| NYguy |
Jun 2, 2016 2:18 AM |
Stern looks like he would make a good villain...
http://therealdeal.com/issues_articl...ael-stern-fly/
How high can Michael Stern fly?
With a softening market and two of NYC’s tallest residential towers in the works, the developer is taking riskier bets
http://therealdeal.com/wp-content/up...-Stern-JDS.png
June 01, 2016
By Konrad Putzier
Quote:
Like Manhattan’s jagged skyline, the history of its real estate industry is shaped by steep rises and swift falls. There is William Zeckendorf, who rose from small-time broker to seminal developer of the 1950s and 1960s only to die bankrupt. Decades later, Harry Macklowe rose from college dropout to real estate mogul, lost it all in the 2007 downturn and landed back on his feet in the years after.
The latest developer to climb the industry’s peak at breakneck speed is Michael Stern, the 36-year-old head of JDS Development Group.
Stern began building his first low-rise properties in the outer boroughs just 16 years ago. Now he is co-developing the tallest building in the Western Hemisphere at 111 West 57th Street and the tallest building on the East Coast outside of Manhattan at 9 DeKalb Avenue in Brooklyn — as well as three other New York high-rises.
When you tally in the buildings JDS and its partners have already completed — such as Walker Tower in Chelsea and Stella Tower in Hell’s Kitchen — you’d be hard-pressed to find many other developers leaving a bigger mark on the city’s skyline in today’s market.
But JDS isn’t just building more than its peers, it is also taking on more risk at a time when the luxury residential market is showing signs of slowing and lending volume is contracting.
A fellow high-rise developer, speaking on condition of anonymity, said he “doesn’t understand the economics” behind 111 West 57th, which JDS is co-developing with Property Markets Group on Billionaire’s Row, the nexus of the luxury condo boom.
The two projects that will make or break JDS’s standing as one of New York’s great development firms are its tallest and boldest. But a look at the cost structures of the projects shows how thin the line between success and failure may be.
The Steinway Gamble
When PMG founder Kevin Maloney told Bloomberg in April that 111 West 57th would hold off on marketing condos for at least a year, due to slowing demand, he seemed to prove all the project’s doubters right.
The tower will include 60 condos with asking prices averaging $5,700 per square foot, according to an offering plan.
But despite slowing demand for high-priced units and increased competition at the top of the market, JDS and its partners remain optimistic that the development will succeed, according to sources involved in the project’s financing.
That’s partly because the tower is not scheduled to be complete until early 2018 and the developers’ construction loans don’t mature until mid-2019, meaning they can wait for the luxury market to recover. And even if it doesn’t, JDS and PMG are betting that a comparatively low cost basis will protect them financially.
“I think they, and we, still feel very comfortable with the basis,” Scott Weiner, head of Apollo Global Management’s commercial real estate debt business and a mezzanine lender on the project, told analysts during a February earnings call. “I can’t speak to their strategy in terms of how they want to approach presales, but they don’t have to sell anything right now.”
The developers estimate the glass-and-steel tower will cost between $2,300 and $2,500 per square foot to build, while the project’s break-even is only a little higher than that, around $2,800, according to sources in the know. That gives JDS and PMG a nice cushion against a possible market downturn.
By comparison, Extell’s condo tower One57, which is nearly sold out, and CIM Group and Harry Macklowe’s 432 Park Avenue, which is selling now, reportedly cost well above $3,000 per square foot to build. Meanwhile Vornado Realty Trust’s 220 Central Park South is expected to cost a staggering $5,000 per square foot.
Aaron Appel, a broker at commercial firm JLL who arranged financing for 111 West 57th, said the comparatively low price the developers paid for the land cannot be overlooked.
JDS and PMG assembled the project by buying a development site as well as the operating lease on the neighboring, landmarked Steinway Building and going through a complicated landmarks approval process. The co-developers paid $131.5 million for the site, or around $400 per buildable square foot, according to property records.
Brooklyn’s tallest
Across the East River in Brooklyn, JDS and the Chetrit Group are working on a similarly ambitious project: the 1,066-foot-tall mixed-use tower at 9 DeKalb that would shatter the borough’s height record by around 400 feet. The project won landmarks approval in April.
Here, too, Stern managed to assemble the site on the cheap.
In June 2014, he and Chetrit bought the development site at 340 Flatbush Avenue for $43.5 million. Then in December 2014, the adjacent, landmarked Dime Savings Bank hit the market along with 285,000 square feet of air rights.
JDS and Chetrit were in the best position to buy the bank site “because no one else could use the air rights,” Ofer Cohen, founder of Brooklyn-based investment sales brokerage TerraCRG, told TRD. The developers paid $90 million for the building and filed plans for a 556,000-square-foot tower. The two deals put the developers’ cost basis at roughly $240 per gross buildable square foot — versus the much higher $350 to $400 per buildable square foot that sites in the area often trade for, according to data from TerraCRG.
“Their basis is really attractive and enables them to do either rental or condo,” Cohen said, adding that the retail space in the historic Dime Savings Bank will likely provide another major revenue source.
...The developers funded their acquisition and pre-development costs of 9 DeKalb with a $115 million loan from Fortress Credit, a subsidiary of the private equity firm Fortress Investment Group. Though the terms of the debt were not disclosed, Fortress has a reputation as a hard money lender with a strong appetite for risk. The firm subsequently sold a portion of the loan to Kushner Companies for $57.5 million, making company head and fellow real estate wunderkind Jared Kushner one of Stern’s lenders.
...JDS and Chetrit aren’t yet in the market for a construction loan, according to sources, but they will need to secure one to replace the financing from Fortress.
JLL’s Appel said he’s not worried about Stern landing a construction loan for the project. “Look, any large construction loan right now is challenging,” he said. “But I don’t see him having any more challenging of a time that any other developer.”
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