Slippery Situation: Oil’s Potential Impact on Real Estate

While it’s certainly good news for the majority of consumers, the sliding cost of oil and gas could gum up the works for some real estate owners and investors.

With crude oil prices hovering around $50 a barrel since the beginning of the year, industry watchdogs are voicing concerns about the threats to particular real estate markets and CMBS transactions.

Oversupply and weak demand have pushed crude oil down more than 55 percent from its recent peak of $107 a barrel in June 2014. For the regions and commercial assets that are fueled by the petroleum industry—including parts of Texas, Colorado and North Dakota—sustained low oil prices could lead to vacancies and reduced property incomes, several real estate observers cautioned.

That, in turn, could bring on a new wave of delinquencies on highly leveraged properties, as well as increased volatility in high-yield bonds, some said.

“What people are most worried about is exposure to real estate markets with a lot of oil-services tenants,” Trepp Senior Managing Director Manus Clancy told Mortgage Observer in mid-January, noting that so far the impacts are largely theoretical.

“Upon re-leasing, the office tenants in those spaces would look to either give up space or spend less money,” he said. “Houston seems to be ground zero for that concern.”

Mr. Clancy said the submarkets at greatest risk are the oilfield “man camps” in West and South Texas and North Dakota’s Bakken shale region, where oil workers drill for fresh supply.

“These are places where there may be a couple of limited-service hotels and multifamily properties and everyone is there just to drill,” he said. “Those will be the first places to close up and die if oil remains in the $40 to $50 range.”

Jana Partners, an activist hedge fund that once held a major investment in the recently spun-off oilfield lodgings company Civeo Corp. sold its entire $51 million stake in the Houston-based firm on Dec. 30, 2014, regulatory filings show.

The New York-based fund dumped its 12 million shares after Civeo announced plans to severely cut its 2015 spending to between $75 million and $85 million, from $260 million and $280 million in 2014, as previously reported. Civeo plans to close sites and further reduce its North American workforce.

Civeo’s stock closed at $3.14 a share on Jan. 21, down from about $25 a share in October 2014. Representatives for Jana and Civeo declined to comment.

Several other Houston-based companies that specialize in oil and oil services, including Baker Hughes and Schlumberger, have announced budget cuts and layoffs. Overall, oil company analysts have said they expect 500 to 800 U.S. drilling rigs to come out of service in 2015, the Houston Chronicle reported in late December.

Likewise, CMBS deals backed by properties with heavy oil-related tenant bases could also take a hit if oil prices remain at a sustained low for several months or more, according to Trepp and other industry sources.

“For the Houston market, the concern is that if you just took out a $100 million loan on an office property where you have three big energy tenants, your grade-A tenants may start to look like grade-B tenants,” Mr. Clancy said. “If oil prices remain low, the securitizer may wonder, ‘Will they shrink their square footage? Will they go out of business?’ he added. “Nobody can say for sure what will happen to these guys, so that’s where all eyes will be.”

One prominent B-piece buyer who spoke at CRE Financial Council’s January 2015 conference in Miami Beach said that some recently issued securitizations for non-prime Texas developments are in jeopardy with oil and gas prices down. That buyer, who could not be named due to a strict conference policy on attribution, said those CMBS loans had been originated with high loan-to-value ratios and that the properties’ projected revenue streams relied on continued oil sector growth.

Now that that growth has been stymied, the panelist said he fears the loans may be headed to special servicing in the near future. That speaker and other industry representatives at CREFC declined to go on the record with their comments.

To be sure, others see the drop in oil prices as a minor concern in the context of a stable economy and rejuvenated real estate industry.

“The geographic diversity of other assets in multi-borrower deals will mitigate oil price exposure for CMBS,” Mary MacNeill, managing director of U.S. CMBS at Fitch Ratings, told Mortgage Observer.

There are no records of a single-asset securitized loan on a property in Texas, according to Fitch. However, the loan could still bring down the cash flow of securitizations that hold other mortgages.

“Vacancies in certain markets will rise over time if oil prices stay low for a more protracted period,” said Ms. MacNeill. “Particularly for office properties in Houston or other oil-dependent markets.”

The city of 2.1 million people, which is commonly referred to as the “energy capital of the world,” houses more than 5,000 energy-related firms, according to city government data.

Among several buildings in Houston that could be exposed are two office properties: Two Westlake Park at 580 Westlake Park Boulevard, owned by Houston-based Hicks Ventures, and Two Allen Center at 1200 Smith Street, owned by Brookfield Office Properties, loan documents provided by Trepp show.

Two Westlake Park is 80 percent leased to ConocoPhillips and BP, while Two Allen Center is 52 percent leased to U.S.-based natural gas and oil producer Devon Energy Corporation. Civeo is based in nearby Three Allen Center at 333 Clay Street, also owned by Brookfield.

The Devon Energy lease does not expire until 2020, which gives the space “minimal near-term exposure,” according to a Brookfield spokesperson.

“While Houston is considered a resource market, its economy is clearly more diversified now than it was during the ’80s and ’90s,” said Paul Frazier, head of the real estate giant’s Houston region. “Furthermore, the mid-stream and down-stream sectors of the energy space are also prominent in our economy, which gives us a hedge against lower commodity prices.”

