Size Matters: Multifamily players weigh
placemaking and economies of scale against the increasingly complex
operations and vocal opposition to the creation of
megacommunities.
By: Chris Wood
September 2010
Credit: Jordan Mantzke
On March 11, Forest City Ratner Cos. Chairman and CEO Bruce
Ratner put his full weight onto the edge of a steel spade and
pushed ceremoniously into the Brooklyn dirt, breaking ground on the
Barclays Center arena—the future home of the New Jersey Nets and
the centerpiece of Atlantic Yards, a titanic mixed-use urban infill
project that will ultimately include 6,430 multifamily housing
units in 16 high-rise towers across 22 acres of Big Apple real
estate. In a show of business, civic, and cultural coalescence
around the project, Ratner was joined at the groundbreaking by New
York Gov. David Patterson; New York City Mayor Michael Bloomberg;
Brooklyn Borough President Marty Markowitz; Barclays President
Robert E. Diamond Jr.; and Nets investor and Grammy-winning hip-hop
icon Shawn “Jay-Z” Carter. These heavyweights, in one aspect or
another, are all publicly lending their support to New York City’s
latest megacommunity.
That’s not to say that everyone is a fan of Atlantic Yards, or
megacommunities in general, which altruistically are intended to
deliver culturally identifiable “placemaking” neighborhoods to
thousands of renters while allowing for economies of scale in
construction and operating costs, but in practice are perennially
fraught with financial difficulties, landlord/tenant strife,
physical upkeep challenges, and intensely focused and
litigation-minded NIMBYism (particularly during design and
development). Plans for Atlantic Yards, for example, were first
announced in 2003, and it wasn’t just the economic collapse that
has stalled the project some six years from its originally
scheduled rollout.
“The opposition for this project committed to suing early and
often to stop the project, and they lived up to their commitment,”
says Maryanne Gilmartin, Forest City Ratner’s executive vice
president of commercial and residential development, referring to
Develop, Don’t Destroy, Brooklyn, the nonprofit coalition that
unsuccessfully took Forest City through state and federal courts
over alleged eminent domain abuses. These claims were ultimately
rejected via a U.S. Supreme Court refusal to hear the case on
appeal and a New York Appeals Court November 2009 ruling that was
likewise in the developer’s favor.
“We always anticipate a certain level of conflict that comes
with the territory in developing large-scale projects. You
definitely need to be thick-skinned and hunker down for the long
haul,” Gilmartin says. “None of what we do is simple,
straightforward, or quick. This is not a guppy in the scheme of
development projects; it is a whale.”
Big Properties, Big
Problems
A look across the roster of American megacommunities—those
projects that are often larger than many small cities, involving
multifamily unit counts ranging from roughly 2,000 to 15,000 units
(see “Jumbo Sized,” below)—confirms Gilmartin’s summation that
these powerhouse projects are anything but simple and
straightforward.
Mostly built at the conclusion of World War II to house
returning servicemen and their families, megacommunities seek to
alleviate the ever-present shortage of affordable housing in the
country’s biggest metropolitan areas. While their age makes ongoing
physical improvements a complex necessity, most assets have enjoyed
historically high occupancy and cash flow from residents eager to
identify themselves with the communities.
That cash flow likewise continues to attract investors and
developers who see cost-savings in the economies of scale at such
large properties. But from operations to capital structure, the
behemoth size that makes mega projects so appealing from an
economies-of-scale standpoint also means that minor problems take
very little catalyzing to become full-blown catastrophes in
communities that are often larger than many small
cities.
Take the Bronx’s Co-Op City, the nation’s largest apartment
cooperative community, accommodating nearly 60,000 residents with
15,372 units across 35 high-rise buildings. In June, the community
faced a sanitation nightmare when contract negotiations stalled
between the property’s management firm, New York-based RiverBay
Corp., and unionized garbage collectors, janitors, repairmen, and
groundskeepers. In the space of 72 hours, some 100 tons of garbage
accumulated on Co-Op City streets. Fearing an explosion in the
rodent population as the summer heat bore down on refuse piles more
than 5 feet high, the Health Department finally declared the site a
health hazard and mandated garbage collection, even as new
contracts had yet to be finalized.
Hop on the subway and head south, and you’ll see that problems
continue to plague Stuyvesant Town/Peter Cooper Village, the
post-war mega complex of 11,227 rental units across 52 buildings
constructed by New York-based Metropolitan Life Insurance Co. in
1947 and sold in October 2006 to a New York-based Tishman
Speyer/BlackRock joint venture for $5.4 billion. The deal continues
to hold the distinction of being the largest U.S. apartment
transaction to date—and one that many multifamily real estate
observers in and outside of New York wonder should ever have been
consummated.
Going, Going, Gone
Politics, ongoing litigation, and delinquencies overshadow the
pending auction of Stuyvesant Town/Peter Cooper
Village.
