Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal.
And I'm Tracy Alloway.
Tracy, I think everyone sort of knows that in many cities, but definitely in New York City, there's sort of this weird like there's two simultaneous real estate problems and they sort of compliment each other in a weird way.
Right, Okay, So rents are too high, there's a shortage of housing, and we have a bunch of empty office buildings, and there's a sort of obvious solution, which would be take all the empty office buildings and convert them into preferably affordable housing. And yet it seems to be very difficult to do that.
That sounds super easy, just like, oh, we're going to turn these offices into homes now.
Just they've been like an open plan trading floor something that's nice.
It sounds you know, put up some walls so people have some privacy.
Okay, but on it.
Actually, this reminds me when I was at university. I had a friend who lived in a warehouse in London and they built their walls out of cardboard to segment it.
Hopefully that's not what we're doing here. But on a serious note, there are a number of difficulties, it seems, in doing this, and there are sort of physical ones around the actual layout of these former office buildings, but there's also regulatory financial and I hear people talk about it in a sort of abstract manner, But today I think we're going to dive into them in a little bit more detail.
Right, So it is, you know, we joked around, but it is everyone says it is very difficult to convert an office into a residential building. But we're getting you know, the opportunities there, but we really understand, like what are the constraints, what are like the real physical constraints, and how big is the opportunity because in theory, like clearly more can be done, but like how much are we like moving? Can this move the dial?
Is like a really interesting question.
Yeah, And the other thing I kind of struggle to understand is New York itself is a city with a long history of carving up older buildings into new types of apartments, and so I wonder why it seems to be so much more of an issue this time around.
Well, I'm very excited because today we do, in fact have the perfect guest. You know, lots of people have been talking about this question really, you know, since the pandemic struck, but our current guest has been working on it for a long time, since well before it was trendy to talk about.
So the perfect guest we're going to be speaking with Joey Khalaily.
He's the managing director of the Van Barton Group, which has been involved in the office to residential conversions for about a decade. So, Joey, thank you so much for coming on.
Odd lots, thank you very much, Thank you for having me.
What do you do at the Van Barton Group?
So I'm within the asset management group and we oversee essentially the execution of the business plan once we acquire assets different buildings.
So I'm going to start very broad, but then hopefully we can sort of get more into like each one of these difficulties or problems. But what are the constraints around converting office buildings to residential?
Yeah, for starters, it's it's the zoning. So is the building that you're looking at within a zoning zoning district that allows for it to be converted?
Okay, that's number one.
If that checks the box, there are essentially a whole list of things that you go through and for me, and when I evaluate these, the structure and the light and air and the possibility of light and air and bringing that in to create residential units and ceiling heights.
So on a on a kind of concrete floor to the underside of the structure above, what is that height And if that height is less than a certain distance, say if it's less than nine foot six or or if it's nine feet then once you factor in all of the MEPs, the mechanical systems that need to go in above.
It's just like plumbing, electric.
Sprinkler, electric, all those things that need to go in the ceiling above. Yeah, then you drop your ceiling down. And if that goes below eight feet, really that makes it very difficult to do, especially in New York, where you're not going to be able to market units that have a finished ceiling less than eight feet. So the ceiling height after the zoni district is one of the most crucial.
So let's say, Okay, there's a building, it's in an area that can be zoned. Theoretically, the zoning allows for the conversion. Some would calls you up. I say, Joey, come check out this building. How long does it take for you to like size up whether it's even worth exploring further? You walk into the building and like, what are you looking for? Broadly and hoping to see on that first?
That first walk through very quickly ten hours really, Yeah, you can go through it and see the ceiling heights, the depth of the floor plate, the actual floor plan and the depth of that, and then the structure. Because if the depth is great and it works out, then you wouldn't need to do any structural reconfiguration.
And the depth just means, like you know, like here we're in the Bloomberg offices and we have this like huge newsroom which is very nice, but like space in the middle of that would not make for a good unit because it would not be exposed to any windows.
Correct.
Correct, You'd have to make structural modifications to the building to be able to make that happen.
So I think one of your famous conversions is downtown one eight Water Street, and you solved that depth problem by basically creating a sort of like inner atrium courtyard.
