54: Building With Foreign Capital With David Kronman

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now here is your host, James Nelson.

Welcome to show number 50 of real estate Investing Live from New York. This is your host, James Nelson and we are on a roll here well into our second season and we've been loading up on the interviews. So a lot of investor spotlights coming your way. That was a great one last week with Matt Pestronk talked about wrestling deals to the mat, which was apropos because he was a wrestler in college. And he talked about how he started with a couple units and worked his way up to a portfolio of thousands. And that would be my wish for each and every one of you who are aspiring to get into the business. Start small, start building a portfolio and really learning each time. And no exception with our guest tonight, David Croman, who is president of Cape Advisors. He's been with them for over a decade and really worked his way up from the ground up there, literally and figuratively with the projects that they're building. And look, there's few developers in the market right now who can say that. They've got four active projects underway in New York City. They've got some luxury condo project product down in Hudson Square where you've got Disney and Google and a lot of these new businesses that have come to this exciting area as well as a rental project in Queens. And he's going to be talking about the ins and outs of these deals, but also about some of these capital relationships. And we haven't talked a lot on this show about foreign capital. And that is one of the things that keeps New York going is we see investors from all over the world. So for those of you who are interested in that world and especially those of you who find large scale opportunities and looking for investors, I think you're going to get a lot out of this episode. So we're going to have a brief word from our sponsor and we'll be right back with that interview. Thank you again.

Well, fantastic. And it was really great to get to know David better over this last month or so and speaking more about this discussion that we're gonna have today. So also looking forward for all of us getting together in person as well. So, yeah, Michael, as you mentioned, I think David is the perfect speaker for us today. In that Cape Advisors have been incredibly active as of late. And I know there's tremendous uncertainty in the market right now. We know sales volume has dropped at least 50% this year. It's been a very challenging time and environment, but we are starting to see some green shoots, we're starting to see some activity. And the fact that Cape Advisors is moving full speed ahead with four projects throughout the city, I know you all are going to be really interested to hear about how they have been accomplishing that and how to keep things moving. And obviously I know they have continued interest for the future. So always great to be speaking to huge advocates for New York. So wonderful. So with that, David, first of all, it's great to see you in your office. If I'm not mistaken, you're down at 375 Greenwich street in Tribeca in an office condo that none other than Michael Rutter sold to you. So a quick commercial for him there. But.

Yeah, we're back in our office. The majority of people are back here. You know, it's much easier managing active projects, active construction sites, being on the ground. So where, you know, we were efficient, working remotely and managed to get through. I think nothing beats being back in the office, you know, walking the job sites, putting your hard hat on. And, you know, we find that's the most effective way to, to manage these projects. So we're happy to be back in the office.

Perfect. And you live in Brooklyn, so I think, are you still, are you driving to the office every morning or what's your mode of transport?

Right now I am, yeah, I'm still driving. It's an easy 15 minute shoot through the tunnel. And so for me, it's an easy commute.

Good. Well, definitely enjoy it while you can. I know we are getting busier by the week. And what's interesting to me is that I think when you go around the city, the neighborhoods seem a lot more full of life. And we are waiting for that to return in Midtown. But safe to say that Tribeca, with the residents there and kind of the mixed use dynamic, I would assume you're seeing a little more activity down there.

We are, yeah. I mean, I was not coming to the office every day during April and May, but I was coming occasionally. And it was felt, as it did in a lot of parts of New York, to be pretty apocalyptic with very few people on the streets and everyone kind of in masks and looking paranoid. And it definitely feels much more vibrant down here. I mean, the outdoor dining scene, which personally I love, makes the streetscape of New York feel really alive and energetic. So you get that. And people returning back to the office, albeit not in full force yet, but the streets feel more vibrant. You know, I think people are, you know, get the sense that the world's not coming to an end. And it feels pretty good down here right now, I gotta say.

Absolutely. Yeah. No, it's great to see the restaurants trying to do everything they can to get things moving. And the outdoor dining has been an incredible option that will now, I'm being told, will stay on and. But also to be able to provide for the indoors as well once it gets a little bit colder. So, David, it would be great if we could go back a little bit to where you grew up, kind of your path. And if I'm not mistaken, you met Michael very early on. You both grew up in New Jersey, is that right?

