Author: Josh

Not Even the Multi-family Asset Class is the Safe Haven it Once Was

Not Even the Multi-family Asset Class is the Safe Haven it Once Was

Published on August 16, 2023

Warren Buffett once compared interest rates to Newtonian physics when he suggested “interest rates are to asset prices…[what] gravity is to the apple.” In fact, he went further declaring “interest rates power everything in the economic universe.” And of course, he is right: take commercial real estate as an example where nearly all acquisitions are financed using leverage typically with five to seven year mortgages. As those loans mature and need to be refinanced at rates now roughly double the rate of the initial loan, trouble ensues. In the last 17 months, the Fed has increased rates 11 times and is likely to keep going if we are to believe the Fed Chairman, Jerome Powell, hell bent on getting inflation back down to 2% (we aren’t there yet). According to CoStar, the value of multi-family buildings across the country have fallen 14% for the year ended June 2023, and why is that? As interest rates increase so does the investment yield, or capitalization rate, investors demand (which is typically higher than the cost of capital) resulting in a decline in asset values. In other words, if an investor can get a 5.25% yield on their money risk free, then the required yield with any amount of risk would need to be higher than that.

So, how bad are things for apartment landlords? Mortgage delinquencies remain low but they are increasing (owners have defaulted in Los Angeles, San Francisco and Houston against thousands of apartments and even, Blackstone, the largest alternative asset manager defaulted on 11 apartment buildings in Manhattan though they say these buildings have unique issues). According to veteran real estate finance executive (and perhaps someone interviewed immediately after viewing the film Oppenheimer), Peter Sotoloff, multi-family property owners are facing a “hydrogen-bomb scenario” that the market may be overlooking. In the last decade, multi-family mortgages have doubled to about $2 trillion, according to the Mortgage Bankers Association and, more troubling still, is that nearly $1 trillion of that debt is set to come due between 2023 and 2027, according to real estate data provider Trepp. Not only is rental growth slowing from its peak, but investors borrowed up to 80% of the purchase price, in some cases, and certain private real estate firms turned to floating rate debt and add to those growing insurance premiums, higher property taxes, and fuel costs, the economics won’t work upon refinancing if rates remain where they are today. Exacerbating the situation further is the recent struggles of regional banks (with depressed loan portfolios due to mark-to-market requirements) that are less likely to lend today than in the past when they were a crucial source of real estate funding.

With multi-family properties, there are three fundamental pillars that matter most: 1. ownership’s ability to increase rents, 2. controlling and/or decreasing expenses, and 3. interest rates. With lower interest rates and increased competition amongst buyers before the Fed’s tightening, investors stretched overpaying for properties with the assumption they could increase rents faster than the rise in expenses but most groups—including sophisticated ones—underestimated the dramatic increase in interest rates. And perhaps they could be forgiven as the Fed for a long time called inflation transitory and suggested it would self-correct. That turned out to be wrong and here we are but such are the unforgiving whims of capitalism.

The next several years will be revealing as these multi-family loans come due and much will depend on interest rates at that time as well as the availability of capital more generally. In many ways, multi-family properties are facing the same financial challenges that other asset classes are, including office, retail and hotel-hospitality (as well as publicly traded equities). And this should come as no surprise to those who understand that interest rates power everything in the economic universe. The nonagenarian Warren Buffett has no doubt seen it all…at least twice. We should listen more often.

Putzier, Konrad, and Will Parker. “A Real-Estate Haven Turns Perilous with Roughly $1 Trillion Coming Due.” The Wall Street Journal, 12 Aug. 2023, www.wsj.com/articles/a-real-estate-haven-turns-perilous-with-roughly-1-trillion-coming-due-74d20528. 

Levine, Richard B. “Investors Bid up Prices for Multifamily Buildings as Rents Steadily Increased.” A Real-Estate Haven Turns Perilous With Roughly $1 Trillion Coming Due, The Wall Street Journal, 7 Aug. 2023, https://www.wsj.com/articles/a-real-estate-haven-turns-perilous-with-roughly-1-trillion-coming-due-74d20528. Accessed 15 Aug. 2023.

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American Consumerism, Inertia, and Human Nature is the Magic Mix Self Storage Facilities Thrive On…

Published on August 10, 2023

Economics students are well versed in the rational choice theory, or the premise that individuals will make choices based on calculations that maximize their advantage and minimize their losses. The real economy, however, is riddled with examples where this is wholly untrue and perhaps there is no better example than the self-storage market. More than one in 10 Americans lease storage space, according to market research, and these customers are paying approximately $166 per month, an amount that over time is often far more than the value of whatever they are storing. Take the CEO of $56 billion property investor Harrison Street, Christopher Merrill, who estimates he has paid for his stored items “six times over” in the last six years. Public Storage CEO Joseph Russell Jr. confirmed this reality stating, “statistically, once a customer stays with us for a year, they end up staying for five years.” There are of course self-storage facilities around the world, but nowhere have they been more profitable to own than in the United States thanks largely to Americans’ propensity to accumulate more stuff than they can squeeze into their homes.

