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Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.

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Speaker 1: I'm Joe Wisenthal.

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Speaker 2: And I'm Tracy Alloway.

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Speaker 1: Tracy, I think everyone sort of knows that in many cities,

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Speaker 1: but definitely in New York City, there's sort of this

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Speaker 1: weird like there's two simultaneous real estate problems and they

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Speaker 1: sort of compliment each other in a weird way.

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Speaker 2: Right, Okay, So rents are too high, there's a shortage

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Speaker 2: of housing, and we have a bunch of empty office buildings,

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Speaker 2: and there's a sort of obvious solution, which would be

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Speaker 2: take all the empty office buildings and convert them into

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Speaker 2: preferably affordable housing. And yet it seems to be very

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Speaker 2: difficult to do that.

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Speaker 1: That sounds super easy, just like, oh, we're going to

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Speaker 1: turn these offices into homes now.

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Speaker 2: Just they've been like an open plan trading floor something

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Speaker 2: that's nice.

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Speaker 1: It sounds you know, put up some walls so people

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Speaker 1: have some privacy.

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Speaker 3: Okay, but on it.

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Speaker 2: Actually, this reminds me when I was at university. I

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Speaker 2: had a friend who lived in a warehouse in London

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Speaker 2: and they built their walls out of cardboard to segment it.

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Speaker 2: Hopefully that's not what we're doing here. But on a

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Speaker 2: serious note, there are a number of difficulties, it seems,

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Speaker 2: in doing this, and there are sort of physical ones

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Speaker 2: around the actual layout of these former office buildings, but

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Speaker 2: there's also regulatory financial and I hear people talk about

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Speaker 2: it in a sort of abstract manner, But today I

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Speaker 2: think we're going to dive into them in a little

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Speaker 2: bit more detail.

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Speaker 1: Right, So it is, you know, we joked around, but

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Speaker 1: it is everyone says it is very difficult to convert

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Speaker 1: an office into a residential building. But we're getting you know,

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Speaker 1: the opportunities there, but we really understand, like what are

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Speaker 1: the constraints, what are like the real physical constraints, and

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Speaker 1: how big is the opportunity because in theory, like clearly

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Speaker 1: more can be done, but like how much are we

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Speaker 1: like moving? Can this move the dial?

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Speaker 3: Is like a really interesting question.

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Speaker 2: Yeah, And the other thing I kind of struggle to

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Speaker 2: understand is New York itself is a city with a

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Speaker 2: long history of carving up older buildings into new types

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Speaker 2: of apartments, and so I wonder why it seems to

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Speaker 2: be so much more of an issue this time around.

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Speaker 1: Well, I'm very excited because today we do, in fact

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Speaker 1: have the perfect guest. You know, lots of people have

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Speaker 1: been talking about this question really, you know, since the

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Speaker 1: pandemic struck, but our current guest has been working on

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Speaker 1: it for a long time, since well before it was

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Speaker 1: trendy to talk about.

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Speaker 3: So the perfect guest we're going to be speaking with

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Speaker 3: Joey Khalaily.

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Speaker 1: He's the managing director of the Van Barton Group, which

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Speaker 1: has been involved in the office to residential conversions for

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Speaker 1: about a decade. So, Joey, thank you so much for

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Speaker 1: coming on.

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Speaker 4: Odd lots, thank you very much, Thank you for having me.

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Speaker 3: What do you do at the Van Barton Group?

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Speaker 4: So I'm within the asset management group and we oversee

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Speaker 4: essentially the execution of the business plan once we acquire

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Speaker 4: assets different buildings.

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Speaker 2: So I'm going to start very broad, but then hopefully

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Speaker 2: we can sort of get more into like each one

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Speaker 2: of these difficulties or problems. But what are the constraints

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Speaker 2: around converting office buildings to residential?

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Speaker 4: Yeah, for starters, it's it's the zoning. So is the

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Speaker 4: building that you're looking at within a zoning zoning district

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Speaker 4: that allows for it to be converted?

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Speaker 3: Okay, that's number one.

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Speaker 4: If that checks the box, there are essentially a whole

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Speaker 4: list of things that you go through and for me,

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Speaker 4: and when I evaluate these, the structure and the light

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Speaker 4: and air and the possibility of light and air and

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Speaker 4: bringing that in to create residential units and ceiling heights.

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Speaker 4: So on a on a kind of concrete floor to

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Speaker 4: the underside of the structure above, what is that height

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Speaker 4: And if that height is less than a certain distance,

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Speaker 4: say if it's less than nine foot six or or

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Speaker 4: if it's nine feet then once you factor in all

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Speaker 4: of the MEPs, the mechanical systems that need to go

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Speaker 4: in above.

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Speaker 3: It's just like plumbing, electric.

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Speaker 4: Sprinkler, electric, all those things that need to go in

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Speaker 4: the ceiling above. Yeah, then you drop your ceiling down.

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Speaker 4: And if that goes below eight feet, really that makes

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Speaker 4: it very difficult to do, especially in New York, where

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Speaker 4: you're not going to be able to market units that

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Speaker 4: have a finished ceiling less than eight feet. So the

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Speaker 4: ceiling height after the zoni district is one of the

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Speaker 4: most crucial.

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Speaker 1: So let's say, Okay, there's a building, it's in an

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Speaker 1: area that can be zoned. Theoretically, the zoning allows for

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Speaker 1: the conversion. Some would calls you up. I say, Joey,

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Speaker 1: come check out this building. How long does it take

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Speaker 1: for you to like size up whether it's even worth

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Speaker 1: exploring further? You walk into the building and like, what

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Speaker 1: are you looking for? Broadly and hoping to see on

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Speaker 1: that first?

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Speaker 4: That first walk through very quickly ten hours really, Yeah,

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Speaker 4: you can go through it and see the ceiling heights,

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Speaker 4: the depth of the floor plate, the actual floor plan

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Speaker 4: and the depth of that, and then the structure. Because

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Speaker 4: if the depth is great and it works out, then

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Speaker 4: you wouldn't need to do any structural reconfiguration.

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Speaker 1: And the depth just means, like you know, like here

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Speaker 1: we're in the Bloomberg offices and we have this like

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Speaker 1: huge newsroom which is very nice, but like space in

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Speaker 1: the middle of that would not make for a good

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Speaker 1: unit because it would not be exposed to any windows.

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Speaker 3: Correct.

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Speaker 4: Correct, You'd have to make structural modifications to the building

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Speaker 4: to be able to make that happen.

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Speaker 2: So I think one of your famous conversions is downtown

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Speaker 2: one eight Water Street, and you solved that depth problem

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Speaker 2: by basically creating a sort of like inner atrium courtyard.

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Speaker 3: Is that right?

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Speaker 4: Yeah, we ended up cutting a thirty foot by forty

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Speaker 4: foot hole in the center of the building. Wow, twenty

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Speaker 4: something stories went all the way and that created a

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Speaker 4: courtyard essentially for light and air to come down on

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Speaker 4: the inside. And then there were studios and two or

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Speaker 4: three bedrooms that had their bedrooms up against that.

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Speaker 3: What was it that made that plausible?

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Speaker 4: So?

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Speaker 1: Okay, so you see it's called the floor plate is

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Speaker 1: the term, and this is like sort of yeah, okay.

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Speaker 4: So you know if we're on the six floor or

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Speaker 4: floor of a building, yeah, that's the floor plate.

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Speaker 1: The horizontal slice of the building. So this what it

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Speaker 1: was one eighty Water Street. Correct, Okay, So one eighty

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Speaker 1: Water Street in its previous version did not have like

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Speaker 1: a suitable floor plate, but you understood the oppor that

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Speaker 1: there was an opportunity to cut a hole in it.

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Speaker 4: Correct it It had a suitable floor plate at one

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Speaker 4: point in time for the office use right, right. For

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Speaker 4: residential it did not, and in evaluating that, came up

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Speaker 4: with the plan of cutting that hole in the center.

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Speaker 1: Can you just talk a little bit more about that

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Speaker 1: hole cutting, Like how did you sort of recognize that, yes,

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Speaker 1: it's only it's currently only capable for offices, but actually

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Speaker 1: we can make the mouth work if we cut a

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Speaker 1: giant hole down the center of a building. Talk a

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Speaker 1: little bit about that evaluation.

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Speaker 4: So with with a lot of things, just about everything

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Speaker 4: is possible, but it would cost a lot of money. Yeah,

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Speaker 4: so you have to evaluate the structural modifications that it

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Speaker 4: would take to create that and ultimately what you're going

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Speaker 4: to do with that building at the end of the day, Yeah,

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Speaker 4: create the residence is how much money you're going to

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Speaker 4: get on the rent and then eventually sell that building

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Speaker 4: one day. And so when you evaluate that, especially in

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Speaker 4: that courtyard area, what's the spacing of the column days

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Speaker 4: from column to column and does it allow for enough

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Speaker 4: space to be able to cut that in without really

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Speaker 4: cutting out any other structural steel columns or supports, which

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Speaker 4: when we cut that out, we still had to reinforce

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Speaker 4: the rest of the structure and do quite a bit

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Speaker 4: of that.