Is that right?
Yeah, we ended up cutting a thirty foot by forty foot hole in the center of the building. Wow, twenty something stories went all the way and that created a courtyard essentially for light and air to come down on the inside. And then there were studios and two or three bedrooms that had their bedrooms up against that.
What was it that made that plausible?
So?
Okay, so you see it's called the floor plate is the term, and this is like sort of yeah, okay.
So you know if we're on the six floor or floor of a building, yeah, that's the floor plate.
The horizontal slice of the building. So this what it was one eighty Water Street. Correct, Okay, So one eighty Water Street in its previous version did not have like a suitable floor plate, but you understood the oppor that there was an opportunity to cut a hole in it.
Correct it It had a suitable floor plate at one point in time for the office use right, right. For residential it did not, and in evaluating that, came up with the plan of cutting that hole in the center.
Can you just talk a little bit more about that hole cutting, Like how did you sort of recognize that, yes, it's only it's currently only capable for offices, but actually we can make the mouth work if we cut a giant hole down the center of a building. Talk a little bit about that evaluation.
So with with a lot of things, just about everything is possible, but it would cost a lot of money. Yeah, so you have to evaluate the structural modifications that it would take to create that and ultimately what you're going to do with that building at the end of the day, Yeah, create the residence is how much money you're going to get on the rent and then eventually sell that building
one day. And so when you evaluate that, especially in that courtyard area, what's the spacing of the column days from column to column and does it allow for enough space to be able to cut that in without really cutting out any other structural steel columns or supports, which when we cut that out, we still had to reinforce the rest of the structure and do quite a bit of that.
So when you're looking to convert an office building to apartments or something like that, how much of what you're looking to do is based on I guess people's preferences on where they live versus regulatory requirements about well, you have to have so many fire exits and you have to have this number of windows and that sort of thing.
So we look at it. We look at it if Vanbardon much differently in terms of you have to obviously look at the code requirements and have to build that within your plan, but we take it much further in terms of we have a little bit more of like a hospitality approach to our multi family buildings or residential buildings, in that we look at the entire life cycle of the day and the resident and really put ourselves in the shoes of the resident and not just in twenty
twenty three, but in twenty thirty three and beyond. So we try and incorporate as much technology and components that set this building up so that it's very much marketable at every point in time.
Can you talk a little bit about you know, again, I'm thinking about finding the right contractor the right construction company that even knows how to like cut a hole in the middle of a building, which seems tricky, Like I imagine that's not something that.
Every construction company can do.
Yeah, but can you talk a little bit about like who how many entities out there that can do that? And then maybe like, all right, the costs in twenty twenty three for that, I assume are really a lot higher than when you started on one eighty Water Street, both due to inflation and supply chain constraints. Can you talk a little bit about sort of operational constraints of Okay, theoretically, yeah, this is a cut holeable building, but actually getting someone to do.
That, Yeah, you have to find the right team members. And since we've been in the space for a while, we've kind of brought on board and continued to work with for the majority of it, I'd say probably seventy percent of our team members or repeat team members.
So when you say team members, these are contractors, yeah, and people you work with and some look got it.
Okay, we have the vision and know how to execute. We bring on our consultants and our other team members to really evaluate those nuts and bolts pieces of cutting the holes and doing those things and be the experts in their field. And finding the experts is difficult, and it takes years to create that team that you're comfortable with to cut a hole in a building and know that everything is going to go as Yeah.
I wanted to ask you a little bit more about the financing because all of this, you know, cutting holes in the middle of the buildings sounds very expensive. And it does seem like a lot of the office conversions are often aimed at a sort of premium segment of residential,
and this has been one of the criticisms. Yes, so how does that fit in with the decisions on whether or not to go ahead for these projects, Like is it just a fact of life that you have to create more expensive apartments that are going to pay for this or could you do this on a more affordable basis?
