Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal.
Speaker 2: And I'm Tracy Alloway.
Speaker 1: Tracy, I think everyone sort of knows that in many cities,
Speaker 1: but definitely in New York City, there's sort of this
Speaker 1: weird like there's two simultaneous real estate problems and they
Speaker 1: sort of compliment each other in a weird way.
Speaker 2: Right, Okay, So rents are too high, there's a shortage
Speaker 2: of housing, and we have a bunch of empty office buildings,
Speaker 2: and there's a sort of obvious solution, which would be
Speaker 2: take all the empty office buildings and convert them into
Speaker 2: preferably affordable housing. And yet it seems to be very
Speaker 2: difficult to do that.
Speaker 1: That sounds super easy, just like, oh, we're going to
Speaker 1: turn these offices into homes now.
Speaker 2: Just they've been like an open plan trading floor something
Speaker 2: that's nice.
Speaker 1: It sounds you know, put up some walls so people
Speaker 1: have some privacy.
Speaker 3: Okay, but on it.
Speaker 2: Actually, this reminds me when I was at university. I
Speaker 2: had a friend who lived in a warehouse in London
Speaker 2: and they built their walls out of cardboard to segment it.
Speaker 2: Hopefully that's not what we're doing here. But on a
Speaker 2: serious note, there are a number of difficulties, it seems,
Speaker 2: in doing this, and there are sort of physical ones
Speaker 2: around the actual layout of these former office buildings, but
Speaker 2: there's also regulatory financial and I hear people talk about
Speaker 2: it in a sort of abstract manner, But today I
Speaker 2: think we're going to dive into them in a little
Speaker 2: bit more detail.
Speaker 1: Right, So it is, you know, we joked around, but
Speaker 1: it is everyone says it is very difficult to convert
Speaker 1: an office into a residential building. But we're getting you know,
Speaker 1: the opportunities there, but we really understand, like what are
Speaker 1: the constraints, what are like the real physical constraints, and
Speaker 1: how big is the opportunity because in theory, like clearly
Speaker 1: more can be done, but like how much are we
Speaker 1: like moving? Can this move the dial?
Speaker 3: Is like a really interesting question.
Speaker 2: Yeah, And the other thing I kind of struggle to
Speaker 2: understand is New York itself is a city with a
Speaker 2: long history of carving up older buildings into new types
Speaker 2: of apartments, and so I wonder why it seems to
Speaker 2: be so much more of an issue this time around.
Speaker 1: Well, I'm very excited because today we do, in fact
Speaker 1: have the perfect guest. You know, lots of people have
Speaker 1: been talking about this question really, you know, since the
Speaker 1: pandemic struck, but our current guest has been working on
Speaker 1: it for a long time, since well before it was
Speaker 1: trendy to talk about.
Speaker 3: So the perfect guest we're going to be speaking with
Speaker 3: Joey Khalaily.
Speaker 1: He's the managing director of the Van Barton Group, which
Speaker 1: has been involved in the office to residential conversions for
Speaker 1: about a decade. So, Joey, thank you so much for
Speaker 1: coming on.
Speaker 4: Odd lots, thank you very much, Thank you for having me.
Speaker 3: What do you do at the Van Barton Group?
Speaker 4: So I'm within the asset management group and we oversee
Speaker 4: essentially the execution of the business plan once we acquire
Speaker 4: assets different buildings.
Speaker 2: So I'm going to start very broad, but then hopefully
Speaker 2: we can sort of get more into like each one
Speaker 2: of these difficulties or problems. But what are the constraints
Speaker 2: around converting office buildings to residential?
Speaker 4: Yeah, for starters, it's it's the zoning. So is the
Speaker 4: building that you're looking at within a zoning zoning district
Speaker 4: that allows for it to be converted?
Speaker 3: Okay, that's number one.
Speaker 4: If that checks the box, there are essentially a whole
Speaker 4: list of things that you go through and for me,
Speaker 4: and when I evaluate these, the structure and the light
Speaker 4: and air and the possibility of light and air and
Speaker 4: bringing that in to create residential units and ceiling heights.
Speaker 4: So on a on a kind of concrete floor to
Speaker 4: the underside of the structure above, what is that height
Speaker 4: And if that height is less than a certain distance,
Speaker 4: say if it's less than nine foot six or or
Speaker 4: if it's nine feet then once you factor in all
Speaker 4: of the MEPs, the mechanical systems that need to go
Speaker 4: in above.
Speaker 3: It's just like plumbing, electric.
Speaker 4: Sprinkler, electric, all those things that need to go in
Speaker 4: the ceiling above. Yeah, then you drop your ceiling down.
Speaker 4: And if that goes below eight feet, really that makes
Speaker 4: it very difficult to do, especially in New York, where
Speaker 4: you're not going to be able to market units that
Speaker 4: have a finished ceiling less than eight feet. So the
Speaker 4: ceiling height after the zoni district is one of the
Speaker 4: most crucial.
Speaker 1: So let's say, Okay, there's a building, it's in an
Speaker 1: area that can be zoned. Theoretically, the zoning allows for
Speaker 1: the conversion. Some would calls you up. I say, Joey,
Speaker 1: come check out this building. How long does it take
Speaker 1: for you to like size up whether it's even worth
Speaker 1: exploring further? You walk into the building and like, what
Speaker 1: are you looking for? Broadly and hoping to see on
Speaker 1: that first?
Speaker 4: That first walk through very quickly ten hours really, Yeah,
Speaker 4: you can go through it and see the ceiling heights,
Speaker 4: the depth of the floor plate, the actual floor plan
Speaker 4: and the depth of that, and then the structure. Because
Speaker 4: if the depth is great and it works out, then
Speaker 4: you wouldn't need to do any structural reconfiguration.
Speaker 1: And the depth just means, like you know, like here
Speaker 1: we're in the Bloomberg offices and we have this like
Speaker 1: huge newsroom which is very nice, but like space in
Speaker 1: the middle of that would not make for a good
Speaker 1: unit because it would not be exposed to any windows.
Speaker 3: Correct.
Speaker 4: Correct, You'd have to make structural modifications to the building
Speaker 4: to be able to make that happen.
