By Hiten Samtani on July 01, 2014.
New York City’s established real estate players and its burgeoning startup community are always on the lookout for the next big idea — something that can revolutionize the industry and rake in large profits.
Sometimes, these ideas set a new industry standard, such as StreetEasy did when it launched its online database of sales listings in 2005, and other times they are merely a flash in the pan.
This past year, for example, many real estate companies including brokerage Bond New York and apartment search website RentHop announced that they would begin accepting the online currency Bitcoin. But Bitcoin’s volatility — in 2013 its exchange rate against the U.S. dollar jumped from as low as $100 to as high as $1,240 — now has many in the industry thinking it will fizzle.
This month, The Real Deal surveyed the industry to come up with some of the most innovative and promising ideas that are gaining traction in today’s market, from crowdfunding to condo-ing LED signs on buildings to using Google Glass to showcase properties.
Below is a rundown of what we found.
The crowdfunding craze
The crowdfunding phenomenon has undoubtedly received more attention than any of the other ideas on this list. It’s also been the most successful.
In New York, Fundrise, Realty Mogul and Prodigy Network have all successfully financed projects using the model, which allows investors to put their money directly into real estate projects of their own choosing, rather than investing blindly through a middleman such as a real estate investment trust or a pension fund.
The Fundrise website, for example, allows building owners to create a profile describing the project they are funding. Potential investors can then decide to put in as little as $5,000. Annual returns vary by deal. A mezzanine debt investment in an East Village mixed-use building renovation, for example, is currently offering a 7 percent return, while a similar investment in Brooklyn’s Prospect Lefferts Gardens is offering 16 percent, according to Fundrise’s website.
The concept is getting some big-time financial backing, suggesting that it may stick as an investment vehicle for the commercial real estate industry.
In May, Fundrise raised $31 million from investors, including Silverstein Properties’ CEO Martin Burger and Chief Investment Officer Tal Kerret as well as Manhattan-based financial brokerage Ackman-Ziff.
“The ability to allow people to put their money where they would like is very powerful,” Kerret told TRD. “I think the concept of democratic investment in real estate has the opportunity to grow dramatically if managed and done well.”
Kerret declined to disclose the amount he invested in Fundrise. But he said the logical next step for crowdfunding is to allow developers to integrate the platform onto their own websites and raise money directly. He declined to comment on whether Silverstein would explore that model.
The crowdfunding craze has taken off since the federal Jumpstart our Business Startups Act of 2012 went into effect and eased restrictions on fundraising by small companies. Though companies such as Kickstarter and Indiegogo have been around since before the legislation, they are strictly fundraising sites, not investment platforms.
Prodigy CEO Rodrigo Nino told TRD that out of the $600 million the company has raised for New York developments since 2013, almost $70 million came through crowdfunding. These projects include AKA Wall Street, a $120 million extended-stay hotel project at 84 William Street that pulled in $31 million in crowdfunding money. Prodigy is now soliciting minimum investments of $50,000 for 17 John Street, an extended-stay hotel conversion.
"It’s the creation of a whole new asset class,” Nino said of crowdfunding. “Individual investors have access to stocks, bonds and commodities, but also to something decoupled with the volatility of the stock market.”
Crowdfunding companies rely on various business models to earn their money. Fundrise’s revenue comes through a combination of listing, subscription and service fees from developers, said company CEO Benjamin Miller. Prodigy charges two fees: 2 percent for asset management on the capital invested, and 3 percent on project costs. It also gets a share of the returns.
Prodigy is now looking to allow developers to independently raise money by licensing its platform to them. Developers interested in using the model include the Korman family, which Prodigy worked with on 84 William. Nino also predicted an uptick in funding for large projects from major developers as word about crowdfunding spreads among the real estate establishment.
“It doesn’t get any more traditional than Silverstein,” he said of Fundrise’s recent investment partner.