You could do it both ways, right, Ultimately it comes down to what your basis is in the building when you purchase it, and if you have a low enough basis when you when you buy that on a per square foot basis, and knowing we've done this a while,
we know what it'll take to convert a building. So if that basis is a certain amount, we layer in the amount that it takes to convert it, and we know at the end of the day where we're going to end up on a per square foot basis and are all in basis, and so you can determine based off of that initial basis which way it really needs to go. So if the basis is a certain amount, say if it's you know, three four, five, hundred dollars
a foot. If you're buying a billion five hundred dollars a foot and it's going to cost you five hundred dollars to convert, you know you're in one thousand a foot. That's a pretty hefty price today, and so you know that you would have to get very high rents market
rate rents to be able to make that pencil. If you're able to purchase the building at a much lower basis, it gives you much more flexibility and then you know, layer into it the need in my opinion, for legislation to be able to make that easier and so then you can target different segments of the market, so it's not all at the luxury end of the spectrum.
So just on that basis, what is the exit You mentioned legislation and my understanding is there is, or maybe there was, some tax credit support for doing these kind of conversions. Can you lay out, like, what would you expect to see in terms of government support for doing this at the moment.
So as of now, there isn't any incentive, but you know, there were debates in New York state legislator to incorporate some sort of tax abatement as part of this and for that tax abatement, there'll be a certain amount of units within that converted building that would be affordable. I think that's fantastic. We need that. That'll help the housing crisis, and that'll that'll target a market that really needs that housing that is not there. Another end of it is
the date. And I don't know if you've heard about the date within zoning being able to kind of convert buildings as of right, So downtown in the financial district south of Murray Street, who was in the early nineties, they changed that date to nineteen seventy seven. So buildings in specific districts south of Murray Street that were built prior to nineteen seventy seven, you could convert those as of right completely to residential and it could be market rate.
Here in midtown it's nineteen sixty one.
What is the basis of these dates, Like I don't quite understand, Like what is it about a building?
What happened in nineteen sixty they were like.
Whya building in nineteen sixty five? They're uncomfortable with offering the carte blanche some what's some of the intuition or logic, but behind some of these constraints.
It's it's very much arbitrary, okay, And at that point in time, yes, it worked to help alleviate some of the vacant office space in the Financial district. But the way that that really needs to be and the Mayor's Task Force and others have been a proponent for, is changing that date to nineteen ninety for.
Instance, why even have a date?
Why not just say if the market says, you know, it's doable, and if the market would value this particular plot of land more as housing than as office, like, what is the logic behind having a date?
So there are a couple of things with that one they proposed in nineteen ninety with a rolling date. So then as you know, in twenty fifty, we don't have the same problem, and we're saying we need to change the date. So it always always cycles out. But one thing within zoning and changing some of the districts, say in Chelsea some of the manufacturing areas, they're only zoned
for man manufacturing right now. An issue of just changing that to residential is and they need to study this and they really do, and they need to put the time in on this. And I don't think it's a good idea just to flip the switch and allow for residential to go immediately without studying do we have enough schools and hospitals and markets. All of those things are the components of why there is a date in these areas.
Interesting, So just on the idea of maybe getting more government support, more tax credits, a loosening of some of the restrictions. One of the criticisms that you hear in New York specifically is that property developers already make a lot of money, and while this might help on the housing front alleviate the housing shortage, we're basically giving them even more money. What would be your response to that or how could you alleviate some of those concerns.
Yeah, I think it's easier to say that from the outside looking in. Butultimately, the risk that we're taking on in converting these buildings and making these investments is our risk, and we should get paid for that.
It's not to say is it a risk though in New York if you make a bunch of really nice apartments.
Like sure, it is always it is always a risk, no matter what. And yes, New York is a fantastic market, and you know the best market in my opinion, to ever do this, because not only that, you know, we feel strongly many people feel strongly about the market here and residential and multifamily. So yes, it is it is a great market to do it, but there is still risk with it. There are cost overruns that could potentially
happen in the conversion. There are numerous operational things that could happen after the fact and during lease up, and things like that new product could come online and compete with you. Recessions could hit, other things could hit. They could bring the prices down from when you started the discussion of that project.
