• 1-800-123-789
  • info@webriti.com

Category ArchiveRelated Companies

Varsity Letters: Chris Lee and Matt Salem on KKR’s Debt Strategies

Global investment firm Kohlberg Kravis Roberts & Co. was founded in 1976—so the story goes—when Henry Kravis and George Roberts dined together at (the now defunct) Joe and Rose restaurant on Third Avenue between East 46th and East 47th Streets. Today, KKR has $168 billion in assets under management (as of Dec.31, 2017).

The firm has had a private equity real estate strategy in place since 1981, but more recently it is being recognized as an increasingly powerful force in the debt space,  too.

The firm has two debt strategies; KKR Real Estate Finance Trust (KREF)—an externally managed real estate investment trust (REIT) that originates senior commercial mortgage loans—and KKR Real Estate Credit Opportunity Partners (RECOP), which purchases junior tranches of commercial mortgage-backed securities.

“What takes several people years to build, in terms of size and breadth, they’ve accomplished in a couple of years,” said A.J. Sfarra, a managing director at Wells Fargo Securities. “They’ve raised a $1 billion B-piece fund and a mortgage REIT.”

KREF currently has a total market capitalization of $1.1 billion and a total portfolio size of $2.5 billion. It originated $1.5 billion of loans last year alone—$800 million in the tristate area—playing in the large loan, transitional and value-add space and competing with private lenders such as Square Mile Capital Management, Blackstone and TPG.

In November of last year, it raised a $1.1 billion fund for its RECOP strategy and is the most active buyer of CMBS B-pieces in the market, with an impressive 35 percent of market share. In 2017, it bought junior tranches on 12 deals, comprising $10.9 billion in principal balance. For all transactions,  KKR satisfied either a portion or the entire risk retention requirement, retaining $949 million in face value of the bonds.

Chris Lee and Matt Salem, the firm’s co-heads of real estate credit, lead KKR’s debt business from the company’s headquarters at 9 West 57th Street between Fifth Avenue and Avenue of the Americas.

A “frustrated Cowboys fan,” Lee hails from Dallas. After studying economics at Emory University he got his industry start with a summer internship at J.P. Morgan Chase Securities, which then led to him to join Goldman Sachs’ commercial mortgage group as an analyst in 1990. He remained there until 2009 when he moved to Apollo Global Management, then to KKR in 2012.

“I like the competitive nature of it, where you’re out competing every day against very savvy investors to create transactions,” Lee—who turns 40 next month—said of his draw to commercial real estate. “I also like the personalities in real estate. You meet a lot of colorful people, and it’s one of the industries where you continuously interact, whether on the finance side or the development side.”

Jeff Fastov, a senior managing director at Square Mile Capital Management, was co-head of lending at Goldman Sachs when the young Lee joined the bulge-bracket bank, and Lee’s first boss out of college. “His raw intelligence is immediately apparent, and he’s incredibly personable and well-liked,” Fastov said of his protégé. “So when you put these two [attributes] together he’s a formidable competitor because people really like to do business with him.”

Salem, 44, is also a New York City transplant. A Kansas City native (and die-hard Kansas Jayhawks fan), he studied economics at Bates College in Maine and—bucking the traditional route of most Wall Street programs—moved back home after college instead to seek employment.

After “being turned down a bunch of times,” by local banks in his hometown, Salem took a job at Midland Loan Services in 1996. Its platform was growing and it was hiring college kids to assist in its expansion, he recalled. Three years later, he took a position at Travelers Insurance—owned by Citigroup at the time—and moved to New York City. It was there that Salem was tasked with investing in high-yield real estate debt and early mezzanine loans, before segwaying—serendipitously, perhaps—into buying CMBS B-pieces.

When Citi sold Travelers, Salem tried the sell side out for size, working at Morgan Stanley, before joining Goldman Sachs in 2006 as a CMBS trader and ultimately running CMBS trading for the investment bank through the crisis. In 2011, he joined Rialto Capital Management to build out its performing businesses, including high-yield lending platforms—such as preferred equity and mezzanine loans—as well as CMBS B-piece investing.

mattandchris 149 Varsity Letters: Chris Lee and Matt Salem on KKRs Debt Strategies
Matt Salem. Yvonne Albinowski/For Commercial Observer

Meanwhile, over at KKR, Lee and KKR’s head of real estate, Ralph Rosenberg, were planning the next iteration of the firm’s real estate business.

“When I got here in 2012 we were figuring out where we wanted to start the business, so we started it in opportunistic real estate because we thought that would be the area we could differentiate ourselves the most,” Lee said. “The goal was to have an integrated business as a solutions provider where we could provide both equity and debt.”

KKR raised its first equity value-add fund—the $1.5 billion KKR Real Estate Partners Americas, or REPA—at the end of 2013. (“We bought a number of hotels in that fund as the hospitality recovery was starting to take hold,” Lee said. “So a lot of it was a buy-fix-sell strategy where we were buying assets that had broken capital structures or broken operations, fixing them then selling them.”) And it raised its $2 billion successor, REPA II, last year.

But Lee and Rosenberg wanted to further expand the business that KKR had evolved to include a credit business. They already knew that Salem was the man for the job.

“Matt had demonstrated the ability to lead and manage a team,” Lee said. “Rialto had a very active business across multiple products and we had very complementary skills. There was a view that we’d be able to do one plus one equals three if we put our different backgrounds together.”

Salem joined KKR, along with nine members of his Rialto team, in 2014.

“I thought it was an absolutely perfect move for him,” Sfarra said of Salem’s move to KKR, “and in way I couldn’t see him anyplace else. KKR is a world-class organization and he fits that mold perfectly.”

Since then, Lee and Salem have been off to the races, finding opportunity in the heightened regulatory environment and leveraging off KKR’s existing infrastructure.

“We both had a very consistent view of where the market opportunity was, and that was direct, transitional lending,” Salem said. “We didn’t think the banks were in a place to commit that capital anymore, and we thought that we had a different approach in being fully integrated into a global asset manager, and being able to draw not only from an experienced bench of private equity and credit professionals but also from those focused on real estate equity within our own team.

“We think like property owners and we can be flexible,” Salem continued. “So there was a great opportunity to commit capital both from a relative value perspective for our investors as well as differentiating ourselves in the market to our clients who are borrowers and property owners.”

KKR’s lending portfolio is heavily weighted toward office and multifamily assets (the opposite is true for hotels, which comprise less than 5 percent of KKR’s business) and it’s carving out a niche for itself in value-add plays in acquisitions as well as construction loan take-outs where leasing is taking longer than expected.

“We have tremendous range in our business,” Lee said. “This year we’ve quoted loans from $40 million up to $400 million and from Libor plus mid-200s to Libor plus 400. Borrowers are buying different properties and executing different business plans so being able to deliver a range of solutions across what they’re doing in their platform helps us to build that relationship and have more connectivity with them, as well as provide us with a better opportunity to prove our experience.”

Recent transactions include a $180 million loan on PIMCO and Zeller’s Fifth Street Towers—a 1.1-million-square-foot Class-A building in downtown Minneapolis. Like most of KKR’s loans, the deal included an initial funding component, in this case $130 million in upfront funding and $52 million in future funding. PIMCO purchased the building in 2015 and had implemented its business plan with some success but leasing was a little slower than expected and—midway through its business plan—it didn’t have access to additional capital to continue to lease the property. KKR stepped in, refinanced the existing loan and gave PIMCO the capital and runway to lease the building up further, closing the deal within three weeks.

The financing was arranged by Eastdil Secured, which has worked with KKR on multiple transactions.

“Chris can understand risks in a transaction very quickly,” said Grant Frankel, a managing director at Eastdil. “He’s very good at understanding the transactions where it makes sense to stretch, and which ones have the quantitative or qualitative intangibles that—as a lender—you may be willing to push a little harder on. He has a very good sense for that.”

Frankel said that the KKR team is easy to work with, too. “Chris and Matt’s originators are very collegial, very smart and they are all pleasant people,” he said. “They’ve built a really good culture. We [at Eastdil] have a similar culture from a collegiality perspective, so it works well.”

Closer to home, KKR made an inventory loan on the Zaha Hadid-designed apartments at 520 West 28th Street to Related Companies. The $200 million loan was collateralized by the property’s 30 remaining condos that were unsold at the time.

“It’s a very special project,” said Greg Gushee, an executive vice president at Related. “KKR quickly understood the structure, the value and our business plan and were extremely flexible in structuring something that would allow us to pursue that plan.”

