From the outside, 95 Evergreen, Hornig Capital Partners and Savanna’s redevelopment project at the former Schlitz Brewery in Bushwick, looks like a textbook conversion deal.
After buying the site for $33 million in 2015 and spending $30 million to turn it into modern offices, the joint venture signed a 20-year lease with the city for all 158,150 s/f last September then, earlier this month, sold the land to a Texas investor for $81 million. In and out, no problem, right? Not exactly.
“Frankly, and I’m not too bold to say this, we got a little bit lucky with Evergreen, all right,” Daren Hornig said during a panel hosted by the National Association of Industrial and Office Properties on Tuesday. “My business plan was, frankly, flawed.”
Hornig said he entered the North Brooklyn neighborhood expecting space would be gobbled up by large tenants seeking 35,000- to 100,000-s/f leases, but “nobody came knocking on our door.” Instead, he found a market flush with companies looking for between 2,000 and 10,000 s/f, each.
“You take a 170,000 s/f building and do the math … you’ve gotta get 30 tenants in that building, roughly,” he said. “That’s a lot of hand-to-hand combat on leasing every single tenant.”
That many tenants also would put extra strain the building’s mechanical systems and increased lost space, Hornig said. However, that crisis was averted when the city’s Human Resources Administration inked a long-term deal at the space and paved the way for an easy exit for Hornig and Savanna, which closed an $81.29 million deal with Dallas-based Ramrock Real Estate on April 10.
Hornig said the experience reaffirmed the importance of talking to local brokers and understanding a market’s demand before investing. He added that similar projects in Bushwick likely won’t be as lucky and if he were trying to put this project together today, he’d have a tough time getting financing.
“If I went out there today and tried to do Evergreen, it would be next to impossible to get that debt,” he said. “That market has just not trended in the right direction.”
Hornig Capital Partners has nine projects in New York City — eight of which are outside Manhattan — and six others outside the five boroughs, but Hornig said he’s been particularly cautious as of late. He didn’t make a single purchase last year.
Although he’s already closed one deal in 2018 (in Tampa, Florida) and he hopes to tack on two or three more by the end of the year (including, potentially, an office property on Long Island), he’s taking a slow approach and focusing on revenue-generating investments.
“I’m looking at deals that have income right now,” he said. “I don’t want to be long on a development curve where you buy land, buy a building, empty it out; that’s two or three years to stabilization. To me, it feels a little late in the cycle so I’m trying to stay away from that. I want more cash flow so I can go to a bank, get somewhat traditional debt and add value over time.”
While Hornig and Savanna struggled to draw large tenants to Bushwick, Atlas Capital Management seems to be doing just fine on the other side of Newtown Creek.
Senior Asset Manager Jay Fehskens, who joined Hornig on the panel, said his firm’s industrial-themed office building The Factory in Long Island City has been successful with tenants between 20,000 and 60,000 s/f.
Last week, The Real Deal reported that Atlas joined forces with Partners Group to buy out its previous partner at the one million s/f commercial site, Square Mile Capital. Previously, Atlas and Square Mile owned 51 percent of the building, which is reportedly valued at $400 million and houses the offices of J. Crew, Macy’s and Polo Ralph Lauren.
“For us to double down,” Fehskens said, “we love our basis, we think there’s continued to be additional demand and the pricing differential from where we can offer at our basis to Manhattan and even Brooklyn, is very attractive.”