Let's say you got the you know, the legislator cooperated change the tax code and they moved up the dates and a bunch of other stuff happened that was sort of favorable from a policy perspective, like, Okay, how much do you think just office TORESI in general could like move the dial in both directions, because that's sort of
the big question here. And it sounds like, you know, you've done you've done a handful of projects, but it you know, they it doesn't seem like it's a possibility everywhere, And there are lots of buildings that as you say, you can like walk in and say no, this is not going to work. So, like, how much is this in terms of when people talk about there being a crisis of office, you know, people not going to the office, et cetera like that, how much could it move the dial?
In your view?
It's it's going to be one one piece of the puzzle. It's not going to be the solving piece. Okay, this won't solve the housing crisis altogether, but not many things on a broad brush will. But doing these things will certainly help and will certainly get more units on the market.
How closely do you follow the sort of return to office headlines? Like, you know, if you see a news article that says Jamie Diamond says everyone at JP Mortgage should come in four days a week instead of three, do you immediately start incorporating that into your like forecasts and expectations for rent.
No, but we we follow it very closely. We also invest in commercial office. We have many office buildings in our portfolio, so we follow that very closely.
Here in New York, sit.
Here in New York, also in San Francisco, Seattle, Los Angeles, So so we follow it very closely.
Can you can we take a minute to talk about some of those markets from an office, just a pure office perspective, because people are so gloomy on it. You know, if you look at the shares of the publicly traded proxies, I guess for some of these markets pretty dumps.
There are challenges.
New York is.
Well ahead of many of the markets that I just mentioned, and I think that it comes down to, you know, the city and the administrations within those cities and making sure that they drive that traffic to their central business district. And you know, for instance San Francisco, it's it's you know, it's seen better days, yes, And we're looking at a lot of different opportunities there where we could potentially convert. Because you have people out eating at restaurants, there are
places that are busy. Impact not all the offices are are occupied. Though. Here in New York we've seen that return. We've seen a lot of people come back into the office. You know, we really saw the residential multi family takeoff in called May of twenty twenty one. That's when we really saw that trajectory. And it's it's helped with all the return to office and with Jamie diamond saying, you know, four days a week or five days a week for managing directors, and that's what we need.
This might be a slightly weird question, but I remember, you know, the other big crisis in commercial real estate was sort of post two thousand and eight, when you had the death of retail, the dead malls all over America, and there was a move then to try to convert some of that space either to new community facilities, gyms
and things like that, or in some cases residential. How successful I know this isn't your area of expertise necessarily, but how successful were those efforts and what can they tell us about the current situation.
Yeah, I think it's area dependent because some of those areas where you're able to change a mall to more of an outdoor mall, put some multifamily on top of those retail shops and maybe some parking below it. That creates a whole new life cycle and a whole new area with entertainment living, and then you know, then you can bring in some office components too, And so I think there are some clear distinctions that separate the two.
But I think the whole idea of breathing life into these areas is the key, and in what we're doing downtown in our conversions is really breathing life into these buildings and neighborhoods. And once you do that and you bring people into those areas, then it just kick starts everything else. It kickstarts the retailers and then you know, even offices want to be there.
I lived in the Financial District for I think four years from twenty eleven through twenty fifteen, and it was like picking up. But now when I go down there, like there's just like so much war like around the seaport and.
Stuff like that. Yeah, like tin buildings, was like, oh yeah.
It's really nice, and I was like, oh man, I kind of wish I uh no, I really like, I mean, it was a good time. Can you talk a little bit about business and the constraints in the pandemic high inflation period that we've experienced, because again we talked about you've been doing it a long time, but everyone who's done doing any sort of construction and twenty twenty two, twenty twenty three is probably seeing headaches. Can you talk
about those headaches and have they abated at all? Have they eased in any way.
Yeah, I think we saw a run up of pricing certainly in twenty twenty two, and a lot of time trying to get people signed on with a contract. They were very busy. They didn't necessarily have the time for this or that and that. That kind of also goes back to building that team. Yeah, making sure that you have the repeat contractors or vendors. But we certainly saw the increase and prices of things.
You also saw the whole.
Crisis with shipping containers and the peace of those skyrocket did that?
What did How did that affect them?
So we actually had it around that same time as when we were purchasing our glass for one sixty Water, the project that's currently being converted to residential, and we were looking to locally sourced as many products as possible. But we couldn't get this glass locally, so we needed to go to Spain. And during that time, you know, shipping containers were extremely expensive. It was hard to get things going. We also saw a trucker strike in Spain, so we had.