From the storage owners’ perspective, the challenge is getting customers in the door, often with discounted starter rates, move-in specials, and algorithmic one-upmanship but, once committed, human nature generally takes care of the rest. It doesn’t much matter what someone pays when they move in as most stays outlast introductory rates. The business benefits from so-called price inelasticity where unwavering demand persists despite an increase in prices. Self-storage operator Extra Space issues about 130,000 rent-increase notices each month holding back some as a control group to ensure the increases aren’t prompting move outs. It turns out that, by and large, moving to a cheaper facility or simply disposing of stored items is just not what people end up doing and the industry knows it.

Self-storage facilities in the United States have benefitted for the last 25 years but is the party coming to a close? During the pandemic, profits soared as bedrooms became offices, basements transformed into home gyms, and the displaced items needed a place to go. More recently, however, return rates to the office have increased and home sales are declining; two factors that could impact the demand and value of self-storage facilities going forward. The CEO of CubeSmart Christopher Marr suggested the period between the summer of 2020 and 2022 may, in hindsight, be “the best 24 months in the history of this business.” Shares of CubeSmart, Public Storage, and Extra Space Storage are mostly down in 2023 while the broader market is up double digits, but M&A activity is thriving suggesting a consolidation within the industry. Specifically, Extra Space acquired rival Life Storage for $11.6 billion creating the largest storage operator in the country with 3,500 locations and 270 million sq. ft. Public Storage will buy 127 facilities from Blackstone for $2.2 billion and corporate takeover KKR determined the business is still viable and has spent more than $400 million on self-storage buildings.

In 2022, institutional investors such as university endowments, insurers, and pensions plowed $2.5 billion into a fund raised by privately held storage specialist Prime Group Holdings. And Prime’s CEO Robert Moser (still only 46 years old) got to work scooping up nearly 100 properties with the fund. And Moser’s story is a dream big rags to riches American fairy tale: he started his business out of his college fraternity room while at Union College (a Michael Dell of sorts) and wrote his thesis on income-producing properties. He spent weekends visiting and photographing properties after sorting through volumes of documents looking for acquisition targets. With so much conviction about his future in real estate, he didn’t bother looking for a job when he graduated and his mother—the story goes—borrowed against the family home to stake him. It certainly didn’t hurt that Moser showed up first semester already a licensed real estate agent and no doubt skilled in the due diligence required for success.

The self-storage industry isn’t going anywhere but the mom-and-pop players will have a tough time competing with the institutional ones. And the recent decline in share prices is perhaps a healthy cooling off from a record run (rather than any existential demise of the self-storage industry) and an opportunity for further consolidation. Until Americans adopt a “tidying up” strategy of decluttering their life of items that no longer spark joy or somehow manage to avoid death, divorce, and disaster (and good luck with that), expect this asset class to be around for generations to come.

Dezember, Ryan. “Is There a Limit to Americans’ Self-Storage Addiction? Billions of Dollars Say Nope.” The Wall Street Journal, 8 Aug. 2023, www.wsj.com/articles/self-storage-addiction-investors-80e0a14b?mod=hp_lead_pos7. 

Morris, David Paul. “A Dixon, Calif., Facility Owned by Life Storage, Which Was Bought Last Month by Extra Space Storage in an $11.6 Billion Deal.” Is There a Limit to Americans’ Self-Storage Addiction? Billions of Dollars Say Nope, Bloomberg News, 6 Aug. 2023, https://www.wsj.com/articles/self-storage-addiction-investors-80e0a14b?mod=hp_lead_pos7.

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Are We on the Brink of a Major Recession? Several Somewhat Quirky Indicators Reveal the Answer…

Published on August 4, 2023

If you’ve been following the news, you could be forgiven for having no idea if the US economy is on the brink of a recession, in the midst of one, or humming along nicely. Perhaps we should start with a widely accepted definition of a recession but the trouble is that too is easier said than done. The common definition of a recession is two consecutive quarters of negative growth in gross domestic product (GDP) but it’s flawed as it’s backward-looking as opposed to predictive. It would be like placing your bets on Sunday’s football game the following Monday morning. Turns out that the formal arbiter of calling a recession is the National Bureau of Economic Research (NBER) and they use ambiguous language such as a “significant decline” in economic activity taking into account employment, GDP and consumer spending figures in order to make the call. But this too isn’t terribly helpful and the two definitions can conflict creating confusion and keeping everyone befuddled. Let me give you an example: the last time we had two quarters of consecutive negative growth was in the first and second quarters of 2022 when the GDP declined by 1.6% and 0.9%, respectively. Lay folks and certainly a handful of experts cried “recession” (using the two consecutive quarter definition) but Treasury Secretary Janet Yellen pointed out that “when you’re creating almost 400,000 jobs a month, that is not a recession.” President Biden also cited record job growth and strong foreign business investment to come to the same conclusion as Yellen (both implicitly embracing the NBER definition that there has been no significant decline in economic activity). Still, both definitions lack practical application as investors are forward-thinking and are looking for predictive indicators to infer whether broad-based weakness in the economy is on the horizon. Folks smarter than I have put forth different hypotheses (some quite quirky) to predict any pending downturn and one was widely followed by former Fed Chair, Alan Greenspan. Let’s review what some of these are (in no particular order):