Tom Fish, co-head of real estate investment banking in JLL’s capital markets group, also said that Houston’s economy and real estate market are adaptable enough to handle a shock to the oil industry.

“I don’t expect developers and projects to be going bankrupt or for there to be a string of foreclosures because of over-leveraged debt,” said Mr. Fish, who is based in Texas’ most populous city. “The capital markets for new development are efficient enough to withstand distress in the market,” he said. “I was here during the oil downturn of the ’80s and I don’t think we’re there again.”

Still, Mr. Fish said that there are concerns about the future of office and high-end multifamily properties in Houston with crude oil prices at such a low.

“Those have been the two most active sectors of construction in our city for the past few years,” he said. “If oil prices were to stay below $50 a barrel for several years, it would take its toll, but we are a long way from reaching a point where we see a lot of defaults.”

For the time being, low oil prices create a boon for retail companies, medical facilities, technology firms, and low- to moderate-income residences, Mr. Fish said.

“We’re a consumer-driven economy,” he told Mortgage Observer. “There’s no better way to turbocharge that than to put money back into consumers’ pockets.”

European Central Bank's QE Plan Lifts US Markets

Last week’s ‘Word of the Week’ was undeniably deflation. Some highly anticipated press conferences on Thursday put the word to work. The first came from Mario Draghi, who provided transparency on the European Central Bank’s plan to fight the shriveling Eurozone economy. Later that afternoon, Tom Brady gave some clouded responses to questions on his organization’s own deflation issues, and the crisis of ‘deflategate.’ While we’re sick of hearing about deflated footballs, we are eager to see how the market reacts to the new European Quantitative Easing plan over the coming weeks.

The market reaction to the ECB’s announcement to purchase €60 billion worth of bonds a month until at least September 2016 was fairly strong. The Euro fell to $1.1229, government bond yields in the Eurozone sank, and European equities surged with confidence. The 10-year US Treasury yield reacted by dipping as low as 1.78% inter-day and ended Friday at 1.79%. US equities finished higher for the week, up over 2%.

The President’s State of the Union address was also last week, which emphasized ‘middle-class economics,’ but ultimately received more attention for Obama’s ad-libbing at the crowd’s reactions. In CMBS news, Standard and Poor’s reached a settlement with the SEC on Wednesday regarding the accusation of loosening ratings criteria in 2011. S&P was struck with $77 million in fines and ‘a one-year timeout from rating conduit fusion CMBS.’

CMBS spreads tightened just slightly for the shortened week and trading volume peaked at $600 million on Wednesday, the highest bid list activity in months. Legacy and new issue spreads moved tighter across the board.

CMBS Swap Spreads

Legacy LCF Price and Swap Price Movement

IMF: Global Growth Revised Down, Despite Cheaper Oil, Faster U.S. Growth

Even with the sharp oil price decline—a net positive for global growth—the world economic outlook is still subdued, weighed down by underlying weakness elsewhere, says the IMF’s latest WEO Update.

Global growth is forecast to rise moderately in 2015–16, from 3.3% in 2014 to 3.5% in 2015 and 3.7% in 2016 (see table), revised down by 0.3% for both years relative to the October 2014 World Economic Outlook (WEO).

Recent developments, affecting different countries in different ways, have shaped the global economy since the release of the October WEO, the report says. New factors supporting growth—lower oil prices, but also depreciation of euro and yen—are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries.

“At the country level, the cross currents make for a complicated picture,” says Olivier Blanchard, IMF Economic Counsellor and Director of Research. “It means good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

Cross currents in global economy

In advanced economies, growth is projected to rise to 2.4%  in both 2015 and 2016. Within this broadly unchanged outlook, however, is the increasing divergence between the United States, on the one hand, and the euro area and Japan, on the other.

For 2015, the U.S. economic growth has been revised up to 3.6%, largely due to more robust private domestic demand. Cheaper oil is boosting real incomes and consumer sentiment, and there is continued support from accommodative monetary policy, despite the projected gradual rise in interest rates. In contrast, weaker investment prospects weigh on the euro area growth outlook, which has been revised down to 1.2%, despite the support from lower oil prices, further monetary policy easing, a more neutral fiscal policy stance, and the recent euro depreciation. In Japan, where the economy fell into technical recession in the third quarter of 2014, growth has been revised down to 0.6%. Policy responses, together with the oil price boost and yen depreciation, are expected to strengthen growth in 2015–16.

In emerging market and developing economies, growth is projected to remain broadly stable at 4.3% in 2015 and to increase to 4.7% in 2016—a weaker pace than forecast in the October 2014 WEO. Three main factors explain this downward shift.

• First, the growth forecast for China, where investment growth has slowed and is expected to moderate further, has been marked down to below 7%. The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation. This lower growth, however, is affecting the rest of Asia.

• Second, Russia’s economic outlook is much weaker, with growth forecast downgraded to negative 3.0% for 2015, as a result of the economic impact of sharply lower oil prices and increased geopolitical tensions.

