By Craig Hormann ’14 and Daniel Joels ’14
|Moderator:||John Livingston, CEO, AECOM Capital, and Vice Chairman, Tishman Construction Corporation; Adjunct Associate Professor, Columbia Business School|
|Panelists:||Tom Bow ’87, Senior Vice President, The Durst Organization|
Tommy Craig ’82, Senior Vice President, Hines NY/NJ/CT Regional Office; Adjunct Professor, Columbia Business School
MaryAnne Gilmartin, Executive Vice President of Commercial and Residential Development, Forest City Ratner Companies
Douglas MacLaury ’81, Senior Vice President, Mattone Group
The panel “Real Estate Development in New York City in the Digital Age” addressed the current state of the development market and how an infusion of tech firms into the local marketplace has altered the equation for real estate executives.
The discussion began with the issues developers are facing amid the recovery from the economic downturn of 2008-09. The general consensus was that the residential rental market is seeing the most activity, with demand being driven by two types of tenants: those who cannot afford to purchase a home and those who are renters by choice. Gilmartin described this notion of “renters by choice” as individuals who have the means to purchase a home but prefer to rent because they value the flexibility of being able to move when they want, where they want. Additionally, the difference between quality luxury rentals and condo product is shrinking. In the higher-end residential market, properties that possess global demand have recovered well. Craig noted that Hines has made a point of focusing on wealthy international buyers.
Another theme that emerged is that population density is the primary driver for successful residential developments in core markets. Gilmartin noted that Forest City Ratner has shifted its focus to such markets since the downturn because of their potential and Forest City Ratner’s desire to focus on complex urban developments within such markets. New York City presents unique opportunities because it is the center of capital and talent and young people are constantly “beating down the door” to live there.
The conversation then shifted to the lack of affordable housing within Manhattan. MacLaury expressed concern that an international clientele is supporting the high prices in the market while local customers are being priced out. The largest barrier to developing more affordable housing has been high land prices. Concerns with the New York City’s affordable housing program were also expressed. Yet, the promising development of modular construction could help in reducing construction costs and making housing more affordable. Gilmartin provided an extensive overview of the modular construction being used by Forest City Ratner at its Atlantic Yards project in Brooklyn. If a success, modular construction may become more commonplace in New York City development.
Next in discussion was the state of the commercial office market, where there has been a flight to core assets by investors. Currently, such assets are being traded at sub-4 percent cap rates. Much of the value is attributable to the capital markets and low cost of debt. For new developments, the best projects have been successful in attracting tenants. As Bow noted, commercial tenants are enamored by new construction and the type of environment new construction can provide. However, high land prices and market competition have forced developers to move away from speculative development. As a result, many developers are forming joint ventures with tenant partners. Large-scale projects are becoming scarce due to lack of available sites, but the city is in need of new construction to replace the aging office inventory. Bow discussed the need for New York City to create incentives to spur development and mentioned the potential of the Midtown rezoning plan proposed by Mayor Bloomberg.
Finally, the panelists discussed how tech companies have impacted the Manhattan office market. There has been a flight of technology firms to the Midtown South market. Bow noted that Google’s purchase of 111 Eighth Avenue in Chelsea set the tone for the area, which has become a magnet for other tech firms seeking cheap, flexible, “vanilla” space that allows the ability to both grow and contract. Gilmartin described the work Forest City Ratner has done at MetroTech Center in Brooklyn to attract such firms. These tech companies want two things: to be near mass transit and to invest as little capital as possible into the space in order to focus most of their funds on research and development. Moving away from the traditional Midtown office market is becoming more acceptable for tenants especially as many firms, not just those in the technology sector, have an increasing number of employees living in Brooklyn and New Jersey. The panel emphasized that as the tech firms mature, their space needs will likely change and become more sophisticated.
The panel concluded with a brief question-and-answer session. Most notably, Craig gave his opinion about Hines operating on a global scale yet remaining a private company. He emphasized that partnerships often get tricky during economic downturns, and therefore in order to withstand the downturn of a cycle it is best to have a capital structure in place with equity partners who think long-term.
The fifth annual Real Estate Symposium took place on December 4, 2012, at Columbia University's Faculty House, with more than 180 alumni representing classes from 1961 to 2012. Please visit the event page for more details and reports on other speakers. Hosted by the Paul Milstein Center for Real Estate and the Real Estate Circle of Columbia Business School, the Real Estate Symposium is an annual educational forum that brings together accomplished Columbia Business School alumni and top industry leaders for a broad-based discussion of topical issues, high-profile transactions, trends, and challenges facing the real estate industry.