Author: Josh

Sam Zell: Didn’t Know Him, Wish I Had…

Published on June 6, 2023

Every now and again someone comes along who changes the status quo and has a grand old time doing it. Someone liberated from societal constructs who truly doesn’t give a shit about what is thought or said of them. Or, as Steve Jobs once described in 1997, “the crazy ones, the misfits, the rebels, the troublemakers…the ones who see things differently…[and who are] not fond of rules…crazy enough to think they can change the world” and sometimes do. From all accounts in this terrific article in The Real Deal by Hiten Samtani (link here), Sam Zell was one such man. Like a montage, the article captures certain highlights of a life well lived and leaves out many that no doubt live on exclusively in the memories of those who knew him best where they will likely stay forever. If you haven’t already, consider giving the article a full read or adding Sam Zell’s 2017 memoir “ Am I Being Too Subtle?: Straight Talk From a Business Rebel” to your Amazon cart as I just did. Below are fragments from the article and life of Sam that resonated most with me:

A life that almost never was… Shmuel Zielonka

Bernard Zell, the father of Sam, purchased a newspaper at one of the stops while traveling on business by train from Sosnowiec, Poland to Warsaw on August 24, 1939, when he read the Soviets and Germans signed the Molotov-Ribbentrop Pact, a non-aggression treaty between the two countries. To Bernard, this was an ominous sign for Poland which he realized would become “scraps for both superpowers” and undoubtedly a horrid fate for Jews in Poland where anti-Semitism was increasingly on the rise at that time. With time running out, Bernard canceled the business trip and escaped a week later, as it turns out, in the nick of time just before the Nazis invaded Poland. By 1941, the family settled in Chicago where Sam Zell was born in September of that year. An amalgamation of good fortune, wisdom, and perhaps divine intervention, the United States is gifted Shmuel Zielonka later known as Sam Zell.

Learning early the business of arbitrage and the law of scarcity…

Though Sam lived in Highland Park, his parents sent him by train five days a week to Chicago (about 25 miles away) to get a Jewish education at the yeshiva where he would roam the streets after class. At the time, the first issue of Playboy hit the newsstands in 1953 with Marilyn Monroe on the cover (as an aside, the photos were actually taken four years prior not by Playboy but by pinup photographer Tom Kelley in exchange for the $50 Monroe needed to make a car payment). Zell purchased the magazine for 50 cents and sold it for $3 to one of his friends in Highland Park who, it is believed, was enamored by the well-written articles. A magazine import business was born and, as Zell tells it, a lasting business lesson: “Where there is scarcity, price is no object.”

Know a path is a dead end before you get there…

After graduating from law school, Zell worked for about a week as an attorney negotiating “a contract for linens.” Of his brief legal career, Zell wisely surmised very quickly that “working is all about having a comparative advantage against other people” and he didn’t see his “comparative advantage in grunt work.” How many practicing attorneys today are working soul-sucking painful hours and not loving an ounce of it—at least in part—because a friend or family member suggested it was a prestigious profession and path to great wealth? I have no idea how many but I do recall and agree wholeheartedly with the words of the late Supreme Court Justice Antonin Scalia who responded to a question in 2009 stating that he was “disappointed that so many of the best minds in the country were being devoted to [lawyering].” I digress but many of us would do well to get off the path we are on immediately upon realizing it is the wrong one. Thanks for that Sam.

Great ones don’t need a boss but valuable partners and maybe a mentor…

Zell managed apartments for a landlord while in college and bought his first building during his second year in law school for $19,500. After the brief detour as a lawyer, Zell devoted himself to real estate investing picking up multi-family properties in states like Ohio and Nevada. In 1969, the billionaire real estate investor, Jay Pritzker, attempted to persuade the 28-year-old Zell to come on board and work real estate deals with him. Zell took the meeting but declined the offer as he was determined to never have another boss. Zell suggested the two partners instead and they did on many deals with Pritzker mentoring the young Sam Zell as to how best to structure these deals.

The deal that exemplified a master of his craft…

In 2006-2007, Zell was looking to sell Equity Office Properties, a 543-building, 103 million-square-foot portfolio at the highest price possible as one does. Blackstone Group headed by Jon Gray had agreed to buy the portfolio for $36 billion, or $48.50 per share, but Zell wanted competition from viable suitors to drive the price. To do so, Zell persuaded Gray to accept a relatively nominal breakup fee of $200 million, which allowed other suitors to enter the fray. Zell wasted little time in engaging Steve Roth of Vornado Realty Trust with the following email (which must be some sort of mating call between real estate tycoons…I wouldn’t know):

Roses are red
Violets are blue
I heard a rumor
Is it true?
Love and kisses,
Sam

Picking up on the suggestive chirping from the potential lovebird, Roth responds in kind:

The rumor is true
I do love you
And the price is $52.
To see if this poem will rhyme
We should talk at a set time
While talking like this is nifty
We should really talk at three fifty.
Forever yours,
Steve

Zell had what he needed: a bidding war ensued with Vornado and Blackstone going toe-to-toe. In the end, Blackstone paid $39 billion, or $55.50 a share, in what at the time was the largest leveraged buyout in American history. Vornado’s leaders and their partner on the bid were not overlooked by Zell. He sent along Franck Muller watches that retail in the tens of thousands of dollars with the pithy (or obnoxious depending on how you see it) inscription: “Timing is Everything.” Mission accomplished for Sam Zell but if this isn’t a man having fun, then it’s hard to see what it means to love what you do.

