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Fascitelli: For big returns in New York real estate, be contrarian

Investors must be willing to ride the wave of structural change in New York City real estate to achieve double-digit returns in current market conditions, according to Michael Fascitelli, co-founder and managing partner of Imperial Companies.

"If you can figure out a little bit of a differentiated edge in that, or be a contrarian in that, I think you can make outsized returns," Fascitelli said March 28 at iGlobal Forum's Real Estate Private Equity Summit in New York. "You could also get killed."

The former Vornado Realty Trust CEO, in a conference-opening Q&A, cited three areas of ongoing change in New York City real estate: consumer preferences, product and location. All three can be observed in the market's slide to the west and south, away from Midtown, the historical center of the city's commercial property market.

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Former Vornado Realty Trust CEO Michael Fascitelli during a Q&A at iGlobal Forum's Real Estate Private Equity Summit this week.

Source: S&P Global Market Intelligence

Fascitelli acknowledged the weakness in the city's retail scene, noting the decline by roughly half in the square footage of the average retail storefront. But there is still opportunity in value-add strategies, he said.

"There's a lot of opportunity for people active in the business to retrofit, to put their brains to work," he said. "But I do think it's a little harder. Prices got a little ahead of themselves. It's a little harder than just playing a flow game. You have to fight [with] a value-added game."

Fascitelli framed recent market volatility in a somewhat positive light, insofar as it may help rein in runaway valuations. He does not anticipate any near-term market correction playing out like 2008's crash.

"It's really a frothy market out there," he said. "But it is adjusting. Pricing is adjusting all over the place. Real estate pricing is coming in. Real estate companies are coming in. Some of the frothiness in the market is being taken out."

Fascitelli later took an impromptu poll of the audience about the prospect of a continued rise in interest rates, which he said would lead to a "diminution" of real estate values. Most in the audience said they expect rates to rise steadily over the next two years.

"So, that probably means they're going down," Fascitelli joked. "The majority of the people in the room think they're going up."