The Stoler Report with Michael Stoler: Michael Rudder

0:00 Speaker 1 Good morning. This is Mike Stola for the Stola Real Estate Report. So we is something called office condominiums. People know what residential condominiums, but not everybody understands office condominiums. So today I have the condo king Il Calm, the individual who is the principal, founder and CEO of Red, a Property group who specializes in office condominiums. Thanks for

0:26 being here.

0:26 Speaker 2 Thank you, Michaelson. Honor to join you today.

0:29 Speaker 1 Okay, so tell my listeners what an office condo is.

0:33 Speaker 2 So an office condo is much like its residential counterpart. It could be a portion of a floor, or a floor or multiple floors within an office building where an office tenant, a company, a business, a nonprofit organization can own their space rather than rent. The office condos are big in Europe and in Asia other markets around the US,

0:59 but for reasons they’ve always been a small hyper niche of a business. Here in New York, office condos make up two percent of the five hundred million square foot office market. There’s about twelve and a half million square feet of office condos in New York and about one hundred and twenty five building citywide.

1:15 Speaker 1 Now, how does the building become an office condo.

1:18 Speaker 2 It is much again like its residential counterpart. It’s a business that’s regulated by the New York State Attorney General. And owner of a building files a three hundred and fifty page offering plan to the AG’s office, and it generally takes six, nine twelve months to get approved, and you can start selling units, floors, or portions of a

1:40 building to owner occupiers.

1:42 Speaker 1 So who’s buying today in this market? And then we’ll go back what happened with COVID and prices?

1:48 Speaker 2 Sure, so always this is a bit of a phenomenon, but even more so today is who’s buying. I’d say over eighty percent of the office condos sales we make are to businesses and organizations where the principle of that firm was born abroad. Oftentimes it’s businesses that are owned by Koreans, or Indians, or Israelis or somewhere where they

2:14 come from. They have a cultural preference towards ownership. Where Americans get spooked by New York City in the office market, Foreigners see this as a time as New York’s on sale fifty percent. Often this is a great thing to purchase.

2:28 Speaker 1 So here’s the big question. You know people are buying, you know, office buildings, but I don’t hear of many people today buying built office buildings and converting them to office condos. Am I correct or in correct?

2:42 Speaker 2 It’s always been a small niche in the market. I would say over my career there’s about one building citywide that gets converted to an office condo on average per year, something close to that. We recently represented mac real Estate Group who converted sixteen nineteen Broadway, the Old Brill Building, to office condos, and we had a great success there,

3:02 selling out office condos to owner occupiers, to businesses that want.

3:07 Speaker 1 To at what kind of price.

3:08 Speaker 2 We averaged four hundred dollars a foot there for eighteen thousand square foot floors, and we sold it out within six months, and.

3:15 Speaker 1 Most of the people from the music business.

3:18 Speaker 2 None were from the music business, which.

3:20 Speaker 1 Is interesting because the real building was known from the music business Carol Kane, the Old Diamond, and many others.

3:27 Speaker 2 It was a very famous and iconic building. But what these buyers saw, again, many of them had a cultural preference towards ownership because they were born abroad, and they saw four hundred dollars a foot It was heavily financiable.

3:41 Many of them took advantage of ninety percent loan to value SBA Small business financing.

3:47 Speaker 1 And what are the rules? How do you get the SBA financing?

3:51 Speaker 2 The rule used to be that you have to own and occupy fifty one percent of the space. I think those rules have even loosened up. But these are loans that that are initiated by a lender and effectively backed fifty percent by the government, So they end up being very safe loans for a lender like Bank of America.

4:10 Even if the borrower is getting a ninety percent loan be a vase, exposure is only only forty five percent, and the government’s in a subordinate position on the back end there. So lenders love giving these loans, but you have to effectively be a user. And while they lend on on the real estate, they’re really underwriting the business’s

4:30 financial So if you’re a business so.

4:32 Speaker 1 It’s making money, they’re requiring recourse.

4:35 Speaker 2 They are requiring recourse. I would say that sell the purchasers that we sell to are not as focused on signing a personal guarantee as typical real estate developers are. That’s like a big no no in our business, although most folks do it. If you’re a user, a business or an organization buying office space for your own use,

4:55 I think that, like signing a personal guarantee, is not their their biggest hold up.

5:00 Speaker 1 So the big question is what happened a couple of years ago when prices worth thousand dollars a foot and today we’re talking about let’s say from three hundred to five hundred foot.

5:10 Speaker 2 Yeah, well, it seems like a great buying opportunity right now to me. But the reality is is office condos continue to fare well. However, they’re not immune to what has happened in the overall B and C class office market.