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Speaker 2: So when you're looking to convert an office building to

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Speaker 2: apartments or something like that, how much of what you're

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Speaker 2: looking to do is based on I guess people's preferences

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Speaker 2: on where they live versus regulatory requirements about well, you

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Speaker 2: have to have so many fire exits and you have

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Speaker 2: to have this number of windows and that sort of thing.

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Speaker 4: So we look at it. We look at it if

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Speaker 4: Vanbardon much differently in terms of you have to obviously

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Speaker 4: look at the code requirements and have to build that

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Speaker 4: within your plan, but we take it much further in

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Speaker 4: terms of we have a little bit more of like

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Speaker 4: a hospitality approach to our multi family buildings or residential buildings,

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Speaker 4: in that we look at the entire life cycle of

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Speaker 4: the day and the resident and really put ourselves in

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Speaker 4: the shoes of the resident and not just in twenty

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Speaker 4: twenty three, but in twenty thirty three and beyond. So

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Speaker 4: we try and incorporate as much technology and components that

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Speaker 4: set this building up so that it's very much marketable

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Speaker 4: at every point in time.

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Speaker 1: Can you talk a little bit about you know, again,

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Speaker 1: I'm thinking about finding the right contractor the right construction

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Speaker 1: company that even knows how to like cut a hole

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Speaker 1: in the middle of a building, which seems tricky, Like

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Speaker 1: I imagine that's not something that.

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Speaker 3: Every construction company can do.

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Speaker 1: Yeah, but can you talk a little bit about like

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Speaker 1: who how many entities out there that can do that?

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Speaker 1: And then maybe like, all right, the costs in twenty

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Speaker 1: twenty three for that, I assume are really a lot

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Speaker 1: higher than when you started on one eighty Water Street,

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Speaker 1: both due to inflation and supply chain constraints. Can you

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Speaker 1: talk a little bit about sort of operational constraints of Okay, theoretically, yeah,

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Speaker 1: this is a cut holeable building, but actually getting someone

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Speaker 1: to do.

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Speaker 4: That, Yeah, you have to find the right team members.

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Speaker 4: And since we've been in the space for a while,

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Speaker 4: we've kind of brought on board and continued to work

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Speaker 4: with for the majority of it, I'd say probably seventy

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Speaker 4: percent of our team members or repeat team members.

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Speaker 1: So when you say team members, these are contractors, yeah,

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Speaker 1: and people you work with and some look got it.

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Speaker 4: Okay, we have the vision and know how to execute.

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Speaker 4: We bring on our consultants and our other team members

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Speaker 4: to really evaluate those nuts and bolts pieces of cutting

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Speaker 4: the holes and doing those things and be the experts

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Speaker 4: in their field. And finding the experts is difficult, and

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Speaker 4: it takes years to create that team that you're comfortable

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Speaker 4: with to cut a hole in a building and know

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Speaker 4: that everything is going to go as Yeah.

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Speaker 2: I wanted to ask you a little bit more about

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Speaker 2: the financing because all of this, you know, cutting holes

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Speaker 2: in the middle of the buildings sounds very expensive. And

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Speaker 2: it does seem like a lot of the office conversions

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Speaker 2: are often aimed at a sort of premium segment of residential,

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Speaker 2: and this has been one of the criticisms. Yes, so

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Speaker 2: how does that fit in with the decisions on whether

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Speaker 2: or not to go ahead for these projects, Like is

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Speaker 2: it just a fact of life that you have to

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Speaker 2: create more expensive apartments that are going to pay for

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Speaker 2: this or could you do this on a more affordable basis?

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Speaker 4: You could do it both ways, right, Ultimately it comes

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Speaker 4: down to what your basis is in the building when

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Speaker 4: you purchase it, and if you have a low enough

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Speaker 4: basis when you when you buy that on a per

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Speaker 4: square foot basis, and knowing we've done this a while,

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Speaker 4: we know what it'll take to convert a building. So

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Speaker 4: if that basis is a certain amount, we layer in

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Speaker 4: the amount that it takes to convert it, and we

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Speaker 4: know at the end of the day where we're going

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Speaker 4: to end up on a per square foot basis and

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Speaker 4: are all in basis, and so you can determine based

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Speaker 4: off of that initial basis which way it really needs

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Speaker 4: to go. So if the basis is a certain amount,

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Speaker 4: say if it's you know, three four, five, hundred dollars

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Speaker 4: a foot. If you're buying a billion five hundred dollars

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Speaker 4: a foot and it's going to cost you five hundred

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Speaker 4: dollars to convert, you know you're in one thousand a foot.

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Speaker 4: That's a pretty hefty price today, and so you know

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Speaker 4: that you would have to get very high rents market

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Speaker 4: rate rents to be able to make that pencil. If

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Speaker 4: you're able to purchase the building at a much lower basis,

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Speaker 4: it gives you much more flexibility and then you know,

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Speaker 4: layer into it the need in my opinion, for legislation

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Speaker 4: to be able to make that easier and so then

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Speaker 4: you can target different segments of the market, so it's

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Speaker 4: not all at the luxury end of the spectrum.

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Speaker 2: So just on that basis, what is the exit You

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Speaker 2: mentioned legislation and my understanding is there is, or maybe

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Speaker 2: there was, some tax credit support for doing these kind

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Speaker 2: of conversions. Can you lay out, like, what would you

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Speaker 2: expect to see in terms of government support for doing

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Speaker 2: this at the moment.

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Speaker 4: So as of now, there isn't any incentive, but you know,

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Speaker 4: there were debates in New York state legislator to incorporate

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Speaker 4: some sort of tax abatement as part of this and

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Speaker 4: for that tax abatement, there'll be a certain amount of

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Speaker 4: units within that converted building that would be affordable. I

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Speaker 4: think that's fantastic. We need that. That'll help the housing crisis,

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Speaker 4: and that'll that'll target a market that really needs that

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Speaker 4: housing that is not there. Another end of it is

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Speaker 4: the date. And I don't know if you've heard about

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Speaker 4: the date within zoning being able to kind of convert

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Speaker 4: buildings as of right, So downtown in the financial district

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Speaker 4: south of Murray Street, who was in the early nineties,

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Speaker 4: they changed that date to nineteen seventy seven. So buildings

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Speaker 4: in specific districts south of Murray Street that were built

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Speaker 4: prior to nineteen seventy seven, you could convert those as

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Speaker 4: of right completely to residential and it could be market rate.

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Speaker 4: Here in midtown it's nineteen sixty one.

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Speaker 1: What is the basis of these dates, Like I don't

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Speaker 1: quite understand, Like what is it about a building?

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Speaker 2: What happened in nineteen sixty they were like.

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Speaker 1: Whya building in nineteen sixty five? They're uncomfortable with offering

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Speaker 1: the carte blanche some what's some of the intuition or logic,

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Speaker 1: but behind some of these constraints.

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Speaker 4: It's it's very much arbitrary, okay, And at that point

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Speaker 4: in time, yes, it worked to help alleviate some of

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Speaker 4: the vacant office space in the Financial district. But the

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Speaker 4: way that that really needs to be and the Mayor's

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Speaker 4: Task Force and others have been a proponent for, is

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Speaker 4: changing that date to nineteen ninety for.

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Speaker 3: Instance, why even have a date?

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Speaker 1: Why not just say if the market says, you know,

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Speaker 1: it's doable, and if the market would value this particular

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Speaker 1: plot of land more as housing than as office, like,

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Speaker 1: what is the logic behind having a date?

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Speaker 4: So there are a couple of things with that one

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Speaker 4: they proposed in nineteen ninety with a rolling date. So

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Speaker 4: then as you know, in twenty fifty, we don't have

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Speaker 4: the same problem, and we're saying we need to change

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Speaker 4: the date. So it always always cycles out. But one

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Speaker 4: thing within zoning and changing some of the districts, say

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Speaker 4: in Chelsea some of the manufacturing areas, they're only zoned

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Speaker 4: for man manufacturing right now. An issue of just changing

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Speaker 4: that to residential is and they need to study this

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Speaker 4: and they really do, and they need to put the

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Speaker 4: time in on this. And I don't think it's a

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Speaker 4: good idea just to flip the switch and allow for

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Speaker 4: residential to go immediately without studying do we have enough

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Speaker 4: schools and hospitals and markets. All of those things are

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Speaker 4: the components of why there is a date in these areas.

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Speaker 2: Interesting, So just on the idea of maybe getting more

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Speaker 2: government support, more tax credits, a loosening of some of

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Speaker 2: the restrictions. One of the criticisms that you hear in

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Speaker 2: New York specifically is that property developers already make a

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Speaker 2: lot of money, and while this might help on the

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Speaker 2: housing front alleviate the housing shortage, we're basically giving them

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Speaker 2: even more money. What would be your response to that

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Speaker 2: or how could you alleviate some of those concerns.

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Speaker 4: Yeah, I think it's easier to say that from the

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Speaker 4: outside looking in. Butultimately, the risk that we're taking on

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Speaker 4: in converting these buildings and making these investments is our risk,

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Speaker 4: and we should get paid for that.

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Speaker 2: It's not to say is it a risk though in

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Speaker 2: New York if you make a bunch of really nice apartments.