Speaker 2: So I think one of your famous conversions is downtown
Speaker 2: one eight Water Street, and you solved that depth problem
Speaker 2: by basically creating a sort of like inner atrium courtyard.
Speaker 3: Is that right?
Speaker 4: Yeah, we ended up cutting a thirty foot by forty
Speaker 4: foot hole in the center of the building. Wow, twenty
Speaker 4: something stories went all the way and that created a
Speaker 4: courtyard essentially for light and air to come down on
Speaker 4: the inside. And then there were studios and two or
Speaker 4: three bedrooms that had their bedrooms up against that.
Speaker 3: What was it that made that plausible?
Speaker 4: So?
Speaker 1: Okay, so you see it's called the floor plate is
Speaker 1: the term, and this is like sort of yeah, okay.
Speaker 4: So you know if we're on the six floor or
Speaker 4: floor of a building, yeah, that's the floor plate.
Speaker 1: The horizontal slice of the building. So this what it
Speaker 1: was one eighty Water Street. Correct, Okay, So one eighty
Speaker 1: Water Street in its previous version did not have like
Speaker 1: a suitable floor plate, but you understood the oppor that
Speaker 1: there was an opportunity to cut a hole in it.
Speaker 4: Correct it It had a suitable floor plate at one
Speaker 4: point in time for the office use right, right. For
Speaker 4: residential it did not, and in evaluating that, came up
Speaker 4: with the plan of cutting that hole in the center.
Speaker 1: Can you just talk a little bit more about that
Speaker 1: hole cutting, Like how did you sort of recognize that, yes,
Speaker 1: it's only it's currently only capable for offices, but actually
Speaker 1: we can make the mouth work if we cut a
Speaker 1: giant hole down the center of a building. Talk a
Speaker 1: little bit about that evaluation.
Speaker 4: So with with a lot of things, just about everything
Speaker 4: is possible, but it would cost a lot of money. Yeah,
Speaker 4: so you have to evaluate the structural modifications that it
Speaker 4: would take to create that and ultimately what you're going
Speaker 4: to do with that building at the end of the day, Yeah,
Speaker 4: create the residence is how much money you're going to
Speaker 4: get on the rent and then eventually sell that building
Speaker 4: one day. And so when you evaluate that, especially in
Speaker 4: that courtyard area, what's the spacing of the column days
Speaker 4: from column to column and does it allow for enough
Speaker 4: space to be able to cut that in without really
Speaker 4: cutting out any other structural steel columns or supports, which
Speaker 4: when we cut that out, we still had to reinforce
Speaker 4: the rest of the structure and do quite a bit
Speaker 4: of that.
Speaker 2: So when you're looking to convert an office building to
Speaker 2: apartments or something like that, how much of what you're
Speaker 2: looking to do is based on I guess people's preferences
Speaker 2: on where they live versus regulatory requirements about well, you
Speaker 2: have to have so many fire exits and you have
Speaker 2: to have this number of windows and that sort of thing.
Speaker 4: So we look at it. We look at it if
Speaker 4: Vanbardon much differently in terms of you have to obviously
Speaker 4: look at the code requirements and have to build that
Speaker 4: within your plan, but we take it much further in
Speaker 4: terms of we have a little bit more of like
Speaker 4: a hospitality approach to our multi family buildings or residential buildings,
Speaker 4: in that we look at the entire life cycle of
Speaker 4: the day and the resident and really put ourselves in
Speaker 4: the shoes of the resident and not just in twenty
Speaker 4: twenty three, but in twenty thirty three and beyond. So
Speaker 4: we try and incorporate as much technology and components that
Speaker 4: set this building up so that it's very much marketable
Speaker 4: at every point in time.
Speaker 1: Can you talk a little bit about you know, again,
Speaker 1: I'm thinking about finding the right contractor the right construction
Speaker 1: company that even knows how to like cut a hole
Speaker 1: in the middle of a building, which seems tricky, Like
Speaker 1: I imagine that's not something that.
Speaker 3: Every construction company can do.
Speaker 1: Yeah, but can you talk a little bit about like
Speaker 1: who how many entities out there that can do that?
Speaker 1: And then maybe like, all right, the costs in twenty
Speaker 1: twenty three for that, I assume are really a lot
Speaker 1: higher than when you started on one eighty Water Street,
Speaker 1: both due to inflation and supply chain constraints. Can you
Speaker 1: talk a little bit about sort of operational constraints of Okay, theoretically, yeah,
Speaker 1: this is a cut holeable building, but actually getting someone
Speaker 1: to do.
Speaker 4: That, Yeah, you have to find the right team members.
Speaker 4: And since we've been in the space for a while,
Speaker 4: we've kind of brought on board and continued to work
Speaker 4: with for the majority of it, I'd say probably seventy
Speaker 4: percent of our team members or repeat team members.
Speaker 1: So when you say team members, these are contractors, yeah,
Speaker 1: and people you work with and some look got it.
Speaker 4: Okay, we have the vision and know how to execute.
Speaker 4: We bring on our consultants and our other team members
Speaker 4: to really evaluate those nuts and bolts pieces of cutting
Speaker 4: the holes and doing those things and be the experts
Speaker 4: in their field. And finding the experts is difficult, and
Speaker 4: it takes years to create that team that you're comfortable
Speaker 4: with to cut a hole in a building and know
Speaker 4: that everything is going to go as Yeah.
Speaker 2: I wanted to ask you a little bit more about
Speaker 2: the financing because all of this, you know, cutting holes
Speaker 2: in the middle of the buildings sounds very expensive. And
Speaker 2: it does seem like a lot of the office conversions
Speaker 2: are often aimed at a sort of premium segment of residential,
Speaker 2: and this has been one of the criticisms. Yes, so
Speaker 2: how does that fit in with the decisions on whether
Speaker 2: or not to go ahead for these projects, Like is
Speaker 2: it just a fact of life that you have to
Speaker 2: create more expensive apartments that are going to pay for
Speaker 2: this or could you do this on a more affordable basis?
