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MICHAEL STOLER: My watch says we're in 2014, but there's
something strange. It seems to me that we're back into 2007.
The time machine has gone back because happy days are here
again in the real estate market. Land prices are the highest
levels in years. Rents for apartments are at their highest
levels. Apartments are selling at the highest prices.
But salaries have not really kept up. But what's happening
in New York? So, as opposed to myself prophesizing of
what are we in 2007 versus 2014, I brought together these
four individuals who've been around during different cycles
and different markets to revive their thoughts on
is this 2007 or 2014? My guests today include:
Philip Eisenberg, Urban America; Allen Goldman,
SJP Residential; a banker, Bill Butler, RBS Citizens;
and, last but not least, Josh Muss, Muss Development.
So Mr. Muss, you've been around -- all of us have been
around -- numerous recessions, different times. This recovery
has seemed to take place and this emphasis that the world
is so great that these properties could demand
these pricing. Can you believe it?
JOSHUA MUSS: I guess we have to believe it, it's happening.
It's hard to understand why it's happening so quickly.
That, to me, is what's unusual. I've seen the properties
go up and down over the years but it just boomed.
Within the last year I would say property values have
gone up at least 20%. The year before maybe another 20%.
Can it be sustained? The development instinct says
I hope so. We're developing, we're looking at new projects,
we're assuming that people will be able to pay
$1500, $2000, $2500.
MICHAEL STOLER: In order for you to pay a certain rent for
an apartment -- and Philip has a different situation,
Philip, you have 14,000 apartments?
PHILIP M. EISENBERG: Yup.
MICHAEL STOLER: You have 14,000 apartments all through
the city and New Jersey. People can afford to pay a
living rent but how many people can afford to pay $4000
for a one-bedroom or $6000 for a two-bedroom apartment?
That's why they're going to the Bronx. Where do you
see this happening?
PHILIP M. EISENBERG: In Queens we've seen significant rise in
rents over the last two years, three years. But we're getting
more than we ever thought we could get an projecting,
no matter what kind of aggressive projections we make.
In Brooklyn, well it's Brooklyn. People are...
MICHAEL STOLER: You said prior to the show that unfortunately
a couple of years ago one of your buildings got hit by
lightning and now the insurance has happened.
You've been receiving offers for more than the cost of the
building just for the rate of the vacant land.
PHILIP M. EISENBERG: Exactly. It was not a huge building right
across from Kings County Hospital and the building
cost us $12 million. We've been offered more for the land.
MICHAEL STOLER: Now, the interesting thing is there is--
I can understand certain things because they may be
near the subway or the bus. Kings County Hospital does
not have mass transit nearby.
PHILIP M. EISENBERG: Not easily.
MICHAEL STOLER: So it's, as we would say, for the old people
over here, it's a double token-- and we won't talk how much
a token used to be, a double fare zone. But you're in a
two-fare zone or you have to take a bus to the train and
people want anything. As a banker, I remember when you
and I sat down in 2008 saying these are emerging markets
in Brooklyn and then the world just came to an end.
How do you look at it? You're the one who has to be lending
money, because he's a developer. He's like Max Bialystock. If he
doesn't produce, and he doesn't produce, he's out of business.
WILLIAM BUTLER: And it came back very quickly.
Like you were saying, Josh, I think what surprised
most of us the velocity by which it came back the last
half of 2012 and then beyond, we all see the compression in
the rates. They've dropped at least 100 basis points.
I'm competing against other banks that have the money,
they need to get it out and they're at anywhere from
150-250 on construction loans, notwithstanding some other
covenants that might hit for construction. But we're also
competing with -- let's not forget, New York has been
this flight to quality. We have all this capital that comes in
globally. I'm not sure everybody is really
particularly comfortable with the risk threshold for
equities at this point but New York real estate has had an
incredible return. We all know what the returns are,
we can't believe it, and the banks are all flush with cash.
Corporate America is flush with cash.
New York is a haven for safety.
MICHAEL STOLER: What about sustainability? You and I talk,
we walk around the city, we look at properties and we
say I can't believe what's happening. I mean, we look
at properties that really don't have rate, as they would say,
skin on the bones because there's not enough light in
there but they're trading at high prices.