A few nuggets from Sam Zell himself…

Regarding risk: “My goal is to be right seven out of 10 times” and “what I [must] do…is assess the scale of the risk. I start by saying, ‘Can I afford to lose it all?’”
On development: “This has always been a fatal flaw in U.S. real estate: the volume of development has been related to the availability of funds, not to demand.”
The rush from a big deal: “If you do deals for a living, you know the energy that a big one generates…It’s intoxicating; the air crackles with the energy of anticipation. You are bouncing on your toes all day, every day. It is, quite simply, really fun.”
On retirement: “Retirement from what?… I don’t understand that, because I’ve never worked in my life. I’ve just done stuff that turns me on.”

Summarizing a man’s life—especially one of Sam’s stature (proverbially speaking as he stood a mere 5’5”) is a tall order and ultimately a fool’s errand. There seemed to be nothing perfunctory or artificially polished about Sam Zell. What you saw is what you got and from the many interviews I watched, this comes through. I didn’t know Sam Zell but he strikes me as a guy who did it his way—saying the things he truly felt—with few regrets.

Samtani, Hiten. “Analysis of Real Estate Mogul Sam Zell’s Legacy and Impact.” The Real Deal, 1 June 2023, 
therealdeal.com/magazine/national-june-2023/zells-angels-how-the-brash-tycoon-changed-the-real-estate-game-forever/.

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Hotels Taking Advantage of Work from Home Trend

Published on June 2, 2023

The work-from-home, or WFH, phenomenon came about during the pandemic but, in my view, has always been somewhat of a misnomer. Perhaps anywhere but office, or ABO, is the more appropriate acronym as what it really involves is working from anywhere but the actual office. Just ask the executives at SL Green—a large office real estate investment trust with a heavy New York City focus—whose credit was recently placed on watch for a downgrade by Moody’s due in large part to slow leasing/high vacancy rates, a heavy debt load, and stubbornly high-interest rates. The hotel chains, Hilton and Marriot, together with dozens of brands under their umbrella flag are about to launch new yet-to-be-named extended-stay brands in 2024 aimed at the ABO crowd i.e., guests seeking longer booking periods.

The newly developed hotels will have rooms that cater to guests seeking 20 nights or longer with larger kitchens containing full-size refrigerators, dishwashers, and cooktops. The properties will have gyms, laundry facilities, and a small market with snacks and toiletries. Expectations are high as Hilton’s CEO, Chris Nassetta, was quoted in a recent WSJ article saying the new brand will likely be “one of the—if not the—most profitable brands on a pure margin basis that we have.” These extended-stay hotels are likely to be in suburban markets where supply is limited and it is less expensive to build.

Room rates are meant to be affordable at $80 and $100 per night ($2,400-$3,000 per month) at the Marriot and Hilton brands, respectively. For those living in New York City, these numbers should make your mouth water as monthly rents in Manhattan recently exceeded $5,000. Hyatt is also introducing its own brand, Hyatt Studios, at a higher—but still unannounced—daily rate. And with standard hotel room rates soaring to an average daily rate of $149, according to hotel data tracker STR, these price points are welcome news to prospective guests. With less frequent housekeeping and fewer amenities, staffing extended-stay hotel rooms require fewer employees (i.e., six to eight full-time workers) than a more typical hotel. And with higher wages crimping bottom lines for companies across industries, including hotel chains, this model represents a win-win for hotel operators and guests alike. Furthermore, these properties are somewhat immune to today’s financing challenges as they typically generate returns for investors within the first year of operation.

Untethered to an office or even a home base allowing people to travel and work on a more extended basis but who is the target customer for the extended stay concept? Several groups, it turns out: think of construction crews and business consultants on temporary projects and work assignments. Traveling nurses and doctors also took advantage of extended-stay hotels during the pandemic when traveling to Covid-19 outbreaks around the country. Extended stays also appeal to those recently divorced, families undergoing home renovations or dislocations due to natural disasters. It’s early innings for the extended stay model, but the results thus far are promising: in 2022, occupancy rates in the United States were at approximately 75% compared to approximately 63% for the more standard hotel, according to STR. Extended stay offerings represent a new addition to the hospitality spectrum of options and it’s here to stay to the dismay of office landlords and perhaps, to some extent, the stakeholders of Airbnb and companies like it.