Flexibility is one of Salem and Lee’s key selling points in making KKR stand out from the herd, Gushee said.  “Some lenders get very fixated on their loan documents when there’s a twist or turn in a deal,” Gushee said. “Chris just says, ‘Okay. Let’s see what makes sense to do here…’ He’s always flexible and open to doing what makes sense for the asset.”  

And, “they can come up with a structure very quickly, get a term sheet to you within days and they can close within 30 days, easily,” Gushee said. “[KKR is] the place to go if you want great execution. They look at the situation and they can customize the solution.” 

Like everyone else in the debt space today, KKR is having to compete with a variety of capital sources for deals.

“It’s competitive, we wouldn’t argue with that, but it’s still a relationship business and it comes down to how you can help your borrower achieve their goal,” Lee said. “A lot of our borrowers aren’t looking to finance a property that is already stabilized; they’re looking for help to execute a business plan. Because we execute a lot of these business plans ourselves we can be very constructive in helping them to solve a capital issue.”

And while relationships are important, so are the cost of funds—something that definitely works to KKR’s advantage.

“Being part of a global asset management firm is extremely helpful for us and we think we have top-tier cost of capital in terms of what we receive from our lending counterparties,” Lee said. “We also have other ways to enhance returns because we have access to different tools at our disposal in terms of the way we finance ourselves, through our capital markets team and our $45 billion corporate credit business. A lot of those synergies accrue to the benefit of our company, KREF, and its shareholders. But that’s how you compete—on borrower experience and on price.”

Salem sees KKR’s speed of execution as the biggest differentiator in its segment of the market: “We’re a small team and not as rigid as [other lenders] so you don’t have to go through layers and layers of investment committee approvals and bank processes to get things changed if business plans evolve,” he said. “Things change in these buildings and they need flexibility and a lender that’s going to be able to work with them through these changes.”

KKR’s other vertical in its debt business, CMBS B-piece buying, has Salem’s name written all over it as a veteran in the space. Most recently, at Rialto, Salem had led a dominant team in the space.

The opportunity was driven by Dodd-Frank and risk retention regulations in the CMBS fixed-rate conduit market, specifically the carve-out that allows banks to pass some of  their risk retention to a third-party purchaser. 

mattandchris 058 Varsity Letters: Chris Lee and Matt Salem on KKRs Debt Strategies
Chris Lee. Yvonne Albinowski/For Commercial Observer

“We thought it was a great opportunity because the banks weren’t going to want to hold that risk and we have the expertise to do it,” Salem explained. “We can create a retention vehicle with our relationships with like-minded, long-dated investors. Combining the institutional client base of KKR with our broad internal underwriting resources across private equity, corporate credit and real estate works well. We draw from all these resources and do all of the underwriting and diligence, which makes us very credible investors in the space.”

Sfarra has known Salem for 15 years. He first met Salem when he was at Citi and buying B-pieces from Wells Fargo. Sfarra hired Salem at Morgan Stanley and sold him B-pieces at Rialto and KKR. Additionally, Wells Fargo took KREF mortgage REIT public last year, leading the underwriting group. “He’s been a B-piece buyer, he’s been a colleague, he’s been a client and he’s a really good friend as well,” Sfarra said.

Further cementing their relationship, Wells Fargo also sold KKR its very first B-piece. “We’re really thrilled to support their business,” Sfarra said. “What they’ve done is built a really successful B-piece business in a really short period of time and the only way you can really do that is by having the capital to do it and by having great relationships. Their word is their bond so people want to transact with them and they’re very smart guys.”

Fastov met Salem when he was on the mortgage desk at Goldman Sachs. “He’s an incredibly smart guy, and very straightforward,” he said. “The B-piece business is one part real estate and one part capital markets which is why he’s so effective at buying CMBS B-pieces because you need both of these skills.”

And while KREF and RECOP continue to have success, so does KKR’s real estate equity business. The opportunity has evolved since 2011 from investing in broken capital structures coming out of post-crisis distress to more thematic investing, with KKR finding macro themes of interest and applying them through the real estate sector.

It also presents opportunities to lend to some of its competitors in the debt space.

Square Mile and KKR teamed up last June on a California office deal, with Square Mile providing a $92 million loan for KKR’s acquisition of 180 Grand—a 15-story, 279,000-square foot-office building located in the Lake Merritt submarket of Downtown Oakland.

“There was a lot of trust that we could deliver on the terms we offered and that we’d focus on what mattered in the transaction,” Fastov said. “When we agreed to do the deal together, Chris said, ‘Let’s stay in touch if there are any real issues in the documentation,’ and guess what? There were none. It’s an example of KKR doing a lot of different things, just as we are, and there are opportunities to be lenders to each other.”

Maybe it’s that out-of-state charm, but—as well as being highly respected deal counterparties—Lee and Salem are known for being all around good people and family guys.

Frankel describes Lee as “a good guy, smart and pretty cerebral. He’s a straight shooter and just a pleasant person you enjoy doing business with.”

“I get Chris’ holiday card every year and his kids are exceedingly cute. If Matt would send me his holiday cards I could comment there, but he doesn’t. So…that’s an issue,” Fastov said, laughing.

As for the future of KKR’s real estate credit business, “I think there’s a lot of growth ahead of us,” Salem said. “We’re one of the newer businesses at KKR. The firm views real estate and real estate credit as strategically important and a growth initiative, and so we’ll have resources and capital available to us to grow.” O.K., KKR.

Source: commercial

Hudson Yards Stakeholders Dive into NYC’s ‘Newest Neighborhood’ at CO Event

What kind of work goes into rebuilding and renewing a massive chunk of Manhattan, spanning from the High Line up to Hell’s Kitchen and Eighth Avenue over to the Hudson River?

That was the question posed to a select group of developers, architects, engineers and officials helming the transformation of Manhattan’s Far West Side, who gathered at Commercial Observer’s “The Hudson Yards District: New York’s Newest Neighborhood” conference earlier this month to discuss the various commercial and infrastructure developments that are recreating an entire swath of the island.

The event, held on March 8 at law firm Herrick Feinstein’s offices at 2 Park Avenue near Murray Hill, was kicked off with remarks from Patrick O’Sullivan, a partner in the firm’s real estate department. O’Sullivan, a former executive at the New York City Economic Development Corporation, recalled how the development of Hudson Yards was preceded by the proposed West Side Stadium, which was part of the city’s unsuccessful bid to host the 2012 Summer Olympics. After the Olympic bid (which was awarded to London) failed, O’Sullivan said, New York “went to plan B—and it was definitely a good one.”

That “plan B”—most significantly the Hudson Yards mixed-use mega-development helmed by Related Companies and Oxford Properties Group—was the subject of the morning’s first panel, which featured Andrew Cantor, a senior vice president at Related; Andrew Werner, a senior associate principal at architecture firm and Hudson Yards master planner Kohn Pedersen Fox Associates; Colin Brown, a principal at engineering firm Thornton Tomasetti; and Mitchell Moinian, a principal at The Moinian Group, which is developing its own Hudson Yards office tower at 3 Hudson Boulevard.

With Phase 1 of Related and Oxford’s 28-acre Hudson Yards project roughly one year away from opening, Cantor recalled the process that has facilitated the evolution of a neighborhood that historically was “always seen as too far away” from the rest of Manhattan into one that has “changed the way many people view” the possibilities for development in New York City.

Werner noted the “mixed-use” aspect of the project, which seeks to bring residential, commercial and retail uses all within close proximity of each other with the goal of building a “24-hour neighborhood.” From an architectural perspective, Werner said the multi-tower development sought a design with “texture” that would “drive people to want to be there”—a daunting task, considering the site was a “tabula rasa,” or blank slate, that forced KPF to draw on its experiences building “large-scale cities from scratch” in Asia.

Brown, whose firm handled engineering for much of the Related and Oxford project, cited the “great challenge” of building on a site that was an operational railyard—constraints that made it “hard not to be innovative [in order] to make something work,” and called for out-of-the-box solutions like suspending the development’s retail podium above the railyards and building from there.

Moinian was quick to point out that while the Related and Oxford project occupies several square blocks south of West 34th Street, half of the Hudson Yards district at large is located above the thoroughfare, stretching up to West 41st Street. The district at large, he said, will provide newfound “connectivity from Midtown [down] to the Meatpacking District.”