Speaker 4: You could do it both ways, right, Ultimately it comes
Speaker 4: down to what your basis is in the building when
Speaker 4: you purchase it, and if you have a low enough
Speaker 4: basis when you when you buy that on a per
Speaker 4: square foot basis, and knowing we've done this a while,
Speaker 4: we know what it'll take to convert a building. So
Speaker 4: if that basis is a certain amount, we layer in
Speaker 4: the amount that it takes to convert it, and we
Speaker 4: know at the end of the day where we're going
Speaker 4: to end up on a per square foot basis and
Speaker 4: are all in basis, and so you can determine based
Speaker 4: off of that initial basis which way it really needs
Speaker 4: to go. So if the basis is a certain amount,
Speaker 4: say if it's you know, three four, five, hundred dollars
Speaker 4: a foot. If you're buying a billion five hundred dollars
Speaker 4: a foot and it's going to cost you five hundred
Speaker 4: dollars to convert, you know you're in one thousand a foot.
Speaker 4: That's a pretty hefty price today, and so you know
Speaker 4: that you would have to get very high rents market
Speaker 4: rate rents to be able to make that pencil. If
Speaker 4: you're able to purchase the building at a much lower basis,
Speaker 4: it gives you much more flexibility and then you know,
Speaker 4: layer into it the need in my opinion, for legislation
Speaker 4: to be able to make that easier and so then
Speaker 4: you can target different segments of the market, so it's
Speaker 4: not all at the luxury end of the spectrum.
Speaker 2: So just on that basis, what is the exit You
Speaker 2: mentioned legislation and my understanding is there is, or maybe
Speaker 2: there was, some tax credit support for doing these kind
Speaker 2: of conversions. Can you lay out, like, what would you
Speaker 2: expect to see in terms of government support for doing
Speaker 2: this at the moment.
Speaker 4: So as of now, there isn't any incentive, but you know,
Speaker 4: there were debates in New York state legislator to incorporate
Speaker 4: some sort of tax abatement as part of this and
Speaker 4: for that tax abatement, there'll be a certain amount of
Speaker 4: units within that converted building that would be affordable. I
Speaker 4: think that's fantastic. We need that. That'll help the housing crisis,
Speaker 4: and that'll that'll target a market that really needs that
Speaker 4: housing that is not there. Another end of it is
Speaker 4: the date. And I don't know if you've heard about
Speaker 4: the date within zoning being able to kind of convert
Speaker 4: buildings as of right, So downtown in the financial district
Speaker 4: south of Murray Street, who was in the early nineties,
Speaker 4: they changed that date to nineteen seventy seven. So buildings
Speaker 4: in specific districts south of Murray Street that were built
Speaker 4: prior to nineteen seventy seven, you could convert those as
Speaker 4: of right completely to residential and it could be market rate.
Speaker 4: Here in midtown it's nineteen sixty one.
Speaker 1: What is the basis of these dates, Like I don't
Speaker 1: quite understand, Like what is it about a building?
Speaker 2: What happened in nineteen sixty they were like.
Speaker 1: Whya building in nineteen sixty five? They're uncomfortable with offering
Speaker 1: the carte blanche some what's some of the intuition or logic,
Speaker 1: but behind some of these constraints.
Speaker 4: It's it's very much arbitrary, okay, And at that point
Speaker 4: in time, yes, it worked to help alleviate some of
Speaker 4: the vacant office space in the Financial district. But the
Speaker 4: way that that really needs to be and the Mayor's
Speaker 4: Task Force and others have been a proponent for, is
Speaker 4: changing that date to nineteen ninety for.
Speaker 3: Instance, why even have a date?
Speaker 1: Why not just say if the market says, you know,
Speaker 1: it's doable, and if the market would value this particular
Speaker 1: plot of land more as housing than as office, like,
Speaker 1: what is the logic behind having a date?
Speaker 4: So there are a couple of things with that one
Speaker 4: they proposed in nineteen ninety with a rolling date. So
Speaker 4: then as you know, in twenty fifty, we don't have
Speaker 4: the same problem, and we're saying we need to change
Speaker 4: the date. So it always always cycles out. But one
Speaker 4: thing within zoning and changing some of the districts, say
Speaker 4: in Chelsea some of the manufacturing areas, they're only zoned
Speaker 4: for man manufacturing right now. An issue of just changing
Speaker 4: that to residential is and they need to study this
Speaker 4: and they really do, and they need to put the
Speaker 4: time in on this. And I don't think it's a
Speaker 4: good idea just to flip the switch and allow for
Speaker 4: residential to go immediately without studying do we have enough
Speaker 4: schools and hospitals and markets. All of those things are
Speaker 4: the components of why there is a date in these areas.
Speaker 2: Interesting, So just on the idea of maybe getting more
Speaker 2: government support, more tax credits, a loosening of some of
Speaker 2: the restrictions. One of the criticisms that you hear in
Speaker 2: New York specifically is that property developers already make a
Speaker 2: lot of money, and while this might help on the
Speaker 2: housing front alleviate the housing shortage, we're basically giving them
Speaker 2: even more money. What would be your response to that
Speaker 2: or how could you alleviate some of those concerns.
Speaker 4: Yeah, I think it's easier to say that from the
Speaker 4: outside looking in. Butultimately, the risk that we're taking on
Speaker 4: in converting these buildings and making these investments is our risk,
Speaker 4: and we should get paid for that.
Speaker 2: It's not to say is it a risk though in
Speaker 2: New York if you make a bunch of really nice apartments.
Speaker 4: Like sure, it is always it is always a risk,
Speaker 4: no matter what. And yes, New York is a fantastic market,
Speaker 4: and you know the best market in my opinion, to
Speaker 4: ever do this, because not only that, you know, we
Speaker 4: feel strongly many people feel strongly about the market here
Speaker 4: and residential and multifamily. So yes, it is it is
Speaker 4: a great market to do it, but there is still
Speaker 4: risk with it. There are cost overruns that could potentially
Speaker 4: happen in the conversion. There are numerous operational things that
Speaker 4: could happen after the fact and during lease up, and
Speaker 4: things like that new product could come online and compete
Speaker 4: with you. Recessions could hit, other things could hit. They
Speaker 4: could bring the prices down from when you started the
Speaker 4: discussion of that project.