• Third, in many emerging and developing economies, the projected rebound in growth for commodity exporters is weaker or delayed compared with the October 2014 WEO projections, as the impact of lower oil and other commodity prices on the terms of trade and real incomes is taking a heavier toll on medium-term growth. For many oil importers, the boost from lower oil prices is less than in advanced economies, as more of the related windfall gains accrue to governments (for example, in the form of lower energy subsidies).

Risks to recovery

The distribution of risks to global growth is more balanced than in October, notes the WEO Update. On the upside, lower oil prices could provide a greater boost than assumed. Other risks that could adversely affect the outlook involve the possible shifts in sentiment and volatility in global financial markets, especially in emerging market economies. The exposure to these risks, however, has shifted among emerging market economies with the sharp fall in oil prices. It has risen in oil exporters, where external and balance sheet vulnerabilities have increased, while it has declined in oil importers, for whom the windfall has provided increased buffers.

Policy priorities

The weaker global growth forecast for 2015–16 underscores the need to raise actual and potential growth in most economies, emphasizes the WEO Update. This means a decisive push for structural reforms in all countries, even as macroeconomic policy priorities differ.

In most advanced economies, the boost to demand from lower oil prices is welcome. It will also lower inflation, however, which may contribute to a further decline in inflation expectations, increasing the risk of deflation. Monetary policy must then stay accommodative to prevent real interest rates from rising, including through other means if policy rates cannot be reduced further. In some economies, there is a strong case for increasing infrastructure investment.

In many emerging market economies, macroeconomic policy space to support growth remains limited. But lower oil prices can alleviate inflation pressure and external vulnerabilities, giving room to central banks to delay raising policy interest rates.

Oil exporters, for which oil receipts typically contribute a sizable share of fiscal revenues, are experiencing larger shocks in proportion to their economies. Those that have accumulated substantial funds from past higher prices can let fiscal deficits increase and draw on these funds to allow for a more gradual adjustment of public spending to the lower prices. Others can resort to allowing substantial exchange rate depreciation to cushion the impact of the shock on their economies.

Lower oil prices also offer an opportunity to reform energy subsidies and taxes in both oil exporters and importers. In oil importers, the saving from the removal of general energy subsidies should be used toward more targeted transfers to protect the poor, lower budget deficits where relevant, and increase public infrastructure if conditions are right.

London's Gatehouse structures CMBS-like Islamic securitization

London-based Gatehouse Bank has structured a 100 million euro Islamic loan facility backed by direct legal ownership of property, a novel type of securitization which in some ways resembles commercial mortgage-backed securities (CMBS).

Conventional CMBS were hit hard by the U.S. sub-prime mortgage crisis seven years ago and were seen by some bankers as a source of the crisis as mortgages became non-performing.

The Islamic version developed by Gatehouse, one of Britain's six full-fledged Islamic banks, may be less unstable because, although it is based on income from commercial property, it includes actual ownership of the underlying property.

Gatehouse structured and arranged the five-year deal to fund its acquisition of property in the Paris region.

Securitization in Islamic finance is still in its infancy. Regulators in Malaysia introduced guidelines on asset-backed securities (ABS) in 2001, revised in 2004, which also cover sharia-compliant ABS.

In 2013, Munich-based FWU Group issued a $20 million Islamic bond backed by insurance policies, the first tranche of a $100 million programme arranged by EIIB-Rasmala, a venture between London-based European Islamic Investment Bank and Dubai's Rasmala Group.

Gatehouse Bank issued a 6.9 million pound ($10.4 million) covered Islamic bond backed by a property in Basingstoke in 2012.

Understanding the Swiss Franc Currency Shock

I dedicate this blog primarily to real estate headlines and news. But on occasion there are non-real estate issues in the global financial system that deserve exposure, and the Swiss Franc Currency Shock is one of them. If you don't fully understand the issue, you're reading the right blog.

The currency shock happened when the Swiss National Bank (or SNB, similar to our Federal Reserve) announced that they would lift the "cap" on the Swiss franc's value.

Why did the SNB create a "cap"?

When countries in the Eurozone (countries that use the Euro) began to have problems (think Greece, Spain, Portugal and Ireland), firms began trading their Euros for Swiss francs (the Swiss have a long-held reputation for having a strong financial system). However, Switzerland is an exporter. They sell goods and services primarily to other European countries. When the Swiss franc increased in demand and the Euro fell in demand, the Swiss franc became more expensive, and it became harder for Swiss firms to sell their goods and services to other European countries. The SNB created a cap in 2011 to protect their exporting firms.

How did the SNB create a "cap"?

A country can peg its currency to another currency by buying and holding large sums of a particular currency. SNB did just that: bought and held various, depreciating European currencies like the Euro. Makes sense, right? If you bought and held a large stake in a foreign currency, your net worth would be tied to that currency. This is not entirely uncommon, and is the same mechanism Tim Geithner accused China of using when he said China is "manipulating its currency". If you don't remember, click here.

Ultimately, this cap means that as the value of the Euro decreased, so did the value of the Swiss franc.

Why did the SNB lift the "cap"?