While acknowledging that The Moinian Group’s 2-million-square-foot 3 Hudson Boulevard, which sits on the north side of West 34th Street, won’t be able to take advantage of the “mini-city infrastructure in place for [Related and Oxford’s] mini-city,” the tower will benefit from the development of Hudson Boulevard Park, which will run from West 34th to West 37th Streets, Moinian said. The developer has commenced work on the foundation of the FXCollaborative-designed office building “on spec,” with no advance agreements with office tenants in place—something that shows the extent to which The Moinian Group “obviously believe[s] in the neighborhood,” he added.

hudson yards panels 90 Hudson Yards Stakeholders Dive into NYC’s Newest Neighborhood at CO Event
From left: Robin Stout, Michael Evans and Henry Caso at CO’s “The Hudson Yards District: New York’s Newest Neighborhood” conference on March 8. Photo: Aaron Adler/for Commercial Observer

The second and final panel of the morning focused on the area’s infrastructure, and the developments and improvements taking place to bolster the Hudson Yards district’s transportation offerings and connectivity. Those include the ambitious redevelopment of the James A. Farley Post Office Building into the new Moynihan Train Hall—a project decades in the making that seeks to build “the Grand Central Terminal of the West Side” while relieving the notorious congestion that affects the neighboring Pennsylvania Station, according to Michael Evans, the president of the Moynihan Station Development Corporation.

Work on Moynihan Train Hall is scheduled for completion in early 2021, and Evans cited the logistical obstacles involved when “working within the busiest train station in the Western Hemisphere.” But the project is expected to increase concourse capacity at Penn Station “by 50 percent overnight,” Evans said, and build momentum for further, “critical” infrastructure improvements at the transit hub deridingly referred to by New York Governor Andrew Cuomo as “the catacombs.”

Further west, the Jacob K. Javits Convention Center is in the midst of its own major overhaul, as detailed by Robin Stout, the president of the New York Convention Center Development Corporation. The four-year, $1.2 billion project seeks to expand the convention center’s roughly 400,000 square feet of exhibition space to 500,000 square feet in order “to attract the largest shows,” Stout said.

The expansion will also add 50,000 square feet of new meeting room and breakout room space, as well as a new 6,000-person capacity ballroom that will be “the largest ballroom in the northeast,” according to Stout. There will also be upgrades to the Javits Center’s infrastructure, including a new three-story electrical transformer building and a new truck-marshalling facility that will be built on West 40th Street.

“We don’t want people to think of Javits as low-rise protection for Hudson Yards’ river views,” Stout said. He added the convention center, and the commerce it will bring to the Far West Side, will spur further hotel and retail development and help Hudson Yards achieve its goal of becoming “a vibrant 24-hour neighborhood.”

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

Let’s Get Frank: Gehry on New York, LA and the Future of Design

“You wouldn’t want me to retire,” Frank Gehry warned. “I’d turn into a monster.”

This kind of candor is typical of Gehry, age 88, who has plenty more iconic projects on the horizon and no plans to slow down anytime soon—a splint on his hand attesting to a broken finger, notwithstanding.

Dressed neatly in chestnut-colored corduroys, black shirt and white Nike slip-on sneakers, Gehry sat close in one of his self-designed bentwood Cross Check chairs for a frank, freewheeling conversation at his headquarters in Playa Vista on the west side of Los Angeles in early January.

Gehry spoke about the humanity that great architecture can convey and the mistaken belief that such work is fiscally out of reach for commercial projects. Even with the soaring nature of his work, including the upcoming Grand Avenue Project in downtown Los Angeles across from his iconic Disney Concert Hall, which is being done in partnership with Related Companies, he pointed to the practical. He broke down the return on investment of his groundbreaking work on the Guggenheim Museum in Bilbao, Spain, which has generated an estimated 650 million euros for the Basque treasury and 5,000 local jobs since its creation in 1997.

But flip a switch, and he’s on to some of the artists who have played the hall. “I’m interested in classical music and the literature surrounding it,” Gehry said. “And a lot of my life is spent with those people. Gustavo Dudamel, Pierre Boulez, Yo-Yo Ma. I love those people, and when I can, I hang out with them, I go to their concerts. Pierre died, but we made a building in Berlin and named it after him—the Pierre Boulez Saal concert hall.”

One of his long-time colleagues Meaghan Lloyd, a partner in his firm, listened in on the talk. “My wife works here, my son works here, my daughter-in-law works here, so it’s kind of a family operation. Meaghan has become family; that’s why she’s overprotective,” Gehry said. (He might also be alluding to, perhaps, the fact that before an interview could be scheduled, a nondisclosure agreement had to be hashed out, which is apparently standard operating procedure with Gehry.)

Overprotective audience or not, the Pritzker Prize-winning architect, who has lived in Los Angeles since relocating from Toronto in 1947, spoke with Commercial Observer about that and much more.

gettyimages 146367902 Lets Get Frank: Gehry on New York, LA and the Future of Design
The Guggenheim Museum Bilbao in Spain. Photo: Getty Images

Commercial Observer: Are there any projects looking back that you would have done differently?

Frank Gehry: Yes, every one of them [laughs]. I’m always self-critical. It’s a self-critical process that you go through as you design and that continues. I see things I should have, would have wanted to do differently or better. I would like to make the windows [differently] or some shit like that.

But I am disciplined, so I stop. I know if you open that can of worms, you’ll never get anywhere.

I read an interview in which you said that every time you start a project it’s like starting over in your life.

Yeah, especially for a commercial project. Projects like a museum are a little more ephemeral. They don’t have that same kind of [objective]. They have to be some place you’d be proud to hang your art in.

What do you think of the all-glass skyscraper designs?

They were inevitable, but the way they are being built makes you wonder. They’re kind of banal; why do they have to be that? Most people would say, “Well, it costs money to make architecture.” Well, it doesn’t. Architects can build a building that qualifies as architecture with the same budget as a commercial project.

So, things don’t have to be so cookie-cutter.

They don’t. If you look at our building in Australia for the business school [The Dr Chau Chak Wing facility for UTS Business School in Sydney], which is a brick facade, it’s wiggly brick. You would not think it would be possible in a school building, but we did it for a reasonable, rational budget.

What other buildings have inspired or continue to inspire you, either now or in the past?

The Parthenon [laughs]. No, contemporary, certainly the Notre Dame du Haut in Ronchamp by Le Corbusier. The tower is a bit more difficult. The Einstein Tower in Berlin is one of my favorites. It’s sculptural. It has a humanity to it, a clarity. It’s sited beautifully. The architect who sited it knew how to capture the relationship with the other buildings. I tried to do that with the Beekman Tower [at] 8 Spruce [Street in Lower Manhattan] having the exterior skin talk to the Woolworth Building and the Brooklyn Bridge, so it becomes an ensemble. It creates a visual neighborhood that’s very successful there. You see it, and you feel it when you’re there.

What was your thinking behind the design of 8 Spruce?

Well, the Woolworth Building has a terra-cotta exterior skin and windows that are designed in a vertical. It has stair steps so the tower goes up a certain way, and then it steps back, and then it goes up. On top is a little triangle cap, so we made the Spruce building have stair steps. I didn’t put a top on it out of respect for the Woolworth Building. If we had put a top, we would have been like “look at me, too,” whereas if you don’t, you accrue the value of the Woolworth Building to your space. It becomes part of you.

gettyimages 513620645 Lets Get Frank: Gehry on New York, LA and the Future of Design
8 Spruce Street in the Financial District. Photo: Getty Images

You were working on Pacific Park [formerly Atlantic Yards] in Brooklyn originally, but that didn’t go forward. They switched gears.

That didn’t go [forward] because it hit the recession. That’s a complication that has nothing to do with architecture. I don’t know what the economics of having a basketball team, basketball stadium are and the difficulty of building over the tracks, but the difficulties of that became exacerbated by the economic drop. They had to punt, as it were, and look for a different way. They were very polite to me. They were fair and gentlemanly about it. They brought in some local guys.

What do you think about the project as it stands?

I haven’t seen it. I can’t do it because I loved that project so much. I’m sorry [laughs]. I’m happy that they did it, but…

In terms of projects, you recently taught a course at Yale University on prison architecture.

