This week's guest: Michael Rudder, Rudder Principal Group

0:00 Speaker 3 Good morning.

0:00 Speaker 1 This is Michael Stola for the Stolar Real Estate Report on the Cats round Table. Today. I have a very interesting individual who specializes as the only real estate company exclusively on focus on office condominiums. I have the founder and principal, Michael Rudder of Rudder Property Group. Thanks for being here.

0:19 Speaker 3 Thank you.

0:19 Speaker 1 Michael, so explain to my audience what an office condo is, because I think it’s really an office co op in most cases.

0:26 Speaker 2 Well, first off, thanks for having me, Michael. I’m a big fan and longtime watcher and listener of your show, so it’s an honor to be here. Office condos are a small niche in New York. They’ve always existed in other markets around the US, and they’re particularly prevalent in Europe and Innesia. But in New York they make up

0:50 two percent of the five hundred million square foot office market. So there’s about ten million square feet of office condos citywide, and that’s in about one hundred building. What I consider an office condo to be is an office space that is owned and occupied by a user and a building that has been converted from office rental use to office condominiums, much.

1:15 Speaker 3 Like you can own and occupy your apartment.

1:17 Speaker 2 In this case, a business or an organization can own and occupy their office space.

1:23 Speaker 1 Now do they pay taxes? They pay real estate taxes. What are the operating expenses of being in an office condo? Sure?

1:30 Speaker 2 So, much like owning a residential condo. A business can own a unit as small as one thousand square feet to many floors and a block of a building. And we’ve sold in excess of two hundred and fifty thousand square feet.

1:44 Speaker 3 And those unit.

1:45 Speaker 2 Owners in lieu of paying rent, they pay a handful of things common charges, real estate taxes if they are a for profit company. Many office condos in New York are owned by not for profits or for governments that are exempt from real estate taxes, and if they have financing on their unit, which one thing that’s attractive about

2:06 office condos is that there’s a lot of high loan to value financing available for office condo owner occupiers, so they would pay mortgage payments as well.

2:19 Speaker 1 On your website, you categorize them as A B and C properties. Explain to me when an A property is B in a C property.

2:27 Speaker 2 Well, we are targeting office users in New York. So the people who come and purchase. The properties that were marketing were historically renters typically, and they rented their office space and they’re coming to us to purchase their space, and we follow the same sort of guidelines that co Star or any other commercial real estate broker might consider

2:49 a Class AB or C building.

2:52 Speaker 1 Sometimes, of the eleven million square feet in the market, how much of the property would you consider a properties.

3:00 Speaker 3 There’s a small handful of office.

3:03 Speaker 2 Condo buildings in New York that are a off the top of my head, it would be like four to twenty fifth Avenue, which is a six hundred thousand square foot Class A building, and a handful of others were marketing a sixty thousand square foot block at that building that’s.

3:17 Speaker 3 Been owned by Wickoff.

3:18 Speaker 2 They had owned that as an investment, but the rest of the building, for the most part, is owner occupied by a variety of different nonprofits and for profit organizations.

3:27 Speaker 1 Now, what’s the per square foot price these days? About five hundred and fifty dollars while the market is like two hundred dollars from many of these office buildings.

3:35 Speaker 3 Yeah, I’d say that’s accurate.

3:37 Speaker 2 I mean, pre COVID times it was approaching one thousand and in some cases for more like Class A buildings was well north of one thousand dollars a foot, but the city wide average for AB and C and Downtown, Midtown, South and Midtown was somewhere between nine hundred of foot and eleven hundred a foot. And now we’re seeing property

3:55 self as well as four hundred of foot and up to seven fifty a foot depending sort of averaging five point fifty a foot. So, you know, the office condo market, while it’s still an exciting sector of the market and there’s demand from all sorts of groups, it has not been immune to the issues that the overall office market

4:14 has been facing.

4:15 Speaker 1 Okay with regard to when was the last plan effective, okay of a building being converted from an office to an office conduct.

4:25 Speaker 2 You know, typically every year we’ve got some sort of new product coming to the market. Our most recent active one is a building called Addresses thirty two West thirty ninth Street. It’s one hundred thousand square foot sort of bus building between fifth and sixth and thirty ninth Street, sort of behind Brian parked there and next to Amazon’s

4:47 new headquarters at Lord and Taylor. Due to COVID, the building sort of emptied out of its tenants and its long term owner, a firm called R and B Realty, was faced with a low and a lot of vacancy, and they took a non traditional route by filing an office condo offering plan with the Attorney General and we

5:07 got it approved last year, and we’ve since declared the plan effective, meaning we’ve signed contracts on some units. We’ve had two closings, We have two contracts out today and negotiating handful of other deals and expect to sell out the sixteen story building over the next year or so.