Inverted Yield Curve

Pundits often cite the reliability of the inverted yield curve as one of the best indicators of a recession, so what is it exactly? From time to time, short term interest rates can be higher than longer term interest rates for an instrument) with the same credit risk profile (typically the two and ten-year treasury bills). This is unusual as the risk inherent in time suggests that longer term debt should reward investors with higher yield given the greater risk they are taking on. Inverted yields impact banks hard as they make their money paying lower interest rates on deposits and lending out that money at higher rates but when the yield inverts the business model for banks do as well. As a result, they stop lending and credit dries up for businesses and investors causing the economy to retrench. The theory makes sense but how well does it hold up in practice? Since 1978, inverted yields have happened six times (excluding the current inverted yield we are experiencing today) and, in every instance, the US economy entered a recession. That doesn’t bode well for the current inverted yield curve environment we are in but how long after the yield curve inverts does a recession typically follow? Approximately fifteen months is the answer and given that the most recent yield curve inverted in July 2022, we might be facing a recession three months from now in October 2023. And a yield curve that inverts for an extended period of time appears to be a more reliable recession signal than one that inverts briefly. But is this time different, some say yes? The lower interest rates on ten-year vs. two-year bonds could suggest that investors believe the Fed has tackled inflation and the further out we go timewise, lower interest rates are “normal” suggesting we are past the worst. You can forgive Harry Truman for wanting a one-handed economist on his staff. For firm believers of the inverted yield curve as a predictor of our economic fate (and there is more than anecdotal support to get on board this train), what should you do? You’ve heard the refrain “Don’t fight the Fed” and you shouldn’t. T-bill rates with three and six-month maturities are offering more than 5% risk-free to investors, easily exceeding the inflation rate running in the mid 3% over the past six months measured by the consumer price index. Perhaps it’s time to place that cash in short term treasuries. Many folks are with investor demand for T-bills surging to $13.4 billion in April 2023 compared to $1.6 billion in January 2022.

Champagne Index

Like a good New Year’s Eve party, good economic times are often reflected in the volume of champagne consumed. It’s widely known that Americans tend to reduce their purchases of champagne during economic downturns and this bears fruit in the numbers. In 2009—during the midst of the 2007-08 global financial crisis dubbed the Great Recession—a mere 12.6 million bottles were shipped, compared to 23.2 million bottles in 2006. Some of you may recall the dot-com recession where publicly traded internet companies were valued, in part anyway, by the number of monthly eyeballs on the site. When that bubble burst in 2001 so did the volume of bubbly sold, which fell to 13.7 million bottles—a drop of 42% from the year prior. In 2021 and 2022, consumers splurged purchasing approximately 34 million bottles each year, suggesting the government stimulus checks kept the party going. It’s too early to tell whether consumers will pull back in 2023, but this index is worth keeping an eye on.

Restaurant Performance Index

Historically, Americans tend to eat out less when times are tough stretching their budgets by cooking at home instead. In 2008 at the height of the global meltdown, the Restaurant Performance Index dropped to 96.4 (anything below 100 indicates a contraction). In April 2020, the index was below 95 (but many restaurants were closed) and one year later (post pandemic) the index was in excess of 106. The dining out index is arguably less helpful today than it was a decade ago as dining out and getting meals for takeout has become more central to our lifestyle suggesting restaurants will be more resilient than they were in previous generations.

Men’s Underwear

Of course we hope the Federal Reserve relies on better economic data than the sale of men’s underwear, but former Fed Chair Alan Greenspan revealed to an NPR correspondent that he monitored sales of men’s undergarments to help forecast economic downturns. Let’s hope he let that slip long after he was no longer in the role. The theory is somewhat sound, when the economy suffers and you need to cut back, why spend on things that aren’t seen? During 2008-2010 during the global financial crisis, men spent approximately $4 billion each year, compared to nearly $7 billion in 2023. During the global pandemic, sales slipped to $5.4 billion, compared to more than $6 billion the previous year. The index is of course flawed as dollars spent year to year fail to take into account inflation and the higher cost of underwear in 2008 compared to 2023 but, according to Circana, unit count dropped by 12% from 2021 and 2022 and households earning less than $50,000 per year spent significantly less on men’s underwear during that same time period. The men’s underwear index could use an upgrade with a focus on unit volume as opposed to dollars spent and further break down those numbers by household income.

