington we signed a lease with the Permanent Mission of the Republic of Nambia, and renewed leases with DQ Acquisitions, Marotta Gund Budd & Dzera, and Interactive Video Technologies at competitive market rents in the mid-30's. In addition, new and renewed leases were signed at 729 Seventh Avenue, 30 West 26th Street, 12 West 21st Street, 88 University Place, 411 Lafayette Street and 462 Broadway.
As co-chair of the Economic Development Committee (EDC) of the Real Estate Board, we have had interesting meetings and presentations during the first six months of 2004. The first two presentations focused on redevelopment in the boroughs. The first presentation was by Richard Barth, Executive Director of the Department of City Planning, who spoke about the impact of agencies citywide as well as many proposed zoning legislative changes. Alex Federbush, President of the Queens West Development Corp, and Michael Royce, President of Moynihan Station Development Corp, spoke about the Empire State Development Corp projects which are extensive and impressive commitments.
Finally, Andrew Alper, President of the New York City Economic Development Corp, made a fabulous presentation outlining our city's economic progress. As Wall Street recovers and New York City has seen job gains in healthcare, the EDC is also focused on continuing growth in tourism and the biotechnology industries. Our committee is comprised of seasoned professionals in a variety of areas, including lawyers, brokers and landlords. Mr. Alper had an interactive conversation with our committee, asking for our recommendations to help the city develop a policy for the manufacturing sector zoning.
Presently, there are over 500,000 manufacturing jobs in the greater New York area. Our committee recommended developing "specialized" areas that should remain as manufacturing zones (e.g., parts of Brooklyn and Long Island City). Further, the restrictive manufacturing zoning (M1-2) that overlays most of Long Island City and many areas of Brooklyn should be lifted to allow for market demand growth and new development. This would continue the "umbrella" rezoning that was done in Long Island City allowing redevelopment. More specifically, we recommended extending the Hunters' Point sub-district of the Long Island City District to include the full area between 51st Avenue to the south and 44th Drive to the north, west of 11th Street.
In addition, we recommended extending the Hunters Point subdistrict of the Special Long Island City District to include the full area between 51st Avenue to the south and 44th Drive to the north, west of 11th Street. This area should be zoned to permit as-of-right residential conversion to augment the residential base and provide a link between Queens West and the growing LIC business district. We also recommended looking at the infrastructure needs of Long Island City and prepare for future expansion of the commercial area.
The recently enacted zoning should also be extended east on Queens Boulevard. The eastern border could be drawn either at Roosevelt Avenue or at 39th Street. Zoning currently is M1-4 up to 39th Street along Queens Boulevard where there are assorted loft buildings. East of 39th Street, the zoning is currently R5 and R7-1 with commercial overlays, C4-2 district and two blocks of C8-1.
On the acquisition front, we continue to seek opportunities whereby we tan create value. It has been difficult to find investment opportunities since continued and historical low interest rates have resulted in cap rates remaining at an all time lows. Secondary office buildings continue to trade at over $300/sq ft. Gross rents are in the upper-20's to mid-30's with cash flows averaging $15/sq ft. Capital is abundant and financing with low interest rates has enabled many buyers to "financially engineer" new purchases with 95% loans and practically no equity. When rates rise over the next few years and the loans need to be refinanced, foreclosures may ensue and more opportunities to purchase will be available.
Our firm, which as been in business for over 20 years, will continue to see more opportunities to purchase as we are long-term owners with a lot of capital and experience. We look to be an active buyer in 2005, continuing to build upon our large portfolio.
LESLIE WOHLMAN HIMMEL, PARTNER, HIMMEL & MERINGOFF
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|Author:||Himmel, Leslie Wohlman|
|Publication:||Real Estate Weekly|
|Date:||Jun 23, 2004|
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