Speaker 1: Let's say you got the you know, the legislator cooperated
Speaker 1: change the tax code and they moved up the dates
Speaker 1: and a bunch of other stuff happened that was sort
Speaker 1: of favorable from a policy perspective, like, Okay, how much
Speaker 1: do you think just office TORESI in general could like
Speaker 1: move the dial in both directions, because that's sort of
Speaker 1: the big question here. And it sounds like, you know,
Speaker 1: you've done you've done a handful of projects, but it
Speaker 1: you know, they it doesn't seem like it's a possibility everywhere,
Speaker 1: And there are lots of buildings that as you say,
Speaker 1: you can like walk in and say no, this is
Speaker 1: not going to work. So, like, how much is this
Speaker 1: in terms of when people talk about there being a
Speaker 1: crisis of office, you know, people not going to the office,
Speaker 1: et cetera like that, how much could it move the dial?
Speaker 3: In your view?
Speaker 4: It's it's going to be one one piece of the puzzle.
Speaker 4: It's not going to be the solving piece. Okay, this
Speaker 4: won't solve the housing crisis altogether, but not many things
Speaker 4: on a broad brush will. But doing these things will
Speaker 4: certainly help and will certainly get more units on the market.
Speaker 2: How closely do you follow the sort of return to
Speaker 2: office headlines? Like, you know, if you see a news
Speaker 2: article that says Jamie Diamond says everyone at JP Mortgage
Speaker 2: should come in four days a week instead of three,
Speaker 2: do you immediately start incorporating that into your like forecasts
Speaker 2: and expectations for rent.
Speaker 4: No, but we we follow it very closely. We also
Speaker 4: invest in commercial office. We have many office buildings in
Speaker 4: our portfolio, so we follow that very closely.
Speaker 3: Here in New York, sit.
Speaker 4: Here in New York, also in San Francisco, Seattle, Los Angeles,
Speaker 4: So so we follow it very closely.
Speaker 1: Can you can we take a minute to talk about
Speaker 1: some of those markets from an office, just a pure
Speaker 1: office perspective, because people are so gloomy on it. You know,
Speaker 1: if you look at the shares of the publicly traded proxies,
Speaker 1: I guess for some of these markets pretty dumps.
Speaker 4: There are challenges.
Speaker 3: New York is.
Speaker 4: Well ahead of many of the markets that I just mentioned,
Speaker 4: and I think that it comes down to, you know,
Speaker 4: the city and the administrations within those cities and making
Speaker 4: sure that they drive that traffic to their central business district.
Speaker 4: And you know, for instance San Francisco, it's it's you know,
Speaker 4: it's seen better days, yes, And we're looking at a
Speaker 4: lot of different opportunities there where we could potentially convert.
Speaker 4: Because you have people out eating at restaurants, there are
Speaker 4: places that are busy. Impact not all the offices are
Speaker 4: are occupied. Though. Here in New York we've seen that return.
Speaker 4: We've seen a lot of people come back into the office.
Speaker 4: You know, we really saw the residential multi family takeoff
Speaker 4: in called May of twenty twenty one. That's when we
Speaker 4: really saw that trajectory. And it's it's helped with all
Speaker 4: the return to office and with Jamie diamond saying, you know,
Speaker 4: four days a week or five days a week for
Speaker 4: managing directors, and that's what we need.
Speaker 2: This might be a slightly weird question, but I remember,
Speaker 2: you know, the other big crisis in commercial real estate
Speaker 2: was sort of post two thousand and eight, when you
Speaker 2: had the death of retail, the dead malls all over America,
Speaker 2: and there was a move then to try to convert
Speaker 2: some of that space either to new community facilities, gyms
Speaker 2: and things like that, or in some cases residential. How
Speaker 2: successful I know this isn't your area of expertise necessarily,
Speaker 2: but how successful were those efforts and what can they
Speaker 2: tell us about the current situation.
Speaker 4: Yeah, I think it's area dependent because some of those
Speaker 4: areas where you're able to change a mall to more
Speaker 4: of an outdoor mall, put some multifamily on top of
Speaker 4: those retail shops and maybe some parking below it. That
Speaker 4: creates a whole new life cycle and a whole new
Speaker 4: area with entertainment living, and then you know, then you
Speaker 4: can bring in some office components too, And so I
Speaker 4: think there are some clear distinctions that separate the two.
Speaker 4: But I think the whole idea of breathing life into
Speaker 4: these areas is the key, and in what we're doing
Speaker 4: downtown in our conversions is really breathing life into these
Speaker 4: buildings and neighborhoods. And once you do that and you
Speaker 4: bring people into those areas, then it just kick starts
Speaker 4: everything else. It kickstarts the retailers and then you know,
Speaker 4: even offices want to be there.
Speaker 1: I lived in the Financial District for I think four
Speaker 1: years from twenty eleven through twenty fifteen, and it was
Speaker 1: like picking up. But now when I go down there,
Speaker 1: like there's just like so much war like around the
Speaker 1: seaport and.
Speaker 3: Stuff like that. Yeah, like tin buildings, was like, oh yeah.
Speaker 1: It's really nice, and I was like, oh man, I
Speaker 1: kind of wish I uh no, I really like, I mean,
Speaker 1: it was a good time. Can you talk a little
Speaker 1: bit about business and the constraints in the pandemic high
Speaker 1: inflation period that we've experienced, because again we talked about
Speaker 1: you've been doing it a long time, but everyone who's
Speaker 1: done doing any sort of construction and twenty twenty two,
Speaker 1: twenty twenty three is probably seeing headaches. Can you talk
Speaker 1: about those headaches and have they abated at all? Have
Speaker 1: they eased in any way.
Speaker 4: Yeah, I think we saw a run up of pricing
Speaker 4: certainly in twenty twenty two, and a lot of time
Speaker 4: trying to get people signed on with a contract. They
Speaker 4: were very busy. They didn't necessarily have the time for
Speaker 4: this or that and that. That kind of also goes
Speaker 4: back to building that team. Yeah, making sure that you
Speaker 4: have the repeat contractors or vendors. But we certainly saw
Speaker 4: the increase and prices of things.
Speaker 1: You also saw the whole.
Speaker 4: Crisis with shipping containers and the peace of those skyrocket
Speaker 4: did that?
Speaker 3: What did How did that affect them?
Speaker 4: So we actually had it around that same time as
Speaker 4: when we were purchasing our glass for one sixty Water,
Speaker 4: the project that's currently being converted to residential, and we
Speaker 4: were looking to locally sourced as many products as possible.