King, K. (2023, May 23). Hilton, Marriott Square Off in Extended-Stay Battle. WSJ. 
https://www.wsj.com/articles/hilton-marriott-square-off-in-extended-stay-battle-c4b98bc2

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City Council Votes Unanimously for Homeless Bill of Rights…One Provision Prompts Debate

Published on May 31, 2023

As a child when asked to clean my room, I would gather all of my scattered toys, games, and other nick-nacks, put them in a pile in the corner, and heaved a blanket on top. If you couldn’t see the mess, then it didn’t exist. But of course, this made no sense and similarly, the hallmarks of a strong civil society require transparency and honesty even when it’s unpleasant as the homelessness crisis in NYC is. Embracing this philosophy, NYC’s Mayor Adams decided to bring homeless people out of the shadows and the shelters by bestowing them with the right to sleep outside in at least some public places when he recently allowed the Homeless Bill of Rights to pass. It’s been said that “sunlight is…the best of disinfectants” and the double entendre couldn’t be more true or apropos than it is to the recent passing of the Homeless Bill of Rights. Moreover, the bill represents a significant departure from past practices that often involved police clearing homeless encampments as they arise i.e., usually dozens each week.

According to the bill’s sponsor, Public Advocate Jumaane Williams, no new rights are being created and, it is true, that there are no laws against sleeping outside in public places per se but there are a fair amount of restrictions. In fact, on any given night, several thousand people rough sleep on New York City’s streets and subways. In a recent NY Times article, it was reported that the city’s Law Department declined to answer questions about what is and is not legal in the realm of sleeping outdoors. Why? According to a spokesman from the Law Department, its “primary obligation is to advise client officials and agencies,” and providing advice to the media on these topics “would not be consistent with that obligation.” Hmmm…

New York City is, of course, not unique in its struggles with a sizable homeless population and in determining the most humane, safe, and favorable policies for all relevant stakeholders. Los Angeles recently passed anti-camping measures and bolstered this decision by outlawing tents within 500 feet of schools and banning sitting, lying, sleeping, or storing personal property that would disrupt traffic flow on streets, sidewalks, and bike lanes. Even one of, if not, the most progressive state, Oregon, couldn’t muster support for the “Right to Rest” proposal that would have allowed homeless people to use public spaces without time limitations. Portland is, however, attempting to set up municipally run campsites while restricting camping elsewhere as a compromise.

So, how would the provision in the Homeless Bill of Rights to sleep outdoors work in practice? Privately owned spaces are off-limits, streets and sidewalks must remain unobstructed, most parks close at 1 a.m. and don’t allow entrance until 6 a.m. and there are rules against setting up campsites. Lying down on benches or seats on subway trains is forbidden but often unenforced; still, I don’t think anyone is looking to populate subway stations with homeless people as a path forward under the new Bill of Rights. Instead of shirking its responsibility, the City’s Law Department (or some other agency) at some point will have to provide sufficient clarity on the rules regarding the details as to where and under what circumstances one can sleep outdoors.

NYC’s obligation to shelter those who ask for it stems from a 1981 court decision—the so-called right to shelter mandate. However, with more than 70,000 migrants entering NYC since the spring and the homeless population jumping by nearly 80% since May 2022, shelters are nearing a breaking point prompting city officials to seek a court-ordered exemption from the shelter mandate saying it “lacks the resources and capacity to establish and maintain sufficient shelter sites.” As a result, Mayor Adams did not have much of a choice but to allow the Homeless Bill of Rights to pass into law as there is an insufficient number of shelter sites for the recent influx and, moreover, they are expensive to operate, putting significant dents in an already stretched budget. With politics, motivations driving policy are ambiguous and this was likely a decision made out of necessity rather than compassion. But whether the bill turns out to be a “sensible…response to unprecedented homelessness” as described by Taysha Milagros Clark, a policy and data analyst for the Coalition for the Homeless in New York City, remains to be seen. Establishing the specifics for a homeless person’s right to sleep outdoors is critical for all New Yorkers as the safety of its residents is at stake, including the homeless themselves who may be most at risk. City-sponsored and operated outdoor encampments may be the best option but are officials up to the task? Also, let’s not let our pursuit of a compassionate policy fail to take into account quality-of-life issues that have the tendency to make cities shine with swagger or sink ignominiously if ignored. Nor should we overlook the many underlying causes of homelessness such as a lack of affordable housing, domestic violence, job loss, hazardous housing conditions, drug addiction, and mental illness, according to NYC’s Coalition for the Homeless. It’s a new day for all of us in paradise.

