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NEW YORK CITY-Since acquiring 370 Lexington Ave. a year ago in a $155-million deal with financial partner JPMorgan Chase, Sherwood Equities has focused on positioning the 307,000-square-foot office tower as a magnet for tenants of 10,000 square feet or less. The strategy has been successful: Sherwood, led by CEO Jeffrey Katz, has closed 13 new deals and handled seven tenant renewals and one expansion at 370 Lexington over the past year. The most recent of the new leases, a 3,562-square-foot deal by newly formed Boxwood Strategic Advisors, was announced last week.

It’s also an example of Katz’s knack for thinking ahead. Many of the newly signed tenants at 370 Lexington have been start-ups launched by Wall Street veterans who were displaced by the financial-sector upheaval that erupted around the time Sherwood and JPMorgan bought the property. Katz was among the first to see the commercial office potential in Times Square, and began acquiring development sites on the Far West Side years before the Hudson Yards mega-project was proposed. Sherwood’s investment strategy during the peak of the market was low-key by comparison to some of the more acquisitive—and highly leveraged—players, and that has stood the company in good stead amid the downturn.

GlobeSt.com sat down recently with Katz and Ryan Nelson, Sherwood’s SVP for development, to discuss the market from the vantage point of a well-capitalized company that would be making more acquisitions if the opportunities were there. In the long term, their confidence in New York’s eventual resurgence is unshaken; short term, they’re drumming their fingers.

A year after the Lehman Brothers collapse, what does the market look like to you?

Jeffrey Katz: The market is the same in this respect: it’s always different, and different now than it’s ever been. A year ago, anyone I know in the business would have predicted there would be a lot of transactions, because that’s the way it happened in 1991. This time, there are surprisingly few transactions, there’s very little financing and banks are not foreclosing on properties that are at the brink.

Relative to all that, we’re in good shape. We’re not in the middle of any projects, we were buttoned down and locked up and very liquid when this thing started. We’ve been shopping aggressively for opportunities. We’ve found two, but frankly, given the amount of work we’ve done and what we’re prepared to do, we’re disappointed that we haven’t been able to find more. There’s just not a lot out there. We still think it may change, but we’ve given up predicting.

Ryan Nelson: Compared to six months ago, the number of transactions has improved, but it’s still sparse. One positive is that on development deals, the one- to two-year bridge loans are reaching maturity, so you’re seeing a little bit of movement and banks being motivated. You have a lot of mezzanine players trading down in the capital stack to secure their positions, but as far as third-party trades where we can come in and do a new deal, they’re pretty far and few between.

I keep going to panel discussions and hearing people saying that “$300 billion in loans are coming to maturity in the next year.” It seems like they’ve been saying that for two years and it still hasn’t gotten there yet. Maybe the sheer volume will push transactions to happen.

A big part of the problem is the slow pace of banks moving to foreclose. What’s holding them back?

Nelson: We talk to banks daily and usually, it’s that their positions are so far under water and the pricing correction was so drastic. So many of these pierces are impaired, and it’s not 90 cents on the dollar; it’s 60, 50, 40 cents. Their thought is, why sell? If you were an equity seller, you wouldn’t sell at those prices. You would wait until the economy picks up and ride it out.

They don’t want to own property, and there are enough guys out there like us that would love to help them with those assets. But when you want to underwrite to a 20 or 25 IRR and they can borrow money from the government below 1%, the numbers don’t work.

Katz: This isn’t going to be over in a year. It’s going to take a while. What’s interesting is that when New York comes back, as we know it eventually will, it be in the aftermath of a lot of things not getting built. Not only that, but the financing will be very reluctant, even after the economy comes back. You’ll see high spreads, low loan-to-values, lots of hair and pimples on the financing. It’s not going to be pretty for a long time.

The long view is rosy, if you’re taking it 10 years at a time. But people don’t live in a 10-year perspective; they look at it from a vantage point of one or two years. I’m optimistic about the long view, not the short view.

What are you seeing in your own properties?

Nelson: The small-tenant market has been gangbusters, and across all industry types. It’s a lot of start-ups from people formerly at places like Lehman. At 370 Lexington, we’ve gone from 85% occupancy at the beginning of the year to 94%. Other buildings are seeing this too.

Our strong position is that we have a lot of capital to invest. Cash is king; it opens a lot more doors than trying to talk to banks and having them have to finance 95% of what we want to buy from them.

Katz: A lot of the people that would be competing with us are putting out fires right now. They were very active in the last three or four years, and now they’re dealing with a lot of problems. We’re lucky enough not to be distracted by that.

Right now we’re looking in Manhattan for anything that looks like a smart, long-term investment. We’re not traders by nature.

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