In a way, the US and the Eurozone have been dealing with the same global recession, but in two different ways. In Europe, nations have imposed "austerity" measures. This is particularly evident in Greece, where the Eurozone has been requiring the country to impose higher taxes and cut spending. In the US, the Federal Reserve has taken to several rounds of "quantitative easing." The Federal Reserve has spent billions nearly every month on bonds in recent years to prop up the financial system. (The Fed spends money on financial firms' assets. Financial firms can sell their assets for more money. This means that financial companies have more cash. If competing financial firms have excess cash, they can't charge borrowers as much to lend that money, and interest rates go down. Ultimately, it's cheaper for borrowers to make investments.)

The American method appears to be attractive to the Eurozone. But another thing happens when you have excess cash in your financial system; the value of your cash depreciates. 

It looks like the Swiss National Bank is afraid of quantitative easing in the Eurozone. If quantitative easing proceeds, AND the SNB is committed to pegging the exchange rate, the easing would further depreciate the Swiss franc. While this may sound like good news because the Swiss watch you've been eyeing is getting cheaper and cheaper, this may not be so good for the Swiss. In real terms, letting the currency become worth less and less, means that the country is becoming increasingly disenfranchised. Get it? The value of the country's holdings (i.e. money, assets, everything denominated in Swiss francs) become worth less and less. This is why they removed the cap.

How did the SNB lift the "cap"?

They will stop their practice of buying and holding weaker currencies.

S&P Barred from Rating Conduits: One Year

For years now, there has been talk of S&P lowering their rating standards. If you've forgotten, after the housing bust, there was a decent amount finger pointing in the direction of the rating agencies, with particular focus on S&P.

Because the rating agencies are hired and paid by bond issuers, the agencies have an incentive to give better ratings than their competitors. Because of S&Ps misconduct, they are barred from rating CMBS conduit deals.

Its single-borrower business and existing ratings won’t be affected. The regulator late last year was negotiating terms of a settlement over alleged violations of federal securities laws when it rated six CMBS deals that were issued in 2011. The worry at the time was that the SEC would suspend S&P from rating all CMBS business. But that’s considered unlikely. As it is, S&P hasn’t rated a new-issue CMBS conduit transaction since last June.

Cantor Lends $270 Million Against NYC’s 26 Broadway

Cantor Commercial Real Estate Lending has provided $270 million of senior and mezzanine financing against 26 Broadway, a 900,000-square-foot office property in Manhattan’s Financial District.

 

The seven-year financing includes a senior loan, with a balance of $220 million, that is expected to be securitized.

 

The 32-story property, also known as the Standard Oil Building, is owned by the Chetrit Group, which in 2007 acquired it, along with three of the four land parcels on which it sits, from the Koeppel family for $225 million. Five years ago, it paid $35 million for the last land parcel.

 

The property previously was encumbered by a $183.5 million loan that Wells Fargo Bank acquired last year from a collateralized debt obligation that was managed by what’s now Gramercy Property Trust.

 

The 26 Broadway building is 90 percent occupied, which is up from 76 percent last year, thanks to some 126,000 sf of new leases that were signed in recent months. Those include a 45,000 sf agreement with the New York Film Academy, which will occupy its space through 2029, and 20,000 sf agreements with graphic-design company Ustwo Studio Inc. and law firm Schlam Stone & Dolan.

Its largest tenant is the New York City Department of Education, in 181,659 sf through January 2039 on behalf of the Lower Manhattan Community Middle School.

 

New York City has designated the 26 Broadway building as a landmark. It was constructed in 1928 by Standard Oil Co., which used it as its headquarters until 1956, when it moved to 150 East 42nd St.

The building includes 3,500 sf of retail space.

KKR puts weight behind non-bank CMBS lending

Non-bank lenders are expected to be a bigger force in the US CMBS lending market in the coming year, particularly as deep-pocketed firms like KKR & Co LP elbow their way into the sector.

The buyout firm has hired industry veteran Matt Salem and several members of his team from Rialto Capital Management, a person familiar with the matter said on Thursday.

It marks KKR’s first foray into real estate debt since it created its property-focused group in 2011.

Rialto has been a consistent presence in CMBS deals as a lender as well as a B-piece buyer over the past three years, and it was one of only a handful of specialty debt shops to ramp up in both areas in the wake of the financial crisis.

At KKR, the team will focus on investments in preferred equity, mezzanine debt and junior credit like B-pieces, in addition to CMBS lending, the person said.

The news was the talk of the second day of the annual Commercial Real Estate Finance Council conference in Miami.

“Non-bank lenders are each saying they are going to increase loan production by 50% this year,” a portfolio manager who buys CMBS told IFR on the sidelines of the conference.

“We want to know how long they will be around after the loan is made.”

Though KKR’s move is not expected to dethrone the dominant players in the CMBS market, it does represent an important shift.

Bond deals flowing from bank-sponsored shelves are likely to look more complicated as the list of lenders spinning loans into bonds expands, the portfolio manager said.

Another non-bank ramping up its CMBS lending effort is Benefit Street Partners (BSB), the credit strategy arm of Providence Equity Partners, a global private equity firm with US$40bn in capital under management.

Scott Wayneburn, a former Deutsche Bank staffer, heads BSB’s 11 member commercial real estate team.