Basic Facts About Homelessness: New York City - Coalition For The Homeless. (2023, February 8). Coalition for the Homeless. https://www.coalitionforthehomeless.org/basic-facts-about-homelessness-new-york-city/
Newman, A. (2023, May 28). Is It Legal to Sleep Outside in NYC? A Bill Aims to Clarify. The New York Times. https://www.nytimes.com/2023/05/26/nyregion/nyc-homeless-camp-bill-of-rights.html
Mays, J. C. (2023, May 24). New York City Asks for Relief From Its Right-to-Shelter Mandate. The New York Times. https://www.nytimes.com/2023/05/23/nyregion/right-to-shelter-nyc.html#:~:text=Right%20to%20Shelter%3A%20Mayor%20Eric,accommodate%20all%20those%20in%20need

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Are Commercial Real Estate Brokers at Risk of Being Left Behind? Let’s Ask ChatGPT and Bard to Find Out…

Published on May 22, 2023

Not a day passes where we don’t read about the powerful capabilities of Artificial Intelligence and the long list of professions that are at risk of being replaced by AI. I figured who better to ask whether my role as a commercial real estate investment sales agent is at risk of disappearing than the two most recognized large natural language artificial intelligence platforms, Microsoft’s ChatGPT and Google’s Bard.

My first question was straightforward enough: can you tell me how artificial intelligence will replace the commercial real estate broker?

Chat GPT Response

Artificial Intelligence (AI) can automate various tasks in commercial real estate like data analysis, property valuation, and market prediction, reducing the need for brokers. AIs can provide 24/7 service, instant responses, and personalized recommendations based on vast datasets. Additionally, AI can facilitate virtual tours, making property viewing more convenient. Hence, as these technologies mature, traditional broker roles may diminish, but they won’t be entirely replaced; instead, they will shift towards more complex negotiations and relationships, where human touch still holds significant value.

Bard Response

AI-powered tools are automating many of the tasks that were once done by brokers, such as lead generation, property research, and contract negotiation. As AI becomes more sophisticated, it is likely to replace even more of the tasks that brokers currently perform. There are several reasons why AI is poised to replace commercial real estate brokers. First, AI can access and analyze vast amounts of data much faster than humans can. This allows AI to identify patterns and trends that would be invisible to human eyes. Second, AI can learn and adapt over time. This means that AI can constantly improve its performance, making it more and more efficient at completing tasks. Third, AI is becoming more affordable. As the cost of AI technology decreases, it will become more accessible to businesses of all sizes. Brokers who are able to adapt to the changing landscape and leverage AI technology to their advantage will be able to thrive in the future. Brokers who are unable to adapt are likely to be left behind.

They both, in their own way, seem to be saying the same thing i.e., much of what brokers do can be done better and more efficiently by AI with each giving their own caveat. ChatGPT suggests we humans are safe from irrelevancy insofar as the role involves tasks that require a human touch. Bard suggests brokers who can leverage AI to their advantage will thrive and says nothing of the need for humanity. I decided to pick up on this need for humans and imbued a bit of anthropomorphism in my next question when I asked the two platforms to answer the same question but make it funny. See how they did.

Chat GPT Response

In the future, commercial real estate brokers might need to have a serious chat with their careers. Why, you ask? Because AI, or as I like to call it, “Artificially Intelligent Real Estate Sharks,” are in town! These Sharks are hungry and they’ve got an appetite for data. They’re like Pac-Man on steroids, gobbling up numbers, statistics, trends, and spitting out property valuations, market predictions, and buyer preferences faster than a broker can say “location, location, location.” They’re the night owls of the real estate world, providing 24/7 service without needing a coffee break or even a power nap. Need a property tour? These Sharks offer virtual tours with more energy than an over-enthusiastic Zumba instructor. And did I mention they do it with all the charm and personalization of a top broker – minus the silk tie and the sweet aftershave, of course. However, brokers, don’t start packing up your corner office just yet. These AI Sharks, with all their data-chomping efficiency, still can’t replace the suave charisma of a human broker or navigate the delicate labyrinth of complex negotiations. So it seems brokers might have to stick around, but they better up their tech game!

Bard Response

Artificial intelligence (AI) is rapidly automating many of the tasks that were once done by brokers, such as lead generation, property research, and contract negotiation. As AI becomes more sophisticated, it is likely to replace even more of the tasks that brokers currently perform. This is bad news for commercial real estate brokers. But it’s also good news for anyone who hates dealing with commercial real estate brokers. Let’s face it, commercial real estate brokers can be a pain. They’re always trying to upsell you on something you don’t need. They’re always late for appointments. And they always seem to be more interested in making a commission than in helping you find the right property. But with AI, all of that is about to change. AI-powered tools can do everything that a commercial real estate broker can do, but they can do it better, faster, and cheaper. So what does this mean for the future of commercial real estate? It means that the days of the commercial real estate broker are numbered. AI is coming for your job, and there’s nothing you can do to stop it. But don’t worry, you’re not the only one who’s going to be affected by this. AI is also going to replace lawyers, doctors, and even teachers. So if you’re looking for a career that’s safe from AI, you might want to start thinking about becoming a stand-up comedian. Because after AI takes over all the other jobs, there’s going to be a lot of people who need a good laugh.