Tapping foreign bond markets
New York City developers have long been tapping foreign capital to get their projects off the ground. But they have now found a new and inexpensive source of international cash: Foreign bond markets.
The first stop on this bond-market bonanza appears to be Israel. New York City real estate players recently became the first U.S.-based developers to tap the Israeli bond market to raise cash.
Last month, mega developer Gary Barnett of Extell Development — whose genius for finding money for his megaprojects is well-documented, particularly at One57 where he raised $600 million through outside investors — raised about 945 million shekels, or roughly $271 million through a bond offering on the Tel Aviv stock exchange. On the same day, Brookland Capital, a Brooklyn-based development company headed by Israeli developers Boaz Gilad and Assaf Fitoussi, raised 120 million shekels, or about $34.5 million.
Turning to foreign bond markets is a relatively new phenomenon, according to Howard Michaels, head of the real estate investment advisory firm the Carlton Group.
“It’s just kind of starting,” he said. “We have a relationship with an Israeli investment bank and we’re also getting involved in this.”
Israeli bonds are akin to U.S. mezzanine debt, he said, which can cost developers between 8 and 15 percent here. In Israel, a New York developer with a solid track record and cash flow can raise money for half that rate, as low as 5 percent. “People like low-cost capital, and this is an alternative and creative way to go about it,” he said.
Extell, for example, will pay 4.65 percent interest on its Israeli bond offering over a 5.5-year term, roughly half what it would pay in the U.S. after mortgage taxes and fees. Brookland’s six-year debt carries a 6.4 percent interest rate.
“There’s a huge appetite for bonds in Israel,” said Brookland’s Gilad, adding that a company of Brookland’s size would be unlikely to stir up the same investor interest in New York. Brookland will use the cash, he said, to fund acquisitions in Brooklyn’s emerging neighborhoods such as Crown Heights, Bedford-Stuyvesant and Bushwick. Representatives for Extell didn’t respond to requests for comment.
Sources told TRD that Extell’s move into the Israeli bond market would likely prompt other New York real estate firms to do the same and look to bond markets in other countries as a new source of cash.
“We’re always on the lookout for new ideas,” an executive with a financial brokerage said when hearing of the scheme.
Taking big data to the next level
Big data is not new to real estate. As TRD has reported, startups such as View the Space, SiteCompli and CompStak have all sprouted up to provide (and crunch) numbers on everything from property management to lease transactions to building violations.
But Related Companies is now taking big data a step further. The developer is teaming up with New York University’s Center for Urban Science and Progress, or CUSP, to create what’s being referred to in urban-planning speak as a “quantified community” at the developer’s 28-acre Hudson Yards megaproject.
The duo will install thousands of sensors across the complex to measure air quality, energy usage, recycling, vehicle and pedestrian traffic, health and activity levels of workers and residents and dozens of other metrics. While data-mining experiments of this size have taken place internationally at megaprojects in South Korean and Spain, this is the first initiative of its kind in New York.
Related Hudson Yards president Jay Cross said harnessing big data will help the developer make improvements in real time for residents and tenants. But it could also help the company’s bottom line. The developer could, for example, provide potential retail tenants with detailed analytics on pedestrian traffic or cut costs by making energy usage changes based on the incoming data.
“What’s happening at Hudson Yards has a lot of implications for urban development going forward,” said Constantine Kontokosta, the director of CUSP, of the program, which is being funded primarily through federal and foundation grants.
Other real estate players have expressed interest in carrying out similar, if smaller-scale, data-tracking efforts since the project was announced, Kontokosta said.
And sources unaffiliated with the Hudson Yards project say it could be groundbreaking. It could “completely redefine how buildings are designed,” said Marc Kushner, the founder of architecture website Architizer and a cousin of real estate magnate Jared Kushner. He said it could provide developers with a better understanding of the most energy-efficient construction materials, for example, or help them determine which public space layouts are most useful.