5:23 Speaker 1 What’s the profile of the purchases.

5:27 Speaker 2 Well, you know, it’s all different sorts of industries, of groups who like to be in Midtown, from apparel to textiles, to mechanical engineering to just traditional businesses. But I would say one common thread between all of the purchasers in today’s market, both at that building and just all of the sales we’re.

5:47 Speaker 3 Making, is that they’re not American.

5:50 Speaker 2 They are businesses that own and occupy their space, and the principles of those businesses were born abroad and it’s there. It’s not like foreign like you see on the residential side coming to the US to make investments and flying back home. These are people who live in New York or New Jersey or elsewhere, but own and occupy their space,

6:10 but the businesses are owned by somebody where they have a cultural preference of ownership.

6:15 Speaker 1 Okay, what about Koreatown that has a significant amount of office condos.

6:20 Speaker 2 Well, we’ve been the beneficiary of the success of Koreatown and creatown is thirty second Street between fifth and six. Even in the worst moments of COVID, it was overflowing with activity there and the buildings are full beyond belief and it’s a huge success. So we’ve seen a spillover from that area, and many of the office condos and

6:41 office co ops that we handle are not on thirty second Street but are in the surrounding areas.

6:47 Speaker 3 And we’ve seen these.

6:51 Speaker 2 Buyers who would ordinarily be in Koreatown start to expand their area. So a couple of weeks ago we closed the sale of an eight thousand square for co op at building twenty five West thirty first Street. And this is like a class C old office co op converted in the nineties as an old laft building and typically

7:10 owned by you know, apparel firms. Quasi warehouse spaces and it’s caught fire amongst the Korean community. And we sold a floor to a Korean law immigration law firm and another Korean media company closed a couple of weeks ago at nearly seven fifty a foot, which is dramatically higher than where we’re seeing sales elsewhere.

7:30 Speaker 3 In the market.

7:31 Speaker 1 Talk about the un Plaza and Carlisle with their inventory and the property, Yes, with the announcement.

7:37 Speaker 2 Yeah, well at the building eight six to six United Nations Plaza, Carlisle recently pivoted their marketing efforts to attempt an auction process through a firm called ten X, which I think is owned by Costar and in conjunction with Newmark.

7:55 And what that is is Carlisle has the sponsor of the building and they purchased a large block of space from Metal Partners several years ago. And we’re selling out the units and they have about one hundred and eighty thousand square feet left to sell, and rather than solely focusing on selling individual units to end users, they thought

8:17 they would try to bulk sell the remaining units that they own through this auction process.

8:24 Speaker 1 Okay, with regard to availability of financing, you said you know, in today’s world, financing is not really available. But you said to me the other day that SBA and other forms are sure.

8:36 Speaker 2 I suspect for purchasers of office buildings and office building investors, it’s very difficult to get financing in this market. However, if you’re an owner occupier of a business and you’re purchasing your real estate, I think financing is as strong and as available as it’s ever been. Albeit interest rates are considerably higher, but the users were selling to, whether

9:01 they’re from the Koreatown community or any other businesses, they’re obtaining in most cases up to ninety percent financing through the SBA, and rates what would have been, you know, three point eight to four percent are now six point eight to seven percent, but still they’re getting prices are a lot lower, and they’re getting ninety percent and sometimes

9:24 up to one hundred percent of financing on the purchase price, and they get to own, you know, a portion of fee simple ownership of a portion of a midtown office building. And I think many people see that this is a great opportunity.

9:38 Speaker 1 Okay, last question, which is the best area today to buy a property as an investor? Well as an investor only and then leasing it out.

9:51 Speaker 3 I don’t think that’s changed.

9:52 Speaker 2 I don’t think that the changing dynamics in the office market in New York and some of the stuff you’ve seen has really impacted what areas in New York are great.

10:02 Speaker 3 When I walk.

10:03 Speaker 2 Around Soho or NoHo or the Village or even Chelsea or Flatirn or Midtown South, it’s thriving. I mean, the buildings are renovated, that people are living there, working their shopping stores. Retail is thriving, and I think those markets are hot. I also think close to transportation remains good.

10:24 I commute the Metro North into Grand Central from Connecticut every day, and I love owning my office space on forty fourth and fifth in the Grand Central sub market, and I suspect others do as well. So owning multi tenanted buildings that you can convert to an condominium and sell out units near Grand Central I think has always

10:45 been great and remains great.

10:46 Speaker 1 Okay, I’d like to thank Michael rohta principle of Rota Property Group, for being here and I’ll see you next week.

10:51 Speaker 3 Thank you, Michael,