The Stoler Report: Real Estate Leaders on the Real Estate Market

The Stoler Report: Real Estate Leaders on the Real Estate Market


♪ [Theme Music] ♪ MICHAEL STOLER: Many
people have said that 2013, 2014 is probably the
best time for real estate for the highest prices
over the years. So today as opposed to bringing
four people on the show I’m bringing people who
have been with me over the past 13 seasons to provide
their real insight on what the market is, what’s
happening more on the commercial, the capital
markets, the residential market because these are
the gurus who truly understand. My guests they
include Jim Kuhn who is the President of Newmark
Grubb Knight Frank and my other guest is my dear
friend Ofer Yardeni who is the Co-Chairman and CEO of
Stonehenge Partners. Thank you for being here today. JAMES KUHN: Thanks for
inviting us. MICHAEL STOLER: So, Jimmy,
since you and I are similar in age, Ofer is a kid, just a
couple years younger, in your career which spans more than
40 years in real estate, how do you look at
the world today? JAMES KUHN: You had
to say that, huh? MICHAEL STOLER: I’m
sorry. JAMES KUHN: So you can’t paint
everything with the same brush. Here’s one of the issues
that I see today. When people say how is the
market? It’s the best ever. And I think it
really depends on where in the marketplace you are.
Everything is better than it’s been since 2008. When
you say what is the best market. The best market
was in 1978 when we could buy office buildings for
$50 a foot. But the best and highest values today
obviously the condo market, which Ofer can probably
speak to better than I can. MICHAEL STOLER: But he’s
only done one condo building. JAMES KUHN: But you know what? You don’t have to build a
condo to understand a condo. The rental market
is the highest its ever been in residential. And
the office market in places is higher than it’s been
and in some places it’s not. MICHAEL STOLER:
But what about there’s a sales market. Let’s talk
about there’s X amount of land in New York City that
you can buy. The prices of land I don’t believe- and I
still remember you were on my show many times, both
of you, and we were talking about the price of
oil and you said when oil will reach $100 or
something like that. I don’t believe that if we
would have sat three years ago, a year ago, two years
ago we wouldn’t believe land to be selling,
developable land at $100- JAMES KUHN: For
multi-family, Michael. For office buildings it’s
different. In 2013 there were 48 deals- over 121
deals over 125. That’s more than it’s been in
five or six years but it’s not yet more than that it
was in 2007 and 2008. Prices for office
buildings have gotten very high and Time Warner is
$1100 a foot. But don’t tell me- MICHAEL STOLER:
What about 450 Park Avenue? JAMES KUHN: 450
Park Avenue is $1700 a foot but that was similar
price than it was the first time- the last time
we sold to Somerset. The really crazy prices are
where somebody decides that you can turn an
office building into a condo. The Sony building,
650 Madison, you can’t count those prices when
you average what office buildings are being sold
for. You wonder who’s going to fill all the
shadow space on 6th Avenue. People talk about
the astronomical rents that they’re getting in
secondary type buildings in locations that five
years ago you wouldn’t have thought about in Chelsea by the technology and the
meat industry. MICHAEL STOLER: When you and
your partners bought the Flat Iron building, whoever
thought that Midtown South, okay, Ofer wouldn’t have even
know what Midtown South was, okay. He had a certain
thing. He always stayed on 48th Street. But I mean,
Ofer, you’ve been in business close to 20
years. You haven’t seen rents this high, the
residential rents. Fortunately you decided to
sell your only office building because the
office wasn’t the market for you in the office market.
How do you see the world today? OFER YARDENI:
Clearly when I started the business the rent and
market when we spoke about high rents in New York
City we spoke about Upper West Side, Upper East
Side. And today if you look at the market in the
last- change in the last 25 years, you are speaking
about areas from Lower East Side to Greenwich
Village to- MICHAEL STOLER: But Jimmy grew
up in Stuy Town. I mean this is hip. They call that
Gramercy Park, Gramercy North. OFER YARDENI: They
extended the Gramercy Park but if you are going to
look at the market, I’ve never seen the rents as
high as they are today. We used to look at rents when
we bought the Ritz Plaza in 1996 at $23 a square
foot versus today we are getting $70 a square foot.