Speaker 4: But we couldn't get this glass locally, so we needed
Speaker 4: to go to Spain. And during that time, you know,
Speaker 4: shipping containers were extremely expensive. It was hard to get
Speaker 4: things going. We also saw a trucker strike in Spain,
Speaker 4: so we had.
Speaker 3: To remember the perfect storm era.
Speaker 4: Yeah, you really have to go through every iteration and
Speaker 4: create backup plants. So we made sure that we had
Speaker 4: a private escort for our glass to the docks and
Speaker 4: to make sure that it got on the containers when
Speaker 4: it was supposed to and to us because you have
Speaker 4: to follow every piece that closely because if not, it
Speaker 4: could get lost in things. The same thing with our generator,
Speaker 4: even though it was made in the Midwest here in
Speaker 4: the US, we had weekly calls with our contractors in
Speaker 4: the in the manufacturer because of parts being an issue
Speaker 4: and what goes into the generator. So we had to
Speaker 4: really press them and say, hey, we'll fly out there,
Speaker 4: we want to come out there, we want to visit
Speaker 4: the plant, make sure everything's on track. And it was
Speaker 4: that pressure that it really made sure that they understood
Speaker 4: this was a very high, high priority for us.
Speaker 2: It's kind of crazy you have to go chasing generators
Speaker 2: in this day and age. But since you mentioned glass,
Speaker 2: I have to ask, what's the deal with windows in
Speaker 2: New York? Sorry, that went very Seinfeld all of a sudden,
Speaker 2: what's the deal with windows and New York apartments? No,
Speaker 2: but this is one of my pet themes about New
Speaker 2: York real estate, which is and I sort of alluded
Speaker 2: to this before, but you have a lot of tenement
Speaker 2: buildings that have been cut up into smaller apartments, into
Speaker 2: these traditional railroad apartments, and the window is always at
Speaker 2: the end in the bedroom, which apparently is also required
Speaker 2: by legal statute. But my preference, certainly as a renter,
Speaker 2: would be if I'm going to choose one room in
Speaker 2: the apartment to not have a window, it would probably
Speaker 2: be the bedroom. So why is that And would loosening
Speaker 2: those type of requirements help these conversions.
Speaker 4: Yes, it would help, But I would say that the well,
Speaker 4: I guess depended upon who you ask, it could hurt
Speaker 4: the quality of life because the rules for light and
Speaker 4: air there for a reason, and so that you know,
Speaker 4: the general population and residence aren't necessarily taken advantage of.
Speaker 2: I appreciate other people might have different opinions in that bedroom.
Speaker 4: But yes, for instance, at one eight Water, we noticed
Speaker 4: that you know, some of the units they didn't have
Speaker 4: as much natural light as others went quicker because people
Speaker 4: have a preference for less light in their apartment or
Speaker 4: in their bedroom so that they could sleep better. And
Speaker 4: that's a lot of times in New York people were
Speaker 4: just there to sleep and go out and explore the city.
Speaker 4: But yes, because of the requirement for.
Speaker 1: That, yeah, I'm with you.
Speaker 3: I would I would.
Speaker 2: I mean, look, I would love windows in every room.
Speaker 2: I would like to make that clear. But if I'm
Speaker 2: going to choose a lot of New York apartments have
Speaker 2: just one window.
Speaker 4: Yeah, we do have the ability for like blackout shades,
Speaker 4: which we incorporate a lot of times in our units.
Speaker 4: Oh yeah, that's the sun drenched units. But we have
Speaker 4: the ability to have the blackout shades to help with.
Speaker 1: That big fan of blackout shades. Can we talk a
Speaker 1: little bit about financing and obviously, you know, interest rates
Speaker 1: a lot higher this year than they were you know,
Speaker 1: say a year ago, or certainly two years ago, or
Speaker 1: certainly pre pandemic. Who is financing this and how much
Speaker 1: is you know, it's sort of this perverse situation. And
Speaker 1: we've talked about it just with residential real estate in general,
Speaker 1: where we want more of it and maybe more of
Speaker 1: it would even be the key to ease of inflation,
Speaker 1: and yet higher rates seem to be one constraint on
Speaker 1: the creation of new units.
Speaker 3: How does that play out in your world?
Speaker 4: Yes, that is it's a deal killer. I mean, if
Speaker 4: the environment that we've been in has put a massive
Speaker 4: constraint on commercial real estate, and there's just no mistaking
Speaker 4: that what.
Speaker 1: Do you mean when you so talk walk through specifically
Speaker 1: what is, what's what's changed?
Speaker 4: What's that you could say that in terms of financing,
Speaker 4: you're spread over librar what it was or now so
Speaker 4: fur which a lot of loans are originally call it
Speaker 4: twenty twenty one, going even back to twenty twenty, I
Speaker 4: remember closing a loan February twenty third of twenty twenty,
Speaker 4: and at that time libror was point one one point
Speaker 4: one one, which is incredible. Now you know library as
Speaker 4: well over five that you know, five hundred basis points.
Speaker 4: Difference is tacked on because you're going to have to
Speaker 4: pay whatever the library is plus your spread to the lender.
Speaker 4: So instead of being in a in a you know,
Speaker 4: call it a four percent range, now you're in a
Speaker 4: nine percent range on your debt. And that it has
Speaker 4: massive impacts on the interest that you pay on the
Speaker 4: money that you're being lent to do these projects, and
Speaker 4: it puts so much of a downward force on it
Speaker 4: that it really makes it so that a lot of
Speaker 4: these projects are not able to be done right now.
Speaker 4: And sure you could get you know, interest rate caps
Speaker 4: on that, but those cost quite a bit of money
Speaker 4: because they're products that bring you your risk down on
Speaker 4: the interest rate, but you have to pay for that privilege,
Speaker 4: and the cost of that factored into everything else just
Speaker 4: makes a lot of these just not viable.
Speaker 2: Can I just say, I love that you brought up
Speaker 2: the benchmark lending rates Because we're recording this on June
Speaker 2: twenty ninth, Tomorrow is the last ever day for libar published.
Speaker 2: It is tomorrow, So moment of silence.
Speaker 1: Aren't you going to a librar end of it's.