Like beauty, humor is in the eye of the beholder so I’ll let the reader weigh in for themselves as to which is funnier. ChatGPT may suffer from a “dad joke” vibeBut at least it tries while the Bard response is more angry, dark and ominous and about as subtle and nuanced as a roundhouse kick in the face without any attempt at humor. It is also guilty of some generalities about brokers that seem off the mark. A waiter may upsell you on a porterhouse over a filet but not sure brokers are often guilty of attempting to convince a buyer to purchase the 50-unit elevator multi-family in the West Village over the 8-unit mixed-use in Harlem when the buyer’s budget is $2.5 million but, then again, maybe I’m doing this broker thing all wrong. And, as far as being a pain, well maybe, but never late for appointments.

I give ChatGPT the victory on the follow up question but both have a ways to go. That said, the platforms have been live for weeks in one instance and a few months in the other. Humor is like wine that improves with age up to a point and, for now, the platforms are mere toddlers. The adoption rate/usage of the platforms, however, is unprecedented (ChatGPT had 100 million active monthly users only two months after launch) and despite being early innings, I think it’s safe to say the world is going to change in a major way with AI and not just for brokers. Who knows, maybe we’ll all be competing for laughs on the comedy circuit in the months and years ahead.

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A Battle Between Billionaire NYC Real Estate Families: Ashkenazy vs. Gindi

Published on May 19, 2023

The story that unfolded last week, publicly anyway, could be described as a Greek tragedy with a modern twist involving two rivaling wealthy New York Jewish families with deep pockets, valuable real estate portfolios and lots of animus between them if only there was a protagonist on either side with a bit more kindness and professionalism. Instead, we have a public display of what appears to be disreputable and immature behavior more fitting of a high school cheerleading squad, but it’s a fun story nonetheless and who doesn’t love a bit of Schadenfreude so let’s get into it.

The facts are relatively straightforward: Ben Ashkenazy of Ashkenazy Acquisition Corporation (think the more aggressive head of the Capulet clan in this story) and Raymond Gindi of the Gindi family (or the more subdued punching bag from the Montague side) co-own the Cross County Mall in Yonkers. The two tangled over a refinancing and capital calls on the asset and—to avoid a default on the loan—the owners were able to secure a $55 million refinancing from Citibank if the parties contributed $6.3 million of additional capital and closing costs. Ashkenazy claims the Gindis both refused to cover their portion of this shortfall and are liable for back rent on their Century 21 store at the mall. Gindis’ counsel, for his part, is claiming that the capital call is invalid as Ashkenazy, in fact, owes the Gindis money. That’s fodder for the attorneys and a court of law, but it’s the juicy tidbits that make this story worth the price of admission. Ashkenazy accused Gindi of spreading rumors about him stealing from the Gindi family to prominent members of the Syrian Jewish community.

One wonders if Ashkenazy would have cared as much if Gindi only spoke disparagingly about him to less prominent members of that community. Ashkenazy—in a series of aggrieved and mean-spirited text messages—called Gindi a “schmuck” (as any good Jewish boy does when he loses his cool) and further called into question his business acumen claiming its “no wonder you lost and bankrupted your $2 bil[lion] business that your dad left you with no debt.” Upping the stakes, Ashkenazy indicated he would “crush [Gindi] for damages” and even suggested Gindi would “lose much more [due to his] destruction and business harassment.” How much you ask, “more than you know,” according to Ashkenazy who thrives on ambiguity.

All of this was disconcerting to NYC real estate tycoons from inside and outside the community who generally follow the playbook on these things, which suggests that business disputes among community members shall be settled out of court. In fact, several real estate players tried to no avail to settle the conflict. One such player was none other than Charles Kushner of Kushner Companies who pleaded with the pair to “stop the fighting” as he knows “from personal experience that these fights have a life of their own and rarely end with a good conclusion.” Of course that’s rich: some of you may know Charles as the father of Jared Kushner—son-in-law and adviser to former President Trump and business phenom in his own right—but there’s a lot more to him than that. Charles Kushner spent 14 months in a federal prison “camp” in Montgomery, Alabama, in part, for witness tampering which involved an act of retaliation against his sister’s husband, William Schulder. Specifically, Kushner hired a prostitute he knew would seduce William and arranged to have the sexual encounter between the two recorded and later sent the tape to his sister, William’s wife. With siblings like this, who needs enemies? The takeaway in all of this is that billionaires can be every bit as petty as you and me and let’s hope for a favorable outcome for both sides and a restoration of peace between the families.

To Mr. Ashkenazy, I respectfully submit this piece was not intended to cast aspersions in any way or prompt a lawsuit (my legal budget pales in comparison to yours) and any stones I may have picked up along the way in this writing have been placed back on the ground where they belong.

Hourie, Ilya. “Retail Mogul Ben Ashkenazy Blasts Raymond Gindi in Angry Text.” The Real Deal, 4 May 2023, therealdeal.com/new-york/2023/05/03/ben-ashkenazy-to-raymond-gindi-im-going-to-crush-you/.