Terrorism Risk Insurance Act Extension Signed into Law

Just last night, President Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015 (H.R. 26). The bill is a six-year extension of the terrorism risk insurance program and also includes The Council’s long-sought NARAB provision to create an interstate agent/broker licensure clearinghouse.

The "trigger” for an act of terrorism covered under the law will move from $100 million in 2015, to $200 million in 2020 (increasing $20 million each year). Additionally, the bill also increases insurer co-shares from 15% to 20% over the next five years. 

Meanwhile, on Monday, The Council asked the Treasury Department for regulatory guidance clarifying the TRIA coverage gap, which is creating some marketplace issues. The issues stem from two facts: 

1. Because the old act expired, the new law technically is a brand new law and not an extension of the old law; and 
2. Many carriers had conditional exclusion riders on the terrorism component of their coverage that said that if the law expires the coverage is terminated.

Read an in-depth summation from law firm Steptoe & Johnson.

Asian Investment Seizes a Tenth of Russia's Commercial Real Estate Market

Investors from Asia and the Near East sprang from nowhere to make up 10 percent of investments in Russian commercial real estate in 2014, according to a study by real estate consultancy Cushman & Wakefield.

The numbers show "a trend of capital from Western Europe and the U.S. gradually leaving as players from the East enter," the report said, adding that Asian investors didn't close any investment deals in the Russian commercial real estate market in 2013.

As Asian investors made their entrance, European capital froze up, spooked by slowing economic growth and Western sanctions over Russia's support for separatists in eastern Ukraine.

European capital accounted for just 9 percent of total investment last year, down from 29 percent in 2013. Meanwhile Russian investors' share rose from 71 percent in 2013 to 81 percent in 2014.

Widespread concern over the state of Russia's economy dealt a harsh blow to the total volume of investment in commercial real estate, which fell to $4.2 billion in 2014, according to Cushman & Wakefield.

The market had seen $8.1 billion in investment in 2013 and $8.8 billion in 2012, according to consultancy Jones Lang LaSalle.

Cushman & Wakefield forecasts that investment will fall further to $2.5 billion in 2015, with some projects under significantly more pressure than others.

"Deals denominated in foreign currency have suffered to a greater extent from the current situation," said Irina Ushakova, head of capital markets at Cushman & Wakefield. The Russian ruble fell about 40 percent against the U.S. dollar last year and is still viewed as volatile, adding significant uncertainty to any projects using foreign currencies.

Projects with ruble-denominated investment and cash flows have a higher chance of reaching closure, Ushakova said

Baron of bland buildings soars to the top—on a shoestring

Gene Kaufman certainly ranks as one of the city's most prolific architects. During the third quarter alone, he had 16 residential and hotel projects totaling well over 1 million square feet underway around town. Yet for all his commercial success, one thing largely eludes him: even a smidgen of love from critics.

When he filed permits for a 79-room hotel in Chelsea last year, for instance, a local real estate blog referred to the designer as the "dark lord of architectural blandness." Weeks later, another critic called the designer's execution of the world's tallest Holiday Inn, which opened its 492 rooms downtown in October, "another atrocity courtesy of Gene Kaufman." Such snipes—some of which are unfit for publication in a family newspaper—have increasingly dogged Mr. Kaufman as he nears 30 years at the helm of his namesake architecture firm.

Yet his skill in landing jobs—this year, another 40 Kaufman properties will be either designed or built—speaks volumes about what it takes to succeed in New York as an architect, as well as, for better and for worse, why the city looks the way it does. The fact is that in a metropolis with some of the nation's highest land and building costs, Gene Kaufman Architects delivers more of the one thing developers -value above all else: profit.

"The value of a [hotel] project when we do it is usually a couple million dollars more than if somebody else does it," said Mr. Kaufman, seated at his desk behind a high, undulating black partition in his SoHo office. "That's why people come to us."

Just ask the city's most prolific hotelier, Sam Chang. In 1997, the then-aspiring developer of smaller, budget hotels—many in the boroughs outside Manhattan—tapped Mr. Kaufman for a seemingly impossible project. It was a proposed 65-room Hampton Inn in the South Street Seaport Historic District, a project where the architect first demonstrated an odd mix of ingenuity and shrewdness that helped launch his career.

The hostelry's location was perfect, but the size of the lot and zoning constraints made it nearly impossible to build enough rooms to cover land and construction costs. Somehow, the designer would have to find a way to shoehorn more rooms.

"So we told them that we will put in this brand-new thing, and people will come to stay in the hotel just to see it," Mr. Kaufman said. "It's called a flat-screen TV."

True, the sets were initially budgeted to cost $10,000 a pop, but they also took up far less valuable space than traditional TVs—enough to allow Mr. Kaufman to shrink the width of each room enough to squeeze in one additional room onto each floor. That change alone was enough to boost the hotel's projected revenue, quickly persuading the chain's executives to go ahead with the project, which indeed has proved wildly successful.

Since then, Mr. Kaufman has designed about 50 hotels, often with Mr. Chang's McSam Hotel Group as the developer, and has found myriad ways of reconfiguring rooms and shrinking construction schedules and costs, all while sticking to guidelines imposed by many hotel chains on everything from ceiling heights in the lobby to room layouts.