Well, there is a group, the Open Society [Foundation], and it’s run by George Soros. They asked us to look at what would we do when designing prisons and jails as they stand with the idea that we’re going to try to lower the incarceration rate and keep an eye on recidivism. What would you do, how would you deal with it? What I decided to do was give it as a project to the university and work with the kids, so instead of one example, we’d have 10. We did it at SCI-Arc [The Southern California Institute of Architecture]. We gave them the jail downtown to do. It’s a beautiful site. They visited jails in L.A. and did research on it. And they came up with 10 or so solutions. They were more like campuses. Some of them were beautiful ideas so they’re going into some sort of book they are using. I teach at Yale every other year. The term just ended two weeks ago, and they were given the Cheshire [Correctional Institution] prison in [Cheshire] Connecticut and some of the same problems.

Was that emotional for you working on a project like this?

Yeah. It was sad to be involved in it. I had a hard time myself. The facilities are terrible. A lot of my time is now spent on philanthropy. We’re very involved with the [Los Angeles River].

Can you tell me about that project, where it stands, what’s needed? [Gehry was brought on board by L.A. River, the nonprofit group that was founded in 2009 by the city of Los Angeles to coordinate policy on the river.]

Living in L.A. all these years, I was not interested in the L.A. River. I knew it flooded. I knew people died. I knew people were trying to make it a recreation space, a habitat space. I met some of those people who were very committed to that. I felt that was a nice thing they were doing. It just wasn’t my thing, so I didn’t get into it. I was called by some of [Mayor Eric Garcetti’s] friends and supporters from the movie industry who came to my office.

When was that?

Four years ago. And they said you know New York just built a High Line and it’s really successful. We have 51 miles of river. Could you take a look at it and see if you could turn it into something like the High Line? And I looked at them and said I thought the High Line was a relic, rusting railroad bridge. It was left over from a former era that was not being used and nobody wanted to tear it down so there it was.

What do you think of the High Line?

I thought it was interesting, but…it’s not a lasting thing. The thing that’s different about the L.A. River than the High Line is that the L.A. River is a flood-control project. That meant that water is coming from the hills and gathering. Then somebody had the brilliance to build a concrete channel to take care of it, so it didn’t flood. Then they sold all the land right up to the edge of it. So now what do you do? The [U.S. Army] Corps of Engineers were studying habitat and recreational studies and planning biking and swimming and hiking and kayaking.

We studied the river for three years and created an index for it, which is online and very thorough. It analyzes the health problems, the economics, the dangers, the pluses and minuses of it. We could not see in our study a way to use it for recreation, but since the Corps of Engineers were working on a plan for recreation, who were we to dismiss it?

They were saying it only flooded 2 percent of the time, so therefore it’s not a big deal. The reality is that the channel is designed for that flood. Even though 98 percent of the time it is empty, 2 percent of the time I call it Godzilla, [and it] comes and reams your butt. It’s dangerous, and when that happens, it takes out people all along the river. You have to stay with the original idea from the Corps of Engineers.

What are your thoughts about the wave of commercial development that’s been happening in downtown L.A.?

It looks like practically every other city in the world.

What’s missing?

It’s crappy. I don’t recognize it as L.A. anymore.

What happened? What made it more “L.A.” before?

City Hall had more power. The buildings seemed to speak more to the city. A few of the towers were O.K., but that barrage of new stuff that’s being done now, it’s mostly with foreign investors that have no real L.A. commitment. They’re just coming in. They don’t want to talk to people like me. When you are a big foreign developer or even the L.A. ones [they think] there is something mystical that I’m going to do that’s going to cost more. It doesn’t, but they’d rather work with people who sort of work with everybody so they all look the same. You can’t really pick out much that is unique in downtown L.A. Harry Cobb’s building, the Library Tower [renamed the U.S. Bank Tower in 2003], that was kind of special, and Cesar Pelli did a building [777 Tower] that’s kind of white, around Eighth or Ninth Street, that’s still there. It’s very simple, very to the point, very beautiful. It has a nice humanity about it.

gettyimages 530367530 Lets Get Frank: Gehry on New York, LA and the Future of Design
The IAC Building at 555 West 18th Street in Chelsea. Photo: Getty Images

I wanted to ask you about the IAC building at 555 West 18th Street, your first freestanding structure in New York City. Didn’t Barry Diller want glass versus the metal you originally planned to use?

Barry Diller was not deeply involved with me on the design in the beginning. Marshall Rose was the partner in charge. Marshall worked with us to develop the design. We met with Barry intermittently, and because Barry is Barry, he had things to say which we accommodated. He was very outspoken about what he didn’t like and what he did like. And, by accident, the first models were made with a white plastic, and he loved that, and he said, “I want a white building.”

Do you find it different working in New York, L.A. and internationally?

I had a good time working in Spain, in Bilbao. The Basques are incredibly precise people. They live up to their promises, and even without a contract, you can count on them. It was great. I consider it almost a second home, a second family, and I go there all the time for the people more than the building.

The Disney Concert Hall is so different than the image many may have of traditional Disney. What was the reaction initially?

Well, Lillian [Disney] was one of the benefactors. I spent time with her, and she was crazy nice, a wonderful lady, fun to be with. She told me stories about Walt [Disney] all the time. Her taste level was not…she liked little cottages of brick and stuff. She even sent me a picture once of a little brick cottage.

Oh, is that the direction she wanted you to go in?

She said, “Could you go more in this direction?” And we had a little bit of a misfire for a while. She loved the interior. The exterior she had trouble with.

What brought her around? Obviously, what you created was very different from a little brick cottage.

I was not shoving it down her throat. I wasn’t giving her a hard time, but I said, “I’m not going to go with a little thatched roof cottage. That’s just not going to happen.” Her daughters, Diane and [Sharon] called me and said, “Mom said we should take over on the building because we love what you’re doing and she trusts us.”

Diane saved it. Diane Disney Miller saved the building on all counts and supported me through thick and thin. I barely knew her. I did not spend time trying to convince her. I asked her why. She said she remembered her father coming home from the studio being beaten up aesthetically over his designs, and she said this felt so much like that and she wanted to cut through that to give me a wide berth. Everybody now on the Philharmonic board credits her with having had the strength of character to see this through and make sure it was architecturally in every way consistent.

gettyimages 836394140 Lets Get Frank: Gehry on New York, LA and the Future of Design
The Walt Disney Concert Hall in Los Angeles. Photo: Kurt Krieger/Corbis via Getty Images

Are there any architects working today that you admire?

Yeah. There are a lot of them. It’s hard to pick one out, and then the other ones will be pissed off [laughs]. I like Rem Koolhaas and Zaha Hadid, who passed away. There’s a guy Greg Lynn, who I love dearly. He’s not doing the kind of architecture that we’re talking about. He’s doing industrial design.

I know you developed technology for your designs that weren’t possible before.

O.K., now you’re opening the box. Thirty years ago, sitting in that seat right here was the CEO of Dassault Systemes. We had used his software in CATIA [a software suite for computer-aided design] to build the Fish in Barcelona and then to build the Guggenheim in Bilbao. It enabled us to build it on budget and save money. It was precise. We then used that software to do a building for another architect in Hong Kong. Our tech team that we used in-house, we sent them there to work on this building and saved 18 percent of the building cost. And then at Beekman Tower at 8 Spruce, we did the exterior skin with no change orders on the skin, which is a wiggly surface, which is complicated.

So, I had the guy sitting here, and I said your software is too expensive for our industry. It’s a great big industry, can you get involved? That was 25 years ago, and he’s slowly getting involved, but he did not embrace it like he needed to. Dassault developed this thing called Revit, and they sold it because it was an inferior system. Now, that’s the system that’s being sold by Autodesk as the reigning system for tech for the construction industry, and it’s very flawed. It sucks in fact, and you can quote me. But it’s the only one that’s out there that’s usable. We created something called Digital Project, which is an add-on to CATIA, but still the software from the French is expensive.

So, there needs to be a solution.

There are solutions. I don’t know why nobody is going there. I had a separate tech company [Gehry Technologies] doing only that, and I just couldn’t run it and my practice. So, we sold it to Trimble [in 2014], and they’re continuing to develop it. It’s going to take a couple of years the way they’re going. We’re trying to help them.

You know they build airplanes paperless. That software exists, and a building is a lot simpler than a freakin’ airplane. We should be able to build buildings paperless which means, if you do it right, you should be able to go through the building department in a few days instead of six months.

What do you think of this tendency to make architects into stars?

Oh, starchitect. I hate that word. The press, you should write this, the press invented the word “starchitect,” and then they call us that, and they demean us for being one in their minds. It’s nasty stuff.