Speaker 2: Awake, I'm going to awake for liboards and I but
Speaker 2: just on this note, I mean, you've done conversions before
Speaker 2: rates got hiked, so one eighty Water Street and now
Speaker 2: you're doing one sixty Water Street. I think you said,
Speaker 2: I take the point about financing in general is more expensive.
Speaker 2: But do you do you find when you're talking to
Speaker 2: investors to lenders that it's easier to make the argument
Speaker 2: for conversions nowadays than it was maybe several years ago.
Speaker 4: It is for us if you have a track record,
Speaker 4: you have the experience, you have the know how. We know,
Speaker 4: like I said, you could walk into a building within
Speaker 4: the first hour or two know it is easier to
Speaker 4: communicate that now because this is much more of a headline,
Speaker 4: and thanks to you and everyone else in bringing this
Speaker 4: to the forefront, it allows us to really tell that
Speaker 4: story a little bit easier and give our investors a
Speaker 4: little bit of a glimpse of some of the expertise
Speaker 4: that we have so that they can be more rest
Speaker 4: assured that we have the know how to do this
Speaker 4: and execute on this.
Speaker 3: You know, as you talked about like New York is.
Speaker 1: For as much as there are problems here in New York,
Speaker 1: still it's done a lot better. And no one really
Speaker 1: knows what the final like equilibrium is going to be,
Speaker 1: right Like it is still to this day like approving
Speaker 1: little by load and you can look at MTA ridership,
Speaker 1: but it's still ticking up modestly, et cetera. How much
Speaker 1: does the uncertainty of what the sort of like ultimate
Speaker 1: stable equilibrium sort of affect the willingness of building owners
Speaker 1: to even come to you for that first call because
Speaker 1: they don't know, Like they might have some guests that's like, well,
Speaker 1: maybe we're gonna be a fifty, maybe we're gonna be
Speaker 1: at seventy. Maybe it'll go back to ninety in two years,
Speaker 1: and how much is that sort of like those estimates
Speaker 1: for what that final destination going to be sort of
Speaker 1: impacting whether to even go down the road on a
Speaker 1: particular site.
Speaker 4: I think it's it's different for different building owners. They
Speaker 4: have some of these family offices that have been investing
Speaker 4: in real estate for generations, and they hold various buildings,
Speaker 4: and they can hold continue to hold without doing anything
Speaker 4: because they're going to hold through this cycle and the
Speaker 4: next cycle and so on and so forth. So they're
Speaker 4: not necessarily feeling the pressures as other building owners who
Speaker 4: really have a certain exit date that they have in mind,
Speaker 4: and if they're not creating that value or if their
Speaker 4: value has gone away from that investment, they need to
Speaker 4: figure that plan out and do it quickly. So I'd
Speaker 4: say it's different depending upon the investor.
Speaker 2: Here's a question we probably should have asked at the beginning,
Speaker 2: a really basic one, but who makes the decision to
Speaker 2: actually convert an office building to residential? Is it developers
Speaker 2: will approach a building owner with a plan, or the
Speaker 2: building owner will tap people like you to explore those options.
Speaker 2: How does that process actually work.
Speaker 4: A little bit of both, So the buildings that we own.
Speaker 4: We always even prior to acquisition, we're always value evaluating
Speaker 4: the various scenarios. Where one sixty Water, for instance, we
Speaker 4: bought in twenty fourteen, we knew the ability to be
Speaker 4: able to convert it, but that wasn't necessarily plan A,
Speaker 4: and so we're always evaluating it, and especially with our
Speaker 4: own assets. Other owners call us because they know we're
Speaker 4: in the space and they know we have a certain expertise.
Speaker 4: But you know, there are developers that also go out
Speaker 4: to different building owners and say, look, I think your
Speaker 4: building is a prime candidate for this. We've had numerous
Speaker 4: discussions with other building owners just like ourselves, but they
Speaker 4: don't necessarily have our expertise, and so we go to
Speaker 4: them and say, hey, look this is a prime candidate
Speaker 4: for this. Here are the potentials, and we look at
Speaker 4: whether or not we could do a deal with them
Speaker 4: where we come in on the equity side, or if
Speaker 4: we just are there to assist on the conversion.
Speaker 1: It does sound like that, know how, is really difficult
Speaker 1: to like from day one, Like if Tracy and I
Speaker 1: were to say, oh, I want to get into this,
Speaker 1: like replicating that would be would be one of the
Speaker 1: challenging parts like building up that network of contractors and
Speaker 1: architects and people whose job it is to escort glass
Speaker 1: across the Spanish country.
Speaker 2: Or look for generator parts.
Speaker 4: Yeah, yeah, parts exactly. It is, it really is, and
Speaker 4: you get down into the kind of nuts and bolts
Speaker 4: of it in terms of the building and how you
Speaker 4: do these things, and especially office buildings where you have
Speaker 4: like a structural steel call it a structural steel and
Speaker 4: metal deck, metal deck with concrete on top, where you're
Speaker 4: carving out residences, but you know you're also reinforcing the
Speaker 4: structure with more steel, and you have to make sure
Speaker 4: that plumbing risers or duct work or electrical risers miss
Speaker 4: that steel and you can't hit that. But then you
Speaker 4: also have to have certain dimensions that are held within
Speaker 4: the apartment itself for code, and so putting all those
Speaker 4: together is like one big puzzle, and at the end
Speaker 4: of the day needing to have a unit that is
Speaker 4: desirable and marketable. So it's a pretty big challenge overall.
Speaker 2: You know, to Joe's question about uncertainty over the outlook,
Speaker 2: I gather there are a lot of different moving parts here,
Speaker 2: but what's your base case for say, in ten or
Speaker 2: twenty years, what is New York going to look like?
Speaker 2: Are we going to be walking down you know, Lexington Avenue.
Speaker 2: We're going to have lots more large apartment buildings versus
Speaker 2: empty office buildings.
Speaker 4: I think that it's unmistakable that there will be more residential.
Speaker 4: People still obviously want to be here and they love
Speaker 4: this city. It's incredible, and so I think there will
Speaker 4: be more a more residential component to it. But it's
Speaker 4: also a cycle where I think we'll add a lot
Speaker 4: more residential in this time period. But in a certain outlook,
Speaker 4: whether that's five years from now or ten years from now,
Speaker 4: the office space will not necessarily come back in the
Speaker 4: exact but it'll be here and it'll be back. There
Speaker 4: is a large demand for Class A office space right now, So.