French Fry Attachment Rate

Few patrons like the restaurant “upsell,” or the suggestion by wait staff to add a side to your meal or get a combo for only a few dollars more, but it turns out that the fast food industry pays close attention to this metric. It’s the so-called fry attachment rate and it tracks the rate at which consumers order a side of fries with a meal. For now, the data is more qualitative than quantitative and the message is mixed with the CEO of fry producer Lamb Weston ironically referring to French fry demand as “healthy” and the fry attachment rate as “solid” on the company’s last earnings call. McDonald’s CEO on the company’s April earnings call had a different view, however, saying the fry attachment rate is going down “slightly” in most markets around the world. This may be another metric to monitor closely as it provides insight into those households earning less than $50,000 per year.

Library Index

It should come as a surprise to no one that when times get tough, people seek out free services. New York runs the nation’s largest public library system and customer attendance at New York’s libraries peaked during the Great Recession, dropping every year since and falling off a cliff during the pandemic, which had more to do with library closures and lack of access than any sort of improvement in the economy. In 2022, in New York City library attendance has ticked up for the first time in more than a decade though numbers are still well below pre-pandemic levels. We will continue keeping an eye on library attendance as meaningful upticks are suggestive of trouble ahead.

Some of these metrics may be better indicators of a recession than others but there is enough data in all of them to suggest investors should proceed with caution. I know I am.

Liberto, D. (2023). Inverted Yield curve: definition, what it can tell investors, and examples. Investopedia. https://www.investopedia.com/terms/i/invertedyieldcurve.asp Gura, D. (2022, July 28). U.S. economy just had a 2nd quarter of negative growth. Is it in a recession? NPR. https://www.npr.org/2022/07/28/1113649843/gdp-2q-economy-2022-recession-two-quarters

Baron’s, and Dreamstime(5). “Sales of Champagne, Lipstick, and Briefs All Form the Basis of Oddball Economic Indicators That Track Real-World Behavior.” Is a Recession Coming? Better Check Men’s Underwear Sales., Baron’s, 12 July 2023, https://www.barrons.com/articles/is-a-recession-coming-quirk-indicators-9da217fa?mod=Searchresults.

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The Bronx is Burning, Again. Only This Time It’s a Good Thing

Published on July 26, 2023

During a 1977 World Series game between the New York Yankees and the Los Angeles Dodgers, the blustery sports broadcaster of that era, Howard Cosell, remarked that the “Bronx is Burning,” and he wasn’t being figurative. During the televised broadcast, an ABC aerial camera panned away a few blocks from the stadium where the roof and top floors of a nearby vacant building were ablaze. Today, it’s the rental market in the Bronx that is on fire as NYC residents are getting priced out of Manhattan and Brooklyn. Rents in the Mott Haven section have grown by nearly 31% since May 2019 currently at $2,950, according to StreetEasy. In addition, online traffic for Bronx rental listings in June 2023 ranked the highest for any location in the Northeast, increasing nearly 50% from last year, according to the apartment search company, RentCafé. To be fair, much of the new supply is along the Harlem River in the Mott Haven neighborhood where developers are pouring money into new buildings. The most notable projects are from Brookfield Properties and RXR, the former building seven (7) high-rise towers collectively referred to as the Bankside project, which will include nearly 1,400 luxury apartments, five (5) retail spaces and a public park along the river with a price tag of approximately $950 million give or take a few shekels. A bit more modest but not too shabby is the 27-story 200-unit RXR project.

What’s driving the development and renter demand in the Bronx? A few things in fact. First, the apartment inventory in Manhattan, Queens, and Brooklyn has been declining in 2023 leaving few options and, for most, a decision between the Bronx and the so-called Forgotten Borough is no decision at all (apologies to my brothers and sisters in Staten Island). Second, the median Manhattan and Brooklyn rents continue to smash records hitting $4,395 and $3,400, respectively, and there was no solace across the Hudson River either as the rents in Jersey City saw double-digit percentage hikes. Lastly, these new projects in Mott Haven benefit from coveted waterfront views and short commutes to Manhattan, and this duo is what people want (or more honestly, demand, if leaving preferable boroughs like Manhattan or Brooklyn). It turns out, however, that there are only a few concentrated pockets in the Bronx that are seeing rent growth. In addition to Mott Haven, it is neighborhoods with easy access to transit, such as University Heights, Pelham Parkway, Concourse, and Fordham.

A larger issue at play as well that should not be overlooked and undoubtedly another reason for rental increases across the city, including the Bronx, is the massive drop off in rental projects coming online across the city. With the sunsetting of the 421-a program in June 2023, rental projects no longer pencil for developers so they simply aren’t getting built and with an increase in housing demand, including nearly 80,000 migrants, NYC is simply running out of apartments. Thank your legislators in Albany and let’s not forget that these mistakes have long-lasting shelf lives as any “righting” of the ship has a three-year tail before newly completed construction projects come online.

