Affordable Housing Institute : US

[Previous Stuy Town posts can be found here:]

1, starting gun, 2, opening bets, 3, what’s at stake

4, paging the cavalry, Part 5, must the public pay?]

Previous posts (see list above) in the billion-dollar battle (hereinafter B$B) have introduced New York’s irreplaceable community, Stuyvesant Town/ Peter Cooper Village (Stuy Town), and the decision by its owner, MetLife, to sell it, apparently to the highest bidder.

I say ‘apparently’ because in any high-value, high-visibility affordable housing asset, 95% of what appears in the public media is propaganda of various sophisticated financial sorts.

Comrades, we must invest boldly in US residential real estate!

It’s designed to establish the terrain and anchor expectations —

Just trying to mark our expectations

— most especially of the public, press, and elected officials.

(And so far, it’s working brilliantly, because everyone’s repeating the $5 billion number.)

But … the melody people hum as they exit the concert hall is not how the symphony began, but how it ended.

At the end, it all sounds perfect

Despite MetLife’s strenuous efforts to force a fast pace —

Big bucks, big bucks, big bucks …

— despite that, I believe this will be an eighteen-month symphony whose score and libretto are far from written.

Whether it reaches a triumphant climax, is atonal and discordant, or merely dissolves in a clash of cymbals, will depend on how well — and how harmoniously or not! — the members play.

So let’s listen to them tuning up their instruments, as summarized in this recent New York Times article:

Metropolitan Life, the largest life insurer in North America, announced earlier this year that it would auction them off. The announcement upset many of the 25,000 residents. Nearly three quarters of the apartments still have regulated rents at roughly half the market rate. Tenants fear the changes that will come with a new owner seeking more higher-paying tenants.

Buyers will come, Ray. Buyers will come.

Size does matter. The property is huge, both physically and financially:

The opportunity to buy 80 acres and 110 buildings overlooking the East River has drawn widespread interest from investors.

Who’s auditioning? At least a dozen:

With MetLife to whip them into shape

More than a dozen groups, including one aligned with the tenants at Stuyvesant Town and Peter Cooper Village, are expected to deliver bids tomorrow to buy the sprawling complexes for anywhere from $4.3 billion to more than $5 billion in what promises to be the largest real estate deal in American history.

We’ll return to the residents’ efforts later. For now, let’s study the money:

But the chance to gain control of such a large block of apartments and a wide swath of land in an international city of rising rents has many prospective buyers salivating.

The buyers always have, as their lead dog, a homegrown Gothamite experienced in residential rental:

Holy rent increase, Batman!

But other bidders have different goals. The Lefrak Organization owns about 20,000 rent-regulated apartments in New York City. In recent years, Apollo has been one of the more aggressive buyers of New York apartments and would double its holdings. Other probable bidders include Related Companies; Stellar Management [A Recap alumnus client — Ed.]; Vornado Realty Trust, which owns the Bloomberg Building on the Upper East Side; and Tishman Speyer, which controls Rockefeller Center.

Even these big dogs need to team with major, major money sources:

The deal is in fact so big that every bidder has had to take on partners.

“It’s a one-of-a-kind purchase,” said Richard S. LeFrak, chairman of the Lefrak Organization, which is bidding in partnership with two financial institutions. “Any transformation is going to occur over a long period of time.”

LeFrak sees unique opportunity

“It has a very exciting potential,” said William L. Mack, a principal at Apollo Real Estate Advisors, which is bidding in partnership with ING Clarion Partners, an investment fund. “These things don’t come up very often.”

Buyers based in Saudi Arabia, Israel and Qatar are also in the mix, executives say.

Money could be flowing from there …

To here.

Asks the reader, why foreign money?

Step away from the micro and think macro.

Capital, the flightiest and fastest of assets, is the ultimate indicator of confidence. Money is fundamentally belief — belief in the government that prints it, the country whose laws protect it, and in the economy that makes it valuable. Any nation’s capital markets have sovereign risk, currency risk, and political risk. So in Egypt (to take a country where I’ve provided policy insight), when the rich think their government is heading in the right direction, they bring their capital back home and buy high-rise flats in downtown Cairo; when they get worried, their money runs to Europe, to dollars, or to America.

Whatever individuals may think of us at any given moment, global capital loves the United States. In terms of decade-plus economic investment prospects, the United States ranks at the top of the large developed nations. Virtually all global capital, everywhere, thinks the same way.

Investing a boatload of currency into US real estate can thus be seen as a giant capital export out of one’s home country and into a country that is geopolitically safe.

If you had a lot of money in Saudi Arabia, or Israel, or Qatar, wouldn’t you want to move it to America?

 

 

Further, despite 9/11, global capital loves Manhattan. (Latin and South American capital loves Miami; Asian capital loves Honolulu, Los Angeles, San Francisco, and Seattle.) But there are only so many trophy office buildings, glamorous brands, and luxury hotels to buy.

The plain, red brick buildings along First Avenue, between 14th and 23rd Streets, are more “meat and potatoes,” as one bidder put it, than gleaming real estate trophies like Rockefeller Center, the General Motors Building or the Chrysler Building.

That’s some trophy you’ve got, big boy

And the world is awash in capital. So:

Even as the condominium market has slowed, investors have increasingly bought pedestrian rental buildings, which are seen as relatively safe investments with potential windfall profits when the apartments no longer qualify for rent regulation.

Then there’s this very curious line, which gives one furiously to think:

MetLife, which has told potential buyers that it is willing to retain a stake in the complexes, is hoping to close the deal by Nov. 15, a quick goal for such a large transaction.

Say what? Why on earth would a seller offer to retain a stake in the property? Why would MetLife surrender control and yet stay in the deal?

[Continued tomorrow in Part 7.]

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