Yeah. So I grew up in South Orange, New Jersey, which is a suburb of New York City. And I've known Michael since we were, I don't know, 10 years old, 8, 9 years old. And yeah, it was a great experience growing up in South Orange. It's a diverse, you know, a diverse neighborhood. And, you know, I value that diversity. And, you know, went through the public school system there and, you know, had a great experience, great group of friends, including Michael, and, you know, nothing but positive things to say about it. Yeah.

And what about growing up? I mean, any odd jobs or things that you did throughout school? I mean, was business even on the radar at that point?

You know, I had, you know, your typical odd jobs of, you know, kids growing up in a small town, you know, working at, like, the golf driving range. And, you know, eventually I had a close friend whose father owned a big. Owned, owned and operate a lot of, like, garden apartments in and around New Jersey and took a job with him for a few summers, getting to know that business. And that's what really attracted me to real estate. The leasing of these apartments, the renovation, driving around every day with the different property managers, getting to know how they operate. And that was really my first experience in the industry, which was a really positive experience for me.

Definitely no substitute for rolling up your sleeves and walking the properties and learning that way. And I'm sure. Is that what prompted you then to go to UW and did you go right into their real estate program?

Yeah, so I went to University of Wisconsin and knew I wanted to go through the business school. And the real estate program there is one of the strongest in the country. And, you know, just kind of got. Got attracted to that Right away with my, you know, limited experience, you know, working in, you know, residential property management ownership those few summers. And, you know, the thing that really attracts me to real estate over other areas of finance is that you're building something tangible and you're working with something tangible and, you know, changing the built environment. And for me, that was, you know, much more enlightening and, you know, attractive than just pushing around paper and the fact that you're creating something, renovating, like, that's what really drew me to real estate versus other areas of finance.

Yeah. Great experience and great college town there. There as well. I actually grew up in Madison, so it's.

Madison is the best. Yeah, I haven't been back in a few years, but love Madison.

Yeah, definitely better in the summer. January, a little tough weather wise, but.

The winters are tough. Sure.

So after that, if I'm not mistaken, both you and Rudder shipped out to the Colorado to, I guess, take a little time to transition to the real world. So was there already a job waiting for you? You were in Denver or were you kind of.

Yeah. So, you know, after graduating, like everyone else, you say to yourself, like, what do I do now? Like, you know, I've been, you know, I've been in college, I've been in school. Like, what do I do? You know, so Rudder and I graduated at the same time and, you know, we both love to ski, love the outdoors, and said, like, why don't we move out to Denver? You know, it seems like a cool town. You know, had spent a little bit of time there, not much, and we were able to convince, like, 10 of our close friends to move out there with us. So, you know, we had a big crew out there and, you know, everyone had just graduated from school. Everyone was looking for their first job. You know, a handful of people that I graduated, you know, the Wisconsin real estate program with and, you know, a handful of people that Rutter had gone to school with and, you know, we all moved out to Denver at the same time and we're all searching for our first job. And I got a job with a company called Low Enterprises that you may know. They're a big, you know, owner, operator mostly, you know, in. In kind of Denver West Coast. They're based in la. Destination resorts and hotels was theirs at the time. And I took a job with them managing a large office building in downtown Denver, which was incredible experience. So it was nice in that, like, the transition between college and the real world was like, let's move out to Colorado. Let's get a Little bit more of that youthful energy out go skiing and hiking and camping on the weekends, but like get our first job doing what we want to do. So it worked out perfectly. And I think low is a great jumping off point for me.

Wow. Well, I think everyone on the Zoom, including myself, are jealous. I mean, that really sounds like the best of both worlds. So two very important questions. What's your favorite mountain to ski out in Colorado and who's the better skier, you or rudder?

Well, I ski in Rudder snowboards. But I'd say I'm still better just because, you know, I am. And my favorite mountain out there is probably Steamboat. I just. The tree skiing there is. I don't know if you've ever been out there or you ski, but the tree skiing and Steamboat and just the town, the fact that it's off the beaten path off of I70 and you don't get big crowds, for me, it's. It's the best.

I have not been there. I've skied a couple mountains out there, but I'm already sensing a rebny sales brokers ski event out there.

Hopefully next spring Rudder will sponsor it.

Good.

And underwrite it.

So. All right, so you're there working for Lowe's for a couple years and at this point, great company, getting some great on the job experience. What brought you back to New York?