ALLEN GOLDMAN: Well, it's a reflection of supply and demand
in the first place. There isn't a great deal of property that's
been available for sale. The developers who are grabbing
onto it are looking at futures because a lot of these
properties have become more marginal. Not every property
is A+, not every property is in Central Park or in Tribeca or
the Meat Packing District and you see more marginal
properties going for very high prices with the anticipation
that we'll get an even higher price in terms of the sale of
condo units, because very little product is being developed
as rental. The loss of the tax benefits, the 421A program,
really was the death of rental, reasonable rental product
being developed-- other than what Gotham or some others may
with heavily subsidized programs that may help them.
But true market rate rental, very little product. So with
prices rising for product, you've got only a condo that you
can sell. And so long as the market is there for it-- and it
appears to be -- where is it coming from? It's coming both
speculators, investors. I spoke to a fellow who is an owner
in one of my condominium projects. He says there's been
a turnover, higher prices than you ever sold for, and
in virtually all of them there are investors buying to put
renters into it. What does that tell us? It's telling us
that indeed it's a very tight rental market.
So the rental rates have gone up, pushing people to Queens,
to the outer boroughs. Brooklyn, yes it's a lifestyle change
they want to be in Williamsburg, but not everyone wants
to be in Bushwick.
MICHAEL STOLER: But let's look at it this way. In a way,
I have a couple of visionaries over here. You were a visionary
in Jersey City going back a number of years ago and now
you're building the first magnificent new property
in 40 years perhaps in Fort Lee. Josh went to the Oceana,
aka Brighton Beach Baths, in Brighton which has the
subway over there but it's a long schlepp in--
but it's a subway and at least it's over there.
JOSHUA MUSS: Not that long.
MICHAEL STOLER: Okay, it's a reasonable schlepp,
it's 45 minutes. How do you see-- the market has moved.
At one time who said I'm going to go to Jersey City
or I'm going to go to Fort Lee or I'm going to have a new
building in Brighton Beach? You hadn't seen this in many years.
Do you think -- are people looking at this and is it
because of this lack of availability?
ALLEN GOLDMAN: Yeah, I would say there's a need. People who
are not going to pay $80-$85 a square foot for rent on an
annual basis in Manhattan if they can't afford it and
a lot of people can't afford it. So if you can get product
at $40, $35, $40, $50, you have to do it. It's an economic
necessity. I think that's what's caused this expansion
in terms of the development area. Who would have thought
certain areas would have gotten development? In Fort Lee
where we are building, it's actually 45 years that land
lied fallow immediately adjacent to Fort Lee.
JOSHUA MUSS: So you gave a range - $40, $35, $50 --
there is a certain edge at which point it won't work.
Let's look at the dynamics of New York City from the
standpoint of users. You have people coming in from all
over the world, not just the rich people but you have
the young people, the wannabes, the people in tech,
and the fact of the matter is that now looking further
out there's no new housing going up of any sort.
When you go further out there's that sense that the
land is so valuable and when you figure that the costs
are going up for construction and the banks are reluctant
to lend construction money anywhere outside of the prime
areas no matter how it projects. There's a dearth of new
product of any kind showing for middle income. Almost
nothing's being built and it's going to get worse.
PHILIP M. EISENBERG: You see people going from our
units in Manhattan. The next bump they say what do
you have in Queens? What do you have on Skillman
Avenue? Where can you find a place for us? We move them
and what's thrilling to them is they're going to pay a little
less than they paid before but they're going to
commute for 20 minutes.
JOSHUA MUSS: In the meantime, not intentionally,
now you're bumping somebody who can't quite afford the
new rents and where are they going to go?
ALLEN GOLDMAN: New product, you look at Jersey City.
It just is a never ending development program.
MICHAEL STOLER: There are like 4000 apartments coming
into Jersey City.
ALLEN GOLDMAN: And it's kept a lid on rents to a
certain extent. It's hovered around the $40 range for a
considerable period of time because there's a huge amount
of supply. But there's been certainly enough demand to
keep the product flow going, but it doesn't happen.
WILLIAM BUTLER: I think what we found all pretty extraordinary
is the continual supply of people coming into this market.
When you think about that five or six year period of
`07-`12,`13, people were still coming from all over the
country. We were creating jobs. In New York not on the
occupancy but the employment was up and it wasn't just
Wall Street. It was all different sectors that were
providing a lot of jobs.
MICHAEL STOLER: The Wall Street segment hasn't really
increased. The Wall Street segment has reduced on
office space. There's been a contraction over there.
