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Freddie Mac’s David Leopold on the Insatiable Demand for Multifamily

Freddie Mac has been a trailblazer when it comes to affordable multifamily housing, delivering record numbers and leading the nation as the top multifamily financier in each of the last three years. David Leopold is at the forefront of Freddie’s presence in the affordable housing space, which accounted for 83 percent of eligible units financed by the government-sponsored enterprise in 2017.

Commercial Observer caught up with Leopold last month at the MBA Commercial Real Estate Finance Convention and Expo to talk about Freddie’s footprint, it’s new products and what’s in store for 2018.

Commercial Observer: Can you explain your focus at Freddie Mac?

David Leopold: One thing Freddie Mac is focused on is touching all corners of multifamily. So, in that broad scope, affordable housing means a couple of different things. It means naturally occurring affordable, which is C, B-minus, product that just happens to be affordable, and then there’s targeted affordable, which is what my team focuses on. And when I say targeted affordable, I mean properties that have at least a portion of the units with rent restrictions to maintain affordability for a long period of time. That generally means our borrowers have traded some rights to raise rents for all of some of the units in exchange for public consideration. So, that’s what we mean by targeted affordable.

Can you speak to the increased demand for multifamily and how Freddie Mac is looking to fill it?

Demand is insatiable in much of the country right now. Those areas—you know, the high-barrier to entry markets—are experiencing dramatic affordability crises and the challenge is not finding people to full the units, it’s finding enough units to accommodate that demand.

What areas specifically are of interest or have seen increased demand?

It’s more common that not just about everywhere, but it’s focused on the high-barrier to entry markets, so markets that have seen a lot of growth or a lot of job opportunities. That generally coincides with more people wanting to live in those markets because there are more job opportunities.

I know Freddie has introduced new products recently. Can you talk about that?

We invested in the platform with a real focus on innovation. And, there’s two specific programs that are advancing the current platform and there’s wholesale, new businesses that we’re developing. In terms of advancing the existing platform, we’re continually tweaking our products. Specifically, in 2017, we spent a lot of time and effort to increase our volume in cash-preservation deals, so these are generally refinancings or acquisitions of deals that have existing restrictions on them, and the owners would like to keep them affordable. So, our job is to help provide the senior debt at a efficient, but aggressive, levels to help them maintain that affordability and also keep the units decent and up-to-date and so forth. Last year, we did over $2 billion of that and that goes K-deals. So, we’re using the strength of our conventional business to source low cost of capital to keep our rates low for affordable. Last year it was very successful.

Can you speak to what you’re doing in the tax-exempt space?

We’ve really driven innovation there. Historically, we were a bond shop, so the diversification of our product set was really going from bonds and into other things—cash preservation. But, at the same time, we really focused on that core competency and tried to wring out any fat there is in terms of tax-exempt finance. That was a multistage process: We went from publicly issued bonds to tax-exempt loans (TEL). That’s a huge step because that’s a direct placement product and there’s no public issue, so now you have fewer transaction costs. Since then, we’ve continued to augment. At first we were doing immediate tax-exempt loans, now forward (executions) have actually become a bigger growth engine that immediates. We also just added what we call Flex TEL (flexibile tax exempt loan), which is a float-to-fixed version and makes it more efficient for rehabs. To the extent that we can get closer to the deal and not need a construction lender for rehab, we want to do that because that drives costs down and helps us reach more borrowers and helps us preserve more units. So, TEL has been tremendously successful, not only because of the innovation on the front end, but also in the way we source capital on the backend.

What are some challenges facing the affordable housing market going forward?

The biggest is that deals are getting harder to do because costs are up—hard costs are up across the board. Interest rates are rising. And, these deals take subsidy. The ability to restrict rents comes at a cost and that cost demands some form of public subsidy, which is hard t come by. I mean, budgets are tight and rates are up, right? And specifically, tax reform has also reduced the value of low-income housing tax credits, which is the single biggest capital subsidy in the business. What we saw last year was that the likelihood of tax reform was bad enough. The market perceived uncertainty and investors pulled back, so there was less demand for credits and value went down. That happened again in November, when the market was trying to figure out where the corporate tax rate would ultimately land. So, there was a fairly material disruption in tax equity markets, making deals harder to do. Now that tax reform is done and we know what the corporate rate is, so the markets are back but they’re back at a lower value per credit. The specifics there are that tax credits are worth less per tax credit so you need more credits to equal the same amount of subsidy, and more credits per deal means fewer deals. So, that’s been a challenge.

So, how do you face that challenge?

Product development is a huge part of my job and a huge value that are platform creates. Every time we develop or tweak a product in targeted affordable towards helping borrowers maximize whatever subsidy is in the deal. If our product can help generate more free money, that money can go farther, and we can do more deals. That’s how we think about it. In a market disruption, we can continue to innovate our product sets.

Can you speak to Freddie Mac’s growth over the last year, having hit record highs?

We had record growth in our targeted affordable business, and that’s $8.6 billion this year, from $5.6 billion last year (2017), so we feel good about that. Also, we’re targeting more units. We need to do well and be sustainable as we continue to invest, but also do well and make sure we’re meeting out mission. If you look at the number of very low income units produced by the platform, the amount of growth and the amount of borrowers we touched, are tax-exempt loan is now in 32 states across the country, so we’re feeling really good about that growth.

What’s in store for 2018?

In 2018, we’re going to re-enter the tax credit equity markets and we’re going to invest no more than $500 million, and starting in the next 60 days, we’re going to be launching our first fund and will enter the market as a proprietary investor with established syndicators and a goal of as close to $500 million as we can get.

Source: commercial

Brookfield Properties Exec James Malone Joins Colliers International

James Malone, a well-known commercial real estate executive in Los Angeles, has joined Colliers International as a senior managing director overseeing the firm’s South Bay and West L.A. offices, according to an official announcement from Colliers.

A former vice president of leasing with developer Brookfield Properties (an operating entity of Brookfield Property Partners) and broker with JLL, Malone will partner with Colliers Executive Managing Director Hans Mumper to expand the firm’s presence in both pivotal Los Angeles markets. The appointment is part of the brokerage’s stated five-year goal to double the size of its business by 2020.

Malone’s deals include one of the largest lease transactions of 2017, when anchor tenant Bank of America extended and expanded its lease at its namesake plaza at 333 South Hope Street in Bunker Hill, growing within Brookfield Property Partners’ 55-story, 1.4-million-square-foot property to 218,000 feet from 164,000. Brookfield did not reply to a request for comment.

Malone, who earlier in his career was responsible for the marketing and leasing of mixed-use projects built by Catellus Development in both L.A. and San Francisco, also served as an attorney at the law firm Haight, Brown & Bonesteel in L.A., where he specialized in commercial litigation. He received law degree from Loyola Law School in L.A. following his graduation from UCLA with a bachelor’s degreein economics. After four years at Catellus, Malone worked at JLL for a 10-year period ending in 2013, according to this LinkedIn profile, and then moved to Brookfield from October 2013 until starting his new gig at Colliers this month.

In addition to his background in real estate and law, Malone formerly was in the National Football League, where he played briefly for the Tampa Bay Buccaneers and Cleveland Browns.

“There was no question in my mind that when James Malone, showed a strong interest in returning to the brokerage side of the business as a senior manager, someone who could partner with me in strengthening our efforts in our new West L.A. location and in the South Bay, there was no one else with his level of experience, or such a sterling reputation, in our pool of candidates,” Mumper told Commercial Observer. “He has everything it takes to succeed, including his work as a former top-producing broker for one of our major competitors, and even his experience as a practicing attorney. The fact that he attended UCLA, where he was a star linebacker for the Bruins’ football team for four years, may not immediately inure him to the many USC grads who work for us, but I think they’ll come around, too.”

Colliers greater Los Angeles presence includes its flagship office in Downtown Los Angeles, as well as offices in West Los Angeles, South Bay (El Segundo), Los Angeles North (Encino), Inland Empire (Ontario), Orange County (Irvine), Santa Clarita Valley (Valencia), and in the cities of Industry and Commerce with a total of 165 brokers, according to a company spokesman.

“The opportunity [at Colliers] fits with my long-term career goals,” Malone said. “My career was largely spent being a transaction person, executing deals. Colliers afforded me the opportunity to be in a leadership role in a global brokerage company.”

Malone, who lives in Manhattan Beach with his wife and two children, will oversee approximately 75 brokers in Colliers West Los Angeles office at 11911 San Vicente Boulevard and South Bay location at 2121 Rosecrans Avenue in El Segundo.

Source: commercial

How Do You Build a NoMad Hotel in LA? R.D. Olson’s Bill Wilhelm Has the Answer

Bill Wilhelm has been a part of R.D. Olson Construction, a leading California general contracting firm, since 1994. Perhaps that’s why he considers his colleagues his second family.

Currently president of the business founded by Robert Olson in 1979, the Southern California native lives in Orange County with his high school sweetheart whom he married 31 years ago and his two children. “I can truly say that the R.D. Olson family means as much to me as my family,” Wilhelm, 54, told Commercial Observer. “The kind of projects that we associate with, 70 percent of our work is through existing relationships, repeat customers. When you have those kind of stats, you love what you’re doing.”

The firm, the construction arm of developer R.D. Olson, specializes in hotel and hospitality—which accounts for 60 percent of the firm’s volume—while also pursuing multifamily housing, country club and retail construction projects. Since 2000, the Olson companies have developed over $1 billion in hotel assets and hospitality projects with a client list that includes Marriott, Kimpton Hotel & Restaurant Group, UDR and Affirmed Housing Group. Based in Irvine, Calif., recent projects Wilhelm has worked on include the H Hotel, a 12-story 260,000-square-foot project located adjacent to the Los Angeles International Airport (LAX), the NoMad Los Angeles downtown, which opened earlier this year, and the redesigned Marriott Irvine Spectrum, the only full-service hotel in the Irvine Spectrum Center area. Annual revenues for R.D. Olson Construction have ranged from $225 million to $245 million over the last three years.

exterior final How Do You Build a NoMad Hotel in LA? R.D. Olsons Bill Wilhelm Has the Answer
The H Hotel Los Angeles, Curio Collection by Hilton. Photo: R.D. Olson

Wilhelm’s lengthy tenure has not been without conflict. During the city planning and review process for the redevelopment of a Jack in the Box the company has owned since 2014 into a 21-story hotel called Ivar Gardens in Hollywood in 2017, Wilhelm’s membership in Legatus, an anti-gay, anti-abortion Catholic business leader networking group, brought unwelcome attention. Wilhelm became the target of Unite Here Local 11, a powerful union that represents 23,000 hotel, airport and food service workers in California, which objected to the executive’s ties to the organization. Wilhelm announced in a letter following the union’s protest that he was resigning from Legatus, saying that “some of Legatus’ beliefs regarding sexual orientation and women’s rights do not represent my own,” LA Weekly reported. He told CO through a company spokeswoman that he left his role with Legatus because he didn’t have time to be an active member. (The R.D. Olson-helmed project was ultimately approved by the Los Angeles City Council in August 2017, with one council member saying the discrimination allegations against the contractor were not credible.)