So I knew eventually my family was back here. This is the center of the universe, especially as it relates to real estate. So I knew eventually I moved back from Denver and you know, I, right before I moved back, I said, look, it's nice being in Denver and staring at the mountains, but I want to be in the mountains. So I moved to Aspen for a bit and just did the ski bum thing. Worked as a bartender at the base of one of the mountains there and skied every day. Got that out of my system. And then I moved back and my brother in law at the time since divorce from my sister was Ron Solars. And Ron is an investment sales broker. I'm sure you know him in the city. And I came back and I said, you know Ron, like who are the, you know, smart, entrepreneurial, active developers that I should be speaking with about landing, you know, my next gig in New York. And Ron had just done a few deals with Craig Wood, who, you know, is a principal over here at Cape. And it was the first thing he said is you got to connect with this guy Craig, super smart, super creative, super entrepreneurial. And I went in and had a few meetings with Craig and we've been working together for almost 17 years since. So it's been a great partnership. And I'm grateful to Ron for introducing me to Craig 17 years ago.

Yeah, Ron and Craig are both incredible guys. And Ron is also. I was checking to see if he's on this zoom because he's a member of this committee, but just great people and. Wow. So when you started off 17 years ago, what were you doing there? And I'd be curious, kind of how many people were in the office at the time? Because in the lead up, Michael was talking about how active you all have been compared to some of the big, big shops. And, you know, when I talk to people looking to get into the business, talk about the advantages of working for, you know, a boutique shop as opposed to a large platform. So what was it like starting off? How many people were there? What kind of things were you doing for them?

I mean, back then it was probably an office of like 10 people. You know, we weren't, you know, we've grown since, you know. And the nice thing about Cape, because it's a small company, is I was really, you know, getting involved in every aspect of the business. So everything from closing out CFOs for projects that we had just done, to underwriting new deals, to helping manage small aspects of construction, everything under the sun from all aspects of the development process, I was getting thrown in the fire, which was a perfect way to learn.

So the other thing that amazes me about Cape is the diversity of what you all do. So in addition to building large scale residential condo rental projects, you've also done a lot in the hospitality space, retail, even owning operating bars and restaurants. So I've got to imagine that experience bartending out in Colorado came in handy at some point.

It wasn't at the top of my resume, but yeah, no, I mean, the company had historically been kind of divided into two arms, and one arm was the New York development office. And then we had a separate hospitality company, Cape Resorts Group, that operated mainly out of South Jersey. And we own and operate, I think it's like eight hotels, mostly in South Jersey and Cape May. We've done some in Atlantic City. We have a property out in Sag harbor in the Hamptons. And that arm of the business we had during the height of the summer season, probably 1200 employees. So it was kind of a tale of two offices. There was a restructuring of the company about a year and a half ago where the Cape Resorts Group arm and the Cape Advisors arm separated and the two founding partners, Craig Wood And Curtis Bashaw, you know, it was a very, very friendly separation, but went their separate ways. And you know, so Craig and I really now run the New York development office and Curtis is, you know, still running the Cape Resorts Group and all those hotel properties down in South Jersey.

Great. So did you spend most of your time then working on the development projects? And, and maybe you can tell us about some of the early projects you worked on. I mean, I know The Mandarin in Soho, Greenwich West, 110 Charlton, 5 Crosby. Any of those projects you want to tell us, any of the stories about kind of from start, how you all acquired the property, how you repositioned it, and any of those early success stories or challenges along the way?