Speaker 3: Where's that coming from?
Speaker 4: So that demand the existing tenant base once brand new space,
Speaker 4: state of the art space, and you know, whether it's
Speaker 4: brand new buildings, it's one Vanderbilt or Hudson Yards, these
Speaker 4: buildings are leasing up, so people want that office space.
Speaker 4: It's this Class B, class C potentially mid block office
Speaker 4: building that doesn't necessarily have a future right now. You
Speaker 4: can convert some of those, but it would have to
Speaker 4: be acquired for really pennies on the dollar, but that
Speaker 4: could be the case, or it could be raised to
Speaker 4: the ground and then a Class A office building built.
Speaker 4: So we're kind of going through that now and how
Speaker 4: that all shakes out. But make no mistake, I think
Speaker 4: that New York in general with office will be here.
Speaker 2: Yeah, I imagine it's the return to office argument is
Speaker 2: a lot easier to make if you're bringing people back
Speaker 2: to shiny. I always up at Midtown Tower.
Speaker 1: And I always have this conversation like, oh, a lot
Speaker 1: of people are back to the office, and people are like, well,
Speaker 1: you work at a really nice office.
Speaker 3: We do work in a.
Speaker 1: Really nice office here. Sorry, this might be a really
Speaker 1: naive question. Class A, Class B, class C Are these
Speaker 1: objective things or are these like you sort of know
Speaker 1: a Class A office when you see it or a
Speaker 1: Class B office when you see it you.
Speaker 4: Very much know, okay, very much now.
Speaker 1: But there's not like there's some very bright set of
Speaker 1: like things that this is.
Speaker 2: It's not like the nineteen sixty one delineation.
Speaker 3: Okay, okay.
Speaker 2: I wanted to ask, you know, just going back to
Speaker 2: support for these conversions and possible tax credits, or other measures.
Speaker 2: You were talking about how the cost base is really
Speaker 2: important in doing these. If you know, New York woke
Speaker 2: up tomorrow and I guess the mayor or the governor
Speaker 2: announced some big support measure. Would that immediately get factored
Speaker 2: into office building value in such a way that maybe
Speaker 2: it made conversions less attractive, Like would everything suddenly be
Speaker 2: ratcheted up?
Speaker 4: No, I don't believe so. No, it would, It would help,
Speaker 4: It would help maybe stabilize the word I would use,
Speaker 4: it would be stabilized. It would help stabilize as oppose
Speaker 4: to increase. There's still a lot of office buildings that
Speaker 4: are going to see decreases in value, those class being
Speaker 4: class cs that that people were holding on to, and
Speaker 4: they're still thinking they're going to get a twenty twenty
Speaker 4: one price for that. That has to work its way
Speaker 4: through the system of sorts.
Speaker 1: Yeah, this seems like a story that multiple guests have
Speaker 1: told us, which is that there is this sort of
Speaker 1: just mental gap between what we can see on the
Speaker 1: screen when we look at say the ticker of an
Speaker 1: entity like you know, like a Vernado or something like that,
Speaker 1: versus where markets are pricing or private markets in which
Speaker 1: in which case it sounds like there's still a pretty huge,
Speaker 1: huge bid esque spread in many of these cases. Like
Speaker 1: has that narrowed it all? Like do you see some movement?
Speaker 1: Have sellers? I don't know, what do you see on
Speaker 1: that on that spread?
Speaker 4: We're certainly starting to see some more movement. And granted
Speaker 4: I thought that we would have seen more movement previously,
Speaker 4: whether it's six months ago or so, but we are
Speaker 4: starting to see that movement. I think a lot of
Speaker 4: building owners are have already come to that realization. They're
Speaker 4: at that place where they understand that value has decreased.
Speaker 4: Now it's more of the lenders are needing to step
Speaker 4: in and they're they're seeing the landscape and also understanding
Speaker 4: where they kind of stack up. And then that's that's
Speaker 4: kind of part of the flushing out, if you will,
Speaker 4: whether it's the owner understanding it and then the lender
Speaker 4: and then it kind of starts to get out into
Speaker 4: the market.
Speaker 1: Just speaking of lending, and I guess you know on
Speaker 1: the office, Torezi, who is lending?
Speaker 3: I mean, we talked about the price, but do you
Speaker 3: go to banks?
Speaker 2: Do you and has the changed?
Speaker 3: We do?
Speaker 4: The mix has changed. There are more people in the
Speaker 4: space We've had a great relationship with Brookfield. Brookfield is
Speaker 4: our lender on one sixty water. They did one eighty
Speaker 4: Water with us. They've done other deals where it's been
Speaker 4: a kind of a heavier redevelopment aspect to it, and
Speaker 4: so they've been a great partner in this space and
Speaker 4: they understand how it works.
Speaker 1: Are bank's part of this or other like private investors
Speaker 1: or private lending or any other just in terms of
Speaker 1: the broad opportunities out there for tech finding money.
Speaker 4: Yeah, I would say it's all into the spectrum to
Speaker 4: for people to fill the full capital stack. It's going
Speaker 4: out and whether you need to have a mezzanine piece
Speaker 4: come in, it might be more on the private side
Speaker 4: and alongside a traditional bank.
Speaker 2: I have a slightly weird question, but do you hate
Speaker 2: the inventor of open plan offices as much as some
Speaker 2: other people seem to like When you walk into an
Speaker 2: office building and you just see a huge empty space
Speaker 2: to you go, oh, why did this happen?
Speaker 4: An empty space? In terms of an open place, I
Speaker 4: guess an.
Speaker 2: Open space, yeah, one giant room. Yeah. Because my understanding
Speaker 2: is there are some office buildings that might be easier
Speaker 2: to convert if they're a little bit more segmented halls.