Despite the controversy, R.D. Olson Construction was recognized among the top 20 medium-sized firms as one of the region’s, “Best Places to Work,” by the Orange County Business Journal, which Wilhelm attributes to the company’s entrepreneurial spirit, mixed-generation workforce and community and team engagement. Team events have centered around pro-bono work building homes for Habitat for Humanity, Cal Poly Pomona, Rady’s Children’s Hospital and the Ronald McDonald Corporation.

Olson spoke to CO about the evolution of the hospitality industry, including the rise in Airbnb and changing client expectations.

Commercial Observer: In terms of markets, your company works primarily in Los Angeles and Orange County, correct?

Bill Wilhelm: We’re licensed in 22 states. Today our focus is really the West Coast. Most of our work is in California and Hawaii, with work in California taking us from San Diego to Northern California. Our West Coast presence remains strong. It’s probably 95 percent of our work. However, we are geared up in preparation to start to go to back across the country in anticipation that the market is going to see some adjustments in the next year and a half.

What’s behind those adjustments?

We are seeing enough indications to tell us that in the next 18 months or so we’re going to see a change. We’re already seeing the change. We’re seeing stabilization. What’s driving that is the supply and the demand, world economics and the financial industry. We’re starting to see a little bit of a cap on the demand side even though you have more growth at the airport, you have the Olympics in 2028 and you have the football stadium. We’re going to see more of a controlled growth, versus a dead stop. It will slow the process down for the next couple of years.

Is that related to the Trump tax plan?

In the multi-unit world, yeah. We’re going to see single-family homes for sale potentially slow down because of [changes to] the mortgage write-off deduction. From my chair, that’s going to drive up or enhance the multi-unit industry, which has been on fire and maybe allow that multi-unit to go a bit longer because the single-family homes—which everyone says we still don’t have enough supply—you’re going to see a slowdown in the buying, you’re probably going to see housing prices a year or so out start to cap out or go down a tad.

You mentioned that the NoMad concept is the talk of the hospitality industry today. What is it about the model that is generating buzz?

Number one, it’s an adaptive reuse, which is a whole new market itself. It’s been there for a long time, but in the last five years adaptive reuse has come [more] into play. We have seen a lot of our work go from new construction ground-up to adaptive reuse for all the right reasons. With the NoMad property, here is a chance to go into a building that was built in the early 1900s. There is a storyline. There’s history there. There’s an architectural element that you’re going to capture, reinvent, revitalize, but [we will] also bring a whole new flair. The NoMad, which is part of a group out of New York, [Sydell Group]—they are the hottest thing since sliced butter in the hospitality circuit. They are pushing the envelope on the overall guest experience.

22 How Do You Build a NoMad Hotel in LA? R.D. Olsons Bill Wilhelm Has the Answer
NoMad Los Angeles Courtesy R.D. Olson

What asset class does your company focus on?

If you look at our hospitality, we’re not chasing the secondary-type market. We’re engaged in the market that is a higher-end project for a higher-end end-user in mainly a primary type market.  

How many employees do you have at the construction arm of the Olson company?

We have 125 employees. Of those 125 we have close to 35 who are field superintendents. We have operations staff and support staff within our building, which is anything from our accounting group to risk management. It’s a nimble-sized company.

What is the biggest challenge you face?

The biggest challenge in any industry is resources—quantity of resources, quality of resources, material availability. Resources are not only what we deal with here at R.D. Olson, but also our contractors, our designers, even city planners. When you look at the city agencies, they are all stretched pretty thin. A lot of people are going to retire in the next five to 10 years. You have aging industries across the board, which is a challenge with the issues we’re dealing with today. The largest percentage of our workforce is going to be the millennials.

Millennials tend to get a bad rap. Are there certain strengths that you see in this generation?

Oh yeah, I’m not one to give them a bad rap because we were all millennials ourselves within our own generational description. They are just a lot smarter than we ever were at that stage of our lives. They have a lot of great things to offer, just like the Gen Xers and the baby boomers have. Our baby boomers and Gen Xers here within R.D. Olson are really welcoming the millennials with open arms and vice versa. They have come together because each generation has been able to bring a unique offering to the table. My superintendents who are 70 years old, are some of the most tech-savvy superintendents you are going to find in the industry and that’s because millennials are investing their knowledge, their experience in them. My millennials are some of the best because my seasoned veterans are sharing with them their experiences on how to deal with certain situations.

What do millennials bring to your company specifically?

Tech, but it’s also the way they look at life. Their expectations. They want it now. Do I agree with all their expectations? No. But if you really step back and listen to what their expectations are and you have a conversation, they’re smart enough to listen to some reason today.

What are you doing to stay ahead of tech and construction trends?

bill wilhelm How Do You Build a NoMad Hotel in LA? R.D. Olsons Bill Wilhelm Has the Answer
Bill Wilhelm Courtesy R.D. Olson

We are updating every platform across company lines. We are updating our construction operations software, our accounting software. We are bringing in new technology that allows us to look at buildings three-dimensionally, to understand the building makeup, how these buildings function, how they operate.  All our superintendents work off iPads. Some of them still have blueprints on the job sites, but those are usually building permits that are required by city officials. We’re just now finishing an $80 million 15-story project here in Orange County and we don’t have blueprints aside from the permits. The entire team built this project off our ability to work online and communicate in a concentrated effort with all our consultants, all our contractors and within our own project team.

You are in the process of updating your operations systems.

A year-and-a-half ago I thought we were cutting edge. We were, but nowhere near where we could or needed to be. We made the commitment to literally go across company lines from accounting to business development, to field operations and are enhancing and updating every platform across the board.

What are the latest trends in hotel development? What are clients asking for?

We have seen a [demand for a] lifestyle experience for the last seven or eight years. When people stay in a hotel, they want a nice room, but they also want a public forum, an open area where they can be part of a community gathering. We’re seeing more and more of that. The social, community area is continuing to step up another notch. That can be anything from the quality of the material to the amenities that are provided. Social connection and interaction is probably the top runner right now in the hospitality industry, which also includes your restaurant facilities and what have you. That’s a market that’s on fire right now.

Is Airbnb having a major impact on the hotel and hospitality industry? (Cities across California have put limits on Airbnb, though, as Curbed LA reported on Feb. 8, in Los Angeles, where there are approximately 23,000 listings for short-term rentals, the L.A. City Council delayed a vote on rules on such arrangements.)

I think like everything else, it has taken a bite out of the hospitality industry because it’s another resource, another option for consumers to consider. It takes a percentage away, but when you look at the sheer numbers [in] the hospitality industry—the number of users that are traveling—we’ve seen a significant increase. So, if anything it’s keeping the hospitality industry a little more honest, a little more focused on the goal line, to not take things for granted, as much as we might have in the past. We must focus on the experience because if we don’t three, four, five years from now there might be a greater impact from Airbnb.

Have there been any injuries or deaths on your sites this year?

We did have one death on the job site, but it was non-job related. A gentleman was up on the roof deck in a safe area and he just happened to have a heart attack, which was a hereditary issue, based on what we found out.

Do you only use union labor?

We are nonsignatory to the union so we use the most qualified and competitive subcontractors that are out there.

Is your company facing a labor shortage?

There is a labor-resource issue in the construction industry and building in general. We have a shortage of qualified craftsmen, designers, even as I said earlier, a shortage of city [inspection] officials.

How have you dealt with rising costs on the large-scale multi-year projects you work on?

It’s been difficult. It’s delayed some projects. It has required us to think outside the box in terms of means and methods to offset some of those costs. It has driven the bottom-line cost of development and construction up. And that is only one part of it. If you look at overall development costs, land costs have gone up substantially, design costs have gone up substantially. For a developer that was going to build, say a Renaissance Inn today, to build that same property in the same city is probably 30 to 40 percent more than what he was going to pay seven years ago. But, on the flip side, look at what he is going to get for a nightly rate today compared to what he made back then.

What about construction costs?

Within the construction industry we have seen an increase over the past few years of close to 30 percent increase, most of which is in labor and some in subcontractor margin.

Today construction costs have plateaued. We’re going to see a couple of small increases, but I’m hoping to see a couple of small decreases or at least for it to stabilize itself, versus the last four years.

Where do you think the biggest opportunities in the contracting business are moving forward?

Every project, every state is different. If I just look at the state of California, Title 24 [The California Building Standards Code, also known as Title 24, serves as the basis for the design and construction of buildings in California. Composed of 12 parts, the regulations cover everything from electrical, plumbing and green building standards code], those are things that continue to throw challenges at us. How do you manage the ongoing code enhancements, the ongoing building requirements to meet the end user’s needs? That is one of the challenges of the industry. Construction, in general, outside of resources being a big issue, are the design parameters that are being driven by a lot of factors from code to owner to end-user expectation.

Source: commercial

In Cannes for MIPIM, Brookfield’s Ric Clark Is All NYC

Brookfield Property Partners is no doubt one of the most active developers in New York City.

The firm recently completed the redevelopment of its 8.5-million-square-foot Brookfield Place office and retail complex in Lower Manhattan, a $250 million project it commenced in 2015. Today the property is nearly entirely leased. And the developer is building at an aggressive pace the more than 7-million-square-foot Manhattan West project.