Vishaan Chakrabarti, a principal at SHoP Architects, cited the aviation industry as a model for constantly improving the way it designs aircrafts based on industry studies. The Hudson Yards experiment, he said, could nudge the building industry, which currently relies on anecdotal evidence, toward a similar, more data-driven approach.
Gearing up for Google Glass
For most New Yorkers, Google Glass is just a futuristic-looking novelty device.
The high-tech Internet-powered computer, which is worn like a pair of eyeglasses, debuted to the general public just two months ago, at a cost of $1,500. But well before its full-fledged consumer launch, it had already begun trickling into the real estate industry, particularly on the residential side.
Real estate company Trulia, for example, launched an app for “Glass” last June, which allows users to see alerts about nearby for-sale apartments while walking around a New York neighborhood. Users can also browse photographs of homes, save a listing and contact an agent through the app.
Zillow has also said it’s working on an app for Glass.
The technology is still being used only by the earliest of adopters and is in the testing phase in the real estate market, but sources say it could have big implications for the industry — even if it’s not for a few more years.
Some New York brokers have already used the technology with foreign investors, albeit with mixed results. Vivaldi Real Estate, a Manhattan-based residential brokerage with several clients in Italy, has used Google Glass to give buyers who cannot visit a property a virtual tour. (The device transmits what the eye can see through a video feed, similar to Facetime or Skype.)
But Guido Pompilj, Vivaldi’s managing director, said the company abandoned its Glass showings after experiencing technical difficulties, and now uses the older, but more reliable, Skype. Google has since nixed Glass’s video conferencing feature, saying that it wasn’t up to snuff. Users can, however, still record hours of video footage with the device.
Terra Holdings, the parent company of Brown Harris Stevens and Halstead Property, is also experimenting with Glass’s video and mapping technology.
“They’re great for open houses,” Arthur Zeckendorf, Terra’s co-chairman and a developer of 15 Central Park West, told the Wall Street Journal in March. “The brokers have all the listing information right there in the glass.”
And sources say Glass’ usefulness in the industry goes beyond just showcasing property. Brooklyn-based brokerage Ideal Properties Group is running a pilot training program for newbie agents and for agents having trouble closing deals, managing director Aleksandra Scepanovic told TRD. Agents wear Glass while out on showings, and the firm’s management can watch the agent’s performance through Glass’ video-recording capability in real time, Scepanovic said.
“It’s a very good tool to try and pinpoint a broker’s soft spot right in the field,” she said. “When you’re in the middle of a showing, you could have your manager in the background” giving feedback and advice.
Using the device could, however, raise some privacy concerns. For example, clients may not want to be recorded. As a result, Ideal has created authorization forms for clients to sign. So far, including training time and four Glass headsets, the brokerage has spent about $12,000 on the pilot program, Scepanovic said.
Meanwhile, other visual technologies are already making a splash in the industry and, in some cases, replacing traditional renderings. Floored, a startup which TRD has written about in the past, does 3-D visualizations of new-construction projects and commercial spaces that can be viewed on both standard computers and through 3D goggles dubbed the Oculus. It’s done this for projects such as Hines’ under-construction 7 Bryant Park and Taconic Investment Partners’ office building at 619 West 54th Street. It also recently showcased a 3D model of Hudson Yards through its goggles at the ICSC retail conference in Vegas. In December, the company raised $5.3 million in funding, a strong indicator of its potential to gain traction in the industry.
Building owners are always looking for ways to slice and dice their properties to maximize profits. On the commercial side, selling off condo interests for either office or retail space has become commonplace. On the residential side, savvy developers such as RAL Companies have created private rooftop “cabanas.”
But some building owners in Times Square are now looking to milk their prime locations by “condominiumizing” their properties’ lucrative signage. Though telecommunications antennas have been condo-ed for years, sources said, signage-specific condos are a new phenomenon and could allow developers to tap another source of profits on their buildings.
“The sum of the parts is worth substantially more than the whole,” said the Carlton Group’s Michaels. “Selling an asset in pieces brings in more money than selling the whole thing.”