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Elevated Interest Rates that Remain Stubbornly High Spells Doom for Commercial Real Estate

Published on May 16, 2023

For the last decade, investors have enjoyed the benefits of ZIRP, or a zero-interest rate environment, where asset prices were one-directional. But like any good buzz, there is a price to be paid in the post-bender aftermath and we could be paying it for many years. Commercial real estate assets and all relevant stakeholders partied at the ZIRP; heck, it’s been a gluttonous feeding frenzy with properties acquired at yields well below the cost of capital (i.e., remember the days of cap rates under 3%). One well-established NYC broker earned the nickname “Joey 1 Cap” because of his uncanny ability to sell properties to willing investors at such low yields. And why not as, in those days (pre-2019), investors could often double or triple the rent roll in short order, turn a 1% cap into a 6% cap, and cash out all equity through refinancing. This was the way it worked until the music stopped and yesterday’s ZIRP heroes are tomorrow’s unfortunate losers. Buying a multi-family property at a 2% cap in 2018 with 3% financing gets a whole lot uglier five years later in a world of 6% cap rates and 7% interest rates. As the proverbial tide recedes, we are starting to see those that were swimming naked.

So what’s going on and why are increasing interest rates wreaking havoc on commercial real estate and why is the issue particularly acute in NYC? Perhaps a hypothetical Class B office building acquired in NYC in 2015 best illustrates the point and let’s assume for the sake of the example that interest rates were zero at the time. The office has a net operating income of $1 million and, because any intelligent office investor demands a sensible yield, he acquires the property for $25 million, or a 4% capitalization rate. And because the real estate game is all about leverage, the investor cuts an equity check of only $5 million and borrows the remaining 80%, or $20 million. Things go well for a while as ownership increases the rent, and operates the asset more efficiently, and by December 2019, the net operating income increases to $1.3 million (and assuming the same 4% cap rate, the property is now worth $32.5 million). Of course, the prescient investor sells right at this moment and takes home a tidy profit for herself and her investors but, in this hypothetical as in real life, few are so prophetic to see the pending doom around the corner. The pandemic hits, New Yorkers flee their apartments and office space sits vacant, tenants walk away from their lease obligations, and those tenants that do stay, re-negotiate their rents lower. The mayhem subsides just a bit and it’s now 2023, the office building is 70% occupied, rents are reduced from their peak, the net operating income is a mere $800,000 and it’s time to refinance that $20 million loan. Uh oh, you see the problem? The value of the office has been decimated and not just because the net income dropped $200,000 but cap rate creep from 4% to 8% during the hold period has further eroded value. The bank determines the value is now around $10 million but you owe the lender $20 million. For those more visual, the charts below illustrate this discussion:

What does a borrower do whose asset is worth substantially less than what they paid and it’s time to refinance? Depending on what that shortfall is and whether ownership is willing to cough up additional equity to cover that gap, the bank may restructure the debt or agree with ownership to sell at a loss. Ownership may simply stop mortgage payments if a turnaround of the asset is unachievable and hand over the keys to the lender. In fact, RXR may be doing just that with two of its office buildings in NYC, Brookfield did so with two Los Angeles towers but surely these aren’t the only groups impacted…expect more headlines in the coming months. In NYC as with other major cities, the pandemic and work from home was the initial kick in the stomach for office landlords while the interest rate hike is likely to prove to be the knockout left hook to the face.

There will be a similar reckoning of multi-family property owners in NYC with a healthy mix of rent-stabilized tenants. Again, it isn’t just the elevated interest rates when owners go to finance that is problematic, the valuations for such properties declined from 35% to 40% in June 2019 when the laws involving rent-stabilized apartments changed in a draconian way. Prior to the change, these buildings were “value add” plays with juice in the rents or meat on the bones as investors back then referred to them because investors could—often through buyouts—convert rent-stabilized apartments with nominal rents into fully free market apartments within a year or so of acquiring them. To illustrate, take a 25-unit rent-stabilized building with a net operating income of $250,000 purchased in January 2019 for $6.7 million at a 3.75% cap rate. That same asset today (assuming that the net income hasn’t declined which is probably not the case as taxes and other expenses likely would have increased while the rent roll plateaued) likely underwrites at a 7% cap rate, or $3.6 million. With refinancing on the horizon, many of these owners face a similar challenge that the office owners do. They can only pray for a change in the rent laws, a dramatic fall of interest rates, or execute a steep capital call to inject additional equity into the asset to hold on to it. This author’s view is that the sharks are currently making their way to the Hudson River for the feeding frenzy on the horizon. Are you the shark or the prey?