The company is also is a partner on Park Tower Group’s 22-acre Greenpoint Landing mixed-use development in Greenpoint, Brooklyn. And on top of that, the developer recently picked up the leasehold of the HBO Building at 1100 Avenue of the Americas along with Swig Company and signed most of the space to Bank of America (386,000 square feet). In addition, Brookfield and Swig recently signed Bank of America to a 127,000-square-foot space at their adjacent property, the Grace Building at 1114 Avenue of the Americas.

Commercial Observer caught up with Ric Clark, the senior managing partner and the chairman of Brookfield, while in Cannes for his very first MIPIM (or Marché International des Professionnels d’Immobilier). His main order of business at the conference: talking about trends in the United States on a U.S. panel co-organized by CO.

But we got to talk to him about the status of the firm’s projects, Brookfield’s investment in on-demand conference space provider Convene and the company’s recent—so far unsuccessful—attempts to acquire General Growth Properties, Forest City Realty Trust and Regus parent company IWG.

Commercial Observer: You have a lot of things going on in New York City. What is the status of Greenpoint Landing, Brookfield’s foray into the outer boroughs?

So the first building opens up in August. I think it’s just shy of 400 units. The second tower will open in 2020 and we hope that we have two more towers coming up on the heels of those.

Park Tower Group brought Brookfield in to do that project. What attracted you to it?

It really started with a desire to expand our presence in the multifamily business. Up until roughly six years ago we really didn’t have any investments in the apartment sector. But looking back it’s been one of the best performing sectors, particularly in New York City—vacancy is very low—tenants tend to stay for a couple of years, and when they do leave the capital expenses are pretty modest unlike an office tenant. Granted stay longer, but when they leave it is a major capital reinvestment to retenant the space. So the first building that we built was The Eugene [with 844 units] at Manhattan West. We are closing in on 80 percent leased now, and it hasn’t even been open [for a year]. So basically on the heels of that and making a decision to enter the multifamily space, we looked around and thought, Brooklyn was a great alternative to Manhattan. It’s cheaper, so more affordable, and there is a lot happening in Brooklyn.

What’s going on at Manhattan West?

So 5 Manhattan West, formerly  known as 450 West 33rd Street, started as an apparel warehouse—at one point it had the Sky Rink—we were able to convert that and put a new facade, new lobby, new systems and take what was once the ugliest building in Manhattan and make it into a pretty attractive building, which is appealing to those in the innovation and technology businesses. So that [1.7-million-square-foot] building is effectively fully leased at this point.  

One Manhattan West is going up. We did 1.8 million square feet of leasing [at Manhattan West] last year so overall between 5 Manhattan West, 1 Manhattan West and The Lofts building, which is a 200,000-square-foot building that we are repurposing there as well, we are 92.3 percent leased across the project. So we had a really big year there last year.

What else did you do there?

We are about to break ground on a [30-story, 164-room] hotel. We haven’t yet announced the operator. But we hope too soon. So the remaining piece is to lease out the retail. We have signed a couple of retail deals already—like Whole Foods

So the only thing left is 2 Manhattan West—the south tower—where we are actively pursuing tenants. We have started the below-grade work [on that building].

With everything happening in Hudson Yards District, is Midtown East dead?

Between us and Hudson Yards there has been a lot of momentum over there in the last couple of years. [But] the east is not finished yet. There is a bit of a nuclear arms race going on when it comes to upgrading buildings that are somewhat obsolete [in Midtown East]. I think it’ll make those buildings more appealing. Those that don’t spend the capital to reposition their buildings and enhance them, I think are going to struggle a lit bit. But the east is not dead. We just saw the J.P. Morgan announcement [to build new Park Avenue headquarters], which was pretty huge for Park Avenue.  

It’s not exactly Midtown East, but your company now has two buildings off Bryant Park with the Grace Building and the recently acquired neighboring 1100 Avenue of the Americas. Why did you want the adjacent property?

Adjacent and back connected to the Grace Building is the HBO Building, 1100 Avenue of the Americas. There is literally a floor where you could walk from one building to the other.

Interestingly, someone along the chain of ownership built what I’m going to call a “spite wall” on the back of the HBO Building. So when we acquired the Grace Building there was this solid wall that went literally up the north side of the HBO Building.

We were the only one’s pursuing the acquisition of 1100 Avenue of the Americas that could remove that wall [since we also owned the Grace Building], and basically connect the Grace Building plaza to Bryant Park with a renovation of the lobby. The other advantage that we had on that building [1100 Avenue of the Americas] than others is that the building does not have a loading dock. So you literally had to pull a truck up in the middle of the night and offload it to bring goods into the building. We can connect the building to the Grace Building’s loading dock underground.

We saw this as an opportunity to help Bank of America [which is the anchor of 1 Bryant Park] create an urban campus. So they leased the bulk of 1100 [Avenue of the Americas], and also have taken some space in the Grace Building as well.

How is Brookfield Place doing?

So we’ve leased up all of the retail space and the project is 8.5 million square feet and 95 percent leased [in both office and retail]. And I just looked at the [2017] year-end sales numbers before I came here and it had very strong same-store sales.

It really has exceeded our expectations. You can go there on a Friday night, it’ll be crowded. You could go there on a Saturday morning, it’ll be crowded. And it’s a difference; the crowd takes on a different complexion on any day of the week. Sunday morning you’ll see a bunch of dads and strollers. And we are really proud of it.

We’ve heard millennials are to blame for the death of malls. How is Brookfield preparing for the influx of millennials that will reshape the economy?

In a year or two, millennials will make up 50 percent of the world’s working population. And by 2030, it’ll make up 70 percent. So for sure, I think those in the real estate business that are paying attention to that are making adjustments to their real estate to help employees attract, maintain and motivate employees will be more successful.

This crowd was basically born with a smartphone in their hands. And they want everything immediately and they want it efficiently, so we’ve been bringing a lot of innovation and technology to our “places.”

What specifically?

For example, at Brookfield Place we are beta testing an app that will package a bunch of other apps that will provide convenience to those that work within our project. You will soon be able to get in and out of the building by using your smartphone instead of a plastic badge. You will receive security alerts on a moment’s notice if there is some kind of terrorism event or some kind of emergency.

We noticed that when we opened Hudson Eats [in Brookfield Place], between the lunch hours the lines were so long that people were actually turning away. So we found an app called Ritual, with which you can sit at your desk, decide where you want to order your food from, you order your food, the food is prepared, they give you a notice when it is ready. They’ll also let you know if someone else on your floor or in your building is going down to pick up food from there and [inform you if] they’ll bring the food back to you.

Within a couple of months 25 percent of the people that work within Brookfield Place downloaded this app, and sales for the stores that use it went up 25 percent as well. So we are trying to wrap all of those with a Brookfield app just to make the overall experience just as seamless and efficient as we can.

And this is only for Brookfield Place?

We’ve been beta testing this whole thing at Brookfield Place so once we get the bugs out and its working efficiently, we’ll roll it out across the world.

How did you get to know Convene and why is Brookfield so heavily investing in it?

I got a phone call once from a CEO of [Hudson’s Bay Company]—one of our tenants—after we signed a lease with him, saying, “I’m sitting here with my architect and I’m planning my space and I’m planning a boardroom, which I am literally going to use once a quarter. And if you had something where I could rent a catered conference room once a quarter, I could use my space that I rented from you for more productive things.”

And he introduced us to Convene. And we understood the merits of it immediately.

On the one hand, I’m sure our leasing group would rather rent more space to somebody even if it is sitting idle, but I think those that listen to their tenants and solve their tenants’ problems as they relate to efficiency will be more successful.

How much has Brookfield invested in Convene?

We are the largest shareholder now. We sign leases with them in some of our buildings and we do management agreements with them as well. So we think wherever we can work a Convene into our projects it’s a great amenity—one that tenants will respond positively to.

Work space as a service has become huge business with players like WeWork, IWG (Regus) and Convene. Are you afraid that they will take business from traditional landlords?

So for our office business primarily we are in the big-bulk leasing business. So we don’t have a lot of small tenants in our facilities… And for sure the smaller tenants I think—particularly those in a start-up business—need flexibility and I think WeWork or IWG provides that flexibility for those tenants that don’t want to sign a 10-year lease because their business may be very different in a couple of years. I think there is room for both of these. And we are working with a coworking or flexible angle within many of our projects around the world.

Although they have been unsuccessful so far, why has Brookfield made moves to acquire GGP, Forest City Realty and IWG?

So I can’t comment on specific transactions. But I would say [Brookfield Property Partners parent company] Brookfield Asset Management’s real estate business has about $150 billion of assets under management and we got to that scale through [mergers and acquisitions] activity. So we are always looking for mispriced or undervalued opportunities—opportunities where we think either through a better capital structure or because of our operating capabilities or some idea that we have or some synergies with some or our other businesses, we can acquire a business and create value. And I’d say, in all of those transactions that is what we are really focused on. As for the specific ones that you mentioned, we will see.

Source: commercial

Michael Shah Talks His New Projects, Toledano and Why He ‘Loves’ This Retail Market

By now, Michael Shah’s origin story is well known in real estate circles. Twelve years ago, at the age of 28, the Harvard Law School graduate quit his gig at Midtown-based business law firm Wachtell, Lipton, Rosen & Katz after growing fed up with the demands of the job.

“I worked horrible hours, as all lawyers do,” Shah recalled. “I did not find it to be very fulfilling. You don’t get the chance to spend any of the money you’re making.” He spent the following six months “just partying in New York, going out every day and figuring out what I wanted to do.”

The Long Island native’s parents, both of whom were doctors, had invested in affordable housing properties in the city with their savings, providing Shah with some exposure to the nature of the real estate business. That, coupled with his own nous in the fields of business and law, meant that real estate proved an attractive opportunity for a smart young guy looking to reboot his professional life.

His first purchase was 1314 Seneca Avenue, a six-story affordable housing building in the Hunts Point section of the Bronx, which he bought for $6 million. “It was a true crack den, in every sense of the word—if you’ve seen New Jack City, it was the Carter building,” Shah said. Those kinds of outer-borough multifamily acquisitions represented Shah’s initial foray into the business, but in time, he began venturing into more ambitious segments of the market.

Today, the 40-year-old bachelor, who lives on Union Square West, oversees a diverse portfolio of New York City real estate assets approaching $1 billion in value, he said. His company, East Village-based Delshah Capital, owns everything from Meatpacking District retail properties, to Lower East Side apartment buildings, to a 1,100-unit federally subsidized housing complex in Staten Island.

