Shimon Shkury: I love New York City! How vibrant. Everybody's coming and wanting to be here, even real estate investors. I know that the New York City that's so remarkable is its resiliency when it comes to real estate. We're coming off a pretty good year. We're gonna try to talk about who invested here, try to explain why they invested here, and lastly, what to expect moving forward. 2022 has been at the best year in terms of transactions since 2018, close to 39 billion, 2,700 transactions. But timing, timing played a major role. The second half was much slower because interest rates went up a lot, but about a hundred percent from three to six almost. And there were two main observations.

The first one is that Brooklyn did close to half of all 2,700 transactions. If you want to talk about the Bronx and Queens, they did extremely well as well, read our reports. Also the multifamily market as a percentage of total sales did an all-time record. In fact, multifamily last year in 2022 did 16 billion dollars of transactions that stood together with 2015 and 2016 as the best years ever for multifamily transactions. However, we have a saying at Ariel Property Advisors and that's that not all multifamily was created equal. See, there is free market, multifamily and rent-stabilized multifamily, and affordable housing, multifamily in New York City, and when we talk about the rent-stabilized, specifically rent-stabilized apartment buildings, we saw a very different mix between 2022 and 2015. In 2022 we had only 3 billion dollars of rent-stabilized multifamily transactions. In 2015, that number was double, about $6 billion, not even including the big stock down transaction that took place. It was above $5 billion. So what created that major change and shift in investor behavior from 6 to 3 billion dollars. That's called the housing policy or HSTPA that took place in 2019. That policy made sure to eliminate the ability to grow rent in rent-stabilized units. In fact, even on vacancy you cannot increase rents or maybe marginally you can increase them, but really cannot increase rents on vacancy in rent-stabilized units. As a result of that, we see less investment, but also we see that landlords do not put money into vacant units. Some of these landlords who have vacant rent-stabilized units just keep them vacant. In fact, 42,000 units, rent-stabilized units are now vacant as of 2019. That's 4.2% of all stock of rent-stabilized units in the city. Can you imagine what's going to happen moving forward? You know what the last thing is is that the tenants that live in rent-stabilized units live in worse conditions. And that's what we call these consequences. We hope unintended consequences. We don't think any legislator in her or his right mind wanted to affect worse conditions for ren- stabilized tenants, for example, or 42,000 vacancies. In every challenge there's an opportunity and New York City has shown its resiliency and there's a silver lining in it. There's still being 3 billion dollars of transactions and those who invested are longer term investors, families, high net worth individuals and overseas money. And the reason we invested were twofold. Values have gone down a lot over the past few years in rent-stabilized multifamily, and this housing policy is unsustainable. So let's now shift and talk about the 76% of multifamily that traded that was free market multifamily. And these are the institutions or some of them that invested in multifamily in New York City. Actually one of them Ofer Yardeni is sitting here with us today. We're excited to hear your insights about why to invest in free market multi in New York City. And the investors here invested in three main categories.

Luxury housing, new construction with 421-a and smaller, less than 10-unit tax last protected buildings and the reasons are threefold. Rent growth in the city has been still great last year compared to other cities in the United States. Inflationary hedge from a free market perspective, this is considered an inflation hedge, especially in the beginning of the year when you could lock in interest rates less than 4%. And the third reason is the perpetual low supply of housing in the city. And the low supply leads to a discussion about the land market and we call it land and opportunity. And when you ask me what about the opportunity, it was only five and a half billion dollars of land transactions, which wasn't a lot. I'll talk about that in one second. So not a tremendous amount of transactions took place in land. These are the investors who invested or some of them they invested in land. As you can see, these are very familiar developers and capital that have been here before. So not a tremendous amount of new capital. And what caused that weakness in land values last year on lead volume? Three things. The 421-a, the tax abatement to encourage rental development was taken away in June last year.

The second reason is the expensive cost growth of 8.5% year-over-year and New York City is always expensive to build anyway. And the last thing is the slower condominium sellouts because of interest rates. In addition to that, in the past seven years, we've seen a consistent decline in volume of transactions in land as well as value. So we believe that the market is going to bottom out by the end of this year and there's going to be an opportunity by the end of this year early next to invest in land. We also expect the 421-a to be back, the tax abatement that encourages rental development and we expect the interest rate environment to stabilize. We believe these will affect the confidence of developers to go back to market by land at cheaper prices probably as early as next year. So land could be an opportunity. This leads to a discussion from housing to where people actually work. And believe it or not, 50% of the people went back to their offices, not where we want it to be, but a substantial increase compared to last year. And when you look at the office market, you see that there were 9 billion dollars of office transactions, which is the best year since the pandemic. And we've seen three observations in the office market. The first one is that the quality, the flag quality, the class A office buildings, the extraordinary buildings received a lot of feedback, good feedback and buyers from those who know New York City, the RFR or the SL Greens of the world.

