Interviews David Schechtman Meridian Capital Group and Meridian Investment Sales

0:00 Speaker 1 Good morning. This is Mike Stole for the Stolen real Estate Reporting on the Catch round Table. So what’s really happening in the real estate market? What’s happening with financing multifamily hotels? I don’t have the answers, So today I’ve brought the senior executive managing director of Meridian Capital, David Scheckman, to the show to tell us what’s really happening in

0:20 the world. You spoke to me the other day and you basically said to me that it’s discreet. The world is really not doing well. There’s certain opportunities, but it’s not the first part of the year wasn’t good. So what’s happening now for the balance of the year.

0:38 Speaker 2 Well, first off, it’s always an honor to be with you, Michael, happy to be here today. The first half of the year across the board for commercial real estate in New York City was really a big question mark. We were dealing with interest rates. Over the past twenty four months, we’ve nearly seen across the board a one hundred percent

0:57 increase in interest rates. We’ve seen in two major bank failures, and we have a lot of question marks about who’s going to be putting out money and where the value lies. I think by the time summer came around, people realize that New York is open for business. I heard a statistic yesterday that office occupancy has risen to fifty eight

1:19 or sixty percent, depending on who you believe, And if that’s true, I think another barometer is the traffic. We’re seeing more people in the five borrows leaving for work and coming home from work. But ultimately, we’ve got some headwinds that are just really without dispute. We’ve got tremendous interest rates, We’re in twenty five thirty year highs. We’ve

1:45 got taxes which are going no place but up. We’ve got a tremendous problem to solve with our migrant crisis, according to the mayor and anybody who reads the papers or walks the streets. And we have two major changes to the way we technological changes. We shop differently, brick and mortar retail is just different fundamentally now for years.

2:08 And the way we office. Even if we have Jamie Diamond banging on the table telling people they’re going to be back in their office four to five days a week, the truth of the matter is the office is released, but very few people are doing five days a week, so the city is trying to solve that. New York

2:25 is Manhattan’s always been a bedroom community, but it’s also been a live workplace. Now you can work from anywhere, so there’s some real questions as to where do values go.

2:37 Speaker 1 So where are values? We’re talking the other day about the office buildings. Office buildings is one specific topic.

2:44 Speaker 2 Well, you know, when you talk about office buildings, and again we’re provincial, we’re talking about New York, I’ll forget about the rest of the country. It’s really a tale of two office buildings. You’ve got Class A and then you have everything else. So when we talk about the towers, the tower have rebounded. You have major corporations and the

3:03 concerns that occupy them, commanding their folks to come back. And while leasing volume is down and leasing pricing is down, there are leases being signed in the shiny, gleaming towers. But if you look in the evening six, seven, eight o’clock at night, no longer do people burn the midnight oil in mass in the city. I think as a

3:25 general proposition, people believe that these office buildings are worthless because people are officing in mass less. However, they are definitely picking up steam and there’s a renewed interest. I’m glad to say that there is a huge contrarian bet.

3:44 Really since July and August of this year, really only in the past four to six weeks, we’re starting to see a lot of foreign capital, and as a true New Yorker foreign as anybody who’s not from New York or that exotic place New Jersey. We’re seeing office owners from Chicago, Toronto, Asia, Europe. They’re all coming to New

4:04 York and saying, you know what, I think what goes down will certainly come up. I’m interested in buying an office building, So I’m glad for that. But then you talk about the Class B, in the Class C office buildings, those mid block garment center or in the not in the midtown core. A lot of those buildings are struggling.

4:23 Those buildings we’re selling for five six hundred dollars in existing foot to the extent that they’re being sold or there’s transactions happening, they’re cut nearly in half.

4:35 Speaker 1 Besides being cut in half, who’s lending on these properties?

4:38 Speaker 2 Well, therein lies the rub. So you find an office building and you know we’re in the market with a handful of them. You find a bidder who says, you know what, I’m not in this for one or two years.

4:51 I believe in New York in perpetuity. I’m going to buy this building and I’m going to hold it at infinitum. I don’t need to sell it in three years because so I think in ten or fifteen years, I’m going to be the smartest office building owner in the world.

5:05 And they’re probably right. So they go out with that.

5:08 Speaker 1 They have to have a holding power to pay their operating expenses. Their insurance has gone up, the taxes have gone up, so there are certain problems.

5:16 Speaker 2 Well that’s a great point, Michael. If you look at historically who has bought these office towers, they’ve generally been They’ve generally been institutions in private equity that buy these things, and inside of three, five or seven years they sell them or have another capital event like a refinance, so they can return that money to their shareholders and investors.