The financial service industry is quieter. The legal
services is down. There's more efficiency in sales.
JOSHUA MUSS: But you have tech. You have hospitality.
You have tourism. You have retail.
MICHAEL STOLER: But what has been taken away has
been increased by the other markets.
JOSHUA MUSS: Except it's a market that's not quite as
flush salary-wise as the Wall Street Market. And to find
out where to live is going to be a problem.
MICHAEL STOLER: So as developers and as bankers,
where do you look? Where do you see the opportunities?
Because you're also, as we would say, seasoned that you
worry that you still remember 1991 recession, the 2001
9/11 initial thing, the 2008. We're around there--
so you're not talking to a 30-year old kid who says don't
worry, things are going to be there, everything's going
to be picked up? It's like we were talking a week ago
on the hotel shows, how do hotel lenders look at it?
They look at projections. Some things are projected and
you don't know what's going to happen.
JOSHUA MUSS: Well Allen mentioned, for example,
the loss of 421A. I remember when -- and we
used to build housing in Staten Island, which was affordable.
MICHAEL STOLER: Is it a borough?
JOSHUA MUSS: Well I haven't been there in a while, unfortunately.
The truth is nobody's building there anymore because there
are no more incentives and they can't afford to build and,
of course, it had a bad rap because of Sandy.
MICHAEL STOLER: You know what? You bring that up. Some young
people I know have recently bought some sites near what
they call the Wheel, this new Ferris wheel that's being
built. There are not tax abatements, as you say,
in Staten Island.
JOSHUA MUSS: That's right, they took they away.
MICHAEL STOLER: The cost of commuting in Staten Island is
rather expensive even with the revised EZ Pass and it's
also a little inconvenient to get to the City unless you
work in Lower Manhattan, but people are building there.
JOSHUA MUSS: No, they're not.
MICHAEL STOLER: Yes, they are.
JOSHUA MUSS: By the Wheel?
MICHAEL STOLER: By the Wheel.
JOSHUA MUSS: We have a piece of property that we've owned
for about 50 or 60 years. I've tried to develop it about
60 or 70 times.
MICHAEL STOLER: There's some...
JOSHUA MUSS: It's a block from the Wheel.
ALLEN GOLDMAN: Now's the opportunity to develop the land.
MICHAEL STOLER: Now you can sell it.
JOSHUA MUSS: Send me a buyer.
MICHAEL STOLER: Okay, but it's in the same situation of
opportunities. Let's be realistic. We'll go on a...
JOSHUA MUSS: And, by the way, it's a zero-cent commute
to New York City. It's a great commute.
ALLEN GOLDMAN: Ferry is free.
JOSHUA MUSS: Absolutely and the community is still nowhere and
you have to assume that the Wheel may be built.
That's another issue.
ALLEN GOLDMAN: But I think the lack-- well, the lack of
incentives -- but the tax structure in the city, which is
potentially even vulnerable to higher rates.
Right now, a new rental product is taxed at 32% of
gross revenue. 32% of gross revenue makes it impossible
for virtually any product to be built. So when we had
the tax abatement, it was a double benefit. It created new
product and it created affordable housing
throughout the city. One of the things that has been looked
upon, where is all the affordable housing to be
developed? Part of that program was one that
developed thousands and thousands of units of affordable
housing and redeveloped neighborhoods. So here's
a program that was abandoned in `08 and we've
paid the price for it. You look at condos and people
say well we could build a condo and if the product doesn't
sell or it doesn't move quickly, what are you going to do,
rent? If you've got to sell a condominium unit at
$3000 a foot, what could you rent it for to survive if
things get a little soft?
MICHAEL STOLER: Getting back to my premise of this
show, how much higher can prices go? Are we at a higher
level than we were in 2007?
ALLEN GOLDMAN: I think we are. Oh, we are, no doubt.
MICHAEL STOLER: I think we've exceeded this and I think
the banks have been a little more disciplined in their
control but they're letting loose, as I was saying before
about construction loans, to inexperienced borrowers,
to the fact that each and every week there's a new
lender coming from the Ozarks or from parts of New Jersey
or from China looking to do business over here. They all
believe that there's opportunities. You see this
in the multifamily market.
PHILIP M. EISENBERG: Or the first lien lenders are now
allowing debt and other subordinate debt that
they wouldn't have done a year ago.