Additionally, Delshah has established itself as a ground-up residential developer. Shah’s boutique Chelsea condo project at 221 West 17th Street, known as the Dorian, recently topped out after suffering a 2015 fire that set construction back a few years, and he’s also pursuing new high-end rental developments at 22 Chapel Street in Dumbo, Brooklyn, and 30 Morningside Drive in Morningside Heights (the latter being a conversion of five former medical buildings that Delshah acquired from Mount Sinai St. Luke’s hospital in 2016).

Shah recently spoke with Commercial Observer about those projects and more—including his firm’s venture into the Israeli bond market, his feud with troubled real estate investor Raphael Toledano and why he’s actually bullish on the retail market.

Commercial Observer: Looking at Delshah’s portfolio, you have a notably diverse array of investments in different types of properties. Do you feel that gives the firm an advantage, rather than just focusing on one asset class?

Michael Shah: It’s definitely an advantage, and there is a method to the madness. Some people just focus on certain submarkets. My personal investment philosophy is you’ve always got to remember real estate is cyclical, and depending on where the cycle is, there are different asset classes you want to be in.

At the top of the market, you want to be in debt, because people are paying more for assets than what they’re worth—so you want to be putting money out. At the bottom of the market, retail rents accelerate way more than residential rents—so if you feel like you’ve hit the bottom, you want to be heavier in retail, and office too. That’s how we pick what we’re in.

We also look at gentrifying submarkets: where people are moving, where we think they’re going to be moving, and where we think rents are going to grow.

You’ve recently increased your exposure on the Lower East Side, where you bought a walkup building at 138 Ludlow Street earlier this year for $19 million. Do you think that neighborhood still has a lot of embedded upside?

The Lower East Side is 100 percent gentrifying. I started investing there in 2007, and I’ve ridden the wave up. You have so many things happening there: Essex Crossing is coming online, and that Ludlow and Rivington corridor, where we bought 138 Ludlow, is maturing right now. I think there is additional upside.

I think the East Village still has upside. Greenwich Village and the West Village are two of the most desirable neighborhoods in Manhattan, so why wouldn’t the East Village a couple blocks over be? That’s where my friends hang out, that’s where some of the cooler bars are, that’s where people want to live.

image001 Michael Shah Talks His New Projects, Toledano and Why He ‘Loves’ This Retail Market
Rendering of Delshah’s Dorian condo project at 221 West 17th Street in Chelsea. Image: Delshah Capital

Let’s talk about some of the new projects you’re currently working on, like 30 Morningside Drive, 22 Chapel Street and the Dorian. Where do those projects stand, and what’s your investment thesis on those properties?

Thirty Morningside Drive will be a market-rate, five-building rental complex; the first two buildings are going to be delivered this time next year, and they’ll all be online by the end of 2019. The thesis is, you’ve seen SL Green do 1080 Amsterdam Avenue, Brodsky Organization [did 400 West 113th Street], and we think there’s demand for luxury product in that neighborhood that’s underserved.

Twenty-two Chapel is my first Brooklyn ground-up project. We’re supposed to close construction financing this month. It’s a very cool building; there will be a pool on the roof, which I think will be a very nice amenity, and a fitness center and lounge. Everyone’s seen what’s happened in Brooklyn over the last five years. It’s no longer a lower-cost alternative to Manhattan; it’s where people want to be instead of Manhattan. That building is also rentals, and 25 percent of the units will be affordable. We’re doing that under the new Affordable New York Housing Program.

We just topped out the Dorian and are going to start closings this September. That building is 45 percent [in contract]; one more unit would take it to 50 percent. Right now, between Chapel Street and Morningside, we have close to 450,000 square feet under development. I think we want to finish out these projects before we look at more development.

What are your thoughts on the Affordable New York program, and how does it compare to the previous 421a tax abatement that it was designed to replace?

Honestly, as a developer, the previous plan was more favorable for developers, but what the city is trying to do is smart. I think the city solves the affordable housing problem by giving people FAR [floor area ratio] bonuses to build affordable housing. Right now the law is that you get the tax incentive if you do a partially affordable building, which I think is great and it works. But I think what would be really good would be if you get an FAR bump—that way you keep all your market-rate FAR, can build the affordable and get the tax incentive.

Delshah has a good deal of exposure to the Manhattan retail market. I don’t have to tell you that it isn’t the easiest time for that market; what are your thoughts on the current state of retail real estate, and have you felt the downturn across your own portfolio?

I love it. We’re one of the few actively investing in retail right now. It’s a market that rose crazy fast from 2012 to 2015, and people always forget that rents don’t go up forever. With that asset class, market timing is very important. People are shying away from it, but we just picked up two notes on Manhattan retail assets from Signature Bank and may pick up a third. People bought vacant retail hoping to lease it up at huge rents, and they’re not because their whole investment was based on rents in 2015.

There’s a market for retail. The thesis is, stock markets are up, people feel wealthy, tax cuts are in place, there’s more disposable income, and retail’s been beaten to shit over the last few years. A lot of the pain was built into the pricing, but [companies] were reporting earnings and this was the best holiday shopping season we’ve seen in five years. When [rents adjust], you’ll see people signing new leases. If you’re a landlord with vacancy, it’s a hot retail market—as long as you don’t need 2015 rents.

But all my shit is leased. No bankruptcies; Restoration Hardware [at 55 Gansevoort Street in the Meatpacking District] is still crushing it, and Urban Outfitters [at 58-60 Ninth Avenue in the Meatpacking District] has very little debt anyway. We have good tenants.

You mentioned Delshah’s purchase of those retail notes; the firm has been particularly active in recent years in scooping up commercial mortgages and particularly debt that is nonperforming or on properties that have slipped into bankruptcy. How did you come to enter that market?

It’s a very active part of our business plan. I think a lot of people understand that buying nonperforming debt is a good strategy. What’s unique about us is that we’re not a purely financial purchaser; some people just buy the paper, but we’re very happy to own and reposition the asset because we’re effectively a real estate operating company. We’ve had tremendous success on all of them.

But those deals have also earned you enemies like landlord Raphael Toledano, who allegedly said he would “bury you” after you bought the note on his building at 97 Second Avenue. What did you make of that? [In November 2017, a federal bankruptcy court judge dismissed a lawsuit filed by Toledano seeking to block Shah’s acquisition of the property.]

The dude was imploding, and it was pretty clear vultures were going to pick his carcass dry, and I wanted to be one of them. From the time Madison Realty Capital made the loan [a $124 million mortgage on Toledano’s acquisition of a 16-building East Village portfolio], it wasn’t a question of if he was going to default—it was when. I think [Madison co-Founder and Managing Principal Josh] Zegen is going to do really well on that [portfolio].

I don’t really know how anybody in their right mind believed [Toledano] was going to out-litigate us; he’s not very litigation-savvy. I think it was a lot of noise and press—he’s a colorful guy. Before we did the deal, we had analyzed the litigation risk and knew how a bankruptcy would end, and it played out exactly how we planned. [Note: Toledano and his firm, Brookhill Properties, could not be reached for comment.]

michaelshah 461 Michael Shah Talks His New Projects, Toledano and Why He ‘Loves’ This Retail Market
Michael Shah at Delshah Capital’s offices in the East Village. Photo: Yvonne Albinowski/For Commercial Observer

Delshah is among a select group of U.S. real estate firms to have tapped the Israeli bond market via a publicly traded bond offering on the Tel Aviv Stock Exchange [the company has raised roughly $180 million to date in Israel, including a $50-plus million issuance last August with the expressed goal of financing 30 Morningside Drive]. What’s that experience been like thus far?

When I look back, that—along with Charlie [Oshman, founder of proptech startup Reonomy] coming on to be COO—have been two of the transformative things that have led to the company’s success. To become a publicly traded entity in Israel, you have to do a lot with organizational infrastructure, and I was a good real estate investor, but organizational design wasn’t something I spent a lot of time on. Charlie came over here, and now the company operates like a company and not just a deal shop.

It’s been very important to our trajectory; having access to that market allows us to do larger deals. We did our Series C offering for 30 Morningside, and here that money would have cost a lot more. It’s a great capital market. There’s a premium you pay when you’re a first-time issuer because the market doesn’t really know you, but this company was the perfect size for that market.

Related, Extell, those companies had larger issuances, but they didn’t pay attention to the market as much. Both Moinian and we looked at it not as a one-off but as a recurring thing for future growth. We have active investor relations programs; we go back to Israel when we’re not looking to raise money, we do a quarterly call after our earnings releases. That has gotten the market more comfortable with us.

How else do you finance your projects? With the growth of the alternative, non-bank lending sector in recent years, is that a segment of the financing market you’ve taken advantage of as banks have retreated from the realm of development lending?

30 Morningside was [financed] with Square Mile—we have a great relationship with them and CapitalSource. Bank of the Ozarks is doing the senior loan on 22 Chapel, and they were the acquisition financier for 30 Morningside. We’re still getting our deals financed; it’s just about how much leverage.

I think the real estate capital markets have matured a lot since 2009; since the credit crunch, alternative capital has stepped in to fill that void. It’s good for us because we tend to do complicated things. Historically, this company has used its own balance sheet [to finance operations], and this year one of the big initiatives for this company is to launch our own credit fund. We’ll be starting to lend on any asset class that’s based in New York.

You’re very much New York City-focused. Do you plan on increasing your exposure in any real estate markets outside of the city?

I think for the immediate future, we’ll be in New York [mostly]. I did buy a building in Miami recently—a corner building just outside of the Design District. We’re turning that into a 12,000-square-foot retail building.

And outside of real estate, you’ve also established yourself as a restaurateur.

I’ve got three operating restaurants and bars: Sons of Essex [on the Lower East Side], Petaluma [on the Upper East Side] and Leave Rochelle Out of It [on the Lower East Side]. They’re all in buildings that I’ve owned. I tried to do one at 200 Allen Street, but the Lower East Side community board feels they have a saturation issue [with bars and restaurants].

What was your motivation for entering the restaurant business? I feel a lot of people get into it so they can have a place where they can bring their friends and hang out.

