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.
“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.”