On June 21, federal district court judge Alvin Hellerstein
granted a summary judgment foreclosure on the 11,227-unit
Stuyvesant Town/Peter Cooper Village megacommunity. The motion for
foreclosure by special servicer Needham, Mass.-based CW Capital was
unopposed by the property’s joint venture ownership group of New
York-based Tishman Speyer and BlackRock, which defaulted on a $300
million mortgage payment in January and requests that the property
be auctioned in one or two parcels to cover the senior mortgage,
litigation costs, and late fees.
While reports have surfaced that Freddie Mac might be
interested in providing financing for the property, most market
watchers speculate that private equity will again win out in the
bid for the project. Some also believe that CW Capital—which would
be, in essence, paying itself—will come to the bidding table with
the upper-hand.
Regardless of where ownership of the complex ultimately settles
out, industry pundits expect the fallout to continue to impact
apartment finance and disposition barometers and
metrics.
How tumultuous of an effect can one property have on an entire
industry? In February, the apartment sector’s delinquency rate
climbed to an all-time high of 8.97 percent, according to Fitch
Ratings. When factoring in the delinquency of the Stuyvesant
Town/Peter Cooper Village default, the rate climbed to more than 13
percent.
Further complicating the StuyTown scenario is a Manhattan State
Supreme Court ruling levied on August 5 that allows a class action
lawsuit against the complex’s developer and former owner MetLife to
proceed. That suit seeks $215 million for improper rent overcharges
as the result of alleged improper deregulation of units under rent
control, similar in nature to a successful suit filed against the
Tishman Speyer/BlackRock JV that led in part to the demise of that
$5.4 billion deal.
“No one wants to touch these mega properties in default,” says
Dan Fasulo, managing director and head of global research for New
York-based Real Capital Analytics. “They have become politicized
properties. The last thing you want is a senator setting up a
conference in front of your building, and that is what everyone is
scared to death of. On their merits, they are tremendous commercial
properties that should have a line around the corner of white
knights who want to recapitalize them, but politics have crept in
and no one wants to touch them.”
In fact, the Stuyvesant Town ownership group announced this
January that it would miss making payments on some $3 billion in
senior mortgage debt after attempts to deregulate approximately
4,400 apartments that were vacant or turning between lessors was
found by the New York State Supreme Court to be in conflict with
J-51 tax abatements granted to the property.
“The market is speaking back that the price paid in the
previous transaction of $5.4 billion was not a sustainable price
based on the income stream of the property, so the market is
revaluing it, and the property has a lesser value,” says Patrick
Siconolfi, executive director of New York’s Community Housing
Improvement Program. “I’ve heard anecdotally that value might be
around $2 billion, but I couldn’t know, and we won’t know until the
market tests it.”
That market test will likely come sooner rather than later. On
June 21, federal judge Alvin Hellerstein granted a foreclosure
motion by the Stuyvesant Town/Peter Cooper Village mortgage’s
special servicer, Needham, Mass.-based CW Capital, ordering that
the property be sold via auction in either one or two parcels (see
“Going, Going, Gone” on page 36).
New York isn’t the only metro area feeling the pain from
megacommunities. In San Francisco, the 3,221-unit Parkmerced is
finding simultaneous difficulty both with jump-starting a 20-year
re-greening/value-add retrofit that could add up to 7,000
additional units as well as simply making mortgage payments on the
$687 million plopped down in October 2005 for the property by a
joint venture between New York-based Stellar Management and
Boston-based Rockpoint Group. In May, Stellar Management
representatives confirmed to the San Francisco Chronicle that they
had engaged an unnamed special servicer to assist with the prospect
of defaulting on an estimated $500 million in combined mortgage
debt coming due in October 2010. Industry blog CRE Review notes
that at year-end 2009, the property was clearing $30 million in NOI
at near 100 percent occupancy—not enough to cover loans
underwritten to $40 million NOI.
Although the public eye remains fixated on the problems of
these properties, that’s not to say that current owners of
embattled megacommunities haven’t strived to make their respective
deals work out. Co-Op City has resolved its contract issues and
remains the first, largest, and arguably most successful apartment
cooperative experiment in history, with a waiting list for units
that can last more than a year. For all of the legal wrangling and
capitalization issues, market observers of the unfolding Stuyvesant
Town/Peter Cooper Village drama say the physical condition of the
property remains top-notch. (The Tishman Speyer/BlackRock ownership
group declined to comment on current occupancy levels.) And the
Stellar Management/Rockpoint Group has often been recognized for
bringing Parkmerced back from the brink of deterioration after
original developer New York-based MetLife sold the community to
Leona Helmsley in the 1970s. (The developers, owners, management
groups, and special servicers involved in these three projects’
past, present, and future declined to comment for this
article.)
Management maneuvers
Even firms finding success with megacommunities sympathize with
the fish-out-of-water complex that many owners experience when
balancing how a multi-thousand-unit deal pencils out financially on
paper, with the complex management and operational systems of the
physical property.
“Take everything you know about property management and just
throw it out the window,” attests Greg Lozinak, chief operating
officer for Chicago-based Waterton Residential, which tapped into a
private equity fund in 2007 for the $470 million purchase of
Chicago’s Presidential Towers from the Pritzker Realty
Group.