To remember the perfect storm era.
Yeah, you really have to go through every iteration and create backup plants. So we made sure that we had a private escort for our glass to the docks and to make sure that it got on the containers when it was supposed to and to us because you have to follow every piece that closely because if not, it
could get lost in things. The same thing with our generator, even though it was made in the Midwest here in the US, we had weekly calls with our contractors in the in the manufacturer because of parts being an issue and what goes into the generator. So we had to really press them and say, hey, we'll fly out there, we want to come out there, we want to visit
the plant, make sure everything's on track. And it was that pressure that it really made sure that they understood this was a very high, high priority for us.
It's kind of crazy you have to go chasing generators in this day and age. But since you mentioned glass, I have to ask, what's the deal with windows in New York? Sorry, that went very Seinfeld all of a sudden,
what's the deal with windows and New York apartments? No, but this is one of my pet themes about New York real estate, which is and I sort of alluded to this before, but you have a lot of tenement buildings that have been cut up into smaller apartments, into these traditional railroad apartments, and the window is always at the end in the bedroom, which apparently is also required
by legal statute. But my preference, certainly as a renter, would be if I'm going to choose one room in the apartment to not have a window, it would probably be the bedroom. So why is that And would loosening those type of requirements help these conversions.
Yes, it would help, But I would say that the well, I guess depended upon who you ask, it could hurt the quality of life because the rules for light and air there for a reason, and so that you know, the general population and residence aren't necessarily taken advantage of.
I appreciate other people might have different opinions in that bedroom.
But yes, for instance, at one eight Water, we noticed that you know, some of the units they didn't have as much natural light as others went quicker because people have a preference for less light in their apartment or in their bedroom so that they could sleep better. And that's a lot of times in New York people were just there to sleep and go out and explore the city. But yes, because of the requirement for.
That, yeah, I'm with you.
I would I would.
I mean, look, I would love windows in every room. I would like to make that clear. But if I'm going to choose a lot of New York apartments have just one window.
Yeah, we do have the ability for like blackout shades, which we incorporate a lot of times in our units. Oh yeah, that's the sun drenched units. But we have the ability to have the blackout shades to help with.
That big fan of blackout shades. Can we talk a little bit about financing and obviously, you know, interest rates a lot higher this year than they were you know, say a year ago, or certainly two years ago, or certainly pre pandemic. Who is financing this and how much
is you know, it's sort of this perverse situation. And we've talked about it just with residential real estate in general, where we want more of it and maybe more of it would even be the key to ease of inflation, and yet higher rates seem to be one constraint on the creation of new units.
How does that play out in your world?
Yes, that is it's a deal killer. I mean, if the environment that we've been in has put a massive constraint on commercial real estate, and there's just no mistaking that what.
Do you mean when you so talk walk through specifically what is, what's what's changed?
What's that you could say that in terms of financing, you're spread over librar what it was or now so fur which a lot of loans are originally call it twenty twenty one, going even back to twenty twenty, I remember closing a loan February twenty third of twenty twenty, and at that time libror was point one one point one one, which is incredible. Now you know library as well over five that you know, five hundred basis points.
Difference is tacked on because you're going to have to pay whatever the library is plus your spread to the lender. So instead of being in a in a you know, call it a four percent range, now you're in a nine percent range on your debt. And that it has massive impacts on the interest that you pay on the money that you're being lent to do these projects, and it puts so much of a downward force on it that it really makes it so that a lot of these projects are not able to be done right now.
And sure you could get you know, interest rate caps on that, but those cost quite a bit of money because they're products that bring you your risk down on the interest rate, but you have to pay for that privilege, and the cost of that factored into everything else just makes a lot of these just not viable.
Can I just say, I love that you brought up the benchmark lending rates Because we're recording this on June twenty ninth, Tomorrow is the last ever day for libar published. It is tomorrow, So moment of silence.
Aren't you going to a librar end of it's.