Are we witnessing a rebirth or resurrection of the Bronx and is it sustainable? Probably not, every few years, the Bronx receives favorable media coverage only to fizzle out and largely be forgotten again by Manhattanites and Brooklynites so is this time different? Hard to say, but these projects by Brookfield and RXR are meaningful financial commitments, at least in one of the most desirable neighborhoods within the borough, and that’s a start. Though average rents in the Bronx may not be sustainable at current levels if Brooklyn and Manhattan rent cool over time as those boroughs are preferred by young professionals and hip artsy folks…at least for now. So maybe this piece should be retitled to something along the lines of Mott Haven Catches Fire While Much of Bronx Remains Lukewarm. Not as catchy though.

Eastland, M. (2023, July 17). This Bronx neighborhood is one of NYC’s hottest apartment markets. WSJ. https://www.wsj.com/articles/this-bronx-neighborhood-is-one-of-nycs-hottest-apartment-markets-27180870?mod=hp_featst_pos3

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I Know a Secret…The Best CRE Asset Class to Invest in Today

Published on July 7, 2023

It’s no secret that it’s slim pickings these days when it comes to finding compelling CRE acquisition opportunities. And with several expected interest rate hikes on the horizon, investors are wise to pause before pulling the trigger on their next acquisition as its value could fall further in the months ahead. But catching a falling knife or timing the bottom is a fool’s errand and as an investor, you invest. It’s what you do. So where are today’s opportunities? It turns out one of the few bright spots is multifamily housing geared to college students but not all schools are benefitting equally. Rents for student housing are expected to grow at top research universities and schools in the five highest-earning athletics conferences for college football while those smaller schools with lesser name recognition are and will continue to suffer. One reason you can bet your sweet baby is that athletic scholarships are here to stay and not go the way of affirmative action.

Despite rising interest rates last year, student housing sales reached a record high of $22.9 billion, according to CBRE Group. Furthermore, though multifamily rents increased by only 2.3% during the twelve months that ended in May 2023, student housing rents have been growing by 9%, according to RealPage, an online firm that tracks the apartment market. Institutional real estate owner and investor, Blackstone, clearly agrees as they bet big—$12.8 billion big—on the acquisition of the student housing REIT, American Campus Communities (“ACC”). ACC has over 200 properties with more than 140,000 beds, according to its 2021 annual report. Even for Blackstone, this is a significant purchase best explained by the co-head of America’s acquisitions, Jacob Werner, who said that “in good times, people go to school…[and] in bad times, more people tend to go to school.” And at least anecdotally I concur with Werner’s views as we all know our fair share of “professional student” types who delay adulthood and the workforce as long as possible by staying in school or those who return to school when the job market offers little opportunity.

Other tailwinds for student housing include lack of financing for developers to increase supply and, at many schools, a dearth of sites both of which allow landlords to continue to raise rents. Even the pandemic couldn’t torpedo the value of student housing as students preferred to live near their college campuses rather than shack up with mom and dad despite attending classes virtually. But it is a tale of two markets out there with certain college campuses thriving financially with increasing student enrollment and other universities suffering from weakened demand and, as a result, are suboptimal for investment. So be careful, and as always, do your homework as luck tends to happen when preparation meets opportunity.

Inline XBRL Viewer, www.sec.gov/ix?doc=%2FArchives%2Fedgar%2Fdata%2F0001283630%2F000128363022000031%2Facc-20211231.htm. Accessed 7 July 2023.

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50 Years in the Making: Congestion Pricing Finally Has Its Day in NYC

Published on June 26, 2023

The Brits do it in London, the Swedes in Stockholm and the Italians in Milan and we Americans are about to start doing it right here in New York City. I am referring to congestion pricing, and starting next spring, folks will have to pay an additional fee or toll to drive in the traffic-choked section of Manhattan below 60^th Street. It would be the first of its kind in the United States and the Metropolitan Transportation Authority (MTA) still needs to finalize toll rates but proposals have ranged from $9 to $23 per vehicle every time they enter the congestion zone depending on the time of day. The idea is not new; in fact, efforts for congestion pricing in NYC date back more than half a century but car and truck owners in the outer boroughs and the suburbs (and local legislators from these neighborhoods) have helped defeat past proposals. And the benefits are hard to dispute: reduced accidents, lower carbon emissions and a decline in noise pollution (all things economists refer to as negative externalities). In addition, public transport would likely improve from the revenue generated from congestion fees (think newer subway cars and electric signals designed to improve accessibility and speeds) and, with more reliable public transport, office occupancy should benefit along with surrounding retail stores.

London recently “celebrated” the twentieth anniversary of its congestion pricing and the numbers are in. One year after implementing the fee, London traffic congestion dropped 30% and average driver speeds increased by the same percentage. In Stockholm, children’s asthma visits to the doctor fell by 50% compared to before the launch of congestion pricing in that city. Sounds like nothing but peaches and cream so what’s the problem? Paying for something that was previously free is tough medicine for folks to take and New Jersey legislators wasted little time responding: they passed the “Stay in Jersey” bill to help employees work from their NJ homes and Governor Murphy himself got in on the action, launching a recent billboard campaign with the slogan: “Pay congestion tax to sit in NYC traffic? Get outta here.” Cute for sure, but ultimately NYC holds the power of the pen on this one and NJ residents who must come to NYC for work will be forced to figure it out. Heck, they may even start taking the bus into the city or some other mode of public transport.