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Speaker 4: Like sure, it is always it is always a risk,

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Speaker 4: no matter what. And yes, New York is a fantastic market,

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Speaker 4: and you know the best market in my opinion, to

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Speaker 4: ever do this, because not only that, you know, we

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Speaker 4: feel strongly many people feel strongly about the market here

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Speaker 4: and residential and multifamily. So yes, it is it is

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Speaker 4: a great market to do it, but there is still

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Speaker 4: risk with it. There are cost overruns that could potentially

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Speaker 4: happen in the conversion. There are numerous operational things that

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Speaker 4: could happen after the fact and during lease up, and

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Speaker 4: things like that new product could come online and compete

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Speaker 4: with you. Recessions could hit, other things could hit. They

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Speaker 4: could bring the prices down from when you started the

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Speaker 4: discussion of that project.

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Speaker 1: Let's say you got the you know, the legislator cooperated

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Speaker 1: change the tax code and they moved up the dates

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Speaker 1: and a bunch of other stuff happened that was sort

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Speaker 1: of favorable from a policy perspective, like, Okay, how much

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Speaker 1: do you think just office TORESI in general could like

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Speaker 1: move the dial in both directions, because that's sort of

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Speaker 1: the big question here. And it sounds like, you know,

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Speaker 1: you've done you've done a handful of projects, but it

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Speaker 1: you know, they it doesn't seem like it's a possibility everywhere,

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Speaker 1: And there are lots of buildings that as you say,

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Speaker 1: you can like walk in and say no, this is

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Speaker 1: not going to work. So, like, how much is this

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Speaker 1: in terms of when people talk about there being a

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Speaker 1: crisis of office, you know, people not going to the office,

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Speaker 1: et cetera like that, how much could it move the dial?

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Speaker 3: In your view?

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Speaker 4: It's it's going to be one one piece of the puzzle.

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Speaker 4: It's not going to be the solving piece. Okay, this

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Speaker 4: won't solve the housing crisis altogether, but not many things

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Speaker 4: on a broad brush will. But doing these things will

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Speaker 4: certainly help and will certainly get more units on the market.

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Speaker 2: How closely do you follow the sort of return to

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Speaker 2: office headlines? Like, you know, if you see a news

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Speaker 2: article that says Jamie Diamond says everyone at JP Mortgage

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Speaker 2: should come in four days a week instead of three,

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Speaker 2: do you immediately start incorporating that into your like forecasts

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Speaker 2: and expectations for rent.

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Speaker 4: No, but we we follow it very closely. We also

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Speaker 4: invest in commercial office. We have many office buildings in

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Speaker 4: our portfolio, so we follow that very closely.

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Speaker 3: Here in New York, sit.

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Speaker 4: Here in New York, also in San Francisco, Seattle, Los Angeles,

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Speaker 4: So so we follow it very closely.

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Speaker 1: Can you can we take a minute to talk about

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Speaker 1: some of those markets from an office, just a pure

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Speaker 1: office perspective, because people are so gloomy on it. You know,

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Speaker 1: if you look at the shares of the publicly traded proxies,

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Speaker 1: I guess for some of these markets pretty dumps.

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Speaker 4: There are challenges.

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Speaker 3: New York is.

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Speaker 4: Well ahead of many of the markets that I just mentioned,

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Speaker 4: and I think that it comes down to, you know,

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Speaker 4: the city and the administrations within those cities and making

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Speaker 4: sure that they drive that traffic to their central business district.

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Speaker 4: And you know, for instance San Francisco, it's it's you know,

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Speaker 4: it's seen better days, yes, And we're looking at a

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Speaker 4: lot of different opportunities there where we could potentially convert.

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Speaker 4: Because you have people out eating at restaurants, there are

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Speaker 4: places that are busy. Impact not all the offices are

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Speaker 4: are occupied. Though. Here in New York we've seen that return.

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Speaker 4: We've seen a lot of people come back into the office.

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Speaker 4: You know, we really saw the residential multi family takeoff

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Speaker 4: in called May of twenty twenty one. That's when we

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Speaker 4: really saw that trajectory. And it's it's helped with all

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Speaker 4: the return to office and with Jamie diamond saying, you know,

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Speaker 4: four days a week or five days a week for

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Speaker 4: managing directors, and that's what we need.

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Speaker 2: This might be a slightly weird question, but I remember,

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Speaker 2: you know, the other big crisis in commercial real estate

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Speaker 2: was sort of post two thousand and eight, when you

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Speaker 2: had the death of retail, the dead malls all over America,

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Speaker 2: and there was a move then to try to convert

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Speaker 2: some of that space either to new community facilities, gyms

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Speaker 2: and things like that, or in some cases residential. How

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Speaker 2: successful I know this isn't your area of expertise necessarily,

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Speaker 2: but how successful were those efforts and what can they

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Speaker 2: tell us about the current situation.

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Speaker 4: Yeah, I think it's area dependent because some of those

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Speaker 4: areas where you're able to change a mall to more

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Speaker 4: of an outdoor mall, put some multifamily on top of

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Speaker 4: those retail shops and maybe some parking below it. That

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Speaker 4: creates a whole new life cycle and a whole new

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Speaker 4: area with entertainment living, and then you know, then you

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Speaker 4: can bring in some office components too, And so I

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Speaker 4: think there are some clear distinctions that separate the two.

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Speaker 4: But I think the whole idea of breathing life into

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Speaker 4: these areas is the key, and in what we're doing

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Speaker 4: downtown in our conversions is really breathing life into these

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Speaker 4: buildings and neighborhoods. And once you do that and you

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Speaker 4: bring people into those areas, then it just kick starts

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Speaker 4: everything else. It kickstarts the retailers and then you know,

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Speaker 4: even offices want to be there.

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Speaker 1: I lived in the Financial District for I think four

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Speaker 1: years from twenty eleven through twenty fifteen, and it was

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Speaker 1: like picking up. But now when I go down there,

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Speaker 1: like there's just like so much war like around the

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Speaker 1: seaport and.

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Speaker 3: Stuff like that. Yeah, like tin buildings, was like, oh yeah.

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Speaker 1: It's really nice, and I was like, oh man, I

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Speaker 1: kind of wish I uh no, I really like, I mean,

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Speaker 1: it was a good time. Can you talk a little

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Speaker 1: bit about business and the constraints in the pandemic high

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Speaker 1: inflation period that we've experienced, because again we talked about

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Speaker 1: you've been doing it a long time, but everyone who's

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Speaker 1: done doing any sort of construction and twenty twenty two,

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Speaker 1: twenty twenty three is probably seeing headaches. Can you talk

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Speaker 1: about those headaches and have they abated at all? Have

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Speaker 1: they eased in any way.

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Speaker 4: Yeah, I think we saw a run up of pricing

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Speaker 4: certainly in twenty twenty two, and a lot of time

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Speaker 4: trying to get people signed on with a contract. They

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Speaker 4: were very busy. They didn't necessarily have the time for

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Speaker 4: this or that and that. That kind of also goes

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Speaker 4: back to building that team. Yeah, making sure that you

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Speaker 4: have the repeat contractors or vendors. But we certainly saw

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Speaker 4: the increase and prices of things.

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Speaker 1: You also saw the whole.

436
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Speaker 4: Crisis with shipping containers and the peace of those skyrocket

437
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Speaker 4: did that?

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Speaker 3: What did How did that affect them?

439
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Speaker 4: So we actually had it around that same time as

440
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Speaker 4: when we were purchasing our glass for one sixty Water,

441
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Speaker 4: the project that's currently being converted to residential, and we

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Speaker 4: were looking to locally sourced as many products as possible.

443
00:22:53,040 --> 00:22:55,800
Speaker 4: But we couldn't get this glass locally, so we needed

444
00:22:55,800 --> 00:22:58,320
Speaker 4: to go to Spain. And during that time, you know,

445
00:22:58,560 --> 00:23:01,560
Speaker 4: shipping containers were extremely expensive. It was hard to get

446
00:23:01,560 --> 00:23:07,320
Speaker 4: things going. We also saw a trucker strike in Spain,

447
00:23:08,040 --> 00:23:08,600
Speaker 4: so we had.

448
00:23:08,480 --> 00:23:10,240
Speaker 3: To remember the perfect storm era.

449
00:23:12,280 --> 00:23:15,760
Speaker 4: Yeah, you really have to go through every iteration and

450
00:23:16,080 --> 00:23:18,399
Speaker 4: create backup plants. So we made sure that we had

451
00:23:18,400 --> 00:23:21,520
Speaker 4: a private escort for our glass to the docks and

452
00:23:21,560 --> 00:23:24,120
Speaker 4: to make sure that it got on the containers when

453
00:23:24,119 --> 00:23:26,919
Speaker 4: it was supposed to and to us because you have

454
00:23:27,000 --> 00:23:30,840
Speaker 4: to follow every piece that closely because if not, it

455
00:23:30,840 --> 00:23:34,480
Speaker 4: could get lost in things. The same thing with our generator,

456
00:23:35,240 --> 00:23:37,280
Speaker 4: even though it was made in the Midwest here in

457
00:23:37,280 --> 00:23:41,680
Speaker 4: the US, we had weekly calls with our contractors in

458
00:23:41,760 --> 00:23:45,960
Speaker 4: the in the manufacturer because of parts being an issue

459
00:23:46,080 --> 00:23:48,760
Speaker 4: and what goes into the generator. So we had to

460
00:23:48,800 --> 00:23:51,800
Speaker 4: really press them and say, hey, we'll fly out there,

461
00:23:51,840 --> 00:23:53,120
Speaker 4: we want to come out there, we want to visit

462
00:23:53,160 --> 00:23:56,240
Speaker 4: the plant, make sure everything's on track. And it was

463
00:23:56,240 --> 00:23:59,920
Speaker 4: that pressure that it really made sure that they understood

464
00:24:00,080 --> 00:24:02,880
Speaker 4: this was a very high, high priority for us.