Awake, I'm going to awake for liboards and I but just on this note, I mean, you've done conversions before rates got hiked, so one eighty Water Street and now you're doing one sixty Water Street. I think you said, I take the point about financing in general is more expensive. But do you do you find when you're talking to investors to lenders that it's easier to make the argument for conversions nowadays than it was maybe several years ago.
It is for us if you have a track record, you have the experience, you have the know how. We know, like I said, you could walk into a building within the first hour or two know it is easier to communicate that now because this is much more of a headline, and thanks to you and everyone else in bringing this to the forefront, it allows us to really tell that story a little bit easier and give our investors a little bit of a glimpse of some of the expertise that we have so that they can be more rest
assured that we have the know how to do this and execute on this.
You know, as you talked about like New York is.
For as much as there are problems here in New York, still it's done a lot better. And no one really knows what the final like equilibrium is going to be, right Like it is still to this day like approving little by load and you can look at MTA ridership,
but it's still ticking up modestly, et cetera. How much does the uncertainty of what the sort of like ultimate stable equilibrium sort of affect the willingness of building owners to even come to you for that first call because they don't know, Like they might have some guests that's like, well, maybe we're gonna be a fifty, maybe we're gonna be
at seventy. Maybe it'll go back to ninety in two years, and how much is that sort of like those estimates for what that final destination going to be sort of impacting whether to even go down the road on a particular site.
I think it's it's different for different building owners. They have some of these family offices that have been investing in real estate for generations, and they hold various buildings, and they can hold continue to hold without doing anything because they're going to hold through this cycle and the
next cycle and so on and so forth. So they're not necessarily feeling the pressures as other building owners who really have a certain exit date that they have in mind, and if they're not creating that value or if their value has gone away from that investment, they need to figure that plan out and do it quickly. So I'd say it's different depending upon the investor.
Here's a question we probably should have asked at the beginning, a really basic one, but who makes the decision to actually convert an office building to residential? Is it developers will approach a building owner with a plan, or the building owner will tap people like you to explore those options. How does that process actually work.
A little bit of both, So the buildings that we own. We always even prior to acquisition, we're always value evaluating the various scenarios. Where one sixty Water, for instance, we bought in twenty fourteen, we knew the ability to be able to convert it, but that wasn't necessarily plan A, and so we're always evaluating it, and especially with our own assets. Other owners call us because they know we're in the space and they know we have a certain expertise.
But you know, there are developers that also go out to different building owners and say, look, I think your building is a prime candidate for this. We've had numerous discussions with other building owners just like ourselves, but they don't necessarily have our expertise, and so we go to them and say, hey, look this is a prime candidate
for this. Here are the potentials, and we look at whether or not we could do a deal with them where we come in on the equity side, or if we just are there to assist on the conversion.
It does sound like that, know how, is really difficult to like from day one, Like if Tracy and I were to say, oh, I want to get into this, like replicating that would be would be one of the challenging parts like building up that network of contractors and architects and people whose job it is to escort glass across the Spanish country.
Or look for generator parts.
Yeah, yeah, parts exactly. It is, it really is, and you get down into the kind of nuts and bolts of it in terms of the building and how you do these things, and especially office buildings where you have like a structural steel call it a structural steel and metal deck, metal deck with concrete on top, where you're carving out residences, but you know you're also reinforcing the structure with more steel, and you have to make sure that plumbing risers or duct work or electrical risers miss
that steel and you can't hit that. But then you also have to have certain dimensions that are held within the apartment itself for code, and so putting all those together is like one big puzzle, and at the end of the day needing to have a unit that is desirable and marketable. So it's a pretty big challenge overall.
You know, to Joe's question about uncertainty over the outlook, I gather there are a lot of different moving parts here, but what's your base case for say, in ten or twenty years, what is New York going to look like? Are we going to be walking down you know, Lexington Avenue. We're going to have lots more large apartment buildings versus empty office buildings.
I think that it's unmistakable that there will be more residential. People still obviously want to be here and they love this city. It's incredible, and so I think there will be more a more residential component to it. But it's also a cycle where I think we'll add a lot more residential in this time period. But in a certain outlook, whether that's five years from now or ten years from now, the office space will not necessarily come back in the
exact but it'll be here and it'll be back. There is a large demand for Class A office space right now, So.