Built in 1986, the 2,346-unit complex spans four 50-story
towers that encompass two city blocks in Chicago’s revitalized West
Loop and features a five-story garage, three-story atrium, and more
than 100,000 square feet of commercial retail space. Currently at
95 percent occupancy, the property employs 72 full-time on-site
associates. Prior to the Presidential Towers acquisition, the
largest complex Waterton Residential took on was 936 units. “From a
systems standpoint and a customer service standpoint, the
traditional garden apartment strategy of assigning one associate
per 20 or 30 residents just doesn’t apply when you get beyond 1,000
or so units,” Lozinak says. “You are talking about a much larger
allocation of resources.”
Forest City Ratner executives are weighing the pros and cons of
that resource allocation as they determine whether to self-manage
or fee-manage the residential components of Atlantic Yards,
construction of which is slated to commence next year with a
projected development timeline of 10-plus years. While the firm has
a proven track record managing for its own accounts, its real
estate footprint in New York City is primarily in the office
sector, and the company does not have residential management
offices currently located in the market.
“It is something that we are still studying,” Gilmartin says.
“We like to be in control; we are very high-quality managers of our
properties; and we have a high standard associated with our
management. There are maybe three companies that might be able to
step up in a way that would satisfy us. Because of that, and
because of the fact that you are talking about critical mass here,
it is a business model that you could develop and build upon over
time. This really begs the question: Why not do it
yourself?”
Housing agencies with input on the continued development of
megacommunities are also beginning to look more closely at on-site
management when it comes to allocating development contracts to
bidders. At Hunters Point South, just up the East River from
Atlantic Yards, the New York City Department of Housing
Preservation and Development (HPD) has issued a request for
proposal (RFP) on the first 1,000-unit phase of a planned
5,000-unit community build-out and is weighing how many private
developers, owners, and (ultimately) property managers control
property on the site as part of the RFP process.
“Over history, we have done it two different ways,” says HPD
Commissioner Rafael E. Cestero. “We have done it on a site-by-site
basis with individual RFPs for one or two sites with multiple
developers participating, and we have also done it where we select
a single developer to build out an entire new community over
multiple phases. Because of the size of the 600-unit buildings and
development parcels in Queens, we are more likely to end up with a
hybrid of those models, involving just a couple of developers over
the course of the project. Not one, but also not half a
dozen.”
According to Cestero, each community is different, and the
decision to go with a single, a select few, or multiple developers
is site- and economy-dependant and evolves in conjunction with each
mega project.
One of those developers could be Alexandria, Va.-based
AvalonBay Communities, which has filed a bid for the first
1,000-unit phase at Hunters Point. “AvalonBay has really been no
stranger to pretty large-scale buildings, and in terms of capital
deployment and long-term strategy, we are very fond of these
multi-phase deals,” says Fred Harris, the REIT’s senior vice
president of development. “These developments capture where people
want to be today. [Testament to that] is the surprisingly low
interest and relatively small requirement for parking spaces at a
lot of these buildings. It tells you that people are really looking
at some of this as a lifestyle choice.”
A Sense of Community
Indeed, even while faced with recapitalization woes,
tenant/landlord feuds, huge operating budgets, and disgruntled
neighbors, the developers, civic leaders, and financiers behind
megacommunities continue to stress their relevance, particularly
when it comes to placemaking and community building in an
increasingly socially fragmented and detached society.
Major Makeover: Currently undergoing a 10-year renovation
program by Chicago-based Waterton Associates, Presidential Towers
in Chicago comprise 2,346 market-rate apartments in four 50-story
towers across two entire city blocks.
“These kinds of communities allow people to have a more
well-defined sense of place,” Cestero says. “Whether you are
talking about [New York’s] Battery Park City or Starrett City or
Stuyvesant Town/Peter Cooper Village, there is a very strong sense
of community that residents are attracted to. You get that less so
with infill, scatter-shot development. There is a softer side to
why we do this, and it is creating that sense of place and that
sense of community that people can gravitate to and connect to in a
really important way.”
Affordability will factor largely in the success of current and
future megacommunities, in part to ensure the placemaking ventures
of the few can be experienced by the masses, particularly those who
work in and serve the communities in which they live. Forest City
has committed 2,250 of Atlantic Yards’ 6,430 units to that end, and
Gilmartin pledges the affordability rollout will be aggressive and
consistent.
“It’s not as if we will wait until the latter years to produce
the levels of affordability that we expect to produce here at
Atlantic Yards,” she says. “We expect that the very first building
will have a generous amount of affordability associated with it, in
large part because it is our commitment to the community that we
will build affordable housing. If we do our jobs well, this can
become a model for how it can be accomplished here in New York City
and in other places. We’re excited about it. We believe in it. And
we take the responsibility very seriously.”
Reprinted with permission from Multifamily Executive, a
publication of Hanley Wood Business Media © September,
2010