So we purchase building in Chelsea on 15th Street
where we used to get $40 a square foot. Today our new
buildings are $85 to $90 a square foot. I don’t think
that this is one specific area where the rents
increase. I think the entire city go in terms of
rents. JAMES KUHN: Well let me
make one point which I think is important and I don’t
know what people think about it. The difference to me in the
growth in rents in the office versus residential
markets is in the multi-family market it’s
been a clear increase in rents. I believe in the
office market it’s more about cap rate compression
and the cap rates on office buildings have gone
to 4.2 percent. It’s not that the rents have gone
to the same multiples as condo prices. It’s that
the cost of capital keeps coming down. And if you
look, the other difference is the difference in the
buyers are generational and there are different
types of buyers in office where the multifamily
developers riding the pricing up, they’re
consistently the same. So what I mean is you look at
when Mark Holiday said some years ago when he
paid $400 a foot for a building and I said why
are you paying so much and he said I’d rather over
pay at $400 than 800. And then the next generation
was the REITs and then Scott Rechler and then now
I think the new dictum in New York is the foreign
investors. When you look at Time Warner and you
look at ADIA and Government of Singapore,
ADIA is interesting because they can buy-Time
Warner is neither a corner or opportunistic buyer
because its’ a core for a while. It’s an
opportunistic later. So the foreign investors,
Fosun coming in to buy- pay the highest price One
Chase Manhattan Plaza. Oxford buying 450 Park
Avenue. So what happened in the office market over
these years is the cost of capital continues to come
down and new capital comes in. In the condo market
the prices just continue to go up for the same but
different reason because the foreign investors are coming
here to buy apartments because- OFER YARDENI: But the same thing
with respect to the multifamily on the investment side. 20 years
ago you didn’t have UDR, equity residential, Avalon
Bay or Chelsea Smith. Everybody remembered that
REIT that they just entered the market in the
last 10, 15, 20 years. Before that they did not
exist. JAMES KUHN: But the ground of
developers- OFER YARDENI: No but we’re
not talking about developers. We are talking income producing
versus income producing. Now when I started to buy, my
first building in New York I thought I bought at 6
percent cap rate. But when really after 30 days When
I analyzed the building when I owned the building
I realized it was really a 5 percent cap rate.
Today- so that was in 1994, 1995. Today in interest
rates we used to go with 8 percent. Today we are
buying multifamily at 3, 2 or even below cap rate but
we bow at 3 percent. But I really don’t like to look
at real estate as a cap rate because the
fundamental thing for me is how much am I paying
price per square foot? Because the way to each
person runs the building in a different way. Each
one looks at the expenses in a different way. And
usually when I get a performer either from the
broker community or from the seller I cannot just
take it as the 10 Commandment and live these
are the two expenses. So I think that cap rates are a
lot lower. MICHAEL STOLER: But in our
market- OFER YARDENI: But price per
square foot, this is- MICHAEL STOLER: But our market
besides Manhattan has gone up. I mean the Brooklyn
pricing. OFER YARDENI:
Williamsburg. MICHAEL STOLER: The Queens
pricing. JAMES KUHN: Ofer said he would
never buy in Brooklyn. OFER YARDENI: I
didn’t say that I would never buy in Brooklyn.
Remember JAMES KUHN: You
always say that. OFER YARDENI: you have to
understand we have office, 400 million square feet in
Manhattan. We have 800 or 600 thousand residential
apartments in the city. So if I can buy in New York City and I
can walk to see my properties- MICHAEL STOLER: If you can buy
in Manhattan. OFER YARDENI: In Manhattan. If I
can buy in Manhattan and I can
walk and remember that I also manage the real
estate that we own. MICHAEL STOLER: Both Jimmy
and you have alluded, who have done well going to
Brooklyn and to Queens. I mean because the
market- you know anything that has- we call it the
TOD, the transit development. Anything that’s near the subway
is highly desirable and if
it’s convenient into the city- look, even Long
Island City, 15 years ago, Jimmy, nobody was building.
There was no TF Cornerstone. JAMES KUHN: But we have two-
when you cut through the profile of
buyers, they’re one of two types. They’re value
creators, value buyers or they’re momentum buyers.