Where's that coming from?
So that demand the existing tenant base once brand new space, state of the art space, and you know, whether it's brand new buildings, it's one Vanderbilt or Hudson Yards, these buildings are leasing up, so people want that office space. It's this Class B, class C potentially mid block office
building that doesn't necessarily have a future right now. You can convert some of those, but it would have to be acquired for really pennies on the dollar, but that could be the case, or it could be raised to the ground and then a Class A office building built. So we're kind of going through that now and how that all shakes out. But make no mistake, I think that New York in general with office will be here.
Yeah, I imagine it's the return to office argument is a lot easier to make if you're bringing people back to shiny. I always up at Midtown Tower.
And I always have this conversation like, oh, a lot of people are back to the office, and people are like, well, you work at a really nice office.
We do work in a.
Really nice office here. Sorry, this might be a really naive question. Class A, Class B, class C Are these objective things or are these like you sort of know a Class A office when you see it or a Class B office when you see it you.
Very much know, okay, very much now.
But there's not like there's some very bright set of like things that this is.
It's not like the nineteen sixty one delineation.
Okay, okay.
I wanted to ask, you know, just going back to support for these conversions and possible tax credits, or other measures. You were talking about how the cost base is really important in doing these. If you know, New York woke up tomorrow and I guess the mayor or the governor announced some big support measure. Would that immediately get factored into office building value in such a way that maybe it made conversions less attractive, Like would everything suddenly be ratcheted up?
No, I don't believe so. No, it would, It would help, It would help maybe stabilize the word I would use, it would be stabilized. It would help stabilize as oppose to increase. There's still a lot of office buildings that are going to see decreases in value, those class being class cs that that people were holding on to, and they're still thinking they're going to get a twenty twenty one price for that. That has to work its way through the system of sorts.
Yeah, this seems like a story that multiple guests have told us, which is that there is this sort of just mental gap between what we can see on the screen when we look at say the ticker of an entity like you know, like a Vernado or something like that, versus where markets are pricing or private markets in which in which case it sounds like there's still a pretty huge, huge bid esque spread in many of these cases. Like has that narrowed it all? Like do you see some movement?
Have sellers? I don't know, what do you see on that on that spread?
We're certainly starting to see some more movement. And granted I thought that we would have seen more movement previously, whether it's six months ago or so, but we are starting to see that movement. I think a lot of building owners are have already come to that realization. They're at that place where they understand that value has decreased. Now it's more of the lenders are needing to step in and they're they're seeing the landscape and also understanding
where they kind of stack up. And then that's that's kind of part of the flushing out, if you will, whether it's the owner understanding it and then the lender and then it kind of starts to get out into the market.
Just speaking of lending, and I guess you know on the office, Torezi, who is lending?
I mean, we talked about the price, but do you go to banks?
Do you and has the changed?
We do?
The mix has changed. There are more people in the space We've had a great relationship with Brookfield. Brookfield is our lender on one sixty water. They did one eighty Water with us. They've done other deals where it's been a kind of a heavier redevelopment aspect to it, and so they've been a great partner in this space and they understand how it works.
Are bank's part of this or other like private investors or private lending or any other just in terms of the broad opportunities out there for tech finding money.
Yeah, I would say it's all into the spectrum to for people to fill the full capital stack. It's going out and whether you need to have a mezzanine piece come in, it might be more on the private side and alongside a traditional bank.
I have a slightly weird question, but do you hate the inventor of open plan offices as much as some other people seem to like When you walk into an office building and you just see a huge empty space to you go, oh, why did this happen?
An empty space? In terms of an open place, I guess an.
Open space, yeah, one giant room. Yeah. Because my understanding is there are some office buildings that might be easier to convert if they're a little bit more segmented halls.
Yeah, oh, I see what you're saying. So instead of just one floor plate that is complete as opposed to some cutouts and things like that, not necessarily. It's all about the era that it was built, in my opinion, and what they were going through during that time and
a more modern era. You have some of these deeper floor plates because they were able to bring in HVAC that they didn't have in nineteen ten or nineteen twenty, where some of the buildings in the Financial District they have some more of these curves where it brings in that natural light and the air because they didn't instually have AC at the time, and so you couldn't have a deep floor plate because people would be way too far away from a window.