5:38 All of our rolodexes have turned upside down. In the brokerage world. The people who are coming in today are the people who don’t have to borrow their equity. They certainly need mortgages. Nobody buys one hundred two hundred million dollar building without a mortgage. But a lot of these folks are generational holders. There are people like life companies

5:58 whose cost of capital is less. They’re making a bet that in seven or ten or twelve years their money’s going to double. And today there are buyers. People are making what I like to call the John Paulson contrarian bet.

6:15 But the truth is time will heal everything. This city, like all other cities, is resilient, and I think office in the long term is a good bet, albeit with a paradigm shifting.

6:27 Speaker 1 What about the conversion of office to residential. What’s your thoughts on that.

6:31 Speaker 2 Well, you know, the fundamental issue with conversion from office to residential is, even if we didn’t have a morass of red tape and legislators, although they may be well meaning, they don’t move quickly and they don’t move in unison, So laboring under the assumption that they all allowed it to happen and the zoning permitted it, which is the

6:51 first stumbling block, and we’re moving in that direction. The issue is a lot of these buildings are antiquated. If you take a side street building in the west thirties, just off of Sixth Avenue that is a nineteen forties or nineteen fifties vintage. You have eight foot ceilings at best, and you have an absolute rabbit warren of rooms. In

7:14 order to gut that thing and create the light and air and entrances and exits necessary to support residences, it’s almost cost prohibitive. My bet, Mike is I’m going to make it here. You’re going to see the values of some of these buildings declined so significantly that it pays to buy them, tear them down and build them up again.

7:37 JP Morgan did it, although it’s not for a conversion to residential. But JP Morgan decided and it was a great bet. Right on Park Avenue. You know what, We’re going to tear down this edifice and make something new because it’s antiquated stock.

7:51 Speaker 1 What about the Supreme Court case?

7:54 Speaker 2 Which Supreme Court case? I guess we should limit it to real estate.

7:57 Speaker 1 Here, Yes, specifically to real estate, especially in multi family in New York City.

8:02 Speaker 2 Look, I think that anybody from brokers to owners to certainly people who are in in tendancy and all of their advocates and housing rights advocates. I don’t think there is a true New Yorker who doesn’t who would dispute that there is a need for rent regulated and rent stabilized housing hardstop. We all believe that we believe that

8:25 people who’ve spent decades in an apartment, whose income is fixed, or living in Social Security, they shouldn’t be kicked out for a whole bunch of yuppies who are willing to turn to triple or quadruple the price. The problem is, our rent regulation system in New York has been so perverted and twisted that the lion’s share of the rent

8:45 regulated units are indeed populated by people who could probably pay closer to free market. So I think the Supreme Court case, if it does in fact reverberate and it becomes the law of the land here in New York, I think it would be a great idea to hit pause on rent regulation, to take a deep dive into

9:05 each individual unit, make sure people who deserve it. And I think that the first reforms we’re done in the seventies, I think it needs to be overhauled because the abuse outweighs the legitimate beneficiaries.

9:21 Speaker 1 Last question, Signature Bank.

9:22 Speaker 2 Loans signature bank loans, so I’m bound on certain instances by confidentiality. I am not a broker engage to sell them on behalf of the fdi C, but as a market observer solely, I think it’s very interesting. You’ve got tens of billions of dollars of loans tied right here to the five borrows which are presently being marketed, and

9:47 you’ve got a whole cabal of bidders. I think it’s going to be very interesting to see where these loans are valued. Although there’s a huge asterisk on this sale, these are not just sales that are going to be The pricing is going to define by market bidding. But it’s a little bit perverted.

10:05 Speaker 1 You have the.

10:05 Speaker 2 FDIC bolstering it. Some of the pools are being sold where you can only buy my understanding is twenty percent of the pool. Some of them you can only buy five percent of the equity. The debt and partial equity is being provided by the FDIC. I think a lot of portfolio lenders and other lenders were waiting to see

10:25 where these things trade so that they can then mark to market their own comparable product. The only problem is if the pricing is being bolstered by the FDIC. I really don’t think it’s a fair benchmark for where values are today, but it’s going to be a historical sale.

10:43 I think whomever buys it over time will make money because when values return, if you’ve bought it at a discount to value, your listeners can fill in the rest. It’s another iteration of the it’s another iteration of savings and loans or RTC.

10:59 Speaker 1 Okay. I like to thank David Schickman for being here and giving his views on the state of the real estate market. See next week.