That was never my motivation—though my dad did do that. It’s a tough business, and you have to manage expenses. I started doing it because I had vacant retail in 2009 and 2010; the thought process was, if we can put our own operating businesses in here, it’ll help pay rent. I definitely think we’ll end up with at least one more [restaurant] opening this year.

Lastly, do you still work out with Hamid Castro? [Castro, a personal trainer, was the subject of a 2016 New York Post article headlined “I Train Fat Rich Guys and Then Get Them Laid.” Shah featured prominently in the article, noting that he began training with Castro after hitting “a low point in my life.”]

Hamid and I are still good friends, though he’s not my trainer anymore.

Is exercise still a big part of your life?

Yeah, it’s basically my hour to myself every day to get into the mindset for what I’m trying to do at work. It’s a good way to start the day. And not being fat anymore is also a huge perk.

Source: commercial

Greg Kalikow Talks Family Pride and His Southeast Strategy

Greg Kalikow is the fourth generation in his family’s real estate business—his industry roots beginning with his great grandfather, Joseph Kalikow, in the 1930s. Part of a real estate dynasty, he is the son of Edward Kalikow, president of The Kalikow Group, and his cousins include Peter Kalikow, the president of of H. J. Kalikow & Company and former chairman of the Metropolitan Trasportation Authority; Richard Kalikow, Gamma Real Estate’s CEO and chairman; and Jonathan Kalikow, Gamma Real Estate’s president.

Kalikow, 33, has been working with The Kalikow Group and overseeing the management of his family’s real estate holdings since 2003. In addition to developing properties and managing them through its property management arm, Kaled Management, the company has a private equity division—Kalikow Equity Partners, which is a source of joint venture equity and mezzanine financing for real estate developers, operators and builders.

 A Hofstra Law School graduate, Kalikow focuses on the development and finance side of the business and taps into his legal expertise when developing rental, single- family and condominium units as well as shopping centers both in and outside of New York City. The firm funds its developments and acquisitions with a mix of debt and equity.

Commercial Observer: Was a career in real estate always written in the stars for you, given your family legacy?

Greg Kalikow: Growing up I always thought it was in the cards for me because it was something that I really enjoyed doing. For me it was more than just the real estate, it was my family name. I worked at the company during high school and was always the first one at the office and last one out—I took pride in turning the lights on in the morning [laughs]. We have people that have worked for us for 30 years and we really treat [The Kalikow Group] like a family. So, when I was growing up I had friends, family and then my work family—and I really enjoyed being part of, and expanding, that family.

 How has business been recently?

Last year was a very active year for us—both in New York and other states. We’re currently developing a residential building at 2415 Church Avenue in Prospect-Lefferts Gardens in Brooklyn [Kalikow Group recently broke ground on a $29 million, 67-unit rental building at the site]. We’ve bought a few properties over the last couple of years that are keeping us busy, including 68 Richardson Street in Williamsburg—a 24-unit, six-story multifamily property [acquired for $17.5 million in a joint venture with River Oak and an investment fund formed by Massey Knakal Realty Services. Hudson Valley Bank provided a $13.5 million loan in the deal]. But outside of New York we’ve been very active. We’re doing our second and third developments in Charleston at the moment.

 Why do you like Charleston?

We believe in the growth there. There’s a large demographic that’s moving to Charleston—it has a hip, downtown vibe, and a ton of job expansion between Boeing and Mercedes Benz [creating manufacturing positions there]. Additionally, it’s nicer weather all year round. We’ve been very active in Charleston in the last couple of years. The first job we did was Shade Tree Apartments on John’s Island—it’s an 11-building, 248-unit residential property across nine acres of land [financed using a HUD loan from Arbor]. The second development is 17 South Apartments—a seven-building, 220-unit residential property in West Ashley, S.C. The third is Wescott, a 182-unit multifamily community in North Charleston.

 So the Southeast is a big part of your strategy right now?

Yes. We’ve been pursuing a lot of opportunities in North and South Carolina, especially due to some of the market conditions here in New York. Based on the influx of product coming into the market and the fact that the vacancy rate in Manhattan is going up, I think we want to sit on the sidelines for a little bit and see what happens.

 You have a few projects in Brooklyn, why does the borough appeal to you?

Because a lot of people with discretionary income are looking to move to Brooklyn as opposed to Manhattan; you see this in Dumbo, in Fort Greene and in Park Slope. People earning six figure salaries are choosing to live in Brooklyn. At the Prospect-Lefferts Garden development you’re two blocks from the 5 train that gets you right into Grand Central. It’s a great area with a lot of multifamily development underway.

 Are you actively pursuing further Brooklyn acquisitions?

Always. Brooklyn, Manhattan and Queens are the three boroughs that we have interest in.

But right now it’s really opportunity-driven—we go where there are opportunities in the in markets that we like. We also believe that there are markets in Queens outside of Long Island City that are exhibiting growth. You’ve seen a lot of development in Elmhurst and Flushing. With the shut down of the L train people may gravitate towards the 7 train instead. They’re getting priced out of Long Island City so Astoria, Forest Hills and Sunnyside are only going to get better and better.

 But, there are more opportunities outside of New York?

The cocktail party chatter when I’m meeting with peers is about Texas, Florida, and North and South Carolina—where we’ve already been for 15 years. So, Texas and the Southeast.

 Do you prefer to joint venture in acquisitions and developments or go it alone?

We do both. For example, in Williamsburg, we joint-ventured with River Oak. A lot of the economics don’t work now with the ask price at 3 percent cap rates.

 Are we nearing the end of real estate cycle?

I think we need to see what happens with the 40,000 multifamily units that are coming online [in New York City], and what concessions need to be offered. I think we won’t know until the first quarter of 2019.

 What’s in your pipeline at the moment?

We’re doing a large development in Apex, in Wake County, N.C. That will be 230 units plus retail and office space. Wake County is another area that has seen a lot of residential and economic growth, so we’re pretty excited about that.

Source: commercial

Packing a Punch: Mike Maturo Talks RXR’s New JV and Worldwide Plaza

Deal-making is bloodsport.

Thankfully, Mike Maturo, the president and CFO of RXR Realty, has come prepared.

“On Saturdays, I box,” Maturo, 56, told Commercial Observer from his office at 75 Rockefeller Plaza. “I train with a professional mixed martial arts fighter, and once a week I go into the ring, which is fun as long as I don’t go too far down in the age group. Because when I fight the younger guys, it gets a little rough.”

That’s on top of the Pilates he does three times per week. Oh, and the basketball he plays on Sundays before church. (Maturo has a license to marry people. He already has one ceremony under his belt and another in the pipeline.) Finally, a Peloton bike is his latest personal acquisition, and he’s gearing up to compete against Scott Rechler, RXR’s founder and CEO, in online classes.

And that’s just what he does in his free time.

By day, it’s a different kind of competition, as he makes sure to dot all the i’s and cross all the t’s as the finance head of a multibillion dollar real estate empire.

Right now, RXR has what Maturo describes as, “big things in our pockets.” One of those big things is a new joint venture with a Canadian pension fund (Maturo wasn’t at liberty to name it quite yet), adding even more capital power to the real estate powerhouse that is RXR.

Commercial Observer: What can you tell us about this new joint venture?

Mike Maturo: We’ve been actively lending, but I think you’ll see us penetrate the market far more deeply in that respect soon. We have partnered with a Canadian pension fund and formed a joint venture, which will seek opportunities for structured finance investments in the New York metro region. It’s starting with $300 million of equity—with the ability to expand over time—and will invest in a cross section of real estate including office, residential, industrial and retail.

Where in the capital stack will you play?

The joint venture will generally make mezzanine debt and preferred equity investments. Most will involve complex capital structures where we can use our business and real estate skillsets to mitigate risk.

Why is now the right time to increase your lending activities?

The investment market still has this bid-ask gap so we see it as a good opportunity to participate in the lending market. There are good developers and sponsors out there who are smaller players but have a good history in their respective markets and have difficulty accessing both equity and debt capital. We can play into their situations.

We can also write large checks; our size goes from $50 [million] to $500 million. Our deal with [Extell Development Company’s] Gary Barnett [for One Manhattan Square in 2016] was $465 million, and so we don’t shy away from that [size of loan]. We have a big appetite not only in this venture that I’m referring to but from our broad base of investors to do co-investment in these types of transactions. So I think that’s another competitive advantage for us.

If the investment activity on the acquisition side starts to heat up you’ll see us actively playing here. That could also be in combination with banks and other players. It’s going to be active and diverse and on the lending side you’ll see us play across multiple products.

More so than previously?

When we were a public company [prior to 2007] we were very pigeonholed in one sector and that never made sense to us because we’re so deep in this region. We have over 1,500 tenants so think about how many companies we’re touching on a daily basis. We all live here, we raise our kids here, we participate in the community here. We’re really ingrained in these markets. We see a lot across multiple sectors so it makes sense for us to participate. We understand what tenants and customers want, so it’s easy for us to underwrite the market and the economics.

How would you describe your lending appetite?

We have a pretty wide view and we don’t restrict ourselves. Would we do hotels? Probably not. But if we found something we really liked—because we have underwritten hotels in the past—we wouldn’t shy away. But, I think you’ll see us lend more on residential, office, mixed-use and industrial properties.

And you’ll continue to target the New York metro area?

Yes, but we’ll be casting a wider net. We’re looking at a lot of opportunities in the boroughs. We have one deal in Westchester, [N.Y.] where we’re providing construction financing to a developer who is building a St. Regis-flagged gated super luxury condominium community. The project is very similar to our very successful Ritz Carlton Residences project on Long Island. We are lending  both the senior loan and the mezzanine loan. The developer selected RXR because of our experience developing the Ritz Carlton project and determined RXR could be value-add to the development. We are also providing recapitalization financing in the form of preferred equity to a three-property portfolio located in Manhattan and Long Island City.

How busy a year was 2017 for you?

We had over $5 billion in new financings last year so we were very active on that side of the business. On the investment side we weren’t so busy in terms of actual transaction closings, but we bought Worldwide Plaza with SL Green [The duo purchased a 48.7 percent stake in the trophy asset with an agreed-upon property value of $1.73 billion], which is obviously a very big transaction. We underwrote probably $30 billion in transactions but in the market there’s a reasonable bid-ask gap that’s been there for the past 18 months or so. So while we were active looking at deals, we only transacted on buying One Worldwide Plaza.

