The Stoler Report with Michael Stoler: Winston Schromm

0:00 Speaker 1 Good morning. This is Mike Stoler for the Stoler Real Estate Report. Leasing has boomed in the city of New York and around the country. It’s hot as hell, as one would say. Big difference from the time of COVID.

0:14 But today I have a very dynamic young individual who’s been with two major brokerage firms, where he’s the vice president today of brokerage and leasing at JLL, Winston Strom. Thanks for being here.

0:29 Speaker 2 Mike, thanks for having me here. It’s a real pleasure to join you today, my first time on the show. I feel very fortunate to be here talking to you about the market today.

0:38 Speaker 1 So how do we look at the market today?

0:40 Speaker 2 Well, I think it’s different, and I think we’ll get there. A lot of the work that I do is in the financial services sector, and that’s a broad range of tenants from institutional banks to hedge funds, And they have an interesting perspective on the market, right? Because, you know, I think people have been quick to proclaim the death

1:02 of New York more than once and more than once they’ve been wrong, right? And one of the really interesting themes that we see is people talking about Wall Street South, Miami, or Yall Street in Dallas, right, with Goldman Sachs. And, you know, a lot of people think that, okay, this is going to remove.

1:22 Speaker 3 From New York.

1:23 Speaker 2 People are turning away from New York, but that’s not the fact, right?

1:26 Speaker 3 The fact is that.

1:27 Speaker 2 People are looking at more global demography for their groups, and they’re saying we need to be spread out, but it’s not removing from New York, right? And I think that’s evidenced by Bank of America recommitting to Bank of America Tower, American Express kicking off through World Trade Center, and Citadel at 350 Park Avenue just last week. One

1:46 of the biggest headlines we’ve seen about whether or not finance is here to stay in New York I think those massive commitments prove that people are willing to establish flagship real estate in New York City, and that’s really because of the talent.

2:01 Speaker 1 In addition to the talent, the biggest question is the cost. Yes. Let’s talk about the cost today of leasing property.

2:08 Speaker 2 Sure. So I think you set a tale of two cities, right? Yes. There are a lot of people who are saying, wow, people are signing leases for $ 300 a foot. The Solo building is now leasing for over $ 300 a foot. But a lot of people in the city are saying, well, that would never be me. I’m not moving to the

2:28 Solo building, so show me the $ 70 space. And the real phenomenon that’s gone on the market now is we have this sort of flight to quality and this flight to productivity, people seeking engaging office spaces. It’s not just the solo building. We’re now seeing for the first time in the history of New York commercial real estate asking

2:51 rents over $ 100 on 3rd Avenue. You’ve never seen that. And that’s one piece of it. But then you look at the World Trade Center downtown. They signed a lease at 7 World Trade Center for over $ 100 a foot to a law firm.

3:06 Speaker 3 So you think about this.

3:07 Speaker 2 We’re now not seeing, okay, I’m protected because I’m not going to spend that much the market is rising because trophy vacancy.

3:15 Speaker 3 Is so low, right?

3:16 Speaker 2 So now we have a pricing up to trophy and B to a certain extent, trying to price to a.

3:23 Speaker 1 What is, what are the, the pricing lower Manhattan besides the world trade center? Because lower Manhattan was always stepchild. Yes. Right.

3:32 Speaker 2 I mean, that’s people moved back downtown after the banks left in the eighties, people moved downtown because there was copious supply at low rates. Uh, and, Now, what we’re seeing is somewhat of a confusing dynamic, right, that the old broad street buildings are not being out for lease.

3:49 They’re being taken off the market, right? And so buildings that used to price at $ 45, $ 50, $ 65 a.

3:55 Speaker 3 Foot are being removed from inventory.

3:58 Speaker 2 Not only does that take away availability, but that also shakes out 400,000 to 500,000 square feet of displaced tenants, right? So, you know, you see, for example, 28 Liberty Street. They can do deals in the upper 90s. And they’re getting those numbers. 28 Liberty Chase Manhattan Plaza is a beautiful building, but it is from an older vintage. So it is

4:21 pretty remarkable that still some of these signature downtown assets, not in the World Trade Center, not as accessible, are still able to price up to those numbers. And I don’t know that there’s really going to be a competitive market for being in an A quality building at a B price in downtown anymore.

4:40 Speaker 1 What’s that? What’s happening with the conversions?

4:46 Speaker 2 Conversions are very interesting, and you can tell it, again, in sort of two stories. Talking about downtown, downtown has never been a stranger to conversions, but we’re seeing that up to 12 million square feet is currently being scoped for conversion. That’s not even projects that are in the pipeline actively going on. So we talked a little bit

5:08 about how that impacts downtown communities.

5:10 Speaker 3 Just a second ago.

5:12 Speaker 2 Then you also have Third Avenue, right, which is sort of going through this renaissance of 675 Third, the old Pfizer headquarters, 135 East 57th Street, Charles Cohen’s old building. You have a lot of conversions going on. And again, what does that mean? It means what was formerly very cost competitive product is being removed from the market and

5:34 it’s shaking people out.

