Interviews Michael T. Cohen, President of Colliers, Tri-State Region

0:00 Speaker 1 Good morning. This is Mike Stoler for the Stolar real Estate Report on the Cat’s Roundtable this morning. I have a unique blend of an individual, a prominent real estate broker who is the president of the Tri State Region for Colliers International and also a principal at William’s Equity owners of office buildings in New York and around the country.

0:22 Michael Cohne, thanks for being here.

0:24 Speaker 2 Thank you very much for having me.

0:25 Speaker 1 Michael, So, when you and I met recently, we spoke about the myths of the office market. Talk about the myths of the office market. You have five different myths.

0:35 Speaker 2 Okay, I’m not sure I remember all five, but I’ll tell you there certainly are a few myths circulating now, and I relish the opportunity to bust them. I think the first myth that’s circulating is the death of the B building. And this myth goes by the claim that all that really is of appeal right now in the

1:01 commercial real estate market is the brand new, the class A building that they are, you know, vacuuming up tendancy from older buildings, and that those older buildings have lost their appeal. And it’s simply not true. There is certainly no question that new buildings are attracting some tenants from older buildings, and there’s a migration that’s been called the

1:30 flight to quality, and that’s that’s the thing that’s happening. But B buildings all over the city can thrive and are thriving, and they’re attracting tenants who gravitate towards buildings that either have an older architectural cachet are are centrally located one of the hats Ie where Michael is the chairman of the Flatirn Nomad Business improve District, and I

2:01 consider that part of a town the poster child for the thriving be commercial building. It’s a live, work and play neighborhood. We have residents that include Elon Musk in the midst of our of our concentration, and we have lots of BEE buildings. I was explaining to you earlier today that we just signed a technology tenant start up

2:29 at one of our B buildings on twenty third Street, home to Home depot. They’re taking almost seventy thousand square feet. And the difference between a successful BEE building today and a B building that may be struggling has less to do with the class of building and more to do with its capitalization, and landlords who didn’t rely on market

3:00 essentials that are no longer valid, market assumptions that are no longer valid.

3:07 Speaker 1 As they say they were assumptions, Yes.

3:09 Speaker 2 Very much so. And you may recall the old when you.

3:13 Speaker 1 Assume right, you take a couple of letters off. But there was also the question of that supply outstrips demands. There were winners and losers. Work from home is the death of the office market. B buildings can get hurt by the interest rates and no one will be outshaved. Okay, sure, so let’s try to approach some of those discussions.

3:39 Speaker 2 So I love the myth that everybody’s working from home and nobody’s coming back to the office. There was an article as recently as this morning in The Times Today about Amazon insisting that folks return to their new Fifth Avenue building three days a week, if not more. And we see most companies, not all, but most companies ascribing

4:02 to the three to four workday week, and some even five days a week. And the dirty little secret is that even if you adopt a three day work week, everybody’s in the office on Tuesday and Wednesday, and you cannot use work from home as a way to have the space you occupy. It just doesn’t work that way.

4:24 The challenge to the real estate market is not the displacement of people from the office thanks to the adoption of technology during the COVID years. The challenge to the office market is interest rates. The inflationary cycle that we’re in has prompted the FED to increase rates to a point that I don’t think anybody anticipated. And anybody that

4:51 acquired or financed a building within the past ten years, which is quite a lot of people, did so predicated on interest rates that are three or four hundred basis points below where the market is today. And the interest rate is really the and the difficulty in sourcing debt capital for commercial real estate, that’s really the story in

5:19 today’s market.

5:20 Speaker 1 Okay, with regard to that, how have you been able to source capital? Well, I mean from you. You have great banking relationships.

5:27 Speaker 2 But unfortunately the banks have closed for business pretty much. The head of lending for one of the household names in commercial banking said to me the other day, when it comes to generating commercial loans here in New York City, he has quote zero interest and so there are new players entering the space. Folks who were accustomed to putting

5:59 out debt at high interest rates in more perilous or risky circumstances now find themselves able to achieve the same rates of return, but as senior lenders on solid real estate. And they’re enjoying that opportunity of moving up, taking a giant step forward in the capital stack, without having to sacrifice their rate of return.

6:21 Speaker 1 Now, what’s happening with regard to conversion of all of his buildings? You know, the mayor has put a program together with regard to that subject.

6:31 Speaker 2 So the mayor is encouraging, of course, that the the developers and owners of office buildings consider alternative uses. And I see that in our portfolio. Everything’s on the table. Is this a building that would be that if we could empty out, would make a good residential building? Is it a tear down? Is it worth? Is it more

6:59 valuable as raw material than it is today? And in some cases the answer is yes, So we’re open minded. Making the transition from an income producing commercial building to raw material is difficult and expensive because you have leases that need to expire. Can’t necessarily vacate a building overnight.

7:19 It takes years and years of planning, and I think that with the Mayor’s encouragement, we’ll see quite a lot of that. They’ve also the city is also doing an ingenious subsidy program that they initiated for commercial buildings. They’ve got an allocation of ten million square feet that they’re auditioning right now for major improvements of commercial buildings and

7:48 offering tax abatements. This is all being handled by the EDC, and there’ll be an announcement eventually of which buildings have been identified to benefit from this program.

7:58 Speaker 1 Right, because if you don’t identify five the buildings one, and if you don’t settle the taxes and the incentives, there’s really no reason for somebody to make that capital investment.

8:09 Speaker 2 That’s right, But I think that certainly the city could do more, and we look forward to hearing what they have up their sleeve in terms of encouragement of rehabilitation of commercial buildings, whether it’s as newer, more modern commercial buildings or for alternative uses, particularly residential and hospitality. The math is pretty stark, Michael. If the vacancy rate right now,

8:37 the availability rate in New York is eighteen percent, an all time high, and that constitutes ninety six million square feet, which is an awful lot. And if we could aspire to a twelve percent availability rate in two three four years, that’s a reduction of about a third from eighteen to twelve.

9:02 And the math is pretty straightforward. A third of ninety six is thirty two million square feet. We need to see thirty two million square feet of available space get absorbed, and it’s not going to be absorbed by folks adding jobs and expanding their office footprint. Much of that thirty two million is going to have to be redeployed as

9:25 something other than office space for us to get to even a twelve percent availability weight.

9:31 Speaker 1 Is it a time for a new tenant to negotiate? Is it a good opportunity for tenants?

9:38 Speaker 2 So, as I said to a landlord today that I was commiserating with, I said, tenants are asking for the sun, the moon, and the stars. Often they get the sun and the moon, and maybe not all the stars that they asked for.

9:52 Speaker 1 So with regard to that, how do you see the next six months?

9:56 Speaker 2 Well, I think the first six months of twenty twenty three we’re very quiet from a leasing standpoint. I think the second six months of twenty twenty three are going to be much more robust. We see it in our portfolio, and I see it among my clientele. A lot of folks looking to close sign new leases by the end

10:18 of this year or early next, and I think we’ll see a pickup in volume. But even with that being said, chipping away at that ninety six million square feet, I’m not sure we’re going to even make a dent.

10:33 Speaker 1 Okay, we won’t worry about the dents. We’re looking at a positive outlook. We all love New York City, and I’d like to thank Michael Komf for being here on the Slowly Report.

10:43 Speaker 2 Thank you so much, Michael,