Triangle Equities, a New York-based development company, sees a short-term opportunity in working with sponsors on stalled development deals.
The firm entered the year with the goal of acquiring unentitled land for ground-up development, particularly in the New York City metro area but shifted that strategy as lending dried up for many projects and buyers and sellers continued to be in a standoff over pricing, said Josh Weingarten, director of capital markets.
“Ground-up development was our goal because we had been exiting some deals. We are not typically deal-driven at Triangle Equities, we tend to do big developments that take years to get off the ground, but this year was a different year,” Weingarten said.
“We also decided to expand our geographic focus to areas slightly further away from New York City due to changes in work habits over the past few years. We see strengths in these areas because with many people now in the office 2-3 days per week, the trade off of a long commute for more space and affordability has opened new development opportunities to Triangle.”
He continued: “Developers who may have spent a lot of time and money getting sites approved and entitled, don’t necessarily have the track record or the capability to raise capital in today’s world. This is an area in which we could add value in some way, perhaps by taking over a deal or restructuring a deal.”
These conversations have not always been easy. “The developer may be slow to recognize that they are underwater or that the value is not what they think it is. Just like in purchasing any asset, the bid-ask spread is a big obstacle. But we are trying to negotiate deals where we can step into the driver’s seat and take over but keep the developer in the transaction so that they can see upside over time,” Weingarten said.
The bid-ask spread, particularly for land, continues to be a challenge.
“In my experience, landowners are the last to recognize the depreciation in value. They are a lagging indicator,” Weingarten said. “When we underwrite a development deal, given where capital markets are right now, our underwriting doesn’t get landowners to what their feeling of fair value is. We are finding landowners are stuck on last year’s values or values from two years ago.”
Relationship lending
Despite a broad pullback in lending, the firm has seen interest from banks and debt funds which are looking for loans with what Weingarten believes is a compelling story.
“Our strength is in the depth of our relationships with a select group of lenders who are remaining active in the construction lending space. That speaks to our track record and experience in complicated development deals in the tri-state area. There are banks and debt funds coming to us, looking for transactions,” Weingarten said. “I think the way they are discerning the way they’re willing to underwrite loans for, there has to be a compelling story. It’s not just, ‘This is multifamily deal.’”
The firm has always had a strong thesis around transit-oriented development. “It is part of our story, if we’re looking at a multifamily project,” Weingarten said. “People are underwriting much more conservatively than they have done in the last couple of years, looking further out at what next financing would look like. We are seeing new metrics or more conservative metrics considered as groups are evaluating loan sizing.”
Still, there are lenders active in the market. “I would say that most importantly, there remain active lenders who are still looking to do construction and bridge loans,” Weingarten said. “Liquidity and credit have not dried up.”
That said, Weingarten noted that even for an experienced, well-capitalized sponsor, pricing is higher and proceeds are lower on new loans. The firm last year obtained a package of loans totaling $317 million for Brick Church Station, a mixed-use, transit-oriented development in East Orange, New Jersey that includes an 820-unit apartment complex.
“We closed that first phase of financing in November 2022 and, looking back from the beginning of the summer 2022 to the end of year when we closed, the increase in interest rates over that period led to a decrease in the senior construction loan of nearly $30 million, which had to be filled with other sources,” Weingarten said. “We wouldn’t have been able to get that deal done today because the senior loan amount would be even lower and the debt service constraints higher.”
Weingarten noted that changes like this are part of what the firm wants to tap into.
“Deals that were in the pre-development prior to the change interest rates were underwritten in a different environment and that is the problem – they were underwritten prior to the increase in rates, and it is next to impossible to get that deal done today,” he said. “As part of our strategy, we have started to pivot to deals that can get into the ground in a year to 18 months. In this environment, you have that degree of uncertainty about the future, and you want something that happens more quickly.”
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