Always challenges along the way in development. I'd say the first big large scale development project that I managed personally was the Mondrian Soho. And that deal was an existing 12 story building on Lafayette street with a block through component on Crosby Street. And it was kind of a weird zoning quirk where we were right outside of the soho landmark district. So we had much more flexibility in what we could do with that site. It was like literally right on the border of the landmark district. And so basically we took this, this old, you know, warehouse building and like cut 30ft of the front and 30ft of the rear and moved all of that far onto the top of the building and added 15 stories to create what was basically. And we had to do that because the building was so overbuilt compared to what the zoning would otherwise allow for. So we couldn't tear it down. And we had to do very painstakingly preserve a certain percentage of the floor area in order for it not to be considered a new building because we were, you know, the building was overbuilt by double versus what the zoning would have allowed for. So we basically did it under an alteration permit. Even though it was such a major construction project, we're able to get it done. And the fact that, you know, we had all this grandfather floor area, the fact that we were right outside of the soho landmark district, enabled us to build this, you know, it was a 30 story, you know, glass hotel tower. And that was a big construction project. We financed it through Capital Source at the time where a lot of probably over leveraged construction loans. And we partnered with Morgan's hotel group and branded it the Mondrian soho and basically built it. They put up a substantial portion of the equity, we built it and basically turned it over to them to run as the Mondor in soho. And Morgan's had their own set of problems and we exited the deal several years after we built it. And it's now the Nomo soho. But that was really my first large scale New York development project. And funny enough, with that project, with all these big projects, you become friendly with your neighbors and know you, you need to get to know your neighbors because there's always so many issues with access. And as I was building that project, I became really friendly with the owner next door at 5 Crosby, who had this 70,000 square foot office building that he had bought in the 80s. He had a clothing, he was a Chinese gentleman, had run a clothing manufacturing business out of there for many years. And we became friendly. You know, I invited him to walk the job with me on occasion and he said, Dave, you know, I've got this, you know, this big great grape bones old office, old building, you know, all of the clothing businesses now, all the manufacturing is over in China now. You know, I've got basically like, you know, a hodgepodge of tenants like help me reposition and renovate my building and let's go into business together. So formed a joint venture with him, the neighbor of the building next door, and over the coming years basically vacated all the tenants that were there, did a huge capex project floor by floor, gut renovated it, added elevators, new H vac, basically, you know, complete renovation of the building and re tenanted it. And you know, we're now, you know, years later, 100% occupied even in this environment with a great mix of tenants. And it's been great office experience for me. You know, we over, we, we as cape still manage the building, we still oversee all the leasing of the building and it's been a huge success story for us and for him. You know, we have not one inch of vacancy at that building. So I don't know if you know the building, it's where BDDW is on the ground floor. The Smile Cafe runs a cafe on the Howard street side of the building. So that's been a huge success story for our company.

No, those incredible projects and the neighborhoods, I mean at the time it was still a little, I guess, pioneering there, but now it's in the middle of everything. So talk a little bit about the construction aspect. Are you all vertically integrated? Were you overseeing all this? Were you self performing? I would imagine if you look at the total capital stack, that construction piece is the riskiest piece. Especially when you talk about the monitoring in soho, having to figure out how to repurpose that. So how much of that did you do in house, were you able to control the costs and is that what makes you also successful?

Yeah, I mean, building in New York City is without a doubt most challenging aspect of what we do. I mean, we're constantly dealing with issues with mta. A lot of our projects we built right on top of the subway, which, you know, comes with its own set of challenges. And you know, of course, you know, dealing with neighboring buildings that are, you know, built in the 1800s and you know, on rubble foundations and when you're trying to build substantial buildings next to them and do sub sellers and sellers, I mean, that's without a doubt the most challenging aspect of what we do. And you know, we do have vertically integrated in house construction expertise, but we don't, we don't CM our own projects. I mean, the projects that we've done are large enough where you know, we, we have historically and that may change going forward, but we've historically used, you know, larger buttoned up construction management companies to, you know, to, to build for us. You know, whether it be under like a GMP arrangement or a lump sum arrangement. We've historically and I think that it also, when you're dealing with projects that are this big and loans that are in the hundreds of millions of dollars and with lenders having construction consultants out the wazoo, I mean, it just makes financing the projects much easier. If you've got a CM that you're partnered with that has a track, you know, of building large projects in New York City, it just, you know, in all the insurances these days that have become so expensive and so difficult to deal with, you know, it just makes it much easier for us at least having third party cms, even though we do have in house project managers and you know, construction directors and design directors that help oversee each of those projects.

From the broker's perspective and trying to underwrite whether these conversions are ground ups. And it always feels like we're guessing and you hear on the street, is it $400 a foot to build and hard cost, is it 600? I've heard, and I'm sure your answer is going to be it completely depends on what you're doing. I heard your project on 11th Avenue with hundreds of different windows that might have even been close to $1,000 a foot hard cost. And then we just kind of tack on our soft costs, which we think are 25, 30% of the hard cost. But looking at how to estimate construction expense today, and what I've heard is yes, the labor is obviously a lot cheaper. Because there's not a lot of competition, new projects. But I've heard the materials certainly during this pandemic have gone up as well. So how do you kind of box that risk today? How do you estimate what it's going to cost to build ground up?