Speaker 4: Yeah, oh, I see what you're saying. So instead of
Speaker 4: just one floor plate that is complete as opposed to
Speaker 4: some cutouts and things like that, not necessarily. It's all
Speaker 4: about the era that it was built, in my opinion,
Speaker 4: and what they were going through during that time and
Speaker 4: a more modern era. You have some of these deeper
Speaker 4: floor plates because they were able to bring in HVAC
Speaker 4: that they didn't have in nineteen ten or nineteen twenty,
Speaker 4: where some of the buildings in the Financial District they
Speaker 4: have some more of these curves where it brings in
Speaker 4: that natural light and the air because they didn't instually
Speaker 4: have AC at the time, and so you couldn't have
Speaker 4: a deep floor plate because people would be way too
Speaker 4: far away from a window.
Speaker 1: So really deep floor plates are in part a function
Speaker 1: of the technology available to get people here.
Speaker 4: Being correct, and it would work much better for a
Speaker 4: trading floor for instance, to have that.
Speaker 1: Just real quickly, you know, we talked about some of
Speaker 1: the architectural issues, but from a sort of like safety
Speaker 1: and code issue, are there like major distinctions between office
Speaker 1: and residential in terms of what needs to be changed?
Speaker 4: Yeah, I mean you have various requirements in terms of
Speaker 4: whether it's sprinkler in fire alarm coverage in systems to
Speaker 4: egress and making sure your your stairwells are certain width
Speaker 4: and certain means of egress in and out your elevator systems.
Speaker 4: There are there are definitely distinctions. I wouldn't say one
Speaker 4: is necessarily much more, you know, cumbersome than the other.
Speaker 4: It's just a part of the overall process.
Speaker 1: Joey Chlelly ben Barton, thank you so much for coming
Speaker 1: on Odd Loves.
Speaker 4: Yeah, thank you for having me.
Speaker 1: That was really interesting. That was super interesting, Tracy. I
Speaker 1: really enjoyed that conversation. I sort of obviously had an
Speaker 1: intuitive sense that it's pretty complex, and I have found
Speaker 1: that that was like really helpful and understanding like so
Speaker 1: many different dimensions of what it takes.
Speaker 2: Yeah, and it does sort of crystallize this idea of
Speaker 2: almost a double whammy for doing these at the moment,
Speaker 2: because they're expensive to do, it certainly seems like, and
Speaker 2: at the same time, the cost of financing them seems
Speaker 2: you have gone up quite significantly. Yeah, getting back to
Speaker 2: that capacity point.
Speaker 1: And the uncertainty and the fact that different types of buyers,
Speaker 1: it's really interesting to think about the owners of buildings
Speaker 1: that have some sort of like strict lending commitments where
Speaker 1: at some point the owner can no longer say, oh,
Speaker 1: we're in it for this cycle, we're long term investors,
Speaker 1: and the lender steps and is like, yeah, that's nice.
Speaker 1: You got to sell the building because we don't want to.
Speaker 3: Like, well zero here.
Speaker 2: The other thing is thinking back to previous cycles. I
Speaker 2: know I brought up the shopping mall analogy, but I
Speaker 2: remember people talking, you know, back in like twenty three
Speaker 2: or something like that, about how well some shopping malls
Speaker 2: are doomed, like you can't do much with them, But
Speaker 2: there were a lot of luxury shopping malls that were
Speaker 2: doing fantastically well at that same point. So it does
Speaker 2: seem like you are getting these like different performances within
Speaker 2: the sector.
Speaker 1: I wish I could remember the name of the guest
Speaker 1: that we had on, but it was and I feel
Speaker 1: bad that I don't. It was a previous cre episode,
Speaker 1: and the guest made the point it was a previous
Speaker 1: real estate episode, and the guest made the point that
Speaker 1: after two thousand and eight two thousand and nine, the
Speaker 1: money was made by like spreadsheet people and there's like, well,
Speaker 1: here's the cash flow of X or Y, And it
Speaker 1: was like all those people like buy like yeah, you know,
Speaker 1: single family houses out in the deserts of Nevada, and
Speaker 1: you didn't really need to know that much about Nevada
Speaker 1: or anything. You just know that like, yeah, this looks
Speaker 1: good on paper.
Speaker 2: Here's how much it costs, here's how I guess, here's
Speaker 2: what I.
Speaker 1: Can borrow at right now, I'm going to buy a
Speaker 1: thousand houses. I think I could rent them out here,
Speaker 1: et cetera. And then hearing Joey talk about like the
Speaker 1: team and it's just intuitive, like the team of like
Speaker 1: contracts and architects and people who would know how to
Speaker 1: cut a hole in a building, et cetera. It's very
Speaker 1: different skills, it seems like than like spreadsheet skills.
Speaker 2: Yes, but I would say, like the spreadsheet portion of
Speaker 2: it still seems extremely important. Yeah, And there's also a
Speaker 2: huge wild card factor in there, which is is New
Speaker 2: York or the US government on a federal level going
Speaker 2: to do something on like a tax credit basis to
Speaker 2: help get more of these done.
Speaker 1: I think with Castillo was the guest that we had
Speaker 1: on to talk about it, that was a really good episode.
Speaker 1: But yeah, I do think like the spreadsheet stuff still
Speaker 1: seems really tricky. And then it's like, Okay, well if
Speaker 1: you cut a hole, how much are we going to
Speaker 1: get for the square footage for the units that have
Speaker 1: a little less natural light because they're looking into the courtyard.
Speaker 1: And so it does seem like there's a lot of uncertainty.
Speaker 1: And you asked that question, like can you lose money? Yeah,
Speaker 1: I feel confident that if I went into New York
Speaker 1: real estate, I would find a way to lose money.
Speaker 3: Like, I know it's supposed to be really good market.
Speaker 3: I feel very confident in my skills, my ability to lose.
Speaker 2: To lose money on real estate deals.
Speaker 3: I mean, I think I could pull it off.
Speaker 2: I bought my place like at the top of the
Speaker 2: market last year, so I'm doing I think, yeah, all right,
Speaker 2: on that happy note, shall we leave it there?
Speaker 4: Let's leave it there, all right.
Speaker 2: This has been another episode of the Odd Loots Podcast.
Speaker 2: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 2: Tracy Alloway and I'm Joe Wisenthal.
Speaker 1: You can follow me on Twitter at the Stalwart. Follow
Speaker 1: our producers Carmen Rodriguez at Carmen Arman and dash El
Speaker 1: Bennett at dashbot. And for more Oddlots content, go to
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Speaker 2: Thanks for joining in
Speaker 3: In