Let’s go into tributes. The Simpsons 2013 episode you were featured on, how did that come about? [The screensaver on Gehry’s smartphone is of his Simpsons doppelganger]

I was at a TED conference, and I met Matt Groening [creator of The Simpsons]. He’s a nice guy, and he asked me to be on The Simpsons, so I did. He now happens to be my neighbor. He lives two doors from me in Santa Monica.

That was an interesting one because they show me crumbling these papers and saying, “Frank Gehry, you’re a genius.” Everybody thinks that I crumble paper to make buildings. People will come up to me since that episode, kids would come to me with a crumbled piece of paper and ask me to sign it. So then since it’s so much in the air, I made a crumbled paper bear. Do you see it there? We have one full-sized at my house.

Do you ever think of retiring?

No. Don’t say that! I’m only 88 for god’s sake.

Source: commercial

George Washington Immigration Group Debuts Loan Platform for EB-5 Debt [Updated]

George Washington Immigration Group has secured the capital to provide $1.25 billion in first-lien construction loans and bridge loans to developers seeking EB-5 financing, Commercial Observer can exclusively report.

The firm declined to specify the source behind the commitment, citing a confidential arrangement.

“We will now be able to provide approved projects with … bridge capital while they seek financing under the EB-5 program,” said Evan Stoopler, a George Washington managing director.

The EB-5 program, administered by U.S. Citizenship and Immigration Services, offers visas for foreigners who make investments in American enterprises. To qualify, foreign entrepreneurs must invest at least $1 million (or $500,000, if the investment is in a rural area) in projects that stand to create full-time jobs for 10 or more workers.

The arrangements have increasingly appealed to U.S. real estate developers looking for financing of late. Rates tend to be more attractive than those offered by domestic lenders, and foreigners seeking EB-5 visas are often less intent on seeking an equity reward for investment. But it has often difficult to line up foreign investors with shovel-ready projects in time.

That’s where the George Washington company’s bridge loans will come in, said one of the group’s managing partners, Steve Anapoell. His firm plans to use the $1.25 billion pool as interim financing for developers while longer-term EB-5 partners can be matched.

“I am constantly called to ask if I have money to provide as bridge,” Anapoell said. “Developers are hungry for this. [They ask me] ‘can you give bridge? Do you know anyone who can give us bridge?’ They need certainty in the capital stack.”

When George Washington’s short-term financings expire, the company hopes to stand ready to roll those bridge loans over into debt funded by EB-5 applicants. But borrowers will not be bound to refinance through George Washington, Anapoell said.

The company’s members have structured over $2 billion in EB-5 financings, including for Related CompaniesHudson Yards development, for Silverstein Properties30 Park Place, and for Extell Development and Lightstone Group.

Update: This story has been edited to include that the financing will be available for construction loans and bridge loans.

Source: commercial

Sterling Equities, Related Strike a New Willets Point Deal With the City

Mayor Bill de Blasio’s administration has hammered out a new deal to resurrect the long-planned redevelopment of the Willets Point area in Queens, sparking hope that hundreds of auto shops will eventually give way to housing.

Community groups and two developers, Related Companies and the Wilpon family, which also owns the Mets, have been fighting over the fate of the 23-acre industrial area next to Citi Field for years in state court. But the legal battle is finally over, and the two developers chosen by former Mayor Michael Bloomberg will build 1,100 affordable apartments, open space and retail on six acres at Willets Point Boulevard and Roosevelt Avenue, The New York Times reported this afternoon.

The de Blasio administration will create a task force with Queens Borough President Melinda Katz and local City Councilman Francisco Moya to decide on the fate of the remaining 17 acres of the site, which included 225 auto shops before the city began demolishing them a few years ago. So far, the city has spent $287 million buying land, acquiring it through eminent domain, removing toxic chemicals from the ground and relocating businesses, according to The Times

It’s been a long road for the cluster of immigrant-owned auto shops, which is often called the Iron Triangle. In 2012, Related and the Wilpons’ Sterling Equities agreed to remove toxic materials from the site and build a mall with 200 stores, a theater and a hotel. They also pledged to build 2,500 apartments, including 875 for low- and moderate-income residents, but not until 2025.

The new version of the deal does not include the mall, which was slated to be built on parkland just west of Citi Field. The parkland was a piece of asphalt used for parking during Mets games, but it was still technically a city-owned piece of Flushing Meadows Park. Consequently, a State Court of Appeals ruled last June that the mall development would need approval from the legislature, which has to sign off on parkland being converted to new uses.

Source: commercial

Four Reasons Why Oxford Properties’ Big Bet on St. John’s Terminal Will Pay Off

Oxford Properties Group and the Canadian Pension Plan Investment Board (CPPIB) announced yesterday that they closed on the $700 million St. John’s Terminal redevelopment project in Hudson Square.

The acquisition of the south portion of the site at 550 Washington Street from Westbrook Partners and Atlas Capital Group was major news, with Oxford owning a 52.5 percent interest in the project and control of the development and Canada Pension taking the remaining stake.

The City Council granted a zoning variance in December 2016 for the 3.3-acre project, which is supposed to include 1,500 rental apartments along with a mix of office and retail, when it was completely under Westbrook and Atlas. Westbrook and Atlas landed $300 million in financing from Morgan Stanley last year and used $100 million to acquire 200,000 square feet of development rights, as CO previously reported. (Westbrook and Atlas Capital will continue to own the northern portion of the site.)

St. John’s Terminal is not Oxford’s first rodeo on the Far West Side of Manhattan; the company is currently working with Related Companies on the Hudson Yards megaproject.  

We talked to real estate experts to get their takes of why spending $700 million for this project was a savvy move for Oxford and CPPIB.

primaryphoto44 Four Reasons Why Oxford Properties’ Big Bet on St. John’s Terminal Will Pay Off
550 Washington Street.  Photo: CoStar Group

Hudson Square is ripe for redevelopment (and close to cool neighborhoods)

Hudson Square hugs up next to Greenwich Village and West Village to the north and Tribeca to the south. Not to mention Soho is to the east. It would be difficult to find four trendier neighborhoods on the island of Manhattan.

“What’s the old real estate adage—location, location, location, and this location has a tremendous amount of untapped potential,” said Daria Salusbury, the president and CEO of Salusbury & Co., which works on branding and consulting for developers.  “And Oxford is very, very smart, and they are very well financed.”

Salusbury was a senior vice president with Related Companies and worked on the development of the firm’s 261 Hudson Street project in the area before she left in 2016. The Robert A.M. Stern-designed rental building features approximately 200 apartments.

She added, “In three minutes you are sitting in Tribeca at a restaurant. And in five minutes you are in Soho sitting in a restaurant. In six minutes you are in West Village sitting in a restaurant. How can you go wrong?”

Plus, while the area was long known for its extensive warehouses, as development has thrived in the surrounding neighborhoods, Hudson Square has come into its own.

“Ride your bike down the West Side Highway and you’ll see the amount of development right off the highway on the West Village,” Steven Kaufman, the president of Kaufman Organization, said. “This is just south of all of that. It’s in between the West Village and Tribeca. And it’s like a hole in a doughnut there. It’s very ripe for development.

He added, “And it’s a big site. It’ll be a city of it’s own. It could be like Battery Park City.”

 

…And has no landmark issues!

Plus, it’s not like the New York City Landmarks Preservation Commission can get involved like in other neighborhoods nearby.

“Greenwich Village, Tribeca and Soho are protected because of the landmark issues. [But] it’s something that they don’t have to worry about, and here they can build something of scale and size,” said Robert Dankner, the president of Prime Manhattan Residential. “The fact that it is not landmarked and it’s one step to the left—it’s a very obvious next step.”

primaryphoto43 Four Reasons Why Oxford Properties’ Big Bet on St. John’s Terminal Will Pay Off
A rendering of other residential properties that could be constructed at the site. Rendering: CoStar Group

The Hudson River Park is a perfect amenity for future tenants.

The 550-acre park that extends from Battery City to the West 59th Street offers a plethora of activities for locals. It attracts 17 million visits each year, according to the Hudson River Park Trust’s website.

‘[St. John’s Terminal] is a two-minute walk to the esplanade. And there are a lot of possibilities there,” Salusbury said. “Look how much money the city put in to create that esplanade. You can bike with your kids or take a walk.”

 

They’re not going into Hudson Square alone.

Oxford Properties is certainly not the only ones working on projects in the area. Hines, Norges Bank Real Estate Management and Trinity Church Wall Street has an 11-building portfolio of 5 million square feet in the area, the majority of which is office space. They have CBRE and Newmark Knight Frank leasing up the buildings, as CO reported in 2016.

