New York City

Multifamily Developers Seize Opportunity

Opportunity Zones have been discussed at length since their inception in Q1 2018. Interest is high, and 300+ investment funds had targets to raise ±$50 billion to invest in Opportunity Zones as of Q2 2019.

The impact of Opportunity Zone incentives is mixed and should be described in nuanced terms. Overall, investment volumes appear to be primarily influenced by cyclical factors. Total investment in Opportunity Zones since the creation of incentives (Q1 2018), transactions have accounted for 10.5% of overall U.S. volume.

The share of volume in these zones remains largely unchanged compared with the 18 months prior to the program (10.7%). Furthermore, annual volume growth in Opportunity Zones has been quite reflective of the broader market throughout the entire cycle, even during the past 18 months (6.7% vs 7.2%) when compared with the preceding 18 months.

While transaction volumes do not appear to have an impact on aggregate demand, demand has shifted around in some ways and there are meaningful localized impacts, including the rise in development site acquisitions since the start of the program.

Development Site Acquisitions Stand Out

Development site investment in the period from Q1 2018 through Q2 2019 totaled $87 billion and was 14.6% higher than the 18 months preceding the program. In contrast, investment outside of Opportunity Zones was only 1.2% higher than the six months leading up to the program.

Development of raw land is one of the most straightforward ways to deploy capital and maintain compliance with program regulations, thus qualifying for tax benefits. As a result, transaction activity for opportunity zone development sites has increased sharply, indicating some impact in this segment of the market.

Investment in land sites for multifamily development experienced particularly significant gains since Q1 2018. Multifamily development site acquisitions jumped 66.2% from the 18 months leading up to the program while development sites for all other property types experienced either losses or only moderate gains over the same time period.

Multifamily site investment accounted for 35.1% of all development site buying in Q1 2018 through Q2 2019. In the prior 18-month period, multifamily represented 24.2% of total development site investment.

In terms of the dollar value of construction starts, multifamily represented over one-half (53.2%) of the total commercial real estate value invested in Opportunity Zones over the last 18 months. Consequently, the estimated dollar value of completions is expected to rise through the end of 2019.

Site Investment by Location

New York City, Los Angeles and San Jose led in investment volumes of development sites since the start of the program. Secondary markets such as Salt Lake City, Denver and the Inland Empire had strong showings in terms of absolute gains as well as total volume.

It is also worth noting that these cities have attractively-located opportunity zones—even encompassing downtown areas in some cases.

The top five markets for percentage increases were Baltimore (896%), Birmingham (728%), Boston (572%), Philadelphia (479%) and Denver (413%).

Clearly, the increased buying activity of development sites in these markets were driven by many transactions that would have taken place regardless of incentives. Favorable locations and other transaction characteristics were also drivers. Still, significant multifamily development is taking place in Opportunity Zones and tax incentives will only help steer more capital into blighted communities.

By George Entis, Senior Research Analyst, CBRE

Large Commercial Loans in New York City

As widely reported in the news media, commercial properties in New York City traded at record high prices and extremely low capitalization rates for most of 2014. In fact, this incredible strength has continued into 2015. Individual Class A assets are regularly trading at prices between $1 billion and $2 billion, with cap rates of 3% to 4% of the current net operating income (NOI). The combination of very large loan requirements for buyers and low debt yields”[1] for lenders creates a series of financing issues and considerations that buyers must consider.

For purposes of this conversation I have assumed a buyer is purchasing a one million-square-foot Class A office building in New York City for $1.5 billion. The asset is trading at a 3.5% cap rate and generates an NOI of $52.5 million. The buyer is an institution that is seeking a loan for 50% to 60% of the purchase price ($750 million to $900 million).

Loan Sizes:

There are generally three basic categories of lending sources for large Class A commercial properties in New York. They include life companies, domestic and foreign banks and the Commercial Mortgage Backed Security (CMBS) market. Life companies and banks, with a few exceptions, generally like to limit their individual exposure to one specific asset at $100 million to $200 million max. In some rare circumstances, some life companies will hold $400 million to $500 million on an asset; an individual foreign or commercial bank could lend up to $750 million to $1 billion, syndicating a portion of the loan after closing. The CMBS market includes a large number of participants who can generally lend at these levels in single asset securitizations. Loan terms can be anywhere from three to 10 years; banks tend to focus on three to seven years, while life companies and CMBS generally focused on five-, seven- or 10-year terms.

These general restrictions greatly impact the ultimate winning lenders. For borrowers who prefer the balance sheet nature of a life company or bank execution, the hold limits forces them to syndicate a $750 million loan among two or three lending partners. This takes more time and includes complications such as two or three loan committees, attorneys and approval processes. On larger loans of $1.5 billion, this syndicate could include five or six lenders which could make the process even more difficult. The CMBS market can quickly and comfortably underwrite these larger loans; however has the disadvantage for some borrowers of not dealing with the balance sheet lender who holds the loan on their books and services the loans.

Debt Yield:

Another complication of the New York City lending market is the current debt yield requirements of lenders, low cap rates and how that translates into initial leverage levels for buyers. Over the past five years, debt yield—in addition to debt service coverage and loan-to-value—has become a key underwriting test to address the low interest rate environment, allowing lenders to underwrite at more normalized interest rates. In general, the senior lenders in the market look for initial debt yields of 7% to 8.5% on in-place NOI.  Even at the low end of that range – in the example above – that translates into a loan of only 50% of the purchase price. Assuming the more conservative approach, that translates into a loan of 41%. This requires buyers to come up with $750 million to $900 million of equity to complete these transactions; clearly a hurdle for many buyers.

Active Mezzanine Debt Market:

To help buyers close the gap of equity, there are a plethora of mezzanine lenders that continue to be active in providing additional debt. These lenders include pension fund advisors, foreign capital, insurance companies, mortgage REITS and specialty funds. The cost of the capital is highly dependent on the last dollar of leverage and debt yield.  In a few recent New York City-based transactions, foreign investors and insurance companies have made mezzanine loans with coupons as low as 5% to 7%, and lending on debt yields as low as 5.5% to 6% on a going-in basis. The focus for this subset of lenders is the stabilized debt yield at the point which the loan matures. Often, a 6% debt yield in year one is anticipated to move to 8% or 9% over time once leases roll to market or vacancy is filled. These sources also rely on the newly invested equity capital by the sponsorship group to gain comfort.

One Stop Shop:

Very often on the large New York City transactions, borrowers end up with a commitment from one CMBS lender to provide financing of up to 60% to 65%. This financing is committed by the bank and sliced into many tranches of senior and junior mezzanine debt and sold to various counterparties with different risk tolerance and return requirements. The one stop shop execution for borrowers can be extremely efficient from a timing perspective and risk of execution, however there are often times where the lender will build in some pricing cushion for the risk they are taking by warehousing the loan until the pieces are sold. Life companies and banks will  not generally commit to this one stop shop structure and will typically require any mezzanine investors to close simultaneously with the senior loan.


The current investment market in New York City creates various challenges for borrowers in how they raise and structure debt capital. Many considerations come into play including loan size, loan term, leverage levels, closing requirements and desire to utilize a balance sheet lender. The great news for buyers is that the lending market embraces the great strength of the New York City market and continues to compress its spreads and covenants. This is a testament to the market and the strong buyers it attracts.

[1] Debt yield is defined as net operating income of the property divided by the loan amount.


By Shawn Rosenthal, Executive Vice President, Debt & Structured Finance, CBRE Capital Markets