465
00:24:03,160 --> 00:24:05,600
Speaker 2: It's kind of crazy you have to go chasing generators

466
00:24:05,760 --> 00:24:09,080
Speaker 2: in this day and age. But since you mentioned glass,

467
00:24:09,359 --> 00:24:12,760
Speaker 2: I have to ask, what's the deal with windows in

468
00:24:12,800 --> 00:24:15,320
Speaker 2: New York? Sorry, that went very Seinfeld all of a sudden,

469
00:24:16,080 --> 00:24:18,720
Speaker 2: what's the deal with windows and New York apartments? No,

470
00:24:18,800 --> 00:24:21,359
Speaker 2: but this is one of my pet themes about New

471
00:24:21,440 --> 00:24:24,040
Speaker 2: York real estate, which is and I sort of alluded

472
00:24:24,040 --> 00:24:25,719
Speaker 2: to this before, but you have a lot of tenement

473
00:24:25,720 --> 00:24:28,800
Speaker 2: buildings that have been cut up into smaller apartments, into

474
00:24:28,840 --> 00:24:32,760
Speaker 2: these traditional railroad apartments, and the window is always at

475
00:24:32,760 --> 00:24:36,280
Speaker 2: the end in the bedroom, which apparently is also required

476
00:24:36,440 --> 00:24:40,400
Speaker 2: by legal statute. But my preference, certainly as a renter,

477
00:24:40,720 --> 00:24:43,520
Speaker 2: would be if I'm going to choose one room in

478
00:24:43,600 --> 00:24:46,359
Speaker 2: the apartment to not have a window, it would probably

479
00:24:46,640 --> 00:24:50,400
Speaker 2: be the bedroom. So why is that And would loosening

480
00:24:50,480 --> 00:24:54,800
Speaker 2: those type of requirements help these conversions.

481
00:24:54,720 --> 00:24:57,440
Speaker 4: Yes, it would help, But I would say that the well,

482
00:24:57,440 --> 00:24:59,720
Speaker 4: I guess depended upon who you ask, it could hurt

483
00:24:59,720 --> 00:25:03,159
Speaker 4: the quality of life because the rules for light and

484
00:25:03,200 --> 00:25:06,000
Speaker 4: air there for a reason, and so that you know,

485
00:25:06,080 --> 00:25:09,600
Speaker 4: the general population and residence aren't necessarily taken advantage of.

486
00:25:09,920 --> 00:25:12,919
Speaker 2: I appreciate other people might have different opinions in that bedroom.

487
00:25:13,160 --> 00:25:15,959
Speaker 4: But yes, for instance, at one eight Water, we noticed

488
00:25:15,960 --> 00:25:20,840
Speaker 4: that you know, some of the units they didn't have

489
00:25:20,920 --> 00:25:25,600
Speaker 4: as much natural light as others went quicker because people

490
00:25:25,800 --> 00:25:29,919
Speaker 4: have a preference for less light in their apartment or

491
00:25:29,920 --> 00:25:32,439
Speaker 4: in their bedroom so that they could sleep better. And

492
00:25:32,480 --> 00:25:34,320
Speaker 4: that's a lot of times in New York people were

493
00:25:34,720 --> 00:25:37,439
Speaker 4: just there to sleep and go out and explore the city.

494
00:25:37,920 --> 00:25:41,639
Speaker 4: But yes, because of the requirement for.

495
00:25:41,280 --> 00:25:43,360
Speaker 1: That, yeah, I'm with you.

496
00:25:43,520 --> 00:25:44,400
Speaker 3: I would I would.

497
00:25:45,119 --> 00:25:47,200
Speaker 2: I mean, look, I would love windows in every room.

498
00:25:47,280 --> 00:25:48,840
Speaker 2: I would like to make that clear. But if I'm

499
00:25:48,840 --> 00:25:50,720
Speaker 2: going to choose a lot of New York apartments have

500
00:25:50,880 --> 00:25:51,600
Speaker 2: just one window.

501
00:25:51,760 --> 00:25:55,360
Speaker 4: Yeah, we do have the ability for like blackout shades,

502
00:25:55,480 --> 00:25:57,440
Speaker 4: which we incorporate a lot of times in our units.

503
00:25:57,440 --> 00:26:00,320
Speaker 4: Oh yeah, that's the sun drenched units. But we have

504
00:26:00,440 --> 00:26:02,800
Speaker 4: the ability to have the blackout shades to help with.

505
00:26:02,760 --> 00:26:05,600
Speaker 1: That big fan of blackout shades. Can we talk a

506
00:26:05,640 --> 00:26:10,359
Speaker 1: little bit about financing and obviously, you know, interest rates

507
00:26:10,800 --> 00:26:13,159
Speaker 1: a lot higher this year than they were you know,

508
00:26:13,200 --> 00:26:15,280
Speaker 1: say a year ago, or certainly two years ago, or

509
00:26:15,320 --> 00:26:19,480
Speaker 1: certainly pre pandemic. Who is financing this and how much

510
00:26:19,720 --> 00:26:22,359
Speaker 1: is you know, it's sort of this perverse situation. And

511
00:26:22,400 --> 00:26:25,720
Speaker 1: we've talked about it just with residential real estate in general,

512
00:26:26,520 --> 00:26:29,679
Speaker 1: where we want more of it and maybe more of

513
00:26:29,680 --> 00:26:31,520
Speaker 1: it would even be the key to ease of inflation,

514
00:26:32,000 --> 00:26:34,600
Speaker 1: and yet higher rates seem to be one constraint on

515
00:26:34,680 --> 00:26:35,960
Speaker 1: the creation of new units.

516
00:26:35,960 --> 00:26:37,240
Speaker 3: How does that play out in your world?

517
00:26:37,400 --> 00:26:41,480
Speaker 4: Yes, that is it's a deal killer. I mean, if

518
00:26:41,680 --> 00:26:46,120
Speaker 4: the environment that we've been in has put a massive

519
00:26:46,200 --> 00:26:51,280
Speaker 4: constraint on commercial real estate, and there's just no mistaking

520
00:26:51,359 --> 00:26:52,160
Speaker 4: that what.

521
00:26:52,119 --> 00:26:54,359
Speaker 1: Do you mean when you so talk walk through specifically

522
00:26:54,400 --> 00:26:55,879
Speaker 1: what is, what's what's changed?

523
00:26:56,119 --> 00:26:59,920
Speaker 4: What's that you could say that in terms of financing,

524
00:27:00,280 --> 00:27:03,359
Speaker 4: you're spread over librar what it was or now so

525
00:27:03,520 --> 00:27:06,399
Speaker 4: fur which a lot of loans are originally call it

526
00:27:06,520 --> 00:27:09,840
Speaker 4: twenty twenty one, going even back to twenty twenty, I

527
00:27:09,880 --> 00:27:13,439
Speaker 4: remember closing a loan February twenty third of twenty twenty,

528
00:27:13,840 --> 00:27:17,840
Speaker 4: and at that time libror was point one one point

529
00:27:17,880 --> 00:27:22,280
Speaker 4: one one, which is incredible. Now you know library as

530
00:27:22,320 --> 00:27:26,159
Speaker 4: well over five that you know, five hundred basis points.

531
00:27:26,720 --> 00:27:30,760
Speaker 4: Difference is tacked on because you're going to have to

532
00:27:30,840 --> 00:27:34,760
Speaker 4: pay whatever the library is plus your spread to the lender.

533
00:27:35,119 --> 00:27:38,160
Speaker 4: So instead of being in a in a you know,

534
00:27:38,440 --> 00:27:41,000
Speaker 4: call it a four percent range, now you're in a

535
00:27:41,119 --> 00:27:44,840
Speaker 4: nine percent range on your debt. And that it has

536
00:27:45,000 --> 00:27:49,320
Speaker 4: massive impacts on the interest that you pay on the

537
00:27:49,400 --> 00:27:52,159
Speaker 4: money that you're being lent to do these projects, and

538
00:27:52,240 --> 00:27:56,920
Speaker 4: it puts so much of a downward force on it

539
00:27:56,960 --> 00:27:59,119
Speaker 4: that it really makes it so that a lot of

540
00:27:59,119 --> 00:28:02,080
Speaker 4: these projects are not able to be done right now.

541
00:28:02,920 --> 00:28:05,639
Speaker 4: And sure you could get you know, interest rate caps

542
00:28:05,960 --> 00:28:09,880
Speaker 4: on that, but those cost quite a bit of money

543
00:28:09,920 --> 00:28:15,000
Speaker 4: because they're products that bring you your risk down on

544
00:28:15,040 --> 00:28:17,680
Speaker 4: the interest rate, but you have to pay for that privilege,

545
00:28:18,200 --> 00:28:21,840
Speaker 4: and the cost of that factored into everything else just

546
00:28:21,880 --> 00:28:24,440
Speaker 4: makes a lot of these just not viable.