And what I mean is in this kind of market somebody
pays 400, the next guy pays 500, the next guy
pays 600 and you hope the market goes up and you’re
hoping for inflation in pricing and that’s one
type of buyer. And the other type of buyer is
somebody who sees value and creates value where
somebody didn’t see it. So four years ago, five years
ago if you looked in Williamsburg and you were
Jeff Levine and you saw- even though he might
have been a little early on his first project, he’s
going to make it back in spades. And if you see a
building in New York where you can turn the first
four floors into retail and the retail rents
disproportionately change the price you can pay for
a building- MICHAEL STOLER: But if you
remember when you started in the real estate
business, there were office buildings on Fifth
Avenue that had large office entrances. Today
you don’t see office buildings on Fifth Avenue
with large office entrances. When 20, 30
years ago you wouldn’t see second floor retail or
third floor retail. The world has changed
completely in that aspect of retail. The retail
world is different. There are different clients. I
mean 25 years ago The Gap was the number one. Today
The Gap is closing their stores. You know we have a
different generation of real estate. I did a show
recently on emerging trends in real estate. I
had your colleague Jeff Roseman and we had City
Med Urgent Care Center. We had Chop’t. We had Equinox
and Blink. These were companies who have- weren’t
here 20 years ago. So we’re seeing a
proliferation in a different change in the
real estate world. OFER YARDENI: Life is changing
every day. MICHAEL STOLER: Right. You were
saying before the show that even the amenity packages of
what people want and there was an article recently in
the newspaper talking that in office buildings
they’re trying to provide more amenity packages. I
mean there’s a different world. OFER YARDENI: It’s
clearly that the type of tenants that we have in
our multifamily it’s younger, more
sophisticated and they all- MICHAEL STOLER:So
you’re considering us to old? Dinosaurs? OFER YARDENI: We
are not dinosaurs but our
expectation of what their expectation is completely
different. If my kids are coming to a building they
expect to have a gym. They expect to have a roof
deck. They expect to have a bicycle storage. They
expect to have music. They expect to have a doorman.
This is what the young generation that is
entering to the market and they are tenants who are
renting the apartments. So in order to be competitive
you need to provide those services and if you
provide those services, you will be able to get
the rent. Now because there is not a lot of
buildings like that- if you take Chelsea, Chelsea you
can rent today without a doorman, without amenities
and you will still get $80 a square foot for your
apartment because the demand is so high and you
cannot really build new construction there. And if
you build, everybody is going to do a condo. So
the pool of housing that you have in certain area,
Greenwich Village, Chelsea, Lower East Side,
you can push the rent to the highest level that you
can have. MICHAEL STOLER: Here’s
the question. Are there opportunities for buyers today?
I mean are there- do you see- people, as you brought up, ADIA
who is from Saudi- from the Middle East, GIC from
China- OFER YARDENI: Singapore. MICHAEL STOLER: Singapore and
Oxford Canada and the other
places. Can people buy properties? I mean you’re
very active in the investment sales business.
Who besides can families buy? Can individuals? I
mean who are the buyers today? Who are we
competing- OFER YARDENI: On the residential
side I definitely believe that there are tremendous
opportunities. A lot of the multifamily apartment
building will build after the second World War and
they’re owned by already the third generation. And
they own most of this real estate free and clear. And
they didn’t go and maximize value. So those
guys did not push the rents. They didn’t
renovate the buildings. And for us we always have
a pipeline between half a billion to a billion of
off market deals. JAMES KUHN: But I think the real
question is not are there opportunities. It’s how
you take advantage of them and who gets to take
advantage of them. Because everything is about your
capital partner today. Ofer would not be able to
be successful if he didn’t have a equity partner that
gave him a low enough cost to capital that he could
be patient in the early days of turning his
property around. And it’s no different than any part
of this market today because of the FIRPTA laws
prohibiting many foreign investors from owning more
than 49 percent, the fact that these people want to
put their money out, if you are a successful and
talented developer and you recognize opportunities,
you’ll be able to hook up with a source of capital
and you will hopefully earn your promote because
you bought it right. And the guy who gets the
lowest cost of capital is the winner because he
doesn’t care whether he’s being at five or six or
seven as long as his cost to capital is cheap
enough. And Ofer for a long time had very good
partners that allowed him to go in and buy. Now the
other opportunity is the families who don’t have an
IRR threshold because they’re generational.
They’re holding forever. They could compete if they
wanted to but Bernie Mendick once said if you
buy IBM at 10, it’s hard to but it at 100. And
that’s why you have new buyers coming into the
marketplace from time to time because of that. MICHAEL STOLER: But you were
saying prior to the show that a number of people that you are
representing are leasing the land because they want
to keep the opportunity over there. They want to
have an ownership. They realize that they’re not
capable or that’s not their expertise to be building.
So you’re seeing more of that? JAMES KUHN:
Well we’re seeing more of it. Look, nothing is a lot
in New York, right? In the highlight in 2007 we sold
20 office building, last year 14. It’s not like
there’s that much on the market at any one time.