MICHAEL STOLER: So we're seeing this and none of us want
to predict any economic crisis or anything else but I still
remember being at a meeting on September 11th, sitting at
a charitable meeting in the former Williams Club
when somebody said to me a plane went into a building.
Right after that we stopped for a couple of years in
any growth in New York City. Then in 2008 we stopped again.
Then in 2008 we stopped again. This could hit again.
JOSHUA MUSS: Michael, from my perspective -- and I'm
looking back now close to 45-50 years -- the tide
comes in, the tide goes out, the tide comes in,
the tide goes out. Right now the tide is in.
I think inevitably it's going to go out, the question is
how deeply and how quickly. I think we all have to learn
to adapt to that.
MICHAEL STOLER: Fine, how do you adapt to that?
And I'm not -- people...
JOSHUA MUSS: But, we can adapt by being smarter because
we've learned from our lessons. I think not everybody's going
to be so smart or adapt because there are some young
people who haven't lived through the recession or the
depression. They're going to say if we don't do it,
nobody's going to get rich.
MICHAEL STOLER: You're a bank. You have to put out
money but you also have to be cautious.
How do you look at this type? How can you be conservative
enough but also to take a risk?
WILLIAM BUTLER: It's very difficult because some of our
competition is doing exactly what you say and reflecting
the fact that you have such incredible price escalation,
particularly over the last 18 months, that some of
the lenders are now looking at LTV, loan-to-value, to
get them out of the deal-- not the property economics,
not the cash flow. So when we went into that ditch in 2007,
for several years a lot of the banks entered into the
whole portfolio management and what they ended up
doing was tightening up the covenants on the lending.
So on the recourse we were back to a full boat of recourse.
That's melting away with a lot of banks right now.
Partial recourse, minimal recourse even on construction
deals if it's for the right sponsor and that's what
the banks did.
MICHAEL STOLER: The question is the right sponsor is no
longer being the Josh or the Allen or the Philip.
That sponsor is someone else. Take into consideration
when you were buying buildings in 2006 or when
your competitors were buying buildings, they preferred to
have vacancies so they could get the highest rents.
They wanted vacant buildings. They didn't care about it
because I'll be able to get this $30 a square foot, I do that.
Today people are back to the point, I would think,
of projections.
PHILIP M. EISENBERG: Banks won't lend against vacancies.
MICHAEL STOLER: Right, but some banks are lending
against vacancies. Today, people are buying, some younger
buyers are buying buildings, they're going to banks and
they're going to say I'm going to get rid of that tenant who's
paying X amount, I'm going to buy out that apartment
or I'm going to subsidize it. I see this all the time.
PHILIP M. EISENBERG: Stuyvesant Town.
MICHAEL STOLER: No, but I'm seeing it in a lot of
multifamily buildings in Washington Heights and other
sections of the city. They're buying these people out for
$25,000-$30,000 and then they're going we're putting a
new kitchen in, we're going to make it three bedrooms--
as I call them, the crowman specials -- and they rent it
over there. People are buying on the projection. That's what
happening, people are buying again based on the projection.
They're buying buildings, they're buying vacant land for
$750 or $1000 based on the fact that they expect to get this.
WILLIAM BUTLER: We're back to the speculation.
PHILLIP M. EISENBERG: That's what happened. As you said,
Stuy Town, it was based on how many people we can move
out and how fast and for what it costs. It had nothing to do
with the economics of the buildings and we have never
underwritten anything like that.
MICHAEL STOLER: But I'm saying this is happening again.
I'm seeing this because I see these requests where a broker
or somebody says look, here's what it is but I have a plan
and I'm going to -- there are certain people over there,
I know it's going to cost me $50,000 to buy this apartment
and then I'm going to be able to get the rent up from $1100
to $3100. Now this has happened and there's some
experience but too many people believe -- It's like going to
a college textbook and there's this cost on how we can change
apartment contingency and make these apartment which were
two bedrooms four bedroom apartments.
PHILLIP M. EISENBERG: People should think before they go
into that business -- and it's really a great business.
You have no cap on your expenses in the rent stabilization
business and you have a cap on your income. What a
great place to be, right?
MICHAEL STOLER: Correct, but what you just brought out is
very interesting because Allen's talking about 32% was real
estate taxes, fuel is going up, repairs and maintenance is
going up, water is going up. So the number -- your operating
expenses are going up and everybody is not looking at
this and everybody says it's panacea, it's euphoria.