5:35 Speaker 1 How do you explain to a tenant rents could go as high as three hundred dollars You have a lot of these small accounting firms, small law firms who have been paying $ 60, $ 70 rent. How do you explain the higher rent today?

5:52 Speaker 3 Well, it’s interesting.

5:53 Speaker 2 And one of the things we have been talking about, exactly what you’re saying, is how much can an accounting firm afford to pay, right? If you look at $ 300 a foot and you say, my average employee needs 250 square feet for their workplace, you’re looking at, $ 75, 000 a desk.

6:13 So it’s a pretty remarkable cost. And what you see is that the people who are making those decisions are making those decisions.

6:20 Speaker 3 Outside of cost.

6:21 Speaker 2 They are saying that this is part of my competitive advantage or it’s part of how I sell my business. And these are high flyers. And for the most part, we haven’t seen large deals over $ 300 a foot.

6:34 Speaker 3 These are.

6:36 Speaker 2 Family offices, hedge funds, private equity firms who can afford to do that. But, you know, the tougher discussion to our point earlier is how do you tell an accounting firm who used to pay $ 70 a foot that they may have to pay $ 100, right? Because, you know, in 2017, $ 100 a foot was a pretty high number, right? So

6:58 that’s one of the discussions I’ve been having with a few of my clients is, listen, the market has moved and you need to understand that people are pricing accessibility, and their pricing quality of space because it means more than.

7:11 Speaker 3 Just a factor of production to their business.

7:14 Speaker 1 Are you seeing certain additional renovations in the building to make sure people stay there?

7:20 Speaker 3 Yeah. Yeah, absolutely.

7:21 Speaker 2 I mean, Sovereign Partners is a great example. They’ve been on a large buying spree, 575 Fifth Avenue to Grand Central, 783rd. Their policy is always to come in and roll out an enhanced package. So we’re talking new lobbies, new elevators, fitness centers, nap pods, all of that. And I think the fact of the matter is that almost every tour

7:46 I’m on now with a tenant, the first question that they ask is, what are the amenities? It’s not even so much that people are going to use them every day, but that is the difference between going to a building with no amenities and a building with even some is massive to an occupier.

8:05 Speaker 1 What’s the biggest risk for tenants right now? Poor planning.

8:11 Speaker 2 We’re seeing more than once I’ve been in a situation over the past two years where tenants delay real estate decisions because, again, it’s not core to their business or they don’t think it is. It’s not their day job or what they get paid for. But the fact of the matter is that it’s squarely a landlord’s market right now.

8:31 And if you want terrific space, you have to plan in advance. Right?

8:35 Speaker 2 It’s no longer, you know, we’re in this copious oversupply. You can pick whatever you want. We’re going to go competitively bid 12 landlords against one another. You’re lucky if you have two competitive options for everything you want, right?

8:49 And so in order not to act out of urgency, you have to plan ahead, right? And that means a lot of strategic planning too and a lot of difficult conversations about what is AI going to do to change our headcount and our business model. We’ve been having that Outside of financial services as well, difficult conversations about forward planning.

9:07 Speaker 1 Are people relocating to Miami?

9:11 Speaker 2 So, you know, that’s a great question that I could spend much longer than my allocated time on this show talking about. My partner and sort of one of our chief data scientists at JLL, Kevin Kelly, wrote a terrific piece in Fortune about this, what we call the migration myth, right?

9:26 And so as you look at net migration from New York to Florida, Florida wins, right? And that’s everybody. That is census migration. But as you start to add four kind of key qualifiers that we look at, which is a bachelor’s degree or greater, 15 years of job experience as someone we consider a mid-career professional, someone who has

9:47 gone to top academic institutions, and someone who’s in the white-collar workforce, that is the inverse. New York holds 60% of that net migration. So we’re actually seeing the opposite. of what the headlines are saying because the headlines are looking at the wrong people.

10:04 Speaker 1 Last question. What do you project for the balance of 2026 and 2027? Well, we’re through halftime in 2026 at 18 million square feet of velocity.

10:19 Speaker 2 And if we were to keep on that pace, we’re going to hit the highest leasing velocity we’ve had in over a decade. Right now, with the demand that we see in the market, I think that that is likely.

10:32 And I think that that’s going to exacerbate these pricing dynamics. I mean, we see people repricing assets on a monthly basis now. I don’t see any reason why landlords shouldn’t feel exceedingly bullish about that. And I think barring outside economic factors, which we certainly can’t control, there’s no reason to assume at this point that demand won’t stop. We

10:56 still see this innovation growth in the city. We see AI leasing two times as much space as they have headcount.

11:04 Speaker 3 I think that demand is going to keep going.

11:07 Speaker 1 So I’d like to thank Winston for being here.

11:09 Speaker 3 Thank you, Mike.

11:09 Speaker 1 I promise to have you back before the end of the year.

11:12 Speaker 3 I can’t wait.

11:12 Speaker 1 See what your projections are. Thanks again for being here.

11:15 Speaker 3 Thank you so much, Mike.