547
00:28:25,080 --> 00:28:26,800
Speaker 2: Can I just say, I love that you brought up

548
00:28:26,880 --> 00:28:30,119
Speaker 2: the benchmark lending rates Because we're recording this on June

549
00:28:30,119 --> 00:28:35,560
Speaker 2: twenty ninth, Tomorrow is the last ever day for libar published.

550
00:28:35,600 --> 00:28:37,400
Speaker 2: It is tomorrow, So moment of silence.

551
00:28:38,000 --> 00:28:41,040
Speaker 1: Aren't you going to a librar end of it's.

552
00:28:40,920 --> 00:28:45,200
Speaker 2: Awake, I'm going to awake for liboards and I but

553
00:28:46,040 --> 00:28:49,760
Speaker 2: just on this note, I mean, you've done conversions before

554
00:28:50,360 --> 00:28:53,080
Speaker 2: rates got hiked, so one eighty Water Street and now

555
00:28:53,080 --> 00:28:55,760
Speaker 2: you're doing one sixty Water Street. I think you said,

556
00:28:56,880 --> 00:28:59,680
Speaker 2: I take the point about financing in general is more expensive.

557
00:28:59,680 --> 00:29:01,600
Speaker 2: But do you do you find when you're talking to

558
00:29:01,960 --> 00:29:05,200
Speaker 2: investors to lenders that it's easier to make the argument

559
00:29:05,280 --> 00:29:09,040
Speaker 2: for conversions nowadays than it was maybe several years ago.

560
00:29:09,400 --> 00:29:13,160
Speaker 4: It is for us if you have a track record,

561
00:29:13,320 --> 00:29:16,560
Speaker 4: you have the experience, you have the know how. We know,

562
00:29:16,720 --> 00:29:18,440
Speaker 4: like I said, you could walk into a building within

563
00:29:18,480 --> 00:29:21,800
Speaker 4: the first hour or two know it is easier to

564
00:29:22,040 --> 00:29:25,480
Speaker 4: communicate that now because this is much more of a headline,

565
00:29:25,760 --> 00:29:28,000
Speaker 4: and thanks to you and everyone else in bringing this

566
00:29:28,080 --> 00:29:31,960
Speaker 4: to the forefront, it allows us to really tell that

567
00:29:32,120 --> 00:29:35,960
Speaker 4: story a little bit easier and give our investors a

568
00:29:36,000 --> 00:29:38,920
Speaker 4: little bit of a glimpse of some of the expertise

569
00:29:38,960 --> 00:29:42,440
Speaker 4: that we have so that they can be more rest

570
00:29:42,520 --> 00:29:45,160
Speaker 4: assured that we have the know how to do this

571
00:29:45,240 --> 00:29:46,239
Speaker 4: and execute on this.

572
00:29:46,640 --> 00:29:48,560
Speaker 3: You know, as you talked about like New York is.

573
00:29:49,000 --> 00:29:51,240
Speaker 1: For as much as there are problems here in New York,

574
00:29:51,320 --> 00:29:53,600
Speaker 1: still it's done a lot better. And no one really

575
00:29:53,640 --> 00:29:57,000
Speaker 1: knows what the final like equilibrium is going to be,

576
00:29:57,080 --> 00:29:59,400
Speaker 1: right Like it is still to this day like approving

577
00:29:59,400 --> 00:30:02,160
Speaker 1: little by load and you can look at MTA ridership,

578
00:30:02,160 --> 00:30:05,680
Speaker 1: but it's still ticking up modestly, et cetera. How much

579
00:30:05,760 --> 00:30:09,240
Speaker 1: does the uncertainty of what the sort of like ultimate

580
00:30:09,280 --> 00:30:14,040
Speaker 1: stable equilibrium sort of affect the willingness of building owners

581
00:30:14,080 --> 00:30:16,080
Speaker 1: to even come to you for that first call because

582
00:30:16,080 --> 00:30:18,200
Speaker 1: they don't know, Like they might have some guests that's like, well,

583
00:30:18,200 --> 00:30:19,640
Speaker 1: maybe we're gonna be a fifty, maybe we're gonna be

584
00:30:19,640 --> 00:30:22,520
Speaker 1: at seventy. Maybe it'll go back to ninety in two years,

585
00:30:22,760 --> 00:30:25,680
Speaker 1: and how much is that sort of like those estimates

586
00:30:25,680 --> 00:30:28,200
Speaker 1: for what that final destination going to be sort of

587
00:30:28,240 --> 00:30:30,760
Speaker 1: impacting whether to even go down the road on a

588
00:30:30,760 --> 00:30:31,920
Speaker 1: particular site.

589
00:30:32,320 --> 00:30:35,560
Speaker 4: I think it's it's different for different building owners. They

590
00:30:35,600 --> 00:30:40,000
Speaker 4: have some of these family offices that have been investing

591
00:30:40,000 --> 00:30:43,480
Speaker 4: in real estate for generations, and they hold various buildings,

592
00:30:43,520 --> 00:30:46,720
Speaker 4: and they can hold continue to hold without doing anything

593
00:30:46,960 --> 00:30:49,080
Speaker 4: because they're going to hold through this cycle and the

594
00:30:49,120 --> 00:30:51,400
Speaker 4: next cycle and so on and so forth. So they're

595
00:30:51,440 --> 00:30:55,600
Speaker 4: not necessarily feeling the pressures as other building owners who

596
00:30:56,320 --> 00:30:59,520
Speaker 4: really have a certain exit date that they have in mind,

597
00:31:00,080 --> 00:31:04,400
Speaker 4: and if they're not creating that value or if their

598
00:31:04,480 --> 00:31:08,640
Speaker 4: value has gone away from that investment, they need to

599
00:31:08,680 --> 00:31:12,760
Speaker 4: figure that plan out and do it quickly. So I'd

600
00:31:12,760 --> 00:31:15,680
Speaker 4: say it's different depending upon the investor.

601
00:31:32,880 --> 00:31:35,400
Speaker 2: Here's a question we probably should have asked at the beginning,

602
00:31:35,600 --> 00:31:38,400
Speaker 2: a really basic one, but who makes the decision to

603
00:31:38,520 --> 00:31:43,080
Speaker 2: actually convert an office building to residential? Is it developers

604
00:31:43,120 --> 00:31:46,520
Speaker 2: will approach a building owner with a plan, or the

605
00:31:46,560 --> 00:31:50,719
Speaker 2: building owner will tap people like you to explore those options.

606
00:31:50,800 --> 00:31:52,520
Speaker 2: How does that process actually work.

607
00:31:52,720 --> 00:31:56,600
Speaker 4: A little bit of both, So the buildings that we own.

608
00:31:56,680 --> 00:32:01,240
Speaker 4: We always even prior to acquisition, we're always value evaluating

609
00:32:01,560 --> 00:32:04,800
Speaker 4: the various scenarios. Where one sixty Water, for instance, we

610
00:32:04,840 --> 00:32:07,720
Speaker 4: bought in twenty fourteen, we knew the ability to be

611
00:32:07,720 --> 00:32:10,120
Speaker 4: able to convert it, but that wasn't necessarily plan A,

612
00:32:11,320 --> 00:32:15,040
Speaker 4: and so we're always evaluating it, and especially with our

613
00:32:15,080 --> 00:32:19,000
Speaker 4: own assets. Other owners call us because they know we're

614
00:32:19,000 --> 00:32:21,920
Speaker 4: in the space and they know we have a certain expertise.

615
00:32:22,440 --> 00:32:24,840
Speaker 4: But you know, there are developers that also go out

616
00:32:24,920 --> 00:32:28,440
Speaker 4: to different building owners and say, look, I think your

617
00:32:28,480 --> 00:32:32,959
Speaker 4: building is a prime candidate for this. We've had numerous

618
00:32:32,960 --> 00:32:36,760
Speaker 4: discussions with other building owners just like ourselves, but they

619
00:32:36,760 --> 00:32:39,280
Speaker 4: don't necessarily have our expertise, and so we go to

620
00:32:39,320 --> 00:32:42,480
Speaker 4: them and say, hey, look this is a prime candidate

621
00:32:42,520 --> 00:32:46,400
Speaker 4: for this. Here are the potentials, and we look at

622
00:32:46,400 --> 00:32:48,080
Speaker 4: whether or not we could do a deal with them

623
00:32:48,360 --> 00:32:51,240
Speaker 4: where we come in on the equity side, or if

624
00:32:51,240 --> 00:32:54,520
Speaker 4: we just are there to assist on the conversion.

625
00:32:55,280 --> 00:32:59,280
Speaker 1: It does sound like that, know how, is really difficult

626
00:32:59,320 --> 00:33:01,000
Speaker 1: to like from day one, Like if Tracy and I

627
00:33:01,520 --> 00:33:03,120
Speaker 1: were to say, oh, I want to get into this,

628
00:33:03,320 --> 00:33:05,920
Speaker 1: like replicating that would be would be one of the

629
00:33:06,000 --> 00:33:09,560
Speaker 1: challenging parts like building up that network of contractors and

630
00:33:09,680 --> 00:33:13,080
Speaker 1: architects and people whose job it is to escort glass

631
00:33:13,120 --> 00:33:14,800
Speaker 1: across the Spanish country.