“Hudson Square has undergone an exciting evolution from New York City’s printing district to a vibrant mixed-use neighborhood with an impressive mix of creative companies, new residential opportunities, local eateries and other businesses that call Hudson Square home,” said Ellen Baer, the president of the Hudson Square Connection. “A waterfront community, amazing access to public transportation and lower west side location, Hudson Square is taking its place as a truly great New York neighborhood.”

 

But one note of caution for the developers trying to outdo other trendier areas nearby:

“As long as [Oxford and CPPIB] don’t get too ambitious with pricing and they recognize that it’s one step to the left, they should have a home run,” Dankner said. “They can’t get too ambitious because they have to look at [other projects] like Greenwich Lane, which is in the heart of the Village. That’s where everyone wants to be. In Hudson Square, there are still some spotty streets. You are not just there yet. It doesn’t have the neighborhood cleaners. It doesn’t have restaurants. It’s not old enough. It’s new. History has to be created there. It doesn’t have personality [yet].”

Source: commercial

Gibson Dunn’s Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards

Joanne Franzel is a partner in global law firm Gibson, Dunn & Crutcher’s New York office, doing deals with Related Companies on Hudson Yards and scooping up properties for Jamestown in Manhattan and beyond.

Not bad for a part-timer.

Gibson Dunn had a policy requiring attorneys work full time for 18 months prior to becoming partner, and Franzel—a member of the firm’s real estate practice—wasn’t interested in going full time. But the policy was eliminated, and after about 35 years at the firm, Franzel was promoted to partner two years ago.

After she had her older son David, now 30, in 1988, Franzel started working flextime, and she hasn’t looked back.

“During all those years raising my kids, I would never have gone back to a full-time schedule,” Franzel said. “By the time they were out of college, I was in a groove, working on a flex basis and able to work on interesting and challenging deals, while keeping a semblance of work-life balance. I increased my overall hours somewhat, but I just wasn’t willing to change my life in a big way.”

Eric Feuerstein, a partner at the firm and a co-head of the real estate practice group, said Gibson Dunn is committed to accommodating “these priorities so stars like Joanne can thrive here.”

Franzel, 62, paved the way for a few other part-timers to obtain partner status this year.

“She was certainly the trailblazer,” said Danielle Katzir, of counsel at Gibson Dunn in the Los Angeles office, who became one of those part-time partners, the only two in the real estate practice. “She…was an incredible role model for us and the face of the firm’s commitment to a flextime policy.”

Trailblazer does indeed feel like the right word but not just in the area of getting a better deal for women at her law firm but also for the work she’s actually doing.

Franzel lobbed a huge grenade last month when she led Jamestown’s first foray into the Bronx. The landlord picked up a 10-story, 280,000-square-foot office building with retail at the base at 260 East 161st Street a few blocks from Yankee Stadium from Acadia Realty Trust for $115 million. (She declined to say anything about the deal.)

Franzel has helped Jamestown nab some notable properties like the Falchi Building in Long Island City, Queens (which she also sold for Jamestown).

She represented the company in its $310 million 2008 purchase of 1250 Broadway (along with MHP Properties) at the corner of West 32nd Street, and then she worked on Jamestown’s behalf last summer in the property’s sale for $565 million.

chelsea market Gibson Dunns Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards
LAW AND ORDER: Franzel has tied up a slew of small deals for tenants at Chelsea Market.

But it is at Jamestown’s 1.2-million-square-foot office and retail property at 75 Ninth Avenue between West 15th and West 16th Streets, Chelsea Market, where Franzel focuses a considerable amount of her attention on retail leases.

You know, these are little deals, and you know you could sort of look down your nose and say, eh, it’s only a few hundred feet but the whole is greater than the sum of its parts,” Franzel said. “And for me it’s just been really exciting to be part of what Jamestown has done creatively in making this one of the top tourist destinations in town.”

Michael Phillips, a principal and president of Jamestown, said of Franzel, “She’s insightful, collaborative, knowledgeable, understands uniquely the types and breadth and width of the tenants we deal with from small license agreements to multinational long-term leases.”

And in addition to heavyweights like Jamestown, Franzel worked with a joint venture of Related Cos. and Oxford Properties Group at Hudson Yards on the Far West Side.

With Hudson Yards, not only does Franzel get to work on the largest private real estate development in U.S. history, but from her office at 200 Park Avenue, she has a direct view of the site (at least until One Vanderbilt is erected), which runs from West 30th to West 34th Streets between 10th and 12th Avenues.

When talking with Commercial Observer, Franzel proudly pointed to the new buildings rising from what will become an 18-million-square-foot commercial and residential city within a city, talking about the deals her firm has done there.

Her personal transactions have included Time Warner’s 1.5-million-square-foot office space acquisition at 30 Hudson Yards, the lease and development and construction agreement for Blackrock to relocate its headquarters to 847,000 square feet in 50 Hudson Yards and Milbank, Tweed, Hadley & McCloy’s lease in more than 250,000 square feet at 55 Hudson Yards (at that site, she also handled the land acquisition for the office tower).

Franzel said Hudson Yards “is one of the most exciting projects I’ve worked on in my entire career.”

She explained, “Related and Oxford are essentially building a small city along the Hudson River, which is development on a massive scale and incredibly complex and requires the input and cooperation of many parties, both public and private, profit and not-for-profit. Seeing how all of these forces interact to create a new environment for people to live, work and play, and having a small role in this visionary project, has been a major thrill.”

Franzel’s 26-year-old son Jonathan Franzel, an associate at Newmark Knight Frank, has been able to take advantage of his mother’s acumen in his own real estate deals.

“When I was a year into the business and running around with tenants and drafting contracts or reading leases, she taught me a lot of the technical skills and things to look for in reviewing a lease and how to find what’s important to your client, whether it be a landlord or a tenant,” Jonathan said. These days he consults her on how to handle “people issues and relying on her judgment with the best way to solve [them] without offending anyone.”

Heather Mutterperl, a principal of Invest-corp, said Franzel has been Investcorp’s attorney in probably 15 property sales across the country since 2000. The deals have ranged in size from $25 million to over $100 million with the last one being a hotel that traded for $37 million in October 2015 in the Midwest.

Mutterperl said she appreciates that Franzel doesn’t get worked up when things go awry.

“She’s steady, attentive, and she doesn’t get rattled,” Mutterperl said. “She maintains her cool when things are not going right. She works extremely well when opposing counsel is difficult, neutralizing some tough situations.”

20171127 joanne franzel 041 Gibson Dunns Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards
PLAYING THE GAME: Franzel has been a part-timer at Gibson Dunn for 30 years, and while she has enjoyed her work-life balance, she recognizes that had she worked more hours, she could have become “a playa” and “one of those high-share partners.” Photo: Sasha Maslov

In addition, Mutterperl said of Franzel, “Joanne has an ability to synthesize a ton of information, distill it down to layman’s terms. She’s a problem-solver dealmaker.” (Like the attorneys cited in this story, Mutterperl was wary of providing specific examples.)

Last month Franzel represented the West Side Montessori School on a pro-bono basis. The school is launching a new preschool program in cellar-level space at the Annunciation Greek Orthodox Church at 302 West 91st Street. The deal logistics, Franzel said, included handling “interesting facilities issues, trying to find ways to accommodate the day-to-day needs of two not-for-profit entities with unique uses and with any not-for-profit there are always unique compliance issues relating to rules of the New York attorney general and other governmental requirements for these types of users.”

The Long Island native acquired her bachelor’s from Brown University and law degree from the University of Pennsylvania. After graduating, Franzel commenced working for Gibson Dunn in the Los Angeles office. (It was during her interviews for a job that she met the person who ended up introducing her to her future husband.)

“I fled to L.A. because I didn’t want to work on Wall Street,” Franzel said.

It was there that she got to work on a real estate deal—a French-speaking investor buying Beverly Hills houses—and realized she liked it. One of her big first deals in New York City was selling a 29-property Bing & Bing portfolio to real estate entrepreneur Martin J. Raynes in 1985. The sale price exceeded $250 million, according to Brick Underground.

Before the sale, Franzel and her husband moved into one of the buildings, at 235 West End Avenue between West 70th and West 71st Streets. In 1990, the couple moved two blocks north into a co-op, where the Franzels still reside.

Even while always handling a serious work load, it was important to the transactional attorney to be home on Fridays and weekends with her musician husband, Jeff, and their sons Jonathan and David—the latter works in cybersecurity.