We’ve been very active on the development and redevelopment side, including this building at 75 Rock. We continue to work on Pier 57, which is a redevelopment of the site for Google and in Brooklyn we have a big redevelopment in the Navy Yard. That will be a primary focus this year, in terms of getting the redevelopment up and running. We also have a residential portfolio that was very active last year. We finished one project in downtown Stamford, [Conn.], that we’ve started to lease, and we have major projects in [other parts of New York including] Westchester, Downtown New Rochelle, Downtown Yonkers and Glen Cove in Long Island. Plus we’re developing the second phase of our North Hills Ritz Carlton Residences project. The first phase sold out last year. So, we’ve been very active across the board.

How did the Worldwide Plaza acquisition come about last October? And why was it the right time for the deal?

It’s a long story and somewhat complex, but we actually had the contract on that building when it originally sold to NYRT [New York REIT] and through a whole confluence of events it didn’t go our way. But we had significant interest in the building for a long time. When NYRT got into its issues [its gradual winding down via a liquidation plan] I think their plan was more geared toward a liquidation than having an ongoing business. We were a natural player to step in and work through the acquisition with them because we had a very good understanding of the asset. We had actually looked to work with SL Green on a potentially broader purchase of assets in the NYRT portfolio beyond just Worldwide Plaza, and that’s how the relationship with SL Green with respect to the property came about.

What was the property’s biggest selling point?

It’s a great asset and one that would be very difficult to build again—the bones of the building are very strong. The West Side of Manhattan continues to flourish—it’s not part of Hudson Yards, but it’s coordinated into that West Side area that’s getting more popular and more populated on both the residential and office sides. We think as a long-term asset there’s potential there with some of the tenant base that may want to extend and renew, and there’s also potential with the retail. So there’s opportunity to create value, and honestly we’re buying at a good price per foot. We bought it in the upper $800s per square foot, and when you look at pricing in New York and the replacement value for a building of that nature, it feels like a solid deal. It was attractive in terms of what our investors are looking for: a good current yield with potential for upside in an iconic building. So, we checked a lot of boxes.

Was there a lot of competition for the $1.2 billion refinance of Worldwide Plaza?  

We went out to a small crowd because in the [commercial mortgage-backed securities] world the pricing isn’t that different, everyone prices off the same model. So we went to our relationships—a handful of CMBS players we knew could execute quickly. Everyone had a strong relationship with Goldman Sachs, so it came together pretty fast, as opposed to 1330 Avenue of the Americas where we went out and had a distribution through a brokerage process. It wasn’t that complex a deal, the building is fully leased long-term and NYRT had some timing requirements that we needed to meet so I think we were done within 60 days—in today’s world that’s quick.

Why was CMBS the best execution?

At that particular time, the bid in the CMBS market was very strong and it’s a very large loan. So, in order to execute that size of loan, the CMBS market tends to be more favorable for that. That being said, we’ve done billion-dollar loans in the bank market, too. But it just seemed right. And remember we had three parties—RXR, SL Green and NYRT—everyone had to agree on CMBS as the best execution.

Are you eyeing any other key acquisitions?

We have our fingers in the mix of a bunch of things but we look for opportunity. Scott [Rechler] and my other partners are always out in the market speaking to people. I don’t want to name any specific buildings [laughs], but we keep a good chart of what’s going on out there and where there could be potential for trading.

Are sellers becoming more realistic in terms of the prices they’ll sell at?

It’s interesting. If you look at it, we’ve already had a five to 10 percent reduction in valuations in New York City. But what you saw last year was a lot of refinancings. On 237 Park [Avenue] we surveyed the market and once we put New York Presbyterian Hospital in there we did the [$850 million June 2017] refinancing because we didn’t really like what we saw in terms of the market for investment sales. But if you look through to the valuations that underlie the refinancings, you can see that valuations that were done for these refinancings reflect that decrease in value. If I had to guess, I’d say that sellers will move more toward those values than the buyers moving up to the higher values. But, we’ll see what happens.

You refinanced 1330 Avenue of the Americas earlier this year with a $285 million loan from DekaBank. What was Deka’s competitive edge?

We saw a very strong bid for that deal; it’s a very strong asset that places well on Sixth Avenue, and it’s the type of asset that—in today’s market—lenders are attracted to. They see upside in terms of the [net operating income], and it’s a solid building that always performs well. Deka came in a little ahead of the pack. It’s interesting, in deals like this there’s always someone who has a feel for the building. Deka is actually in the building, and I think that makes a difference because they see how the building is operating on a day-to-day basis. So, they were pretty aggressive on the deal.

Did the competition for that financing include many foreign capital sources?

Yes, it was really across the board. Even alternative, private equity lenders are bidding into assets of that nature. We had foreign banks, we had foreign lenders, and we had the big U.S. banks. I think—particularly in today’s market—it’s desirable for a lender to get an asset like that in their portfolio. It was an easy deal to get done from an attraction standpoint.

And the Starrett-Lehigh Building’s debt refinance will be coming up soon, right?

The loan is due in June, and we’re in the early stages of the process. We will be looking at both floating-rate and fixed-rate options. We’ll be exploring floating-rate CMBS as well as a bank deal and we’ll likely look for five to seven years of term. That will be a very large loan, probably $1 billion-plus.

20180130 michael maturo 083 Packing a Punch: Mike Maturo Talks RXRs New JV and Worldwide Plaza
Mike Maturo. Photo: Sasha Maslov/ For Commercial Observer

Google is reportedly in talks to lease a substantial amount of space at Starrett-Lehigh. How are those talks going?

They’re going. It’s very exciting. If you look at what Google is doing, it makes sense. They’re building up their presence, and that building has a great personality for them.

It’s a pretty good time to be a borrower, right?

Yes, and I think one thing that’s interesting is the presence of the alternative lenders that are in the market right now. That continues to be an expansive group, and we have used them. We borrowed $5 billion last year, and that’s probably split $3 billion to $4 billion in refinancings and $500 [million] to $600 million in construction financings and transition financings. You’re seeing those transitional lenders be really active in those markets because they understand the real estate markets and mechanics of development properties a lot better than more traditional lenders. The market has gotten very competitive, and spreads have come in with those alternative lenders who historically looked to value add-type construction of redevelopment projects.

The construction side is a little more difficult. Big banks and alternative lenders and insurance companies are looking to make those type of investments but more with sponsors that have a track record of execution and that they have relationships with. We’re fortunate enough to be in that group and we have terrific access to ground-up construction financing.

Has your construction financing primarily come from traditional or nontraditional lenders?

We were very active on the construction borrowing side and used a combination of both traditional and alternative lenders for our New Rochelle, Yonkers and [Garvies Point Long Island] projects as well as the second phase of our Ritz Carlton Residences North Hills project [in Long Island]. I think alternative lenders are still credit-metric focused and maintain that discipline, but they understand the complexities and can focus more on the real estate side of the project.

Additionally, foreign capital is much more willing [to invest] than it previously was and finds lending more attractive from the standpoint of risk benefit metrics. The alternative lenders are benefiting from foreign capital looking to get into lending and investments.

In addition to your New York City presence, RXR is betting on the suburbs.

Our business is New York City-centric but regional in scope, so we look to the suburbs strategically. On the residential side there is an affordability issue in Manhattan, and the notion of trying to solve that in New York City is difficult—foolhardy, even—because there’s just not enough space and it’s not efficient enough to create housing that people can afford. So we think the solution is regional. The suburbs are going through a period of transition and the suburban market of the 1980s and 1990s is slowly becoming a relic in terms of office parks and malls. There’s a re-urbanization not only in New York but across the entire country, and the suburbs really need to wake up and understand that. Unless they change their complexion in terms of their real estate and in terms of office, retail and residential they will continue to lose out to the cities, which has been happening over the last 10 years.

So, you have an interesting combination of the cities—which can’t solve their issues with the housing they can produce—with the suburbs that now need to recreate the housing produced. It’s no longer white picket fences; more densification is needed in downtown developments.

So, we’ve combined those two. We’ve put a lot of effort into working with municipalities and helping them create revitalization programs. What’s interesting is if you go back to the 1960s and 1970s, these downtowns were bustling commercial centers. So the streetscapes and the architecture are already there; they just were abandoned and need to be refigured and revamped.

How’s your Long Island University Brooklyn campus project coming along?

We’re helping LIU with their future plans to redevelop their campus, and that will include some housing options. That will be market housing, but we’re also thinking through some plans to have creative-type shared houses in there. We’ve finished our development agreement and are now in our planning stages.

Are you on the hunt for construction financing yet?

Not yet, but we will be. It’s a pretty major project. I’ve been out whispering about it but—particularly where there is some complexity to it—you want to go through your predevelopment process and have your budgets done so you know what things will cost before you go out and talk construction financing.

So, is it just nonstop action at RXR?

We’re 24/7 here. I say that half-joking, but all weekend long we’re all connected—whether through email or texts—there’s constant collaboration and a flow of ideas. We’re a tight group of people. We worked hard to get to this point, but people come to us for solutions, and they see how we can take a property and recreate it. It’s a good place to be.

Source: commercial

Invesco’s Charlie Rose Talks Revamped Debt Platform and What’s in Store for 2018

While Invesco Real Estate has been an under-the-radar mezzanine lender for many years, last year the firm made a decision to ramp up its debt platform with a plan to originate senior loans—entering a highly competitive market that’s already brimming with capital.

Charlie Rose joined Invesco’s structured investment group last year from Los Angeles-based Canyon Partners, as part of the financier’s push.

With a goal to reach $1.6 billion in origination volume this year, Invesco has its work cut out for it. “First and foremost, we’ll leverage the firms broader relationships as an equity investor in the marketplace,” Rose told Commercial Observer. “We have a lean team, so we’re generally focusing on larger loans in negotiation situations with relationship borrowers. Right now, we’re on track to hit $1.6 billion.”

Rose caught up with CO at the MBA Multifamily Convention and Expo in San Diego last week to discuss his team’s lending strategy, how they’re prepared to compete and potential headwinds they could face this year.

Commercial Observer: Any new deals in the works?