JOSHUA MUSS: Well maybe you shouldn't say anything so we
can sell all of ours-
PHILIP M. EISENBERG: Put this program on next year.
JOSHUA MUSS: He said 1915, not 2014.
MICHAEL STOLER: Okay, but also look at other opportunities.
You own retail and so do you own retail in different markets.
How's the retail today? How do you see the retail market?
JOSHUA MUSS: I'd say it's been pretty good actually.
We were concerned, obviously, with the internet and
purchases from the internet. Certainly food services are
doing well. We just had a major homerun in downtown
Brooklyn, but everyone was a food service and there was
one childcare so it's not something that the internet
can fight with. But if you're looking at a discount store,
if you're looking at an electronics store, if you're
looking at a bookstore obviously you're going to start
having problems.
MICHAEL STOLER: Right, but those are businesses
which have been replaced by the internet and so on,
but generally retail...
JOSHUA MUSS: Everything's being replaced by the internet,
except for nail salons and restaurants.
MICHAEL STOLER: Yeah, but part of that has also been
replaced by Fresh Direct and so on.
JOSHUA MUSS: There you go.
MICHAEL STOLER: How do you, as a banker, look at the other
aspects of the real estate market today-- the hospitality
market, the retail market and the office market?
WILLIAM BUTLER: I think after that crash in 2007 we
retrenched. When I say 'we' I think the commercial banking,
CMBS, they went down to near nothing.
MICHAEL STOLER: But the CMBS is back to happier days.
WILLIAM BUTLER: Everybody's back up. We've kind of
retraced back to core sponsors and the core properties and
that's why you see the slimming of the yield, that's why.
We're all chasing those same few deals because, like you
mentioned, there's not a lot of product coming on.
So we're going after the deals that are conservative--
some retail down in Lower Manhattan that we just did
for some of your clients-- and what we ended up doing to get
these deals is we're slicing our spreads to extraordinary
levels where you're getting five-year money at just
slightly over 3%. Are we really being compensated for the
risk? I would suggest that a lot of bankers don't think
we are. We're just getting compensated for
the use of the money.
MICHAEL STOLER: If I asked the question 20 years ago and said
do you ever see interest rates at 3%, would have any
of you ever believed that? I mean, you remember when
interest rates were 20%.
PHILIP M. EISENBERG: I remember when you'd get 10%
on your money market.
WILLIAM BUTLER: Well that is the big fear because we could in
three years from now be back and say I can't believe they were
3%, they're back up to 6%. That is one of the big fears
in all the banks because these are not extraordinary times.
MICHAEL STOLER: So what happens when the loan
which was a couple of years old that has to come back
to refinancing and we're at a 6% rate? It's wonderful we've
been living here but home mortgage rates have been
going up. How do you see that?
WILLIAM BUTLER: I think one of the ways the banks have
addressed that is to raise that underwriting rate. I mean,
we have even incrementally raised ours to over 6% as our
rack rate, as our takeout metric because we don't underwrite
based on the actual rate where it is today-- and putting in
covenants, things like that. It's the only way we can
really protect ourselves. There's not much we can do
about the interest rate environment.
MICHAEL STOLER: Here's another question. Forget that--
how do you look, because you want to buy things, how do you
make a determination how to buy something, a new apartment
house -- not a new apartment house, an existing market or an
office building or so on? How do you make that determination?
PHILIP M. EISENBERG: Well some of it is you're not going
to buy unless-- at least we don't-- we see some value add
function to it where you have a good amount of loss to
lease, where if you just do the right thing natural turnover's
going to get you to raise your rents enough. But, as you
said, we have to assume that the banks are going to look at
exit cap of six-- not at four or three-- and we have to
underwrite to be able to meet that.
WILLIAM BUTLER: And where's *** Mae/Freddie Mac
going to be two, three, four years from now? It's another
big pending issue we have, not to mention the global growth
and the regulatory environment, the new capital rules that we,
as bankers, are now going to be under. We might have to
charge more interest rates just based on Tier 1
capital requirements.
MICHAEL STOLER: So I hope that the market remains strong.
I hope that the world continues to be buoyant. But we have
to remember that -- we have to be a little cautious.
Cautious optimism is prudent in the economy and
I'd like to thank Philip Eisenberg, Allen Goldman,
Bill Butler and Josh Muss and I'll see you next week.
♪ [Theme Music] ♪