Opponents of congestion pricing also argue lower income groups will be disproportionately impacted. Taxi and ride-share drivers fear demand will be curtailed along with their income making it tougher to make ends meet. Many low-income drivers complain that driving is their only viable option to access downtown Manhattan. Furthermore, parts of NYC like the Bronx may see increased traffic diverted to their neighborhoods. The MTA and other agencies haven’t overlooked these concerns and are planning discounts to certain drivers in low income brackets and truckers who enter the congestion zone during overnight hours, as well as investments to improve air quality and the environment in areas where traffic could be diverted. The former New York City traffic commissioner, Sam Schwartz, aptly remarked that “100 years ago we decided the automobile was the way to go” but the future of NYC belongs to “the pedestrian” and I couldn’t agree more but then again, I don’t drive in lower Manhattan so there’s that.

Mckinley, Jesse. “What’s behind the Widening Divide between New York City and Its Suburbs?” The New York Times, 18 June 2023, www.nytimes.com/2023/06/18/nyregion/suburbs-new-york-city-tension.html. 

Meyersohn, Nathaniel. “New York City Will Charge Drivers Going Downtown. Other Cities May Be next | CNN Business.” CNN, 12 June 2023, www.cnn.com/2023/06/10/business/congestion-pricing-new-york-city-transportation/index.html.

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Sometimes What Happens in Vegas Should…Well, Be Exposed

Published on June 23, 2023

To all you brokers and real estate players who make the annual trek to Vegas’s ICSC convention and dabble during off hours at the casinos, beware that the rules of several games have changed. Blackjack players on the Vegas Strip lost nearly $1 billion in 2022, the second highest on record. What’s going on, did Vegas see a huge influx of visitors or did folks simply adopt a more maverick style of play resulting in unprecedented losses? It turns out neither…something more subtle, and perhaps sinister, is at play that favors the house that few have seemed to notice. In an effort to cater to a more affluent clientele, certain Vegas casinos have raised the minimum bets during the busiest hours and reduced the total number of tables with dealers. Smaller ballers, or bargain bettors as they are known in the industry, are often relegated to automated electronic blackjack and roulette, which don’t require a dealer and, in many cases, offer lower minimum bets.

If these were the only changes, we should—in theory—see more money flowing into the casinos but it doesn’t necessarily account for the unusually high losses in 2022. Well, many casino executives on the Strip pulled off a bit of magic by reducing how much they pay for winning hands. Historically, blackjack paid out a ratio of 3:2 when a player hit 21 on the first two cards and now more than two-thirds of blackjack tables on the Strip are paying out at 6:5, according to gambling news and data company Vegas Advantage. To illustrate what this means in dollar terms, a player who hits 21 on the first two cards on a $1,000 bet now yields only $1,200 as opposed to $1,500 under the old payout ratio. For anyone paying attention, that’s a substantial or material tweak to the game but, let’s be honest, many tourists trek to Vegas once or twice a year and, for these gambling dilettantes, tracking the latest trends on the number of blackjack tables, minimum bets, and payout ratios just isn’t what they do. In short, it has gone largely unnoticed. Vegas knows this and even the savvier players among us may miss the fine print at the table scrolling along the bottom of a small digital screen. Vegas knows this too.

It isn’t just blackjack that casino, executives have tinkered with: roulette has undergone certain tweaks that undeniably favor the house. For those that don’t know, the centuries-old game roulette historically involved a wheel with 38 slots, including 18 red, 18 black and two green slots numbered zero and double zero and gamblers can bet on the ball landing on colors or numbers. The change adopted includes the addition of a triple-zero slot, lifting the house’s advantage and making it even more difficult for players to win. Of the 278 roulette tables on the Strip, 78 are triple-zero tables and 111 are double-zero. Expect these house-friendly odds to continue as they bring in higher value customers and so far tourists haven’t been deterred by this nor by the increase in prices for everything from hotel rooms to concerts to restaurants. More than ever, Las Vegas is becoming an upscale destination for the wealthy few who are either oblivious or apathetic to their shrinking odds at the casinos. For the rest of us perennial Vegas real estate folks, there is vintage downtown “Old Vegas” where the drinks may not be free but the odds are less lopsided.

Sayre, Katherine. “Why You’re Losing More to Casinos on the Las Vegas Strip.” The Wall Street Journal, 3 June 2023, www.wsj.com/articles/why-youre-losing-more-to-casinos-on-the-las-vegas-strip-73f6f3ab?page=1.

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It’s Time for NYC’s Real Estate Industry to Take Back the Narrative

Published on June 22, 2023

Like an elite Navy Seal team toiling under the cover of darkness, members of the NY State Assembly reconvened on Tuesday, June 20, 2023, to wrap up some unfinished business. That unfinished business included passing several real estate-related matters that will impact owners and tenants alike albeit the impact will be immediate for the former and delayed for the latter.