But in the multifamily market there are many
owners that want to pass this on to their next
generation. They’re not sellers. But they went up
side. And so they have a 99 year ground lease. They
have appraisals every 20 years that goes to market.
And there are many developers who build
rental housing who are content to take a long term
ground lease, finance building- MICHAEL STOLER:
It’s a nice thing to own. JAMES KUHN: And the
ultimate risk is when the 80/20 bonds run out and
you have a ground lease reappraisal, those two
events collide or coincide and those are risks. I mean nothing
is without some type of risk. MICHAEL STOLER: What about
there’s a lot of development on
the Hudson Yards area. You have the Related and the
Brookfield Hudson Yards but you also have a lot of
properties that people are talking about on the Tenth
Avenue, the 11th Avenue from the 34th Street to
41st Street. So that’s one market. You have Lower
Manhattan where we’re talking about One Wall
Street they’re talking about. You know 85 where
AIG was. Do you see- what is your thoughts about
those markets as emerging markets as opportunity
markets because I can tell you when I took Ofer once
down to Lower Manhattan it was like a culture shock. JAMES KUHN: I’m not sure
anything today anymore is an emerging market especially in
office buildings. I think that Steve’s done a great job
at Hudson Yards creating an environment and it’s
still going to take time for him to build the
platform but he made a smart decision that he
wouldn’t try to make it all in the office. He
would make it later on the retail and the
multifamily. But having said that, Larry has great
projects downtown at The World Trade Centers, and
Brookfield is going to build 34th and Ninth. But
I think ultimately there aren’t going to be enough
tenants for every single project in every single
building. Somebody is going to win and somebody
is not going to win. It just don’t think that the
office stock of tenants is growing at any kind of
great rate. The financial services industries has
certainly consolidated. The law firm business has
consolidated. The technology and new media
has taken up some of that slack and will continue to
grown. MICHAEL STOLER: So what
I’m hearing- OFER YARDENI: The residential
side, on the other hand, you don’t have enough product
because if we had today another thousand
units in Chelsea or the Hudson
Yard, for example- MICHAEL STOLER: Hold on. I said-
I brought up Lower Manhattan. You still are adverse to Lower
Manhattan for residential? OFER YARDENI: I’m not
adverse. I prefer- in fact I was at the offices
of Brookfield yesterday. And I was
stunned by the view and every time I go to Battery
Park I look at it as a miracle and the lifestyle
that they have there. But for me and for the capital
that I represent and I rather be in a neighborhood like
the East Village, West Village- JAMES KUHN: But,
Michael- I’m sorry. OFER YARDENI: Hudson Yard and I think that the rents that
we are able to achieve in those areas they are
between 70 and 80 dollars a square foot. And for me
the key in Manhattan is not just location,
location, location. And so I always said it’s
transportation, transportation, transportation
of which is very important- JAMES KUHN: Let’s
go five years into the future. Time Inc., McGraw
Hill, GroupM Condé Nast, Jones Day, you
can go on and on. I’ve been in business a long
time, and for many, many years tenants looked downtown
and they stayed in Midtown. MICHAEL STOLER: Low cost
alternative. JAMES KUHN: I think there was no
question today that downtown is now a place
where any type of industry feels that they can
relocate to. And that’s going to ultimately create
a market for Ofer that might not be there today
but it will be there five or 10 years from now
because this is no longer just a spotty trend. This
is happening and it’s because it’s hard to get
class A product in Midtown because it’s hard to
build. MICHAEL STOLER: But you do
have the opportunities in the Hudson yard for that type
of project. JAMES KUHN: Yeah and they’re
going there too but the Hudson Yard’s ultimately is six
million feet of office and six million feet of
multifamily more or less. Six millions feet, 1.5
percent of stock. MICHAEL STOLER: But what about
the other space that we’re talking about? You know
the sites that are being offered for sale today in
the Rosenthal is selling a site 1.2 million square
feet. There’s a number of sites on Tenth and 11th
Avenue near there Javits Center which really did
poorly over the years. Nobody wanted to be there.
And it’s still it’s not where the train is. It’s a
different neighborhood okay. JAMES KUHN: I was
addressing Ofer’s point that he would prefer right
now to be in Midtown. My point though is that when
you reach critical mass where you have 170 or so
million feet downtown and it’s not just Wall Street.