Yeah, I mean, a lot of it depends on what type of building you're building and how big that building is. Because, you know, you've got certain fixed costs with construction, you know, with, you know, general conditions, with insurance, with a lot of the bureaucratic things that the city makes you do with site safety and site security and vibration monitoring and those requirements, a lot of them. And that, that construction oversight, a lot of it is generally the same whether you're building a 50,000 square foot building or you're building a 500,000 square foot building. So, you know, when you talk about the cost per square foot, I think as you get to bigger projects and more scale, where those fixed costs are spread out over, you know, a much bigger project, you're able to bring the construction cost per square foot way down. And as an example, like, you know, the condo projects that we're building in the city, you know, they're not 1,000 a foot, but they're certainly not, you know, 300 a foot. And you know, Astoria, where you have, you know, a 500,000 square foot site with, you know, a big open piece of land, the logistics are much easier. Contractors don't have as hard of a time getting out there, you know, putting up a hoist, putting up cranes, all that stuff is much easier. You know, we're able to bring a project like that in for, you know, at or around $300 a square foot or less. So it really depends on the size of the project whether you're building a condo or you're building a rental. And then again, like you brought up 111th Avenue, which is a super high end condo project that we built with an architect, Jean Nouvelle, who's a Pritzker Prize winning architect. And anyone that's driven by that facade on 19th street in the west side highway knows that that wasn't an inexpensive facade to build. You know, that being said, you know, we at Cape believe that, you know, design people pay a premium for good design. So whereas we sold that project in a really challenging environment, we were still able to get, you know, a huge premium over what other condo projects in West Chelsea were selling for at the time. So we paid more for the building, but we also got a huge premium.

On the sellout, no doubt. Let's Talk a little bit about.

I don't know if that was a roundabout way of answering your question.

No, no, it's completely project specific, but also location specific. So I think it's very helpful to talk about the cost of building in densely populated area in Manhattan versus maybe in the boroughs where you have more space and obviously the type of construction. So. But yes, I would imagine the important thing is, you know, build to the market. So talk a little bit about the financing environment now. I mean what I'm hearing today is that and part of the challenge and if you look at land prices and we could say, you know, two, three years ago we were hitting 8001000 a buildable foot for super prime locations, whether Greenwich Village, whether Upper east side. I'm now hearing, speaking to some of the biggest developers out there and they're saying, look, it doesn't matter what it is, even if it's a spectacular location, we can't go much above 400 a buildable because it's got to underwrite as a rental. So is that true and if so, what type of lender are you going to to get financed? Because I would assume the days of 400 over Libor with a 70% loan to project cost are probably in the rear view mirror. So what is the re reality today of going and getting a construction loan?

Yeah, no, I would agree with everything you just said. I mean the days of 70% loan to cost construction financing or you know, are a thing of the past. I think that the leverage is much more conservative. I think that there's certain, like right now, I don't know how you'd go out and even finance a ground up condo project. There's just not money out there for that. You know, we were fortunate, you know, we had started, you know, our project in Astoria as an example. You know, we just closed during the middle of the pandemic on $280 million of financing Square mile, you know, and a lot of this is relationship driven. I think just going out, you know, as a development firm. If you don't have a proven track record, if you don't have relationships right now, you're just not going to get things financed. And you know, our Astoria project, you know, square miles, our construction lender on that project, you know, we've done you know, five deals with those guys, all successful over the years. Never had any issues with, you know, giving projects back to them, you know, never had any issues. They respect the way we build and do business. And you know, I think the fact that we closed this loan in the heart of the pandemic goes to show that relationships mean everything right now. And that was a tough one. I mean that was one that, you know, we had started and gotten close to the finish line on with them pre pandemic and you know, things got delayed and you know, there were certain terms that, you know, got retrained a little bit, not much, but a little bit. And you know, the fact that we were able to get that done I think is primarily, you know, a relationship driven and be basis driven and the fact that they believed in the project and in all these projects going back to where we started. Do you believe in New York, all these projects, you need to take a little bit of a leap of faith that New York is going to come back. I could convince myself on every deal we have and every deal we're looking at that, you know, it doesn't make sense given the current environment. But you need to take a step back and say to yourself, are the fundamentals in New York there? Do you believe that, you know, once we get past the election, once we get past a vaccine that things are going to return back to normal in New York and you know, we at Cape are of the mind that yes, New York is absolutely going to come back and you know, a lender like Square Mile has to be able to take a little bit of a leap of faith with that as well. And I think those guys, you know, those guys over there get it. And you know, to your point, yes, you're, you're seeing lower leverage. You know, rates have creeped up. You know, there's certain things that you just can't get financed right now. Hotels, you know, nobody's financing hotels, you know, nobody's financing condos. You know, I had an office, CMBS office loan that we were days away from closing right before the pandemic that I still, it's come back. But office with a retail component, people are still taking a very hard look at that. Retail. Things that have big retail components are tough to get financed right now. So it's a tricky environment. But I think for multifamily deals with a good basis, even condo inventory loans at the right basis I think are still getting done. But. But it's a tricky environment right now for sure.

