Today Blue Rock is primarily focused on the development of residential rental and condo buildings and hotels, in Manhattan and development of rental apartments in nearby New Jersey.   Blue Rock’s residential developments are typically 100 units or more and   hotels 100 keys or more.  Development projects are inherently value creation propositions. Acquisitions of apartment buildings and hotels are of interest to us, if there is an opportunity to create value through renovations, repositioning, rebranding, refinancing or any other means.


There are obvious reasons for developing apartment buildings in NYC, especially in Manhattan.  The NYC and nearby New Jersey vacancy rates are currently in the 1-2% range at most and there is no reason to believe this rate will increase in the foreseeable future.   If 15,000 new rental units were suddenly dumped on the market, which is highly unlikely, it would have essentially no real effect on the supply versus demand ratio.

Of course a favorable supply versus demand ratio is only half of the story.  Equally important is the strength of the local economy.   If people are fighting to rent apartments, and they are armed with lots of money – in certain Manhattan locations, apparently unlimited money — it is happy days for apartment building owners.   And the NYC metro area has a vast supply of renters with ample funds to pay exorbitant rents.


Are the rents really that high?  Yes they are.  Rents averaging $60 to $75 per square foot are the norm in well-located, luxury doorman buildings.  And many apartments, on higher view floors, rent for $100 per square foot which equates to $8,333 per month rent for a 1,000 square foot, two bedroom unit.  Even more astounding is what has been done in some buildings on the Lower East Side.  Picture this if you can – a 350 square foot “two bedroom” in a 100 year old, rat infested tenement building, adorned by fire escapes, renting for $2500 per month which equates to $85 per square foot.

Who are the people who can pay such rents?   They are sometimes native New Yorkers, but more often than not, they are people who have come to NYC for fame, fortune and excitement.  Investment bankers, lawyers, big business owners and executive, movie stars, international criminals,  real and imagined students being subsidized by wealthy parents.  Some of the wealthy live alone.  Others, in their twenties, share apartments paying $1,000 to $2,000 per month each, to have a small bedroom in the right location.

In Manhattan, the primary format for developing rental buildings is to utilize the 80/20 program.  Under this program, 80% of the units are market rents and 20% of the units pay affordable rents.  If market rents are $70 and affordable are $16, the developer is taking a big hit on the affordable units.  However, the trade off is long term real estate tax abatement and low floater bond interest rates.  Instead of paying real estate taxes of $15 to $20 per square foot, 80/20 buildings pay $1 or 2.  And instead of paying today’s conventional long term mortgage interest rates of 4 or 5%, interest rates on low floater bonds are under 1%.

The all-in development cost of building 80/20 buildings in Manhattan is about $900 per rentable square foot.  The blended rental income is about $60.  Operating expenses and real estate taxes combined comes to about $12.   Thus the net operating income is $60-12 = $48.  The stabilized return on investment or cap rate is $48 / $900 = 5.3%.  This 5.3% cap rate doesn’t sound to great, until you consider that your debt service on your low floater bond of say $600 per square foot is today about $12.  That leaves a whopping $32 per square foot of cash flow on $300 of equity.  And when it comes selling an apartment building in Manhattan, the cap rates are 3.5 to 4.0%.  A 3.5% cap rate on $48 of NOI equals $1,370 versus a development cost of $900 per square foot.  And a decent sized rental building may be 300,000 rentable square feet or more.  300,000 SF X  $470 profit on sale per SF =$1,410,000,000.  We rest our case.


There are enclaves where rents are close or equal to Manhattan rents – Willimsburg, Brooklyn Heights, Cobble Hill, DUMBO and Park Slope, to name a few.  But of course there are many more areas where rents are in the $40 per square foot range and in the less desirable areas, the rents are lower still, but there are few vacancies.


Even in today’s nationally depressed condo market, Manhattan continues to show strength.   Per square foot prices for good buildings in good locations are $1,200 and higher.  The highest prices are paid for larger units, higher view floors and prestigious addresses.  For example, a 5,000 square foot unit on a high floor, in the Time Warner Building at Columbus Circle, will sell for $5,000 per square foot or $25,000,000.

For buyers, of Manhattan condos, with unlimited funds, there seems to be no price that is to high.


Once you cross the Rubicon, price is an issue.  For example if you sell a condo for $700 per square foot in Brooklyn, Queens, Jersey City or Hoboken, you’ve done very well indeed.  Prices in the $400 to $600 per square foot range are more the norm.


There just doesn’t seem to be a limit to absorption of hotel rooms in Manhattan.  Occupancy rates on an annual basis are running steadily at 85% or better.   And the returns on investment are excellent, if food and beverage operations are kept to a minimum or entire eliminated – i.e. limited service hotels.

The economics for limited service hotels of 100 keys or more are as follows:

All in development cost of about $370,000 per key.  With $300 average daily rates at 85% occupancy the adjusted room income is $93,000 per key per year

All in expenses run about 55% of this adjusted room income or $ 51,000 per key per year.  Thus NOI per key is about $42,000 per key per year.

ROI is $42,000 / $370,000 = 11%.  Limited service hotels sell for $400,000 to $600,000 per key.

Hotel flags can be either national brands like Hilton Garden Inn, Marriot Courtyard, Fairfield, Holliday Inn Express, or can be popular boutiques like the Standard, and the Gansevoort in Manhattan.  The hot boutique hotels can often charge a premium room rate and can derive substantial additional net income from F&B sales.


Rental Apartments – 65% construction loan, the balance developer and investor equity.

Manhattan Condos – 60% construction loan, the balance developer and investor equity

Manhattan Hotels —  50% construction loan, the balance developer equity.

Required Internal Rates of Return on Development Deals are as follows:

In general, realistically projected leveraged IRRs, at the deal level, before developer promotes, are approximately 25%, for condo and hotel developments assuming an average three year investment period. Leveraged IRRs sought by investors may be lower for a variety of reasons.