5:25 We’ve seen just such an extreme destruction of value of these office buildings. I remember five twenty nine Fifth Avenue sold to a group of investors for I think three fifty a foot. I mean, it’s an unthinkable price. That’s not an office condos a total building sale, but the retail alone. This is the corner of Fifth Avenue and

5:44 forty fourth Street. The retail alane’s worth multiples of that. And we’ve just seen price levels go to a level we haven’t seen since the early nineties.

5:55 Speaker 1 And for example, give me an example of the building. Maybe twenty fifth Avenue.

6:02 Speaker 2 Four to twenty fifth Avenue is a good example. There were years before COVID where we were selling units there for nine hundred one eleven hundred dollars per foot in the building. We just closed the sale last month on behalf of Wickoff for thirty one thousand square feet. Wickcoff had owned it for a long time and it was

6:20 least to Major League Soccer and we sold to five We sold for five hundred and fifty dollars a foot to a Turkish bank. They were a foreign buyer who have again a culture preference use.

6:32 Speaker 1 Yeah, they’re didn’t buying for investment. They bought it for use.

6:36 Speaker 2 Correct and at five point fifty a foot, I think that’s that’s multiples higher than what an investor might pay. And it was still a good outcome for Wickoff, but considerably lower than where prices were pre COVID.

6:50 Speaker 1 Okay, what about eight sixty and eight sixty six um Plaza.

6:55 Speaker 2 It’s a building very near and dear to my heart. In twenty thirteen, Meadow Partners bought this half million square foot building across from the United Nations from its longtime owner Vernado, and they divided it into one hundred office condo units and we sold about half the building to owner occupiers, to governments, to nonprofits, NGOs and groups like

7:20 that and average one thousand dollars a foot.

7:22 Speaker 1 How many nonprofits are buying their own space because they also get the tax advantage.

7:27 Speaker 2 Well, for a while nonprofits were selling their space. They had, you know, funding crunches, they weren’t using the space like they used to. So we were representing and still are representing a number of nonprofits who are buying. They are I’m sorry, who are selling and looking to dispose the space they weren’t using. But now nonprofits are re entering

7:46 the market. There’s great like tax exempt bond financing available for nonprofits, high loan to value, low interest rate financing. There’s other grants that cover the equity portion for social service nonprofit and nonprofits are exempt from paying real estate taxes when they own, but they don’t they pay taxes if they lease unless they least for a thirty year time.

8:10 So we recently sold i think about thirty thousand square feet at a building two oh seven West twenty fifth Street across from Whole Foods in Chelsea, to a church and they are tax exempt.

8:23 Speaker 1 And that’s interesting. Most of the churches are settling their properties.

8:27 Speaker 2 This church had sold their properties. They owned a number of properties in Murray Hill and they sold a year or so ago to a developer and they needed a new home for their space. And they’re not as much of a traditional church there, even running yoga classes and stuff like that. So they bought a large commercial condo

8:46 from us.

8:46 Speaker 1 So how do you secure your business?

8:49 Speaker 2 Well, my relationship with condo king, Yeah, I would say that my relationship with the real estate community is paramount. I have long career of being friends with you and other folks and other commercial real estate brokers, and I’m just known to my My firm is sort of synonymous with this hyperniche of a business of office condos and

9:09 anybody who has a requirement and that that world comes to us and we partner, we pay referrals, We do anything we can to capture that business and serve everyone properly.

9:19 Speaker 1 So how do you expect two thousand and six, in two thousand and seven to do in the office condom market?

9:26 Speaker 2 Well, I think we’re on the road to recovery here. Let office condos are more in lockstep with the office leasing market than they are in the capital markets cap rates and investment sales. That does not impact office condo pricing as much as rental rates do. Last year, we saw forty one million square feet of space leased in

9:45 New York, the highest since twenty nineteen, and really, you know, a record recovery of space absorption. This past week we saw three hundred and twenty five dollars a foot sublease signed at nine West fifty seventh in I’m told more are coming, right so I think that there’s twenty million square feet of office space being taken off the leasing

10:08 pool and converted to residential. I think all of these signs point to a recovery that’s underway.

10:13 Speaker 1 And what’s your thought about the conversion of office space to residential.

10:17 Speaker 2 I think it’s a win win win, and the last administration, I think, pushed it through and it’s a really tremendous gift in New York. It’s providing much needed housing in many cases of affordable housing. It’s taken older, antiquated office space off the market, and it’s going to end up beautifying neighborhoods. I think most people outside of real estate

10:39 can’t appreciate what Third Avenue and Second Avenue in the thirties to forties is going to evolve and going to become much like what we saw occur in Wall Street.

10:49 Speaker 1 In Lower Manhattan. Yeah, so I’d like to thank the condo thing. Thank you for his insight on the market, and he is the demand to go to with regard to the office condo. He understands it better than most people.

11:01 Thanks for being here, Michael. Thank you