You will have people who want to live there and I
think that those projects that Larry has and that
Brookfield has where you can get class A product
and you can start to live down there. I think that
has really been a paradigm shift in most of our
thinking in recognizing that downtown is now a
viable place for office tenants. MICHAEL STOLER:
But now when you relate that point and it is a
place for office tenants one of the largest number
of people who used to work downtown was a large
number of people from Brooklyn and from Staten
Island. Now there are new developments in Staten
Island taking place on the waterfront over there
where they’re putting the wheel and where they’re
putting the outlet stores. So you’re going to see
certain development in Staten Island in the
residential market. Not for you because the ferry
boat, water. What’s your thoughts
about Staten Island? JAMES KUHN: I don’t really know
enough about Staten Island to try and given guess what kind
of market that will be. But Brooklyn is a very short
commute to lower Manhattan. MICHAEL STOLER:
And what about Jersey City? It’s a 15 minute
commute. JAMES KUHN: Jersey City will
always be a viable office market but once again the amount of
office space you can build there is very limited. And
so when you look at the limitations of a Manhattan
or a Jersey City when it comes to office and the
amount of time it takes to build office. I think that
these tenants that are moving both to Jersey City
for tax reasons and for Lower Manhattan for price
reasons MICHAEL STOLER: I know your
organization sold the development side at 125th and
Park to Bruce Eichner which was at one time planned to be an
office building. The Vernado site, okay. Now
Harlem had an interest. There was limited number
of buildings up in Harlem, office buildings. The
commute is relatively well. It’s a quick commute
into- do you see commercial and do you see residential
opportunities there? OFER YARDENI: I always look at
the residential opportunities there. In
fact, I have a building on 109 and Fifth Avenue. MICHAEL STOLER: Which
I’ve been too, yes. OFER YARDENI: And I feel that market is still lagging a
lot behind the Upper West Side or Upper East Side
and even when you’re talking about in the 90’s
because there is not enough retail to- the
people who are going to live there. So if you
don’t have retail, if you don’t have restaurant, if
you don’t have shops, it’s very difficult to go into
build a residential community. I more like the
location of 34th Street between 10th and 11th
because you are walking distance to Chelsea, to the
Galleries, to the High Lines. MICHAEL STOLER:
There’s a question at the 34th Street, 10th and 11th
but you have the train. You have Penn Station. You
have the Port Authority. You have a lot of amenities.
You have a lot of things- OFER YARDENI:
Yeah it’s more vibrant. It’s more exciting. So we
look every day when I come to the city I pass by
location in Uptown in Harlem and I’m trying to
look for site or look for apartment buildings to buy. But
the returns are not making it- MICHAEL STOLER: It’s
like what Jimmy was saying before about the Bronx. He represented a seller and
the Bronx is not attracting the same
pricing as Manhattan is or as Brooklyn is because
Brooklyn has become sort of- OFER YARDENI: And you
have to remember, Michael, we are also in the
residential, not just the fair market building. We
are on the rent stabilize. Whenever we have a
turnover in the unit in the rent stabilize we are
able to take the rent from $1,000 to $4,000. If you
are taking the same unit in the Bronx you are
taking, if you have a turnover, you take the rent from 600 to
1,100. So the delta is not large enough for us to go and
to make the investment there. MICHAEL STOLER: How
do you see the next 18 months in the real estate
market? JAMES KUHN: I think the- I
don’t expect any big changes in the real estate
market in 18 months. I think the market will
continue to be very vibrant in the multifamily
market. I think that the Midtown South market and
office is extraordinary. There is really not a lot
of space there. It looks like Lower Manhattan will
continue to get tenants to go Downtown. There’s still
an awful lot of space that could be built that you
got to absorb. So it doesn’t mean that that
market is going to start escalating dramatically in
price. But it will be solidifying. And then the
question is going to be when all these tenants are
done moving, you’re going to have a big bunch of
space left in Midtown Manhattan. MICHAEL STOLER: At 6th Avenue
we may have a lot of space. JAMES KUHN: And the question is going to be who is going
to fill that space and that will be the
interesting question. But it’s not 18 months till we
have to worry about. OFER YARDENI: Okay, so at
least in our residential market I feel very
comfortable on the rental for the next 18 months. I
believe that you will have a spike around 10 percent
increase in the rent. I’m a little bit concerned
about the condo market between the $5,000 to
$10,000 a square foot. MICHAEL STOLER:
Fortunately we didn’t talk about that. But I
really- it’s always great to have good friends and
supporters here, and I’m so happy that the two of you have
been here to help me today. JAMES KUHN:
Thank you, Michael. OFER YARDENI: Thank you,
Michael. Appreciate. ♪ [Theme Music] ♪

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