632
00:33:14,880 --> 00:33:16,200
Speaker 2: Or look for generator parts.

633
00:33:16,280 --> 00:33:19,840
Speaker 4: Yeah, yeah, parts exactly. It is, it really is, and

634
00:33:20,640 --> 00:33:23,200
Speaker 4: you get down into the kind of nuts and bolts

635
00:33:23,200 --> 00:33:25,440
Speaker 4: of it in terms of the building and how you

636
00:33:25,480 --> 00:33:28,040
Speaker 4: do these things, and especially office buildings where you have

637
00:33:28,160 --> 00:33:31,000
Speaker 4: like a structural steel call it a structural steel and

638
00:33:31,120 --> 00:33:34,840
Speaker 4: metal deck, metal deck with concrete on top, where you're

639
00:33:35,040 --> 00:33:39,840
Speaker 4: carving out residences, but you know you're also reinforcing the

640
00:33:39,880 --> 00:33:41,920
Speaker 4: structure with more steel, and you have to make sure

641
00:33:41,960 --> 00:33:46,560
Speaker 4: that plumbing risers or duct work or electrical risers miss

642
00:33:46,680 --> 00:33:50,480
Speaker 4: that steel and you can't hit that. But then you

643
00:33:50,560 --> 00:33:53,040
Speaker 4: also have to have certain dimensions that are held within

644
00:33:53,160 --> 00:33:57,360
Speaker 4: the apartment itself for code, and so putting all those

645
00:33:57,360 --> 00:33:59,880
Speaker 4: together is like one big puzzle, and at the end

646
00:33:59,880 --> 00:34:02,600
Speaker 4: of the day needing to have a unit that is

647
00:34:02,960 --> 00:34:08,120
Speaker 4: desirable and marketable. So it's a pretty big challenge overall.

648
00:34:08,440 --> 00:34:12,360
Speaker 2: You know, to Joe's question about uncertainty over the outlook,

649
00:34:12,560 --> 00:34:15,440
Speaker 2: I gather there are a lot of different moving parts here,

650
00:34:15,480 --> 00:34:18,920
Speaker 2: but what's your base case for say, in ten or

651
00:34:18,960 --> 00:34:22,200
Speaker 2: twenty years, what is New York going to look like?

652
00:34:22,320 --> 00:34:24,760
Speaker 2: Are we going to be walking down you know, Lexington Avenue.

653
00:34:24,880 --> 00:34:28,320
Speaker 2: We're going to have lots more large apartment buildings versus

654
00:34:28,440 --> 00:34:30,080
Speaker 2: empty office buildings.

655
00:34:31,040 --> 00:34:35,759
Speaker 4: I think that it's unmistakable that there will be more residential.

656
00:34:36,200 --> 00:34:39,160
Speaker 4: People still obviously want to be here and they love

657
00:34:39,200 --> 00:34:42,520
Speaker 4: this city. It's incredible, and so I think there will

658
00:34:42,560 --> 00:34:45,520
Speaker 4: be more a more residential component to it. But it's

659
00:34:45,560 --> 00:34:48,759
Speaker 4: also a cycle where I think we'll add a lot

660
00:34:48,800 --> 00:34:52,840
Speaker 4: more residential in this time period. But in a certain outlook,

661
00:34:52,840 --> 00:34:55,200
Speaker 4: whether that's five years from now or ten years from now,

662
00:34:55,840 --> 00:34:59,680
Speaker 4: the office space will not necessarily come back in the

663
00:34:59,680 --> 00:35:02,719
Speaker 4: exact but it'll be here and it'll be back. There

664
00:35:02,800 --> 00:35:08,520
Speaker 4: is a large demand for Class A office space right now, So.

665
00:35:08,880 --> 00:35:10,000
Speaker 3: Where's that coming from?

666
00:35:10,120 --> 00:35:15,920
Speaker 4: So that demand the existing tenant base once brand new space,

667
00:35:16,160 --> 00:35:18,920
Speaker 4: state of the art space, and you know, whether it's

668
00:35:19,120 --> 00:35:23,160
Speaker 4: brand new buildings, it's one Vanderbilt or Hudson Yards, these

669
00:35:23,160 --> 00:35:26,200
Speaker 4: buildings are leasing up, so people want that office space.

670
00:35:26,680 --> 00:35:30,800
Speaker 4: It's this Class B, class C potentially mid block office

671
00:35:30,800 --> 00:35:35,040
Speaker 4: building that doesn't necessarily have a future right now. You

672
00:35:35,080 --> 00:35:37,000
Speaker 4: can convert some of those, but it would have to

673
00:35:37,040 --> 00:35:41,319
Speaker 4: be acquired for really pennies on the dollar, but that

674
00:35:41,400 --> 00:35:43,799
Speaker 4: could be the case, or it could be raised to

675
00:35:43,840 --> 00:35:47,360
Speaker 4: the ground and then a Class A office building built.

676
00:35:48,000 --> 00:35:50,839
Speaker 4: So we're kind of going through that now and how

677
00:35:50,880 --> 00:35:54,359
Speaker 4: that all shakes out. But make no mistake, I think

678
00:35:54,400 --> 00:35:57,399
Speaker 4: that New York in general with office will be here.

679
00:35:57,600 --> 00:36:00,880
Speaker 2: Yeah, I imagine it's the return to office argument is

680
00:36:00,880 --> 00:36:02,759
Speaker 2: a lot easier to make if you're bringing people back

681
00:36:02,800 --> 00:36:06,600
Speaker 2: to shiny. I always up at Midtown Tower.

682
00:36:06,480 --> 00:36:08,600
Speaker 1: And I always have this conversation like, oh, a lot

683
00:36:08,600 --> 00:36:10,200
Speaker 1: of people are back to the office, and people are like, well,

684
00:36:10,239 --> 00:36:11,399
Speaker 1: you work at a really nice office.

685
00:36:11,680 --> 00:36:12,520
Speaker 3: We do work in a.

686
00:36:12,480 --> 00:36:15,480
Speaker 1: Really nice office here. Sorry, this might be a really

687
00:36:15,600 --> 00:36:18,399
Speaker 1: naive question. Class A, Class B, class C Are these

688
00:36:18,400 --> 00:36:20,520
Speaker 1: objective things or are these like you sort of know

689
00:36:20,560 --> 00:36:22,080
Speaker 1: a Class A office when you see it or a

690
00:36:22,080 --> 00:36:23,560
Speaker 1: Class B office when you see it you.

691
00:36:23,560 --> 00:36:25,239
Speaker 4: Very much know, okay, very much now.

692
00:36:25,440 --> 00:36:28,000
Speaker 1: But there's not like there's some very bright set of

693
00:36:28,040 --> 00:36:29,560
Speaker 1: like things that this is.

694
00:36:29,719 --> 00:36:32,080
Speaker 2: It's not like the nineteen sixty one delineation.

695
00:36:32,200 --> 00:36:33,360
Speaker 3: Okay, okay.

696
00:36:35,000 --> 00:36:36,799
Speaker 2: I wanted to ask, you know, just going back to

697
00:36:37,320 --> 00:36:42,040
Speaker 2: support for these conversions and possible tax credits, or other measures.

698
00:36:42,440 --> 00:36:45,640
Speaker 2: You were talking about how the cost base is really

699
00:36:45,680 --> 00:36:49,879
Speaker 2: important in doing these. If you know, New York woke

700
00:36:50,000 --> 00:36:53,360
Speaker 2: up tomorrow and I guess the mayor or the governor

701
00:36:53,520 --> 00:36:58,400
Speaker 2: announced some big support measure. Would that immediately get factored

702
00:36:58,480 --> 00:37:01,880
Speaker 2: into office building value in such a way that maybe

703
00:37:01,920 --> 00:37:05,440
Speaker 2: it made conversions less attractive, Like would everything suddenly be

704
00:37:05,520 --> 00:37:06,200
Speaker 2: ratcheted up?

705
00:37:07,320 --> 00:37:11,000
Speaker 4: No, I don't believe so. No, it would, It would help,

706
00:37:11,160 --> 00:37:14,160
Speaker 4: It would help maybe stabilize the word I would use,

707
00:37:14,160 --> 00:37:17,280
Speaker 4: it would be stabilized. It would help stabilize as oppose

708
00:37:17,360 --> 00:37:22,400
Speaker 4: to increase. There's still a lot of office buildings that

709
00:37:22,440 --> 00:37:25,719
Speaker 4: are going to see decreases in value, those class being

710
00:37:25,760 --> 00:37:29,800
Speaker 4: class cs that that people were holding on to, and

711
00:37:29,920 --> 00:37:32,000
Speaker 4: they're still thinking they're going to get a twenty twenty

712
00:37:32,000 --> 00:37:34,919
Speaker 4: one price for that. That has to work its way

713
00:37:34,960 --> 00:37:36,800
Speaker 4: through the system of sorts.