While the trend is largely limited to the Times Square area, sources say if all goes well there, it could spill over into other prime areas and create a new incentive for buying buildings with major signage potential.
Creating a condo for a sign usually involves taking an unrentable portion of the building’s interior, such as a supply closet, and documenting it in a condominium offering plan, according to Jay Neveloff, a partner at the law firm Kramer Levin.
The move allows the owners to comply with the requirement that an offering plan can only be drawn up on the basis of actual physical space in the building, Neveloff said.
“If you have a revenue stream, whether it’s a sign or big antenna, you can create a condo unit — it could be as small as a closet,” he said. “A tax lot would be assigned, and then you sell it separately and finance it separately.”
Splitting the building up in this manner allows landlords to reach out to more investors. “There are people who are going to be willing to pay a lot of money for that income stream,” Neveloff said. “I’ve certainly over the past few years represented buyers who are actively looking for signage. Every building in Times Square could explore this opportunity.”
The area sees pedestrian traffic of about 360,000 visitors daily, according to numbers from the Times Square Alliance, the local business improvement district. And landlords already lease the signs out for astronomical annual rents.
Creating signage condos could also help landlords appeal to more lenders, said Nicholas Kaiser, a partner at the Manhattan-based law firm Cohen & Gresser. “Different lenders have different asset categories and profiles that they tend to focus on,” Kaiser said. “You can maximize the amount of leverage by slicing it into different pieces and reaching out to lenders amenable to those kinds of assets.”
Private equity firms Carlyle Group and Capstone Equities, who paid $83 million for an office and retail building at 570 Seventh Avenue last year, are now considering condo-ing the signage, according to a source familiar with the property. The owners are currently asking an annual rent of $8 million for both the signage — which includes 3,178 square feet of LED signage and 5,852 square feet of static signage — and the building’s 20,000-square-foot retail space.
Robert Shapiro, a veteran assemblage broker and principal of City Center Real Estate, said that in Times Square, “you don’t have to bother erecting a building. All you have to do is build a signpost.”
Using health to create wealth
Doggie spas and golf simulators are old news in the one-upmanship world of luxury residential amenities. And while “green buildings” have also been all the rage, developers are now going beyond that and looking to cash in on the health and clean living movement.
At the forefront of the trend is development firm Delos, which is behind a new condo building at 66 East 11th Street, that claims to “enrich the health of the people” who live there. The amenities range from Vitamin C-infused showers to aromatherapy air supplies to the pièce de résistance, a “circadian lighting system” that will filter in light to invigorate residents in the morning and melatonin-filled light in the evening to help them to sleep. (See related story on page 112.)
Delos was founded by former Goldman Sachs executives and brothers Peter and Paul Scialla, along with former Starwood Hotels and Resorts Worldwide executive Morad Fareed. The partners paid $120 million for the former dress factory and converted it into five condos. The building, which is being marketed by powerbroker Dolly Lenz, has three remaining units, which are asking between $15.5 million and $50 million.
And it also has celebrity buyers such as actor Leonardo DiCaprio and spiritual guru Deepak Chopra. Both DiCaprio and Chopra also sit on the Delos’ advisory board, along with healthcare authorities such as Dr. Michael Roizen, the chief wellness officer of the Cleveland Clinic. After being tapped to sell the building in 2012, Lenz said in a statement that the “effort to bring health-based technologies into our homes is only in its infancy.”
Indeed, others say that the building could be the first of many attempts to play into buyers’ desire to integrate health-focused elements into the home. “Things such as filtered air and filtered water actually make a difference in your life, especially when you have allergies,” said Jarrod Guy Randolph, a principal at newly launched residential brokerage JGR Property Group and a former broker at Core. Other buildings with filtered air include the Sheldrake Organization’s Riverhouse in Battery Park City and Extell’s the Lucida on the Upper East Side.
Representatives for Delos didn’t respond to requests for comment.