Charlie Rose: Yeah! We are closing a senior loan on a newly built apartment project in Miami, and we’ve executed term sheets on several other opportunities, including a couple multifamily opportunities: One is a value-add opportunity, and the other is a newly constructed multifamily deal as well as a hotel acquisition loan here on the West Coast.

Which areas on the West Coast have been appealing so far?

In California, primarily the coastal markets—so the Bay Area and coastal Southern California from Los Angeles down to San Diego. And nationally, the top 20 markets and across all property types.

Are there any specific asset classes where you like to direct your focus?

I would say the majority of our pipeline today is high-quality multifamily properties. That being said, we lend across all major asset classes. So, you’ll see us particularly active in 2018, lending on multifamily, office, hospitality—with a lesser focus on specialty classes, as well as industrial and retail.

With a market that’s already heavily competitive and flooded with capital, what’s your strategy for standing out in a crowded field?

Several things. We take a credit-over-yield approach to lending, so credit and underwriting come first and—generally speaking—our pricing is highly competitive for those deals that meet our credit standards. Secondly, we are an integrated real estate investment management platform that includes a significant equity investment platform, which owns 90 million square feet of real estate nationally. So, our access to information through our existing portfolio and our internal resources and relationships allows us to be much quicker in our turnaround times and responses then many lenders that may not have that breadth of information internally. Lastly, we’re very flexible on structure and term. We’re willing to have minimal prepayment penalties, but we can also go out as long as a seven-year term on a nonrecourse, floating-rate basis, which distinguishes us from some of the other lenders in the same space.

Who are you competing with mostly?

We compete against both banks and debt funds. Occasionally, borrowers will be evaluating multiple options, which may include our capital, banks and life insurance money. So, I would not say that there’s a single, direct competitor whom we butt up against regularly, but we often see our borrowers evaluating our loans alongside some of the larger debt funds and mortgage real estate investment trusts but also domestic and European banks and then, occasionally, life insurance companies.

It’s a tough landscape right now for construction financing. What is your team’s position on it?

Our debt strategy is to invest in construction situations on a very limited basis. So, don’t think of us as a construction lender. We did recently close a senior construction loan on a ground-up industrial deal on the Inland Empire in California. And, we like the industrial construction lending space because the construction risk is mitigated, the construction time frame is much shorter than other assets classes, and it’s a great way for us to access high-quality, newly constructed and state-of-the-art industrial product.

What are some challenges or hurdles your team is anticipating going forward?

Without a question, spreads have compressed significantly over the last two years—even over the last six months. It’s incumbent upon us to maintain every day our discipline on our credit standards and not be tempted to loosen our standards in order to get that higher spread. We spend a lot of time thinking about selecting our spot in the market and being judicious with our use of time on deals that will be heavily bid on.

Source: commercial

RAL’s Spencer Levine on His Journey From Waldbaum’s to Landscape Architecture

Spencer Levine, the 36-year-old director of landscape architecture and site development at RAL Companies & Affiliates, got his first exposure to the nitty-gritty work of real estate while still a teenager. His father, RAL Founder Robert Levine, was working with the Waldbaum’s supermarket chain and would bring his son on site at every opportunity, a chance for professional insight the teen fully embraced.

“I grew up immersed in the work my father was doing,” said Levine, who will now, among other projects, play a key role in developing the P.C. Richard site near Union Square into a new tech-focused job training facility. “We always spent our weekends going from job to job and seeing what was going on. I spent a lot of time at supermarket openings. I definitely grew up in the industry.”

Today, Levine oversees all the firm’s landscape architecture in addition to project management duties on numerous projects at any one time. Looking at his upbringing, it’s hard to imagine him having gone any other way.

Levine was born in in the Great Neck area of Long Island, N.Y., and was ushered into real estate as a way of life early on.

One of the main missions of RAL is this kind of hands-on approach. It penetrated the family, this idea that we were all part of it, that we were part of facilitating something,” he said.

“Growing up, [real estate] was always the topic of conversation. It was what we did on weekends. On Saturdays, my father used to take me to the latest Waldbaum’s that was being built, and we’d meet with all the tradesmen. It gave me a true appreciation for the process of construction and how to put together a project.”

Levine was so enamored with his father’s working world that he turned his toy trucks into members of the team.

“I was the only kid who had his own landscaping team and his own structural steel team. I used to take the label maker from my dad’s office and label all my trucks, as far as what they did. It was very much a part of me.”

Following in his architect and urban planner father’s footsteps, he earned a bachelor’s degree from Cornell University in landscape architecture in 2003, then a master’s in the same from Harvard Graduate School of Design in 2005. He began working at RAL part time while still in school, and right after graduation, he became a full-time project manager, finding himself learning a broad cross-section of real estate tasks and skills.

“One of the things about RAL is that we’re a very diverse company,” Levine said. “We started as an architecture firm and still maintain a full architectural firm, including landscape architecture. But we do everything: property acquisitions, design, construction management and administration, property management. In our office, we all wear a lot of different hats, and we all pitch in. It’s very collaborative on projects. While I might have been a project manager, I was certainly drafting at that point, I was doing basic architectural work, and I was probably doing filing and copying. Whatever we have to do to facilitate what needs to be done that day is what we do. It was all part of the job.”

This embrace of so many aspects of his profession is part of what makes him a valuable asset for RAL.

Vince Cangelosi, the firm’s director of design and development, has known Levine since he was a teenager. He said Levine was always inquisitive and eager to learn and that his passion for the business has led him to master so many of its essential elements.

“He’s one of the best multitaskers I’ve ever met. He manages to have 12 to 18 balls in the air and not drop any, which is a pretty difficult skill,” Cangelosi said. “He’s managing projects from all aspects of development. He deals with financing and with scheduling construction—he really has a passion for the construction end of things. He gets really excited when we break ground, and he likes to be in the field, getting his hands dirty.”

Levine’s first projects at RAL full time included handling much of the landscape design for the gut renovation and redesign of the 1960s-era Parkwood Sports Complex in Great Neck (the renovation of which was conceived in 2004 and finished in 2008) and working on project development for Capella Telluride in Telluride, Colo., a $190 million, 450,000-square-foot development with a 100-room hotel and 48 residences that opened in February 2008.

He said that the nature of RAL renders job titles close to irrelevant, as the team ethos finds employees working in various areas in addition to their specialties. He received a crash course in this on the Telluride project, which he worked on for three years.

“That was my first major project out of grad school, and it was intensive. I was working with our director of construction and our head of acquisitions, and I served as the coordinating point person. That was the first post-tension structure built on the western slope in Colorado,” he said of the method for reinforcing concrete.

“Post-tension enables you to do a thinner slab structure on each floor, which gains you height overall. That building had a very regimented set of guidelines of what we could build. I came in during the design phase and started working with the hospitality companies, as at the time we were still choosing our [operator for the hotel]. I worked with the different operators to see how they might fit into the building.”

While immersed in this development education, Levine also learned how business can take a toll on relationships, as he missed the celebration of his six-month anniversary with his wife, Jordana. (They live in the Roslyn area of Long Island with their two children: son Liam, 7, and daughter Zoe, 5.)

“We got married while I was working on the project,” he said. “I spent our six-month anniversary hanging pictures to get the hotel ready for opening in Telluride while she was in New York. I’ll never forget it, and she’ll never let me forget it. We still have the Vermont Teddy Bear I sent her that says ‘Happy Six-Month Anniversary.’ ”

Since then, while landscape architecture is his primary purpose, he has continued working in whichever area he’s needed, from relationship management with his wife to project development with construction companies.

“As a licensed landscape architect, I oversee all of our landscape architecture work. I’m actually serving as our landscape architect of record on our Philadelphia project,” he said, referring to a 14-story, 624,575-square-foot mixed-use property the company is developing at 1300 Fairmount Avenue in Philadelphia, which will consist of an approximately 471-unit residential rental tower totaling 303,930 square feet, a 287-space parking garage and 58,759 square feet of retail space.

“But I’m also working in site development, which is a broader look at how we’re master-planning properties if they’re land deals, or how we’re developing and putting together proposals for specific properties,” Levine said. “So it’s very much a blended role.”

While on the Telluride project, he was also working on the development of One Brooklyn Bridge Park, which the company says is the largest residential conversion in Brooklyn’s history in addition to being its own largest project to date, involving over 1 million square feet, 438 luxury condominium units and parking space for over 650 cars. The development opened in 2008.

“That was a milestone project for myself and for the company,” he said. “My role on that was as the liaison between construction and the design and project management teams.” He added, “One of the mandates of Brooklyn Bridge Park was that it needed to be financially self-sustaining. We developed a mechanism where we turned the building over to the park and took the ground lease back on it, then they leased it back to us for development. Those ongoing lease payments, along with PILOT payments, which are payments in lieu of taxes, go to sustain the park. We worked very closely on that with state and city officials, along with lots of different legal voices. That was a landmark learning project for me.”

Levine also worked on Pier 6 at Brooklyn Bridge Park, a 423,000-square-foot development that included 339 units in two buildings, including luxury condos and both market-rate and affordable rentals. Suffolk Construction was the project’s contractor, and its chairman and CEO, John Fish, said that Levine’s leadership helped make the project flow smoothly for all involved.

“The first time I met him, you could sense immediately that he was extremely intelligent, both in IQ [intelligence quotient] and EQ [emotional quotient], and that he understood the business from the contractor’s perspective,” Fish said.

“A lot of times we work with developers who look at the project from the development perspective and don’t really understand the building side of the equation. Spencer had a tremendous sense of comprehension about what we do and how we as an entity fit into the [development] equation. That really gave me a lot of comfort.”

All of these projects helped prepare Levine for his current significant effort, the development, in conjunction with the city, of a 20-story, 240,000-square-foot training and educational center at 124 East 14th Street near Union Square, home until recently of a P.C. Richard.

“I’m going to be working with the architecture and interior design team on that, to detail and manipulate the landscapes on the roof and by the sidewalk,” Levine said. “But my overall role, I think, will be more project management.”

According to Levine, P.C. Richard, which sat on city-owned land, did not have its lease renewed because the city wanted a facility related to job training and creation on the site as part of Mayor Bill de Blasio’s New York Works plan, which intends to create 100,000 jobs for New Yorkers.

