Avison Young

Erick Edeen

As a Principal and the Director of Tri-State Investment Sales Operations in Avison Young, Erik Edeen leads and coordinates day-to-day execution for the three-dozen member group in the New York City office.

Erik has been involved in developing and executing all facets of the investment sales business across all asset types in the Tri-State region. His oversight includes underwriting & analytics, marketing, technology, market research, and business development strategy, as well as managing the P+L, human resources, and training.

What are the major challenges facing the real estate investment space, and what can they do to resolve those issues?

I believe interest rates have risen faster than ever because there are macro variables that might not affect most asset classes equally but with some degree of certainty. Because the purchasers can no longer obtain the same return at that pricing level, deals that could have been completed a few months ago are no longer within reach for those sellers from an underwriting perspective. This has caused a divergence between buyers and sellers, or what we refer to as a "bid-offer spread," which means that sellers are finding it difficult to accept that today's prices are lower than they were earlier in the year. In a similar vein, purchasers are reluctant to invest in items that could lose value over the next months due to rising interest rates. So, across all asset expenses, that is presently our biggest challenge.

The strength of their earning potential or the capacity to lease those assets is often indicated by the value of offices. In New York City, we've seen a huge fly to quality. That means the lease rate of Class A buildings has continued to remain strong if not increased. This indicates that while the revenue associated with those assets has stayed high, so too have their valuations regarding class B or simply subclass A. Therefore, B and C, or any letter grade you want to assign them, have generally struggled in contrast.

Another big challenge is the phenomenon of working from home. It’s a big factor in people's decisions whether they want or not to spend time in the workplace. There is a lot of unoccupied space in many lower-quality buildings because renters do not perceive the same value as those who work for the companies. Therefore, it is difficult for tenants to justify signing leases at rates that would increase the worth of those structures. The company's employees who utilize the property as their place of employment are the ones who must sign the leases and contribute to the buildings' income and worth.

Because the leasing market in New York City lacks the power and depth that might present opportunities for those assets, Class B and C properties have truly struggled from a value perspective. The possibility of taking faltering office buildings and unoccupied office buildings and converting them to residential buildings is one of the strong, well-publicized, and most frequently discussed prospects right now. Because there is a housing shortage in New York City, we are finding that faltering commercial buildings could offer a fantastic chance for multi-family conversion.

While New York City's population has increased by perhaps 800,000 over the past ten years, we have only created 200,000 housing units. That is a blatant sign of a supply problem. Therefore, there is still a chance. However, a number of elements, such as zoning department of buildings regulations, fire department regulations, and a basis that would permit this to actually happen. In reality, there are two tails in the multi-family sector— Free market or fair market housing. This enables a landlord to choose their own price and charge what the market will bear. For fair market owners, breaking this new record and exceeding 2019 numbers has been excellent, which is why there has been a significant capital inflow into these highend structures that are fair market from a rent regulation perspective.

Rent-regulated apartments oftentimes reflect a decreasing annuity because there is essentially no means for owners of rental housing to keep up with the rising costs of operating and taxing a building. This is the other segment of the rental housing industry. While the rent guidelines board will permit you to increase rents in accordance with the annual guidelines they release each year, the rate at which they have historically increased is below the growth rate of expenses, making it harder each year to achieve the same return that you did the year before.

As a result, owners are ready to pay substantially lower cap rates for fair market and free market multi-family than rent-stabilized, which has an impact on returns. Therefore, one must be aware of the mix of revenue flowing from each of those streams and adjust while analyzing an asset. Therefore, this supply constraint affects the following asset class, which is in development.

It is very challenging for those developers to make that work since the cost of land has not declined to a level where it makes sense for sellers to sell, and construction expenses continue to grow. This implies that a large portion of current residential construction is focused on condominium developments, which in most cases target a wealthier demographic in New York City. However, as interest rates have increased, it has become more challenging for buyers of condos to finance their houses, whether they are condominium apartments or regular apartments.

Therefore, it becomes more challenging for developers to finance this development's exit. As a result, both the total buildable square footage sold annually and the number of building permits being requested are currently experiencing significant slowdowns. Without a new tax break, this would only lead to further home supply restrictions, which will actually benefit current free market department owners as their properties will appreciate even more in value.

The final asset is retail, which prior to Covid, was a faltering asset class because of the growth of e-commerce. Furthermore, there was too much shopping in New York City relative to the city's needs. Thus, there was a significant disparity between retail pricing in the peak years, where it fell throughout the COVID period.

Retail was really already in a position to have positive leverage, which means the cap rates were already higher than the interest rate, producing positive cash on cash return when you include it in the leverage, as the increase in interest rates spread through the market. The top locations have successfully leased, which has been able to support and offer strength in the pricing of those assets, making retail today a hyper-local industry.

Is there any particular project that you have been working on, and how is it making a difference in the realistic space?

At Avison and Young, we use a technological tool called AVANT to keep track of more than just asset-level data, such as construction specs, price requirements, and geographic information. We include hundreds of real estate-related data points that will aid building owners and investors in understanding the rationale behind why a specific location is advantageous.

In order to understand where people are coming from and why they would prefer to use one site over the other, we were able to examine the occupancy of their people and their travel habits. This enables us to understand how this would bring value to that organization. We were able to determine that a large portion of their staff arrived in New Jersey via the route, which was conveniently located nearby their financial district site, utilizing anonymized cell phone pinging data.

This assisted them in coming to the decision that they could monetize and sell their Midtown location and use the proceeds to upgrade their space in the financial district, which would further enhance the customer experience, increase occupancy, and create a more collaborative workplace for their employees.

How do you envision the future of real estate investment space?

Real estate has historically uneven access to information, which allowed some players to have better information than others and take advantage to purchase assets at a discount or upgrade them more effectively than their rivals. There will be fewer opportunities for this enormous buying as more players in the market have access to better data. Instead, the complexity and ability of individual investors or groups of investors to put the finest value-add strategies into action and add value to properties are what gives real estate its added worth. I believe Real estate will become an even more valuable and best-in-class operator of properties that will produce value for your assets.

What advice do you want to give to your peers and upcoming professional in this field?

We are in a challenging market both nationally and especially in New York City. Loans are due, or leasing is tough, which means that the assumptions and investments we made are coming to a head in this market.

It creates challenging circumstances that will put a lot of people's moral character and judgment to the test. Therefore, it's important to keep in mind that you'll be evaluated by the way that you behave when things are challenging and not going your way. Hence, my advice would be to always act honorably and recognize that this trying period will pass.