So really deep floor plates are in part a function of the technology available to get people here.
Being correct, and it would work much better for a trading floor for instance, to have that.
Just real quickly, you know, we talked about some of the architectural issues, but from a sort of like safety and code issue, are there like major distinctions between office and residential in terms of what needs to be changed?
Yeah, I mean you have various requirements in terms of whether it's sprinkler in fire alarm coverage in systems to egress and making sure your your stairwells are certain width and certain means of egress in and out your elevator systems. There are there are definitely distinctions. I wouldn't say one is necessarily much more, you know, cumbersome than the other. It's just a part of the overall process.
Joey Chlelly ben Barton, thank you so much for coming on Odd Loves.
Yeah, thank you for having me.
That was really interesting. That was super interesting, Tracy. I really enjoyed that conversation. I sort of obviously had an intuitive sense that it's pretty complex, and I have found that that was like really helpful and understanding like so many different dimensions of what it takes.
Yeah, and it does sort of crystallize this idea of almost a double whammy for doing these at the moment, because they're expensive to do, it certainly seems like, and at the same time, the cost of financing them seems you have gone up quite significantly. Yeah, getting back to that capacity point.
And the uncertainty and the fact that different types of buyers, it's really interesting to think about the owners of buildings that have some sort of like strict lending commitments where at some point the owner can no longer say, oh, we're in it for this cycle, we're long term investors, and the lender steps and is like, yeah, that's nice. You got to sell the building because we don't want to.
Like, well zero here.
The other thing is thinking back to previous cycles. I know I brought up the shopping mall analogy, but I remember people talking, you know, back in like twenty three or something like that, about how well some shopping malls are doomed, like you can't do much with them, But there were a lot of luxury shopping malls that were doing fantastically well at that same point. So it does seem like you are getting these like different performances within the sector.
I wish I could remember the name of the guest that we had on, but it was and I feel
bad that I don't. It was a previous cre episode, and the guest made the point it was a previous real estate episode, and the guest made the point that after two thousand and eight two thousand and nine, the money was made by like spreadsheet people and there's like, well, here's the cash flow of X or Y, And it was like all those people like buy like yeah, you know, single family houses out in the deserts of Nevada, and you didn't really need to know that much about Nevada
or anything. You just know that like, yeah, this looks good on paper.
Here's how much it costs, here's how I guess, here's what I.
Can borrow at right now, I'm going to buy a thousand houses. I think I could rent them out here, et cetera. And then hearing Joey talk about like the team and it's just intuitive, like the team of like contracts and architects and people who would know how to cut a hole in a building, et cetera. It's very different skills, it seems like than like spreadsheet skills.
Yes, but I would say, like the spreadsheet portion of it still seems extremely important. Yeah, And there's also a huge wild card factor in there, which is is New York or the US government on a federal level going to do something on like a tax credit basis to help get more of these done.
I think with Castillo was the guest that we had on to talk about it, that was a really good episode. But yeah, I do think like the spreadsheet stuff still seems really tricky. And then it's like, Okay, well if you cut a hole, how much are we going to get for the square footage for the units that have a little less natural light because they're looking into the courtyard. And so it does seem like there's a lot of uncertainty.
And you asked that question, like can you lose money? Yeah, I feel confident that if I went into New York real estate, I would find a way to lose money.
Like, I know it's supposed to be really good market. I feel very confident in my skills, my ability to lose.
To lose money on real estate deals.
I mean, I think I could pull it off.
I bought my place like at the top of the market last year, so I'm doing I think, yeah, all right, on that happy note, shall we leave it there?
Let's leave it there, all right.
This has been another episode of the Odd Loots Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Wisenthal.
You can follow me on Twitter at the Stalwart. Follow our producers Carmen Rodriguez at Carmen Arman and dash El Bennett at dashbot. And for more Oddlots content, go to Bloomberg dot com slash odd lots, where you can find transcripts, a blog, and a newsletter. And check out our discord discord dot gg slash odd lots, where listeners are chatting twenty four to seven about all these topics, including a very active real estate channel YEP.
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