One of the bills addresses legal rents for so-called “Frankenstein” apartments that involve either the merging or sub-dividing of rent-stabilized apartments. Rather than charging a “first rent,” owners must keep rents for any newly formed apartment(s) at the same aggregate amount previously being charged. Other bills passed are designed to further restrict landlords (i.e., impediments on de-regulating apartments through “substantial rehabilitation,” more cumbersome rules involving record retention/rent registration, and imposing a more punitive definition of fraud on property owners). All that’s left is for Governor Hochul to sign these into law and, if she does, no doubt lawsuits contesting these new laws will follow but the damage will be done. Though lawmakers say they are merely seeking to clarify the 2019 rent law and its application going forward, the policies seem vindictive and ultimately self-defeating, making the much-needed increase in affordable housing for millions of New Yorkers a pipedream. Expect the 60,000 rent-stabilized apartments currently being warehoused by owners to grow substantially. With onerous DHCR look-back periods and retention record requirements, tenants have been armed for battle and incentivized to question their current rents (even those they have been paying for years). Tenant-initiated lawsuits for fraud and overcharges will rise, arrears will climb, and deferred maintenance and much-needed building capex will be shelved. Chaos will ensue but at least Albany will have its Pyrrhic victory.

We can blame those lawmakers in Albany pushing this through (and we should as it is short-sighted and bad policy) but like an erratic kite with no direction, legislators seem to move in whatever direction the current political winds take them. We know that and, so, to some extent, NYC’s real estate industry shares in some of the blame for these newly passed bills. The industry’s stakeholders have lost control of the narrative and failed to convince average New Yorkers of their importance and the value proposition they bring to the table. The focus should be on winning the hearts and minds of ordinary New Yorkers. Take back the narrative.

Cifuentes, Kevin. “Chip Says Albany Pushing Devastating Rent Law Bill.” The Real Deal, 9 June 2023,  therealdeal.com/new-york/2023/06/09/landlords-in-panic-about-last-minute-albany-bill/.

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A Nod to the Dons of the Massey Knakal (MK) Mafia

Published on June 14, 2023

They say it’s the teachings we pass on that make us immortal and, in this sense, Paul Massey and Bob Knakal have secured their place as the godfathers of investment sales brokering in NYC. Few in the business measure up and if you haven’t sat in on a panel with either of these guys, do yourself a favor and sign up for the next one you can find. The war stories alone are worth the price of admission. Add to that, Bob’s encyclopedic knowledge of just about everything NYC commercial real estate related (i.e., pending legislation, zoning intricacies, and sales metrics going back decades across all asset classes; yep, he knows it all). These two created a thriving mid-market brokerage that consistently dominated the rankings. Oh, and then Paul decided to do it all over again from scratch just to prove it wasn’t a fluke. As one of their disciples referenced in the recent Real Deal article [Link here], I wanted to weigh in on MK and my thoughts as to what made it the juggernaut it was.

First and foremost, Bob and Paul love what they do and, to no one’s surprise, they are still very much at it and in top form. Bob’s sales stats speak for themselves and Paul’s brokerage includes a 45-person team handling more than 120 listings last time I checked. And the passion they imbued was contagious, permeating the halls of MK headquarters at 275 Madison which we all breathed in. Bob has often remarked that he will keep brokering until they have to carry him off the field and Paul similarly demonstrates a “can’t stop, won’t stop” approach to the business. In short, it was all in for the MK investment sales agents and it started at the top. As they say (though Confucius said it first), “Choose a job that you love, and you will never have to work a day in your life.”

A great relationship isn’t about a perfect couple coming together; rather, it’s about partners learning and benefiting from their differences. Bob and Paul were and remain great at their craft but stylistically they are very different and, as partners, they were the perfect complement to each other. Two Bobs or two Pauls probably wouldn’t have had the staying power that MK had and together the two built a team of agent “assassins” who dominated their territories. They also had an extraordinary and unrivaled idea which, at the time MK came into existence in 1988, was truly revolutionary. It was known as the “territory system” and it involved subdividing the entire city into submarkets or neighborhoods and placing individual agents there with a singular focus to know everything knowable about every building and owner located in your “hood.” Remember this was pre-internet and cell phones where information was hard to come by—it required real hustle. No brokerage was doing this at the time and it worked, very well in fact.

They emphasized hiring well and, of course, this makes sense, as human capital is everything in the world of brokerage. Hire well and good outcomes follow—hire poorly and, well, you get it. The plan, as Bob explains it, was to hire “former athletes, members of the military or [those] who showed some excellence” as folks with these backgrounds are likely to excel in a competitive environment. Division I athletes populated the ranks at MK and intra-company softball games were as charged as a UFC title fight. Rumor has it Bob would pick up his golf clubs once a year with little to no practice and score in the 80s but this may just be apocryphal folklore and Paul, for his part, worked in rounds of boxing several times a week no doubt pummeling someone half his age. Competitive prowess and overall excellence were necessary but not sufficient to get in the doors at MK; you also needed to be a likable person—someone they would want to “have lunch with…or go have a drink with,” as Bob explains. Likable agents win business. Through weekly meetings, one-on-ones with the founders, regular training sessions, and outside speakers, Bob and Paul methodically crafted a culture of excellence evidenced by MK’s results as the number one brokerage in NYC by sales transactions 14 or 15 years in a row.

