Borrower view: Arch tilts back to New York as rising rates start to slow transaction activity 

The manager is observing more hesitation from lenders, which ultimately will have an impact on transaction activity. 

Arch Companies, a New York-based manager, is shifting more of its focus back to its hometown as prices continue to rise in the Southern markets where it has allocated substantial capital over the past few years. 

“Prior to the pandemic, we called where we thought the market was going – to the South – and we were lucky that we were right. We shifted a lot of energy down there and sold a lot of those assets at a good disposition value,” said Jeffrey Simpson, managing partner. “We now want to get more of our focus here back in New York. We’re also looking at other markets now because the South has gotten so expensive.” 

The firm, with a roughly $1 billion portfolio and assets in nine states, is seeing more lenders which are adjusting their lending parameters as rates have risen. 

“This means we’re talking about a 5 percent market now, but it also means lenders are adjusting with the times,” Simpson said. “We’ve also seen adjustments in LTVs and LTCs, but we have to remember this happens in every cycle.” 

The firm observed initial pushback from lenders on an office loan financing. “Ultimately, we got a loan, but lenders are taking the most conservative approach. We have an environment where cap rates and interest rates are rising and it can cause a glitch,” Simpson said. “Over the longer-term, I think you’ll see lenders doing more commercial work and pulling back on multifamily because pricing is so high.” 

Simpson is sanguine about rising rates, noting that the change will ultimately affect transaction activity. “We’re seeing a more normalized circumstance where they don’t have to worry about the what ifs. People have always been asking, ‘Are rates going to rise?’ Well, they’ve risen. The question now is how much more are they going to rise and that is a question I can’t answer.” 

The company looks for deals in the $50 million and up size at this point and is seeking markets with growth. Arch sees some opportunities in the retail sector, particularly as more consumers are returning to in-store shopping while pricing continues to be depressed.  

‘More balance now’ 

“There have been a lot of good changes in the retail sector. It was a dying sector, and I’ve observed that after sitting inside for so long, consumers want to get back out,” Simpson said. “Take the Upper East Side, where all the shops that were vacant are now full on Madison Avenue. It went from doomsday there to fully occupied again. That’s not to say e-commerce has disappeared, but there is more balance now.” 

The New York office market continues to be depressed, with office usage around 50 percent, according to new research from Newmark. “We just embarked on an office building JV opportunity in the NYU area and we are seeing great leasing activity for boutique office space, so there is definitely demand to come back to the offices,” Simpson said. “I do really worry about the Class B buildings in Midtown? What happened to the hotels that closed that aren’t going to re-open and can’t be developed into other uses? There is a lot [that] can be really problematic.” 

Still, this dislocation creates opportunity, Simpson believes. 

“I think you’ll see more acquisitions for us in New York, and other m markets in the Northeast that are growing, like Philadelphia and Pittsburgh,” Simpson said. “If the cap rates are where they are down south, why do that if I can be in my back yard? There is more opportunity for longer-term growth in New York than in the South, where the markets are getting to points of stabilization.”