Danny Fishman loves a down market.
The Gaia Real Estate co-founder and CEO recently exited a 1,376-unit portfolio in the booming Sun Belt to the tune of $1.5 billion. Now, he’s deploying that capital in New York where multifamily prices are still depressed and distressed properties, according to Fishman, are bountiful.
Late last month, Gaia picked up three mixed-use, walk-up buildings on the Lower East Side for about $35 million. The portfolio — 102 Norfolk Street, 177 Ludlow Street and 99 Allen Street — includes 56 occupied apartments and five retail spaces.
Fishman likens the investment strategy to private equity’s approach of buy low, sell high: Nab the properties hit hardest by the pandemic — those with lower asking prices and leases still locked in at Covid rates — and wait for rents to rise.
Gaia plans to scoop up six city buildings in all with its Sun Belt profits. Fishman said the firm will close on a fourth Lower East Side multifamily property in the coming weeks and is in contract to buy two more in Brooklyn. That adds to the three East Village ones Gaia grabbed last summer for $50 million.
It may seem like a no-brainer to get in on investment sales with asking prices down and cap rates attractive, but Fishman says other investors have shied away from the city’s challenges: the threat of good cause eviction (which didn’t pass this legislative session), crime, and the “hell” of working with backlogged city agencies.
“I think, now, people are more cautious on New York,” Fishman said.
The data back him up. Last year, 392 multifamily properties changed hands for $6 billion, according to a report from Ariel Property Advisors. That’s up from 293 in 2019 but at a discount to the $7 billion paid in those deals.
It was a far cry from multifamily’s peak in 2015 when there were 790 sales for $18.7 billion. That was twice as many sales and three times as much money as last year.
The investment fears Fishman discussed aren’t confined to politics. At multifamily conferences last month, conversations often turned to economic headwinds.
“You’re seeing interest rates go up. That impacts deals,” Jonathan Stern, a senior managing director at Meridian Capital Group, said during the brokerage’s luncheon at ICSC last month.
“You’re hearing people throw around the word recession, depending on who you talk to,” he added.
Executives had voiced similar concerns during the New York Multifamily Summit in mid-May.
At a finance and investment panel, moderator Drew Fletcher of Greystone Capital Advisors asked a conference table of five executives whether multifamily’s robust rent growth could last.
Andrew Holm, Ares Management’s partner of U.S. investment, took a swing at divination, saying that the Fed’s “aggressive” rate hikes would lead to one of two outcomes: flat rent growth or a recession that would likely lead to job losses that drive renters right back to their parents’ homes.
“So I think [multifamily] is probably past its peak growth period,” Holm concluded.
Fishman has accepted that rents will likely plateau, but he believes the market’s silver linings can compensate for that.
For one, the executive said a number of tenants in his new buildings are still enjoying pandemic discounts. That offers an opportunity to hike rents to market rate as soon as leases expire.
Plus, citywide inventory is still hovering around rock bottom while demand among young renters for trendy neighborhoods, such as the East Village and Lower East Side, remains strong.
Coupled with cap rates around 5 percent, the market is offering ample returns, Fishman said.
“We have cash flow from day one, which is something very rare in New York,” he said.
And with so many investors wise to the market’s troubles, Fishman said there’s less competition.
“There are very few buyers in New York these days. I mean, you can count them on one hand,” Fishman said.
By comparison, the executive said, Gaia’s Houston portfolio drew interest from 350 investors and sold for more than the asking price.
Given Gaia’s history, its purchase of New York buildings not on others’ shopping lists is not a surprise. The CEO said the company got its start buying a Lehman Brothers portfolio out of bankruptcy “when no one wanted to touch it.”
In the same vein, Gaia picked up its Houston portfolio in 2015 after oil prices had plummeted by nearly half and whispers of recession were circulating.
The city’s economy rebounded in no time on the fracking boom and Fishman said Gaia made out with three times its investment.
By his own admission, Gaia isn’t interested in safe investments that generate moderate cash flow. It seeks problem properties with potential for big returns.
For that reason, Gaia doesn’t plan to hold its Lower East Side acquisitions for longer than five years.
“As soon as the portfolio stabilizes and New York returns to normal cap rates, it’s less interesting for us,” Fishman said. “We’re looking for the next opportunity — something else in trouble.”