Among other things, he has an in-house team of consultants focused on getting projects through labyrinthine bureaucracies like the city's Department of Buildings. The fact that his designs often feature plain-Jane façades, and buildings set back from the street wall to ensure that every floor is exactly the same size, also help cut costs.

The world's tallest Holiday Inn (99 Washington St.), Candlewood Suites (339 W. 39th St.) and 347 Bowery are beloved by clients but loathed by critics of Kaufman-designed hotels.

Similarly, on the residential side, Mr. Kaufman has a reputation for keeping costs low enough that developers can afford to take chances on projects in iffy areas that others had written off. More than 20 years ago, he and a developer tried to persuade the city to grant permits for an apartment project in Williamsburg, Brooklyn, where they insisted that they could make good money charging monthly rents of a then-¬unheard-of $1 per square foot.

"They said, 'How are you ever going to get that much money?'"

For the developer, that bet would have paid off handsomely, as rents in the area have since quintupled.

Scores of designs for shoestring apartment buildings and budget hotels that others insisted would never pencil out have handsomely enriched Mr. Kaufman's clients and his own firm, but they have also come at a cost to the 56-year-old's reputation. One writer referred to him as the designer of "craptastic apartment buildings." Yet even some of his harshest critics concede that his budget designs simply reflect what his clients want and what city zoning rules allow.

When Mr. Kaufman was tapped in 2006 for a planned seven-unit residential project at 314 John St. in Prospect Heights, Brooklyn, for example, he produced two very different façade designs. His client, the developer Aljohn Group, cited costs in opting for the cheaper one, since the prices for other elements of the building, such as the foundation and plumbing, are fairly standard.

"At the end of the day, everything in New York City always comes down to money," said Nikolai Fedak, founder of blog New York YIMBY [Yes in My Backyard]. "While rich people are willing to pay the price for top-level design, it just so happens most New Yorkers aren't rich, and neither are the people who come here to visit" and stay in a hotel.

Developers of luxury properties can afford to hire starchitects and set a higher aesthetic bar because they know their buyers will cough up enough cash to justify all the additional sums spent on the finer points of a building—from custom-made windows to marble-clad bathrooms. But for those who aim to build for everybody else, the same math does not work.

"It's very 'in' to say architects can do design on any budget," Mr. Kaufman said in his deadpan delivery. "But I think a lot of criticism [of my buildings] is actually from people who want something for nothing."

Others insist that New York has to offer not just striking properties for those few who can afford them, but something for everybody else, too.

"We need hotels and residential buildings that are not exclusively for the very rich," said Kenneth T. Jackson, a history professor at Columbia University. "To the extent that Gene Kaufman is helping to provide those units, that's a good thing."

And while Mr. Kaufman has designed pricey projects as well, it is the blander ones for which he is known. Oddly enough, they seem out of keeping for a man who has so many connections to high art and design. After graduating from Cornell University, he interned at an architecture firm in Switzerland and went on to work as an associate for world-renowned Uruguayan architect Rafael Viñoly—the designer of what now stands as the tallest residential tower in the hemisphere, 432 Park Ave.—before starting his own firm.

Bowing to the greats

During the last real estate boom, he designed a Williamsburg condo inspired by the design of French architect Le Corbusier, a titan of modernism. And since purchasing a majority stake in well-regarded architecture firm Gwathmey Siegel & Associates in 2011, Mr. Kaufman has led a campaign to save an upstate government office building, designed in the (all too) brutalist style by Paul Rudolph.

Outside the office, he is a devoted museumgoer, along with his wife, Terry Eder, a successful classical pianist. In recent months, Mr. Kaufman has been attempting to purchase the name and assets of their beloved but bankrupt New York City Opera.

It is less surprising, then, that Mr. Kaufman is currently designing a ground-up development of artist studios in Bushwick, Brooklyn, and that he also has done many higher-end projects that have been better received by the same people who criticize his budget hotels. Among those is his design for Hilton's boutique brand, Indigo, in the financial district. YIMBY grudgingly praised it as "actually somewhat appealing." In the same vein, Mr. Kaufman's vision for a Thor Equities hotel on Canal Street was deemed "not that ugly," by Curbed.com, which also described an upcoming project of his a few blocks west as "surprisingly pleasant."

And on the residential side, Mr. Kaufman's work in today's hyperpricey Williamsburg bears little resemblance to designs he came up with in the late 1980s. His work there includes projects such as the Lucent and the Decora.

Even when he's had big bucks to spend, though, Mr. Kaufman's designs have stirred the wrath of some critics. A daring design for a condo on the Bowery prompted The Village Voice to note that the building "may as well come emblazoned with a rainbow 'F—k You!' sign."

But like him or loathe him, it is the pricier side of Mr. Kaufman that the city may be seeing more of as a result of changing market dynamics. The designer's longtime collaborator, Mr. Chang, notes that stratospheric land and construction costs are making budget-hotel development a thing of the past.

"People think there will be a lot more new [budget] hotels, but I think construction will completely slow down," said Mr. Chang, who, having built more of them than anyone else, announced last year that he is retiring.