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New York’s Lack of Affordable Housing is Serious But…Good Cause Eviction isn’t the Answer

Published on April 13, 2023

Affordable Housing, Good Cause Eviction

Resource from Clio Chang at Curbed. (n.a.). https://www.curbed.com/author/clio-chang/. https://www.curbed.com/2023/03/good-cause-eviction-new-york-courts-losing.html

Call it good cause eviction or universal rent control, but the truth is a wretched legislative proposal by any name reeks just the same. A sincere and candid economist (preferably with one hand as President Truman liked them) will tell you that rent control is not a sound way to increase the amount of affordable housing as price ceilings create supply/demand disequilibrium. Sound economic theory be damned, however: the “give-them-what-they-want-and-then-some” Bernie Sanders has called for the need for “national rent control” while Alexandria Ocasio-Cortez—never one to be outdone when it comes to grandstanding and bloviating—demanded, “it’s time that we stop commodifying the housing market.”

Local judges, fortunately, are obligated to adhere to the rule of law and have ignored the politics on this issue. In cities such as Newburgh, Albany, and Poughkeepsie, judges are shooting down local measures aimed at limiting a landlord’s ability to increase free market rents on the rationale that cities simply don’t “have the power to draw a circle around [themselves]” and declare that “state laws [d]on’t apply” to them. That’s sound legal reasoning for sure (as good cause eviction is not the law in NY—it has been mired in legislative limbo for years). Sadly, however, the median household income in many of these cities is below $50,000 while free market rents have increased at a torrid pace (i.e., more than 50% in some cases) leaving many residents floundering on the brink of homelessness.

Rent control is in vogue because America’s housing market is increasingly unaffordable with real housing prices having doubled in NYC since 1970. Nationwide, 25% of renters spend over half their income on housing. Skyrocketing prices are the result of a demand-supply disequilibrium: housing demand across the US is outstripping supply by 370,000 units a year. Rent control is often presented as a solution to greedy landlords taking advantage of pinched renters—it takes aim at the landlord’s profits by limiting rents at below-market levels.

The problem of course is complicated and the fix isn’t simple. There has been a chronic lack of supply (newly built apartments) throughout the state but most notably in NYC. The issue is further exacerbated by the fact that nearly one-third of all units are rent-stabilized putting significant pricing pressure on the remaining available market-rate units. Furthermore, the population has increased by 800,000 people over the past decade but only 200,000 new places have been created for them to live. This isn’t a baffling Millenium Problem on the scale of the Poincare Conjecture, the math here is easy: New York hasn’t built nearly enough and the scale of new housing required to meet current demand is significant. Housing cannot become more affordable without becoming more available…meaning we need more of it. And wishing or wanting developers to build without the right economic incentives is as ludicrous as expecting to run a sub-4-minute mile with a daily diet of Double Trouble Bacon Bites and a training regimen that involves streaming endless hours of Succession.

The 421-a tax incentive worked. While in place, developers built an abundance of rental projects with 25% or more of these new buildings allocated to affordable apartments. It expired in June 2022 and legislators in Albany, to date, have yet to extend it or replace it with something similar. Local councilmembers share some of the blame too. In May 2022, Harlem Councilmember Kristin Richardson Jordan blocked the construction of a pair of two 363-foot-tall towers to be built in Upper Manhattan, known as One45, which called for 915 apartments, half of which would have been affordable. Ms. Richardson Jordan, however, wasn’t persuaded even after the plans were altered to include more affordable units. One45 isn’t dead, however; instead, the developers will build a combination of market-rate condominiums and a self-storage facility without any affordable housing. Way to go Ms. Richardson Jordan! That’s what the kids call a pyrrhic victory.

As time goes on, saying “no” to proposed development projects will—in this author’s view—become politically untenable. Governor Hochul and Mayor Adams certainly want to “build, baby, build” but the question remains whether the legislative dotards in Albany are on board or will they keep pushing for universal rent control, described by the socialist economist Assar Lindbeck in 1977 as the most efficient technique known for destroying cities “next to bombing.”

Chang, Clio. “Good-Cause Eviction Keeps Dying in Court.” Curbed, 30 Mar. 2023, www.curbed.com/2023/03/good-cause-eviction-new-york-courts-losing.html.

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WeWork Doesn’t Work and It Never Did

WeWork Doesn’t Work and It Never Did

Published on March 20, 2023

Office

It’s been nearly a year since we last checked in on WeWork when we wrote a blistering critique of its founder, Adam Neumann, who has demonstrated an uncanny ability to fail upwards and amass obscene wealth in the process. The WeWork narrative is one of shareholder pain and suffering coupled with broken dreams and empty promises. Neumann is doing just fine though: he walked away with a whopping $1.7 billion (yep, that’s a “b”) while the company currently teeters on collapse with a market value of approximately $700 million and trading under $1 per share. So the stock is in the crapper but perhaps operationally the company is doing better? Nope, WeWork recorded a loss of $527 million in the fourth quarter of 2022 (better, however, than a year earlier when the company lost $803 million). Revenue for the first quarter of 2023 is expected to come in well under analyst estimates and the cash burn for the year is pegged at $210 million.