To facilitate that, Franzel avoided clients that would require night and weekend hours.

50hudsonyards costar Gibson Dunns Joanne Franzel Is Making Serious Deals in Meatpacking and Hudson Yards
LAW AND ORDER: Franzel has tied up large deals like an agreement for Blackrock to relocate its headquarters to 847,000 square feet at 50 Hudson Yards (building on left). Image: CoStar Group

She acknowledged that, had she taken a more aggressive approach to her career, she could have been a bigger shot.

“If I worked more hours, I’d make more money,” Franzel said. “If I had made that decision years ago to run for partner, I would have been further along. I’d like to think I could have been one of those high-share partners if I had chosen that route. And there certainly are other women at the firm, and at other firms, that have chosen that route, to develop a big book of business and be the big shot, be ‘the playa.’ It’s not for everybody, and it wasn’t for me. It was too important for me to be able to leave here at 6 o’clock and go home, and Jeff would pick up the food at Fairway, and I would cook dinner, and I’m sitting down at that table with my kids.”

While her kids are grown up, Franzel still enjoys working part time—fielding calls in the morning and drafting documents late into the night with The Late Show With Stephen Colbert playing in the background.

In her free time, Franzel enjoys Gyrotonic training sessions and classes. “It is my addiction,” she said. “Whenever I’m on vacation I find a gyro studio and I go workout for an hour. I found one in Valencia, when I was there.” And she hangs out with friends and watches her husband perform. On summer weekends (and less frequently during other parts of the year), the couple can be found at their Westport, Conn., home. After renting what Franzel calls “my shitty little house” for a number of summers, the Franzels purchased it this August.

Whether she’s on vacation, at her country house or enjoying personal time, Franzel pulls her weight at work. “I always kind of joked because part time for her is really full time for any other profession,” Jonathan said.

“Joanne,” Feuerstein said, “is truly a standout example of how someone can work on a self-tailored schedule and always provide outstanding service to our most demanding real estate institutions on their most sophisticated deals.”


Source: commercial

The Construction Industry Should Brace Itself for a Rollercoaster 2018: Experts

Coming off a few booming years, New York City’s real estate industry—including the construction sector—has been suffering a bit of a setback this year.

The New York Building Congress forecasts at year end, $45.3 billion will have been spent on construction in 2017, the second-highest-ever total dollar amount committed to construction in the city’s history, according to the organization.

But it would mark a 13 percent decline from last year’s record $52.2 billion. At the same time, the number of jobs in the industry increased to 149,800 in 2017 from 146,200 in 2016. And the organization expects it to rise to 151,200 jobs next year.

Construction permits, which indicate the level of future work in the city, meanwhile are up slightly this year, although the pace is slowing. The New York City Department of Buildings issued 109,724 permits in fiscal year 2017, ending in July, a 0.4 percent increase from 109,277 in 2016, according to the city’s annual Mayor’s Management Report released in September.

What does all of this mean for the construction business in 2018?

Commercial Observer spoke with five experts about what to watch for. Overall, they forecast a decline in housing construction, but an increase in work in the public sector and the office market. The jury is out on construction costs. And then there is the elephant in the room: tax reform, which has been passed by the Senate but not the House of Representatives. Republicans cheer it as a win for jobs (and big Wall Street businesses are chomping at the bit as it would cut the corporate tax rate by nearly a half). Democrats are against it, claiming it serves wealthy individuals and corporations. As for New York City construction experts, they are split on the impact to their segment of the industry.

Housing

Over the past few years, there has been a surge in housing development, which many experts say has led to an oversupply. And in turn, construction of new homes slowed down this year by 41.2 percent and that is expected to continue for the foreseeable future. There were 37,700 new housing units added in 2016, just 26,700 this year, and the Building Congress expects 24,000 new housing units in 2018.

In terms of dollars and cents, $11 billion will be spent on residential construction this year, the Building Congress forecasts, a 31.3 percent drop from $16 billion last year. In 2018, the figure will rise to $11.6 billion.

“I think on the residential end—apartment complexes and condominiums—I think that it’s is a little overheated,” said Richard Lambeck, the chair of the construction management program at New York University’s Schack Institute of Real Estate. “There will be a slow down. The products that have been produced have surpassed the absorption rate. The amount of apartments that are going to be purchased is going to be slowed and it will have an impact on the industry.”

In addition to the oversupply problem, there are a lot of people crying “Not in my backyard,” a.k.a. NIMBY. Community organizations are rallying against large skyscrapers such as SJP Properties’ 200 Amsterdam Avenue on the Upper West Side, Gamma Real Estate’s planned 67-story building at East 58th Street between First Avenue and Sutton Place, and Extell Development Company’s 69-story tower at 50 West 66th Street.

The fear is that these projects could be forced to scale back or canceled altogether due to community opposition, which will lead to less work for construction companies and subcontractors.

“I worry about community to reaction to projects,” Louis Coletti, the president and chief executive officer of contractor association umbrella Building Trades Employers’ Association. “We are going to go back into the 1990s where NIMBYism just takes over and stops the city. You see this opposition to as-of-right projects, that’s crazy. You see the general direction of the city becoming progressive. You just wonder if it is the natural course of things as people become more politically active.”

Public works

Government spending for public infrastructure projects climbed this year for projects of note around the five boroughs, such as the redevelopment of LaGuardia Airport and the expansion of the Jacob K. Javits Convention Center and the new Kosciuszko Bridge.

Spending on similar projects is expected to reach about $16.9 billion in 2017, according to the Building Congress report—a 16 percent increase from 2016’s $14.6 billion. And the organization expects a further increase to $18.8 billion next year.

“Our infrastructure and transportation systems are the key,” Coletti said. “They are the real foundation to continued growth in the city. Those systems have lacked appropriate level of investment for many, many years. That’s the reason why the governor has to move billions of dollars for the [John F. Kennedy International Airport] and LaGuardia [Airport] [redevelopment projects].”

He added: “There is going to be a real focus on how to finance and really build our infrastructure to allow New York City to have continued growth.”

On the horizon, major infrastructure projects such as the redevelopment of JFK, the next phase of the Second Avenue subway and the Gateway Tunnel project—which would build another tunnel to New Jersey—lay in wait.

And some are questioning the viability of the next phase of Second Avenue subway project in the short term, as the calls to repair and fix the existing subways grow louder, meaning dollars would go to maintenance. While that could be great for commuters, maintenance produces less construction work than new projects.

“I don’t know if the [Metropolitan Transportation Authority] has sufficient funds to start that early,” Lambeck said. “At least from the MTA psperspective, they have been getting a lot of pressure, primarily in maintenance.”

Office   

All across the city there has been an abundance of construction on office projects in 2017. Just along the Far West Side alone there is Related Companies and Oxford Property Group’s Hudson Yards, Brookfield Property Partner’s Manhattan West and Moinian Group’s 3 Hudson Boulevard.  

In Brooklyn, Two Trees Management Company is building an 380,000-square-foot office tower at 292 Kent Avenue in Williamsburg; Rubenstein Partners and Heritage Equity Partners is working on the 500,000-square-foot 25 Kent Avenue in Williamsburg; Tishman Speyer and HNA Group is converting the upper floors of the Macy’s at 422 Fulton Street into 620,000 square feet of office space in Downtown Brooklyn; JEMB Realty and Forest City New York are building a 500,000-square-foot building at 1 Willoughby Square; and Thor Equities is working on Red Hoek Point in Red Hook, a nearly 800,000-square-foot office development. And in Queens, Tishman Speyer is building a 1.2-million-square-foot two-building office and retail project called The Jacx in Long Island City.

Construction work on all of these projects, as well as others, will continue into next year, keeping contractors busy.

“You have a lot happening with Midtown West products. You have a lot of activity in Lower Manhattan and upgrades to office buildings [across Manhattan],” said Carlo Scissura, the president and CEO of the Building Congress. “Office is a strong part of the market. And you are seeing [large office developments] happen in Brooklyn and in Queens.”  

Looking forward, the demand for office space in Manhattan is high (as CO recently reported), and there is a need to renovate a crumbling older stock of buildings. Redevelopments of towers and expansions are an area that could see growth next year. Midtown East—thanks to its new rezoning—will allow for larger projects and developers could look to redevelopment projects in the area, which would create more work for construction companies.

“Hudson Yards has proven that there is a tremendous need for new space and much of the city’s current product needs to be replaced,” said Kenneth Colao, the founder and CEO of CNY Group. “If you had another large sector of town that was wide open for development, I think it would be in play. The [Midtown East] rezoning I think will support more redevelopment.”