10 Best Boutique Hotels in NYC

10. The Bowery Hotel

This Manhattan hotel offers free Wi-Fi, a lobby bar and outdoor lounge, and rooms that have a flat-screen TV with cable channels. The Bleeker Street underground station is 5 minutes’ walk away.

Plush bedding along with an iPod docking station and a mini bar are offered in every room at New York City’s Bowery Hotel. Guests can enjoy city views from the oversized windows.

Gemma Restaurant serves breakfast, lunch, and dinner. It features Italian cuisine as well as an Italian wine list.

Enjoy a workout in the fitness centre or use the fax and photocopying services at your convenience. A daily newspaper, complimentary bicycles, and a complimentary film library are also provided.

Times Square is 20 minutes’ underground journey from The Bowery Hotel. Washington Square and New York University are 10 minutes’ walk away. Rooms start at $485 a night.

9. Lowell Hotel

Located in Manhattan's Upper East Side, this upscale hotel is one block from Central Park. The 5-star hotel features 2 fine dining restaurants. Every room offers a flat-screen TV.

Hotel Lowell features spacious rooms furnished with marble bathrooms and a DVD/VCR player. A nightly turndown service and free New York Times newspaper are also provided.

Manhattan Hotel Lowell has a fully-equipped gym with modern equipment. Guests can arrange restaurant, entertainment and transportation reservations at the concierge desk.

On-site dining is possible at The Pembroke Room or The Post House, a gourmet steak and chop house. Room service is also available 24-hours at the Hotel Lowell in Manhattan.

Hotel Lowell is 5 blocks from Midtown with boutique shops and international restaurants all within walking distance. Carnegie Hall is a 15-minute walk away. Rooms start at $720 a night.

8. Andaz 5th Avenue

The Andaz experience begins the moment you arrive through the bronze-colored doors of our Manhattan hotel on 41st Street and are greeted by an Andaz Host. Have a drink in the lounge while checking in via iPad, or simply en-route to your luxury Manhattan hotel room. Arrival is at your pace, your style.

Andaz 5th Avenue offers uncomplicated and attentive service by real people who are passionate about New York City and their role at one of the most unique hotels in Manhattan.

Renowned designer Tony Chi has created loft-like rooms with oversized bathrooms in travertine marble, with walk-in rain shower, double sinks, and porcelain foot baths. 12' foot floor-to-ceiling windows with views of 5th Avenue and the New York Public Library are standard in all rooms, which starting at 322sq ft are among the largest in NYC. Many of the 47 spacious suites offer private balconies or landscaped terraces. Non-alcoholic mini-bar beverages and snacks, wireless Internet, local phone calls, and access to the gym at our Midtown New York hotel are complimentary, and entertainment is provided by the Geneva Sound System with iPod docking and a 42” HDTV. Rooms start at $355 a night.

7. Casablanca Hotel

This boutique Manhattan hotel is located in the Theater District and steps from Times Square. The hotel offers a daily complimentary continental breakfast, free Wi-Fi and 24-hour access to refreshments.12

The accommodations at Casablanca Hotel include a flat-screen cable TV, DVD player and iPod docking station. A bathrobe and slippers are supplied in the en suite bathroom.

Live piano music can be enjoyed on Friday nights at the Casablanca Hotel – New York City and a social reception with cheese and wine is offered nightly in the Club Room. The continental breakfast includes items like pastries, yogurt and fruit.

Guests can also enjoy Italian cuisine at the on-site Tony’s di Napoli Restaurant.

Bryant Park and Rockefeller Center are within 7 minutes’ walk of the hotel. Rooms start at $342 a night.

6. Hotel Giraffe

Located in the NoMad neighborhood, this boutique New York City hotel is within 10 minutes’ walk of Union Square Park and Chelsea. There is a rooftop garden and free Wi-Fi.

Decorated with photography from the 1920’s and 1930’s, each room at Hotel Giraffe includes amenities like an iPod docking station and flat-screen cable TV.

Every night, guests of Hotel Giraffe – New York City can enjoy a wine and cheese reception in the Club Room. Passes to the off-site New York Sports Club are available.

The complimentary continental breakfast served each morning includes fruit, yogurt, pastries and more. The on-site Bread & Tulips Restaurant serves Italian cuisine.

Madison Square Park and access to the 28th Street underground rail station is within 2 minutes’ walk of the hotel. Rooms start at $370 a night. 

5. Bryant Park Hotel

Centrally located in Manhattan, this boutique hotel is directly across the street from Bryant Park and New York Public Library. The luxury hotel features a 24-hour gym, Free Wi-Fi, and modern rooms.

The stylish rooms at Hotel Bryant Park are decorated with hardwood floors, handmade Tibetan rugs, and leather furniture. Each features a 32-inch LCD TV and Bose CD player. The marble bathrooms include bathrobes and spa toiletries.

Bryant Park Hotel features a modern lobby with red furniture and black marble. A helpful concierge desk is available and the gym offers personal trainers. An evening reception with complimentary drinks is available. Free parking is offered Friday and Saturday.