The second observation talks about specialty users. These are the Googles that bought St. John's terminal for 2 billion dollars. JP Morgan, which continues its commitment to build a tower, two and a half million square feet on Park Avenue or Citadel, the famous hedge fund that partnered up with Vornado and with Rudin to build their own tower also on Park Avenue. And the third observation are those assets or office assets that are in transition. PWC is telling us that 10-20% of all office space will need to be repurposed. When we talk about repurposing, we usually think about commercial to residential conversion, and Tom from GFP here is going to tell us more about it because he's doing one of the largest, if not the largest conversion. I'm just curious to hear what you say. I know it's pretty easy to do, probably right, but I know it's not that easy and not every building is conducive to conversions.

In addition to that, there's some co-working brands and other ideas and officer service, the offices that in transition will take years and different ideas, so we're really in the middle of it. This is a great picture of Times Square in New Year's and I love it because it tells you how many tourists are coming to the city. And if you want to get a room, ask Mayor here, cuz Mayor is an owner of a few hotels. One of the things mayor will not do is he will not give you a discount. The average daily rate is up 50% in last year. And that's not just because of tourism, it's also because less rooms are available in the city post pandemic. There's less hotel rooms, in fact Hyatt took advantage of it. But their dream hotel increased its capacity by 30% or 1700 rooms.

Retail has done well specifically in residential areas. There's been growth in retail buyers. These are some of the buyers, and the retail in residential areas is doing better in terms of prices preferred in vacancies. Industrial 2.7 billion dollars has done well. These are some of the investors in industrial and there we also see very strong fundamentals, mostly in very low vacancy and higher pricers per square foot. So we'll continue to see strength in that category. That leads me to try to project what are we going to see this year and will we set down the team and everybody else to try to bucket things in two or three categories.

We thought about some macro events, some housing policies and investor demand. And when it comes to macro events, the first thing that comes to mind is the global unrest, then the likelihood of recession. These are things that are uncertainties. They're like a cloud above us. We don't really know how to look at them, but we gotta be aware of them. And then you have inflation. In a way, inflation, we're being told, is under control. For the most part mortgage rates have stabilized or are coming down a bit, they'll probably fluctuate. There's a lot more certainty with interest rates today than there was 60 and 90 days ago. That at least is the feeling. There's another macro thing that we should pay attention to. These are mortgage resets and mortgage maturities. They're gonna affect the United States in general. Every product that in New York City, they're gonna affect office, some hotels and multifamily market, specifically in rent-stabilized multi. And how we're gonna see it is mostly forcing some sellers or some owners to sell. Not putting good money off to bed, for example, some distress, but marginal, not a tremendous amount. There's a tremendous amount of capital on the street today waiting to invest. So we think that will push transactions forward in the second half of the year.

For the first time, when we talk about housing policy, for the first time in years, the governor and the mayor are talking to each other and they're talking the language of a different narrative. They're talking about supply of housing, not just regulation. And that's a big deal. The governor is telling us she wants 800,000 new units in the next 10 years. She's telling us also that she wants the 421-a back. She just made a suggestion to push the current 421-a completion four years. We'll see how that goes. The mayor wants to rezone certain areas. The mayor wants a rezoning from commercial to residential. They both want more licensing when it comes to casinos. These are all good things for New York City.

And then you have the last thing, which is investors demand. These are some of the investors, many of the investors, institutional investors who invested in New York City in 2022, several of them have invested for the first time in the city or have changed products. So they wanted to stay here. They used to invest in office, now they're moving to multifamily. So this is what's happening. What you don't see on this slide is you do not see the private investors. These are the families that had what? The overseas people, and our teams here are working with many of them. And I can tell you that some of them started investing only in 2022. That all attests to the depth, quality, and quantity of the capital that's here in New York City that wants to get in.

So let me try to summarize it briefly. We had a pretty good 2022 with a weaker second half due to inflation. It's going to affect us in the first and second quarters. The first and second quarters, 2023 are going to be slower. However, the abundance of capital, the mortgage rates that are stabilizing, the strong fundamental of New York City and the housing policy and its narrative that is changing could lead us to a much more transactional second half of 2023. We believe that pricing will stay more or less stable. That's what we project for this year. And that concludes my high level overview.