714
00:37:37,120 --> 00:37:41,440
Speaker 1: Yeah, this seems like a story that multiple guests have

715
00:37:41,560 --> 00:37:43,759
Speaker 1: told us, which is that there is this sort of

716
00:37:44,480 --> 00:37:46,680
Speaker 1: just mental gap between what we can see on the

717
00:37:46,719 --> 00:37:49,680
Speaker 1: screen when we look at say the ticker of an

718
00:37:49,880 --> 00:37:52,640
Speaker 1: entity like you know, like a Vernado or something like that,

719
00:37:53,000 --> 00:37:57,359
Speaker 1: versus where markets are pricing or private markets in which

720
00:37:57,560 --> 00:38:00,000
Speaker 1: in which case it sounds like there's still a pretty huge,

721
00:38:00,080 --> 00:38:03,080
Speaker 1: huge bid esque spread in many of these cases. Like

722
00:38:03,120 --> 00:38:05,960
Speaker 1: has that narrowed it all? Like do you see some movement?

723
00:38:06,120 --> 00:38:08,920
Speaker 1: Have sellers? I don't know, what do you see on

724
00:38:08,520 --> 00:38:09,560
Speaker 1: that on that spread?

725
00:38:09,800 --> 00:38:13,480
Speaker 4: We're certainly starting to see some more movement. And granted

726
00:38:13,520 --> 00:38:16,239
Speaker 4: I thought that we would have seen more movement previously,

727
00:38:16,800 --> 00:38:19,239
Speaker 4: whether it's six months ago or so, but we are

728
00:38:19,239 --> 00:38:21,960
Speaker 4: starting to see that movement. I think a lot of

729
00:38:22,239 --> 00:38:26,640
Speaker 4: building owners are have already come to that realization. They're

730
00:38:26,680 --> 00:38:29,880
Speaker 4: at that place where they understand that value has decreased.

731
00:38:30,920 --> 00:38:35,200
Speaker 4: Now it's more of the lenders are needing to step

732
00:38:35,200 --> 00:38:39,799
Speaker 4: in and they're they're seeing the landscape and also understanding

733
00:38:39,880 --> 00:38:43,799
Speaker 4: where they kind of stack up. And then that's that's

734
00:38:43,880 --> 00:38:46,279
Speaker 4: kind of part of the flushing out, if you will,

735
00:38:46,360 --> 00:38:49,360
Speaker 4: whether it's the owner understanding it and then the lender

736
00:38:49,480 --> 00:38:51,239
Speaker 4: and then it kind of starts to get out into

737
00:38:51,239 --> 00:38:51,680
Speaker 4: the market.

738
00:38:52,120 --> 00:38:54,120
Speaker 1: Just speaking of lending, and I guess you know on

739
00:38:54,239 --> 00:38:56,040
Speaker 1: the office, Torezi, who is lending?

740
00:38:56,080 --> 00:38:58,239
Speaker 3: I mean, we talked about the price, but do you

741
00:38:58,320 --> 00:38:58,920
Speaker 3: go to banks?

742
00:38:58,920 --> 00:39:00,880
Speaker 2: Do you and has the changed?

743
00:39:01,040 --> 00:39:01,399
Speaker 3: We do?

744
00:39:02,040 --> 00:39:04,920
Speaker 4: The mix has changed. There are more people in the

745
00:39:04,960 --> 00:39:09,000
Speaker 4: space We've had a great relationship with Brookfield. Brookfield is

746
00:39:09,000 --> 00:39:11,560
Speaker 4: our lender on one sixty water. They did one eighty

747
00:39:11,560 --> 00:39:14,680
Speaker 4: Water with us. They've done other deals where it's been

748
00:39:14,719 --> 00:39:18,440
Speaker 4: a kind of a heavier redevelopment aspect to it, and

749
00:39:18,520 --> 00:39:22,000
Speaker 4: so they've been a great partner in this space and

750
00:39:22,040 --> 00:39:23,320
Speaker 4: they understand how it works.

751
00:39:23,520 --> 00:39:26,120
Speaker 1: Are bank's part of this or other like private investors

752
00:39:26,160 --> 00:39:28,160
Speaker 1: or private lending or any other just in terms of

753
00:39:28,200 --> 00:39:30,840
Speaker 1: the broad opportunities out there for tech finding money.

754
00:39:30,640 --> 00:39:33,560
Speaker 4: Yeah, I would say it's all into the spectrum to

755
00:39:33,960 --> 00:39:38,440
Speaker 4: for people to fill the full capital stack. It's going

756
00:39:38,440 --> 00:39:41,760
Speaker 4: out and whether you need to have a mezzanine piece

757
00:39:41,840 --> 00:39:44,160
Speaker 4: come in, it might be more on the private side

758
00:39:44,680 --> 00:39:47,440
Speaker 4: and alongside a traditional bank.

759
00:39:48,680 --> 00:39:50,879
Speaker 2: I have a slightly weird question, but do you hate

760
00:39:50,960 --> 00:39:54,239
Speaker 2: the inventor of open plan offices as much as some

761
00:39:54,320 --> 00:39:56,279
Speaker 2: other people seem to like When you walk into an

762
00:39:56,280 --> 00:39:59,080
Speaker 2: office building and you just see a huge empty space

763
00:39:59,160 --> 00:40:00,840
Speaker 2: to you go, oh, why did this happen?

764
00:40:01,200 --> 00:40:03,320
Speaker 4: An empty space? In terms of an open place, I

765
00:40:03,320 --> 00:40:03,759
Speaker 4: guess an.

766
00:40:03,680 --> 00:40:07,600
Speaker 2: Open space, yeah, one giant room. Yeah. Because my understanding

767
00:40:07,640 --> 00:40:10,160
Speaker 2: is there are some office buildings that might be easier

768
00:40:10,239 --> 00:40:14,120
Speaker 2: to convert if they're a little bit more segmented halls.

769
00:40:14,400 --> 00:40:16,760
Speaker 4: Yeah, oh, I see what you're saying. So instead of

770
00:40:17,320 --> 00:40:19,920
Speaker 4: just one floor plate that is complete as opposed to

771
00:40:20,080 --> 00:40:24,080
Speaker 4: some cutouts and things like that, not necessarily. It's all

772
00:40:24,239 --> 00:40:27,160
Speaker 4: about the era that it was built, in my opinion,

773
00:40:27,280 --> 00:40:29,759
Speaker 4: and what they were going through during that time and

774
00:40:29,880 --> 00:40:32,120
Speaker 4: a more modern era. You have some of these deeper

775
00:40:32,120 --> 00:40:35,200
Speaker 4: floor plates because they were able to bring in HVAC

776
00:40:36,120 --> 00:40:39,440
Speaker 4: that they didn't have in nineteen ten or nineteen twenty,

777
00:40:39,719 --> 00:40:42,239
Speaker 4: where some of the buildings in the Financial District they

778
00:40:42,280 --> 00:40:44,960
Speaker 4: have some more of these curves where it brings in

779
00:40:45,239 --> 00:40:48,280
Speaker 4: that natural light and the air because they didn't instually

780
00:40:48,320 --> 00:40:50,680
Speaker 4: have AC at the time, and so you couldn't have

781
00:40:50,719 --> 00:40:53,440
Speaker 4: a deep floor plate because people would be way too

782
00:40:53,520 --> 00:40:54,560
Speaker 4: far away from a window.

783
00:40:55,080 --> 00:40:57,760
Speaker 1: So really deep floor plates are in part a function

784
00:40:57,840 --> 00:41:00,160
Speaker 1: of the technology available to get people here.

785
00:41:00,000 --> 00:41:01,920
Speaker 4: Being correct, and it would work much better for a

786
00:41:01,960 --> 00:41:04,080
Speaker 4: trading floor for instance, to have that.

787
00:41:05,600 --> 00:41:07,640
Speaker 1: Just real quickly, you know, we talked about some of

788
00:41:07,680 --> 00:41:10,360
Speaker 1: the architectural issues, but from a sort of like safety

789
00:41:10,400 --> 00:41:13,840
Speaker 1: and code issue, are there like major distinctions between office

790
00:41:13,840 --> 00:41:16,040
Speaker 1: and residential in terms of what needs to be changed?

791
00:41:16,719 --> 00:41:20,920
Speaker 4: Yeah, I mean you have various requirements in terms of

792
00:41:21,080 --> 00:41:25,200
Speaker 4: whether it's sprinkler in fire alarm coverage in systems to

793
00:41:25,360 --> 00:41:29,320
Speaker 4: egress and making sure your your stairwells are certain width

794
00:41:29,719 --> 00:41:34,440
Speaker 4: and certain means of egress in and out your elevator systems.

795
00:41:34,760 --> 00:41:37,919
Speaker 4: There are there are definitely distinctions. I wouldn't say one

796
00:41:37,960 --> 00:41:40,919
Speaker 4: is necessarily much more, you know, cumbersome than the other.

797
00:41:41,200 --> 00:41:43,640
Speaker 4: It's just a part of the overall process.

798
00:41:44,320 --> 00:41:47,200
Speaker 1: Joey Chlelly ben Barton, thank you so much for coming

799
00:41:47,239 --> 00:41:47,799
Speaker 1: on Odd Loves.

800
00:41:47,920 --> 00:41:49,000
Speaker 4: Yeah, thank you for having me.