Construction costs

In May, Turner & Townsend released its annual construction market survey that pegged New York City as the world’s most expensive city for construction. The average cost of a building was at $354 per square foot, surpassing Zurich, Switzerland which came in at $328 per square foot.

Rising costs has become a problem in the industry due to a variety of factors, including the cost of labor. Construction companies have blamed union’s high hourly wages and an abundance of regulations.

On the latter point, unions have been making compromises in contract negotiations and lowering hourly wages as more developers demand general contractors take bids from nonunion companies in order to increase profit margins. Some construction leaders expect this trend to continue as the competition between organized labor and other subcontractors heats up further.

“I think the unions have to recognize that in order to be viable they need to work with their development clients and figure out ways to reduce costs,” said Richard Wood, the CEO of Plaza Construction.

Another reason for inflated construction costs is high insurance rates. New York is the only state with a law that allows a worker injured on a construction site to sue everyone—construction companies and individual superiors. This increased liability raises insurance premiums.

But regulations for the industry have increased towards the end of the year, as the City Council tried to improve safety on construction sites. The council passed a number of bills this year targeting construction safety, including one polarizing one: Intro-1447-C. The legislation will require workers to have at least 40 hours of safety training. Opponents to the bill claimed that it will force contractors to fund courses for their workers, increasing the bottom line. And the council also passed yesterday Intro-1399, which gives most industry employees, including construction workers, the right to “flextime” or two days off from their regular schedules.  

One construction watchdog said losing workers could disrupt work flow on projects.

“This isn’t a store or a restaurant—this is a construction site,” Coletti said. “We have schedules and budgets we have to make.”

Tax reform

As of publication, Congress’ tax reform bill had not been signed into law. But it looks extremely likely that it will as Republicans in the Senate passed a final version of the bill early today and their counterparts in the House of Representatives will re-vote on the legislation today after approving it yesterday with some errors.

The legislation will cut the corporate tax rate to 21 percent next year from 35 percent, which could mean a boon for companies. With extra money on their balance sheets, companies could reinvest in their offices. And real estate developers may use those funds to upgrade facilities in their assets. This will lead to more construction projects.

“I think indications are that it will be good for the construction industry,” Colao said. “If in fact the tax reform results in corporate tax reductions, corporations may start sprucing up facilities, then there would be an uptick in activity. Corporations—and entities that are tenants in office buildings—if they are looking at an improved bottom line at the same revenue—they might look to increase their capital expenditures.”   

However, as a part of the regulation, individuals will be limited in deducting state and local income taxes, sales taxes and property taxes to $10,000. Homeowners will be able to deduct mortgage interest on debt up to $750,000, down from $1 million. These segments of the bill don’t bode well for real estate interests in New York City, which has an average home sales price at $987,000 as of the third quarter, according to the Real Estate Board of New York. If people can’t reduce their taxes it will add to Gotham’s living expenses and could mean less people wanting to relocate to the city—lowering demand for more housing and impacting construction.  

“New York and especially the New York City area is one of the highest areas for state and local taxes,” Wood said. “I think there is going to be a tendency for people to want to move to states that don’t have high state taxes, and with that, many corporations may think in order to get a good labor pool they’ll want to move their offices to those low-tax states.”

He added: “I personally think that people are going to have to stay focused on solutions to that problem, because it could have long-term adverse effects on the real estate industry and the construction industry in New York.”


Source: commercial

Vornado Talks Up Moynihan Train Hall for Amazon HQ2

Vornado Realty Trust’s redevelopment of the James A. Farley Post Office Building into the new Moynihan Train Hall is “front and center” in New York City’s bid to house Amazon’s new HQ2 headquarters, Vornado said on its third-quarter earnings call today.

Vornado, which is redeveloping the former post office building with partners Related Companies and Skanska, cited the project’s 730,000 square feet of office space and 120,000 square feet of retail offerings as key facets of its pitch to host Amazon—which has sent municipalities across the country into a sweepstakes to host the Seattle-based e-commerce giant’s second headquarters complex.

Steven Roth, Vornado’s chairman and chief executive officer, said the company was “pleased” to see Manhattan’s West Side included in the New York City Economic Development Corporation’s proposal to Amazon as one of four city neighborhoods that could accommodate HQ2 (the other three being Lower Manhattan, Downtown Brooklyn and Long Island City), with the city touting the area’s robust transit offerings and ample office space in the Hudson Yards, Penn Plaza and Midtown West areas.

Roth noted that Moynihan Train Hall would be able to meet Amazon’s “near-term needs” for roughly 500,000 square feet of office space—though whether it would be able to provide that space by next year, as indicated by Amazon, is uncertain given the Moynihan project’s 2020 targeted completion date. (Amazon will eventually require up to 8 million square feet of office space for HQ2.)

But Roth and other Vornado executives noted that the project’s large, 250,000-square-foot office floor plates would be “extraordinarily attractive” to a company used to the sprawling, campus-like headquarters occupied by many major West Coast-based tech conglomerates.

They noted how Vornado’s senior management team visited Silicon Valley this past summer “to understand the nature of what these campuses are”—citing Facebook’s Frank Gehry-designed, roughly 10-acre headquarters as a “one-story building [with a] 450,000-square-foot footprint,” as well as the 820,000-square-foot floor plates at Apple’s headquarters. Both facilities also feature sizable outdoor, park-like amenities.

Moynihan Train Hall, they said on the call, is “truly unique” in its “ability to deliver a horizontal campus in New York, with great roof deck space in the heart of the city with views all around.”

But Roth added that regardless of “whether New York wins the HQ2 race or not, Amazon will have a long-term significant presence” in the West Side “for years to come,” with the company having committed to large blocks of space at Vornado’s 7 West 34th Street as well as Brookfield Property Partners’ Manhattan West development.

On a broader scale, Vornado reported a bullish outlook for its core New York City office and retail assets. It cited more than 450,000 square feet of office leases across 33 separate transactions signed at “record-breaking” average starting rents of $83 per square foot, as well as 97 percent occupancy across its city office portfolio.

Roth described demand for New York City office space as “robust” and coming from a diverse cross-section of industries. David Greenbaum, the real estate investment trust’s New York division president, noted that office-using employment in the city remains strong and will be able to “absorb the new supply coming online in the next five years,” with the financial services sector having “finally reached its pre-financial crisis level” of employment in the third quarter.

Greenbaum said Vornado has a “negligible amount” of office lease expirations planned over the remainder of the year, with the REIT’s 1 Penn Plaza comprising “over a third of our lease expirations over the next two years.” The company is currently “finalizing our plans” for an ambitious repositioning of the office tower, which Greenbaum said is expected to commence next summer.

Roth also discussed 666 Fifth Avenue in Midtown, which Vornado co-owns with Kushner Companies and which has drawn much attention this year due to the property’s uncertain financial future (as well as its ties to former Kushner Companies head and now-Trump administration senior adviser Jared Kushner).

The building, while located on a “very attractive piece of real estate,” is “over-leveraged,” Roth said, acknowledging rumors “about tearing the building down and doing all manner of fairly grand development schemes.” But he labeled such ambitious plans as likely “not feasible,” adding that the property will probably remain in its current state as an office building via capital improvement plans that he described as “a work in process.”

Vornado also leased around 38,000 square feet of retail space across its Manhattan portfolio in the third quarter, with the most notable deal being Sephora’s 16,000-square-foot relocation to 1535 Broadway in Times Square. Greenbaum said the company is also in talks “for another flagship lease, with a major national retailer, for the remaining 12,000 square feet” of retail space at the property’s base.

“Our upper Fifth Avenue and Times Square [retail] assets are buttoned up for term with great credit tenants,” Roth said, noting that the company has only one lease expiry in its Manhattan high street retail portfolio coming in the next five years—fashion retailer Massimo Dutti’s location at 689 Fifth Avenue, which is due to expire in 2019 “at below market rent.”

Vornado has also identified roughly $1 billion in assets that it plans to sell in the coming years, excluding residential condominium sales at its 220 Central Park South tower in Midtown, Roth said.

The 75-year-old Roth also acknowledged that he had heart bypass surgery in August—a procedure that raised questions about the publicly traded company’s future leadership and succession plan.

But the Vornado head attempted to dispel concerns about his health and the company’s leadership, saying that he is “now better than new, and back to work.”


Source: commercial