After submitting a proposal RAL won the rights to a 99-year ground lease on the site in December 2016. It has paired up with tech-focused coworking organization Civic Hall, which will operate a digital skills training center, a coworking space, and an event space available to community groups for reduced or waived rates. In addition, 124 East 14th Street will house temporary and permanent office space and a public food hall on the ground floor.

Construction is expected to begin in late 2018, and the building should be open to the public by late 2020.

Levine said the building will provide a much-needed resource that can be hard to find in the city’s hottest neighborhoods.

“[Programs like this] often can’t find space to operate their training facilities in, or they’re in the outer boroughs, and people that want these skills have to travel,” Levine said. “This is right smack in the middle of Manhattan.”

With a clear benefit for the community RAL’s 14th Street project is part of why Levine has such a passion for the work. But at its most basic, a passion for real estate is ingrained in Levine, making for a perfect match between a man and his career.     

“What I love about the business now is not necessarily real estate development,” Levine said. “I love building projects, seeing how those projects impact communities, and seeing how our work comes together and becomes something. That’s something that was instilled in me from the beginning.”

Source: commercial

How a Rivalry Between VTS’ Romito and Hightower’s Weber Turned Into a Bromance

It was over a beer in the summer of 2016 that Nick Romito and Brandon Weber knew that they were meant to be together.

From there, the pair did a series of double dates—a brunch and two dinners—with their respective partners, and those meetings were just as positive.

It shouldn’t have worked: Romito and Weber had a rivalry going as strong as that of Coke and Pepsi, or the Red Sox and Yankees, or DC and Marvel.

Romito had founded VTS (formerly called View the Space), a leasing and asset management platform, in 2012. Weber’s Hightower came on the scene a year later doing a lot of the same stuff. But whatever bad feelings they might have had evaporated.

“We’re all like, ‘This is unbelievable how similar we all are,’ but even where we’re different, those are actually filling gaps that both companies have, so it was a super synergistic thing,” Romito said during an interview along with Weber at their offices last week. “We got along, the visions lined up, and we just said, ‘Alright, this is something worth further pursuing.’ ”

So Romito and Weber merged their commercial leasing and asset management platform startups in a $300 million all-stock deal on Nov. 29, 2016.

They retained Romito’s company’s name, VTS, and its New York City offices at 114 West 41st Street. Romito kept his CEO title and Weber, the CEO of Hightower, became VTS’ chief product officer.

In the year since, the bromance has bloomed with Romito and Weber singing each other’s praises—a far cry from the premerger days when they were trying to one-up each other to win business.

As a combined commercial real estate tech platform, VTS has expanded its reach with more than 180 new clients last year (three quarters of which are landlords and one quarter of which is brokerages). The number of customers jumped by 87 percent to 28,000 in 28 countries, and VTS saw a 112 percent increase to 7 billion square feet (in over 49,000 buildings) in office, retail and industrial space managed on the platform. Office properties comprise 50 percent of the platform—retail makes up about 10 percent, and industrial constitutes the rest, according to Weber.

“We’re averaging almost 300 million square feet a month,” Weber said. “The entire New York office market is 450 million square feet, so on a monthly basis, we’re adding two-thirds of the entire Manhattan office market. It’s been great. We’re now really hitting this tipping point where I think the broader industry kind of recognizes and buys into our vision.”

While the 200-person VTS has managed to grow in the year since the merger, the executives committed a lot of time to the integration of two very different work environments.

“[VTS had] a really, really strong sales organization [and] a strong methodology,” Weber said. “I think Hightower brought more seniority around the technology side.”

Zach Aarons, a co-founder and partner at real estate tech accelerator MetaProp NYC, said Romito and Weber “were dogmatically hyperfocused on integration in 2017.” That meant establishing a climate that would combine VTS’ old-school broker culture with Hightower’s more product-focused Silicon Valley ethos all while blending employees (and cutting 35 to 50 jobs, Romito said) and technologies.

The merging of the two companies has cleared the playing field, except for some competition from technology like Yardi’s Commercial Leasing Pad, billed as a mobile leasing and tenant support solution, and RealPage, which provides property management software solutions.

Meanwhile, it is not any one technology company or platform that presents the biggest hurdle for VTS in the marketplace.

“The No. 1 competitor factually is still Excel—it’s spreadsheets without a doubt,” Romito said.

Weber added, “When you’re talking about who we’re selling into—and we’re having conversations with landlords of all sizes, brokerages of all sizes—85 percent of the time still to this day…they just have nothing. So we’re taking them from this kind of really shitty world where they’ve got 1,000 spreadsheets, and a CEO asks a question, and it takes them two weeks to get the answer to the question. We’re their platform that they buy to better manage acquiring, converting and retaining their tenants.”

The commercial real estate world has long been considered slow to embrace new technology, but in recent years landlords, who make up the bulk of the VTS customer base, are investing their venture capital funds directly and indirectly into new real estate tech companies. Some are even developing their own in-house technology. VTS, for example got a big plug when real estate private equity funds managed by Blackstone invested $3.3 million in the company in January 2015.

A lot of landlords and office and retail brokers still don’t know what VTS is or don’t use it.

“We have an old (electronic) system that we created,” said Chris Conlon, COO of Acadia Realty Trust in an email. “We are reinventing it now. I have never found that canned software serves us effectively.”

Another landlord, who requested anonymity, said his “asset managers have a system that generates reports, and they have lease abstracts on file. The leasing team keeps up to date via Excel.”

A retail broker at a prominent firm said in an email, “Owners we deal with use it. Never had the patience to learn it.”

But then there was developer, mall owner and property manager Time Equities, which decided to sign on with VTS last May, putting 5.5 million square feet of retail space in the U.S. on the platform. The company, said Ami Ziff, the director of national retail at Time Equities, was “looking for transparency on our retail portfolio.”

Specifically, Ziff said, Time Equities “wanted to be able to understand at different points in time who are largest tenants are, who’s growing, who’s shrinking. You want when you are on the phone to pull up where else a tenant is. I’d have to remember or our broker would have to look it up. There’s human error and immediacy issues with that. For sales, it has a functional sales tracking interface so you can track, summarize, view, estimate and average different sales numbers.”

It also allows users to track “salient lease clause provisions,” Ziff said. For example, he said, “it’ll prompt you if you are going to lease a space that has a neighbor with a right of first refusal or a restriction against a certain use.”

two guys How a Rivalry Between VTS Romito and Hightowers Weber Turned Into a Bromance
A BIGGER PLATFORM: Nick Romito, top, and Brandon Weber, bottom, have joined forces with a combined VTS after years of competing for clients in the commercial leasing and asset management business. Photo: Sasha Maslov/ for Commercial Observer

Another notable company that signed on with VTS post-merger was Brookfield Property Partners, which put its North American office space on the VTS platform in the last quarter of 2017. That amounts to 84 million square feet of office space in the U.S., Canada, London (excluding Canary Wharf) and Dubai. Now Brookfield’s industrial group is looking at adapting the technology, Kevin Danehy, the global head of corporate development for Brookfield, said.

Brookfield had been looking for a “centralized database to manage our portfolio of tenants both at the local level and across the portfolio,” Danehy said. And the landlord wanted to automate its internal approval systems, which VTS does.

The merger between VTS and Hightower ended up being a boon for Brookfield as it faced the conundrum of which firm to select.

“We felt it was one plus one equals three when they combined,” Danehy said.

So far the younger Brookfield employees have been quicker to embrace the technology than the old guard, he said.

One feature that Brookfield hope VTS will build out is its customer relationship management system, or CRM. That is an area where VTS faces more competition from the likes of Apto, Salesforce and MRI.

“Apto is built just for brokers, so our software is focused entirely on streamlining their workflows so they can find new business and work their deals,” said Tanner McGraw, the founder and chief strategy officer for Apto. “Think CRM but without the hassle.”

Indiana shopping center owner and operator Regency Properties is relying on VTS to track the performance of its entire 6-million-square-foot retail portfolio since September 2016. Prior, the leasing team relied on anecdotal information, emails, status meetings and Microsoft Dynamics CRM to do their job. (The property management arm at Regency still uses the Microsoft software package.)

The first thing Dan Brandon, the director of leasing at Regency Properties, does when he gets into the office is pull up Microsoft Outlook and VTS. Those two applications remain on his two computer monitors all day.

VTS has saved the company time communicating within the organization and allows company executives to view a portfolio in real time.

VTS’ strength is on the supply side of the market with more than a dozen countries represented on the platform, Weber said, including one of Australia’s biggest landlords, AMP. It serves its clients from offices in New York, Boston, Chicago, San Francisco, Los Angeles, Dallas and London, and the U.K. is its fastest growing market, Romito noted. (Hightower and VTS both had London offices in the same WeWork space but on different floors.) VTS even lists property for the Crown Estate, which manages real estate that is passed from British monatch to monarch on accession.

Down the line, Romito and Weber hope to provide market analytics to their clients and establish a way for all parties in a deal to communicate via VTS.

“Today, you’re emailing each other for weeks at a time, actual Word documents. You are then going into VTS and putting in the information and figuring out what the actual numbers mean. Then, you go back into a Word document and put in your response, emailing it,” Romito said.

Weber added, “We’re a long ways down the road of modernizing the experience, the analytics, the tools that the landlord and the listing agent and the property manager have for their side of the business. We haven’t yet embarked on creating a really awesome experience for the tenant rep and the tenant side, so those two sides can connect in the VTS platform.”

MetaProp NYC’s Aarons anticipated this year VTS could expand into another asset type like multifamily (although he said, “That’d be a heavy technological lift”), buy a technology company or launch in Asia or other parts of Continental Europe.

Romito told CO that VTS has “no plans to go into multifamily this year,” but “in terms of acquisitions, M&A is a real part of our go-forward strategy, and we’re constantly looking at interesting products we could possibly deploy.” As for geography, he added, “We’re more focused on Continental Europe than we are on Asia at the moment. However, we do think there are significant opportunities in Asia in the future. Our focus continues to be on building our business in North America and the U.K.”

How about an initial public offering for VTS?

“There are a lot of variables you have to take into consideration when exploring the possibility of going public including market conditions, growth strategy, reporting transparency, etc.,” Romito said. “We’re probably a few years out from making that decision.”

Source: commercial