On-site dining includes the award-winning Koi Restaurant which serves Japanese cuisine. The Cellar Bar offers signature cocktails, music entertainment, and a one-hour open bar for hotel guests Monday through Friday.

The 42nd Street Subway Station is one block from Bryant Park Hotel. Times Square and the Empire State Building are a 10-minute walk away and Fifth Avenue is a half-block away. Rooms start at $325 a night.

4. Library Hotel

Located within 2 minutes’ walk of Bryant Park and Grand Central Terminal, this boutique Midtown hotel offers free Wi-Fi, a library and an evening reception with wine and cheese.

Decorated with the theme of a traditional American library, the rooms at Library Hotel include amenities like a flat-screen cable TV and an iPod docking station. A bathrobe and slippers are also provided.

A complimentary continental breakfast with pastries, cereal, and yogurt is served daily in the Reading Room. Fresh fruit, coffee, and tea are available throughout the day. Guests of Library Hotel have access to an off-site fitness centre.

The on-site restaurant, Madison & Vine, serves daily lunch, dinner, and weekend brunch. The rooftop bar and Poetry Garden offer literary inspired cocktails and city views.

Times Square and the Empire State Building are within 15 minutes’ walk of the hotel. The New York Public Library is 2 minutes' walk away. Rooms start at $419 a night.

3. Crosby Street Hotel

Located on a cobbled street in the SoHo neighborhood, this contemporary design hotel features a beautiful inner courtyard and an on-site terrace restaurant. Free Wi-Fi is available throughout the hotel.

The Crosby Street Hotel offers bright, modern rooms with high ceilings and full-length windows. Each is equipped with flat-screen cable TV, DVD player and iPod docking station.

Guests of Crosby Street are welcome to work out in the 24-hour gym or relax in front of the fireplace in the plush drawing room. Films are shown in the hotel’s private theater each Sunday.

The Crosby Bar and Terrace serves gourmet items including breakfast and brunch. An afternoon tea with pastries and sandwiches is offered daily.

The Crosby Street Hotel is adjacent to the Museum of Modern Art Design and 1 block from the Spring Street subway station. Rooms start at $675 a night.

2. The Mark

Located in Manhattan just 1 block from Central Park, this boutique hotel features The Mark Restaurant. With an artistic design, Mark Hotel includes a state-of-the-art gym and spacious guest rooms.

Free Wi-Fi, an iPod docking station and 32-inch flat-screen TV are included in all modern rooms. The large marble bathrooms boast a large soaking tub and mini flat-screen TV. Each room is decorated in ebony and sycamore furnishings.

The Mark Restaurant by Jean Georges serves European and globally seasoned dishes. Signature cocktails and classic drinks are featured at Mark’s Bar.

The Mark features a concierge desk for guests’ convenience various activities can be arranged. Frederic Fekkai Salon is on site and offers hair and beauty treatments.

The Whitney Museum of American Art is 3.5 blocks from this luxury hotel. The 77th Street – Lexington Subway Station is 2 blocks away. Times Square is 15 minutes away by subway. Rooms start at $625 a night.

1. The Greenwich Hotel

This New York City hotel is located in the city’s elite Tribeca neighborhood. It features an underground pool and fitness center, as well as an on-site restaurant and spa.

All 88 rooms at the Greenwich Hotel are individually decorated with luxurious goods from around the world. The rooms include free Wi-Fi access and a minibar stocked with free snacks.

The Greenwich Hotel has a knowledgeable concierge staff to help guests plan their stay in New York. Other features include the on-site Shibui Spa, offering a variety of massages and treatments.

Locanda Verde is the hotel’s on-site restaurant. It serves drinks and Italian cuisine in a relaxing and casual setting.

The Tribeca Performing Arts Center and Washington Market Park are both about 3 blocks from the Greenwich hotel. LaGuardia Airport is 10 miles away. Rooms start at $575 a night.

2015 CMBS Outlook

The economy, coupled with low interest rates, contributed to continued growth in the commercial real estate and securitization markets. Property fundamentals for most CRE segments improved, fueling the appetite for CMBS investment. As demand increased, credit standards continued to ease as competition among loan originators progressed through the year. Credit metrics continued to weaken as leverage climbed to new post crisis highs and debt service trended downward despite lower interest rates and the prevalent use of interest-only loan structures.

Despite the slowdown at the start of the year, the economy posted meaningful growth through the remainder of the year, ending the Q3 at 3.9%. In addition to the economic expansion, employment figures scored solid gains throughout the year, as approximately 241,000 jobs were added in each of the last 11 months, lowering the unemployment rate to 5.8% from 7.0% a year earlier. The increase in payrolls is no longer contained in the technology and energy sectors but has broadened over the past year to include health care and leisure & hospitality, which contributed to economic growth in many regions of the country. This bodes well for commercial real estate (CRE) fundamentals across the U.S.

As the economy continues to expand, KBRA believes that real estate fundamentals will remain stable across all of the property type segments, many of which will experience flat to modest growth. However, the multifamily and lodging sectors are standouts, having experienced marked gains over the past few years. The performance of these two sectors in many markets is at or above that experienced during the height of the last real estate cycle. About Kroll Bond Rating Agency KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).