The company is undertaking a financial restructuring that will involve its largest shareholder converting debt to equity and extending the maturity of its existing loans at higher interest rates no doubt. CEO Sandeep Mathrani—putting on his best game face—claims the company is “methodically executing his plan to achieve profitability.” Call me Groucho Marx and count me out of this club of financial chicanery. That said, you almost can’t blame CEO Sandeep as he was handed something unsalvageable and asked to conjure up a nearly impossible turnaround. WeWork was doomed from the start with an easily duplicable business model exacerbated by bad execution and insider grift. The next update on WeWork will likely find the company in the bankruptcy bin. See you then.

Stribling, Dees. “WeWork, Now Trading below $1, on Verge of Financial Restructuring.” Bisnow, 16 Mar. 2023, www.bisnow.com/national/news/coworking/fresh-capital-infusion-for-wework-from-softbank-reportedly-in-the-offing-118131.

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Can We Get More Nuanced Numbers on NYC’s Office Vacancy? Now, We Can.

Published on March 17, 2023

Office

Understanding the office occupancy rate in NYC is important to a host of various stakeholders and, until now, the numbers have been reported broadly without much nuance. That is, the return to office numbers have focused on a single market average which shows directional trends but fails to capture the difference between building classes. The company responsible, Kastle Systems, measures building entry swipes but it doesn’t cover properties owned or managed by Rudin Management, Brookfield Properties, Silverstein Properties, Rockefeller Group, Tishman Speyer, Boston Properties (formerly Boston Properties) and Related Companies. That’s a problem as these guys own some of the best-in-class office towers where many law firms, banks and financial-services firms call home. These tenants also have more employees at their desks than, say, tech, creative and media firms.

For a more accurate read of daily occupancy office numbers, REBNY (Real Estate Board of New York) recently issued a report that relied on Placer.ai, which uses location intelligence data to measure the movement of mobile devices in and out of office towers across the city. Specifically, it covers 250 towers of all classes, including many of the larger owners of Class A buildings. As a result, the numbers are more nuanced with Placer.ai and can measure differences in occupancy between Class A and Class B buildings and get more granular on office occupancy on any given day of the week or even times of the day.

Placer.ai could probably tell you which industries have the hardest working employees (investment bankers or corporate attorneys), measure the differences in occupancy of all buildings in an owner’s portfolio (and extrapolate from the data why some may be underperforming others) or determine which professions/businesses have higher occupancy levels to help owners strategize which tenant types to target. A few takeaways from the REBNY report include occupancy rates exceeding 50% of pre-pandemic levels for nearly two-thirds of all buildings and, more interestingly and not surprisingly, Class A buildings were at 66.3% of pre-pandemic levels while Class B buildings were only at 53.6% of pre-pandemic levels in 2022. We are in the early innings for sure but expect companies like Placer.ai to play a greater role in measuring key performance indicators for all asset classes and not just NYC office buildings.

Cuozzo, Steve. “Rebny’s New Return-to-Office Gauge Paints Bright View for ‘Trophy’ Towers.” New York Post, 26 Feb. 2023, nypost.com/2023/02/26/rebnys-new-return-to-office-gauge-paints-bright-view-for-trophy-towers/.

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Does Your NYC Skyscraper Have That “Je Ne Sais Quoi?”

Published on March 3, 2023

Development

In a city like no other where bravado and ego are measured not by the size of your wallet or the quality of your ride, NYC developers duel over the size and amenity richness of their high-rise towers.

Take SL Green’s One Vanderbilt, NYC tallest midtown skyscraper, which stands 1,300 feet above the ground, has 73 floors plus an area on top with bars and something called SUMMIT, three levels of immersive space with mirrors, waves of color, shape-shifting visuals and mind-bending digital images.

Refusing to be outdone, Stephen Ross’s Related Companies, allows, the more adventurous among us, to scale the side of 30 Hudson Yards, the highest external building climb in the world. Daring climbers, fitted with harnesses, can traverse a series of open-air platforms and stairs slanted at a 45-degree incline over a course that takes about 45 minutes and culminates with a celebratory glass of champagne.

Never one to sit on the sidelines, Extell Development’s Gary Barnett, sees monsieur Holliday and Ross and raises the stakes. Earlier this week, he revealed plans for a power drill-shaped (and somewhat phallic) 56-story tower with a mix of hotel rooms, fine dining, shopping and thrill rides at 740 Eighth Avenue. One attraction envisioned is a 260-foot indoor freefall inside the high-rise, which is double the distance of Disney World’s already petrifying freefall drop.

Great views high in the sky of the world’s greatest city seem to no longer be enough, the market is now calling for death-defying experiences.

Rebong, Kevin. “Extell’s Theater District Highrise Lines up for Major Tourism.” The Real Deal, 22 Feb. 2023, therealdeal.com/new-york/2023/02/21/plans-revealed-for-extells-740-eighth-avenue-tower/.

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