801
00:41:49,239 --> 00:42:04,600
Speaker 1: That was really interesting. That was super interesting, Tracy. I

802
00:42:04,680 --> 00:42:08,080
Speaker 1: really enjoyed that conversation. I sort of obviously had an

803
00:42:08,080 --> 00:42:10,520
Speaker 1: intuitive sense that it's pretty complex, and I have found

804
00:42:10,520 --> 00:42:12,920
Speaker 1: that that was like really helpful and understanding like so

805
00:42:13,000 --> 00:42:14,720
Speaker 1: many different dimensions of what it takes.

806
00:42:14,880 --> 00:42:17,400
Speaker 2: Yeah, and it does sort of crystallize this idea of

807
00:42:17,440 --> 00:42:20,000
Speaker 2: almost a double whammy for doing these at the moment,

808
00:42:20,040 --> 00:42:23,440
Speaker 2: because they're expensive to do, it certainly seems like, and

809
00:42:23,480 --> 00:42:26,000
Speaker 2: at the same time, the cost of financing them seems

810
00:42:26,040 --> 00:42:29,400
Speaker 2: you have gone up quite significantly. Yeah, getting back to

811
00:42:29,440 --> 00:42:30,560
Speaker 2: that capacity point.

812
00:42:30,400 --> 00:42:33,160
Speaker 1: And the uncertainty and the fact that different types of buyers,

813
00:42:33,280 --> 00:42:36,920
Speaker 1: it's really interesting to think about the owners of buildings

814
00:42:36,920 --> 00:42:39,920
Speaker 1: that have some sort of like strict lending commitments where

815
00:42:39,920 --> 00:42:42,400
Speaker 1: at some point the owner can no longer say, oh,

816
00:42:42,480 --> 00:42:45,280
Speaker 1: we're in it for this cycle, we're long term investors,

817
00:42:45,400 --> 00:42:47,560
Speaker 1: and the lender steps and is like, yeah, that's nice.

818
00:42:47,640 --> 00:42:49,759
Speaker 1: You got to sell the building because we don't want to.

819
00:42:49,760 --> 00:42:51,040
Speaker 3: Like, well zero here.

820
00:42:51,239 --> 00:42:53,640
Speaker 2: The other thing is thinking back to previous cycles. I

821
00:42:53,680 --> 00:42:56,680
Speaker 2: know I brought up the shopping mall analogy, but I

822
00:42:56,760 --> 00:43:00,000
Speaker 2: remember people talking, you know, back in like twenty three

823
00:43:00,520 --> 00:43:03,120
Speaker 2: or something like that, about how well some shopping malls

824
00:43:03,200 --> 00:43:05,920
Speaker 2: are doomed, like you can't do much with them, But

825
00:43:05,960 --> 00:43:08,640
Speaker 2: there were a lot of luxury shopping malls that were

826
00:43:08,640 --> 00:43:11,399
Speaker 2: doing fantastically well at that same point. So it does

827
00:43:11,400 --> 00:43:14,520
Speaker 2: seem like you are getting these like different performances within

828
00:43:14,560 --> 00:43:15,080
Speaker 2: the sector.

829
00:43:15,360 --> 00:43:17,719
Speaker 1: I wish I could remember the name of the guest

830
00:43:17,800 --> 00:43:19,600
Speaker 1: that we had on, but it was and I feel

831
00:43:19,600 --> 00:43:22,040
Speaker 1: bad that I don't. It was a previous cre episode,

832
00:43:22,040 --> 00:43:24,600
Speaker 1: and the guest made the point it was a previous

833
00:43:24,640 --> 00:43:27,200
Speaker 1: real estate episode, and the guest made the point that

834
00:43:27,400 --> 00:43:29,880
Speaker 1: after two thousand and eight two thousand and nine, the

835
00:43:30,040 --> 00:43:33,759
Speaker 1: money was made by like spreadsheet people and there's like, well,

836
00:43:33,920 --> 00:43:36,400
Speaker 1: here's the cash flow of X or Y, And it

837
00:43:36,440 --> 00:43:38,799
Speaker 1: was like all those people like buy like yeah, you know,

838
00:43:38,880 --> 00:43:41,560
Speaker 1: single family houses out in the deserts of Nevada, and

839
00:43:41,600 --> 00:43:43,560
Speaker 1: you didn't really need to know that much about Nevada

840
00:43:43,640 --> 00:43:45,719
Speaker 1: or anything. You just know that like, yeah, this looks

841
00:43:45,760 --> 00:43:46,680
Speaker 1: good on paper.

842
00:43:46,480 --> 00:43:48,600
Speaker 2: Here's how much it costs, here's how I guess, here's

843
00:43:48,640 --> 00:43:48,920
Speaker 2: what I.

844
00:43:48,840 --> 00:43:50,719
Speaker 1: Can borrow at right now, I'm going to buy a

845
00:43:50,760 --> 00:43:53,000
Speaker 1: thousand houses. I think I could rent them out here,

846
00:43:53,120 --> 00:43:56,440
Speaker 1: et cetera. And then hearing Joey talk about like the

847
00:43:56,520 --> 00:43:59,000
Speaker 1: team and it's just intuitive, like the team of like

848
00:43:59,480 --> 00:44:02,360
Speaker 1: contracts and architects and people who would know how to

849
00:44:02,400 --> 00:44:05,400
Speaker 1: cut a hole in a building, et cetera. It's very

850
00:44:05,400 --> 00:44:09,480
Speaker 1: different skills, it seems like than like spreadsheet skills.

851
00:44:09,600 --> 00:44:12,640
Speaker 2: Yes, but I would say, like the spreadsheet portion of

852
00:44:12,680 --> 00:44:15,560
Speaker 2: it still seems extremely important. Yeah, And there's also a

853
00:44:15,640 --> 00:44:19,640
Speaker 2: huge wild card factor in there, which is is New

854
00:44:19,719 --> 00:44:22,640
Speaker 2: York or the US government on a federal level going

855
00:44:22,680 --> 00:44:25,239
Speaker 2: to do something on like a tax credit basis to

856
00:44:25,680 --> 00:44:27,000
Speaker 2: help get more of these done.

857
00:44:27,000 --> 00:44:29,879
Speaker 1: I think with Castillo was the guest that we had

858
00:44:29,960 --> 00:44:32,359
Speaker 1: on to talk about it, that was a really good episode.

859
00:44:32,800 --> 00:44:34,960
Speaker 1: But yeah, I do think like the spreadsheet stuff still

860
00:44:35,000 --> 00:44:37,359
Speaker 1: seems really tricky. And then it's like, Okay, well if

861
00:44:37,360 --> 00:44:38,640
Speaker 1: you cut a hole, how much are we going to

862
00:44:38,719 --> 00:44:40,799
Speaker 1: get for the square footage for the units that have

863
00:44:41,200 --> 00:44:44,239
Speaker 1: a little less natural light because they're looking into the courtyard.

864
00:44:44,560 --> 00:44:47,239
Speaker 1: And so it does seem like there's a lot of uncertainty.

865
00:44:47,239 --> 00:44:49,759
Speaker 1: And you asked that question, like can you lose money? Yeah,

866
00:44:49,840 --> 00:44:53,040
Speaker 1: I feel confident that if I went into New York

867
00:44:53,239 --> 00:44:55,000
Speaker 1: real estate, I would find a way to lose money.

868
00:44:55,160 --> 00:44:56,560
Speaker 3: Like, I know it's supposed to be really good market.

869
00:44:58,239 --> 00:45:00,920
Speaker 3: I feel very confident in my skills, my ability to lose.

870
00:45:00,800 --> 00:45:02,680
Speaker 2: To lose money on real estate deals.

871
00:45:02,719 --> 00:45:03,880
Speaker 3: I mean, I think I could pull it off.

872
00:45:03,920 --> 00:45:05,440
Speaker 2: I bought my place like at the top of the

873
00:45:05,440 --> 00:45:09,319
Speaker 2: market last year, so I'm doing I think, yeah, all right,

874
00:45:09,360 --> 00:45:10,880
Speaker 2: on that happy note, shall we leave it there?

875
00:45:10,960 --> 00:45:12,040
Speaker 4: Let's leave it there, all right.

876
00:45:12,120 --> 00:45:15,000
Speaker 2: This has been another episode of the Odd Loots Podcast.

877
00:45:15,040 --> 00:45:17,400
Speaker 2: I'm Tracy Alloway. You can follow me on Twitter at

878
00:45:17,480 --> 00:45:19,440
Speaker 2: Tracy Alloway and I'm Joe Wisenthal.

879
00:45:19,520 --> 00:45:22,360
Speaker 1: You can follow me on Twitter at the Stalwart. Follow

880
00:45:22,400 --> 00:45:26,160
Speaker 1: our producers Carmen Rodriguez at Carmen Arman and dash El

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Speaker 1: Bennett at dashbot. And for more Oddlots content, go to

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Speaker 1: Bloomberg dot com slash odd lots, where you can find transcripts,

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Speaker 1: a blog, and a newsletter. And check out our discord

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Speaker 1: discord dot gg slash odd lots, where listeners are chatting

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Speaker 1: twenty four to seven about all these topics, including a

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Speaker 1: very active real estate channel YEP.

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Speaker 2: And you can stream Bloomberg TV on Apple Originals, Roku,

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Speaker 2: Samsung or any of the other streaming platforms. And you

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Speaker 2: can also tune in on Bloomberg TV at ten pm Eastern.

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Speaker 2: Thanks for joining in

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Speaker 3: In