In the article, Knakal says there wasn’t something “in the water or any secret sauce” that explains the high number of MK alumni success stories but I respectfully disagree. The secret sauce wasn’t tangible but it was felt in the examples set by the trailblazers themselves: Paul Massey and Bob Knakal. Yes Bob, “it was a good run.”

Rebong, Kevin. “Inside the Massey Knakal Leadership Tree.” The Real Deal, 12 June 2023, therealdeal.com/new-york/2023/06/11/the-massey-knakal-mafia/.

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Housing Package Fails to Pass: Albany’s Brazen Contempt for the People of New York on Full Display

Published on June 12, 2023

When I was in my first year in law school, a professor once remarked the mark of a great lawyer is not the number of adversaries outplayed, but rather the deals successfully navigated across the finish line. A successful transaction involves compromise and often a whiff of disappointment in the outcome by both parties. As an aside, readers interested in negotiation should consider the book “Getting to Yes: Negotiating Agreement Without Giving In” by Roger Fisher and William L. Ury and not so much the “The Art of the Deal” credited to Donald J. Trump but written entirely by Tony Schwartz. New York state officials would be well served to heed the advice of the aforementioned law school professor and the lessons from “Getting to Yes” as much is at stake for New Yorkers who are paying the price for their leaders’ political pandering, gross ineptitude, and resolute intransigence.

The latest shenanigans from Albany involved a potential deal to protect millions of New York renters, including those of free-market apartments, from outrageously high rent increases and extending the 421a project completion deadline beyond June 2026 so those projects grandfathered into 421a actually get built (some 32,000 units are at risk without the extension). Unsurprisingly, the legislative session ended without any new housing legislation but a whole lot of finger-pointing. The Assembly Speaker, Carl Heastie, and Senate President, Andrea Stewart-Cousins together claimed that lawmakers had reached a “consensus” on many of the housing proposals but that they “could not come to an agreement with the governor.” The problem with this assertion by the Democratic lawmakers (and they know this) is that bills—to be passed into law—must first be introduced at the House Senate or Assembly level, approved by both houses and reconciled for any differing language before landing on the governor’s desk. Heastie and Stewart-Cousins failed to introduce any proposals let alone get any legislation passed.

Now, it is true that Governor Hochul lacks any meaningful political gravitas having barely eked out a victory over a weak opponent in Lee Zeldin but she did put forth several ideas on how to tackle New York’s housing crisis in her annual budget (none of them original but all designed to encourage more housing for New Yorkers). Some of those ideas included incentivizing developers to build with favorable tax benefits akin to 421a, converting office space to residential buildings, and modifying zoning regulations to allow for taller, denser residential complexes. Lawmakers pushed back on all of these proposals as a victory for none seems to be an easier path forward than explaining the advantages of a negotiated deal to their constituents.

Ironically, Assembly Speaker Carl Heastie is not without some housing controversy of his own. In 1999, Heastie was able to hold onto a home that his mother purchased with money embezzled from a nonprofit charity where she worked (she wrote checks to herself from the nonprofit and used some of these ill-gotten gains to buy the home). Though Mr. Heastie was instructed by a judge to sell the home and relinquish the proceeds from the sale to his mother’s former employee—through an unusual string of legal lapses in the court system or something more nefarious as suggested in a 2015 NY Times article—Mr. Heastie was able to keep the home, sell it for a profit of nearly $200,000 and use the money to buy a more expensive home. So much for Mr. Heastie’s vow to bring accountability and integrity back to the statehouse.

With the most recent legislative session over, and no housing legislation passed, what next? It seems we wait until January 2024 when legislators re-convene and hope for cooler, more rational heads to prevail. Of course, Governor Hochul has the legal authority to call a “special” session that would require lawmakers to return from break and address any specific housing issues she raises. But, does she have the political power to corral the troops and get something done? Who’s to say, but in the interim, the housing supply crisis “continues to worsen” as New Yorkers experience “escalating rents, increased homelessness, and a continued deterioration of the city’s rental housing stock,” according to the President of the Real Estate Board of New York, James Whelen.

SHORT , AARON. Last-Minute New York Housing Deal Falls Apart in Legislative Session, commercialobserver.com/2023/06/new-york-housing-deal-hochul-heastie/. 
Buettner, Russ, and David W. Chen. “Carl Heastie, New York Assembly Speaker, Benefited from His Mother’s Embezzling.” The New York Times, 20 Apr. 2015, www.nytimes.com/2015/04/21/nyregion/carl-heastie-new-york-assembly-speaker-benefited-from-mothers-embezzling.html.

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