That all makes a ton of sense. And I really want to say I appreciate what you had to say about taking that long term view and belief in New York coming back. And Bill and I, Montana, who's on. We were participants in the board of governors meeting this morning Rebny where Douglas Durst and and hopefully I'm not breaking news here that he will be Rebny's next chairman of the board but in his words he said think of all the things that New York has been through. 9, 11, Sandy, now this pandemic. We're not going anywhere, we're coming back. So that was incredible to hear and so glad to hear that you feel the same way. So let's talk a little bit about the equity side of the equation. I don't know if you all are typically the GP looking for that 90% LP partner. What type of equity do you look for? And have you ever thought about doing a fund or does it make sense to just raise capital on a deal specifically basis?

Yeah, I mean historically the equity that we've raised has been on a deal by deal basis. And I think that you know, we structure our deals similar to the way a lot of sponsors structure their deals with like a GPLP structure. And you know we have a lot of part a lot of LP partners that we've done business with on you know, repeat deals and you know, have been, have been with us for a long time. And it's as you said, you structure your deals gplp, we go out, we'll source the debt, we'll guarantee the debt, we'll come to the table with a big chunk of equity but our LP partner will come to the table with the majority of the equity and we'll have a typical promote structure with a waterfall and that, you know, it's kind of deal specific, you know, depending on whether it's a condo deal, what the, you know, what the horizon is as far as like the timeline, projected exit from the deal. But yeah, I would say historically on our deals it's been, you know, GPLP with Kate being the gp, the managing member kind of running the deal, you know, running the development, sourcing the debt, guaranteeing the debt and the LP having certain major decision rights but cake really driving the bus on day to day decisions. And we've historically aligned ourselves with a lot of foreign equity. We've had partners from Russia, China, the Ukraine. We certainly have had US based partners as well some REITs. You know, we've got relationship with a whole laundry list of financial partners both domestically and abroad. So you know, it's kind of run the gamut.

So I'd be very interested to ask if you are still seeing that foreign appetite with everything going on. And then a follow up question is, you know, what are they looking for? So is it kind of a chicken and the egg where you go find the deal and then you go see if the equity is interested or is the equity telling you what they want to do and then you go find it?

Yeah, I mean, it's a little bit of both. I mean, some of our equity partners want to look at deals on a deal by deal basis and others are saying, look, we've got a bucket of equity that we want to invest in multifamily in New York City, or we've got a bucket of equity that we want to invest in, you know, distressed hotels. You know, we're seeing some of that right now. So different partners coming to us with different deal parameters. But I think, you know, going back to one of your questions, we're still seeing a huge appetite for investment in New York City from abroad. I think that, you know, that's changed a little bit. I think there was probably at least what we're seeing more, more interest from the Chinese historically in the past, and we're not seeing as much of that right now, but we're still seeing a lot of interest. From Russia, Eastern Europe, Ukraine, even Canada, we're seeing a lot of interest. So still a huge appetite. And goes back to the story of do you believe that New York, the fundamentals are there for New York and it's going to come back. And a lot of our partners are of the same mind that we are, that, yes, New York is going to come back. And this moment in time right now with COVID with political uncertainty, both in New York and nationally represents a moment in time where there's tremendous buying opportunities. And, you know, we're going out and aggressively looking at new deals because we think this is a moment. You know, the money in a lot of these deals is made when you, when you acquire the site to acquire the buildings. And you know, we believe that this moment in time represents a tremendous opportunity and we're trying to take advantage of that.

Totally agree. I mean, how many investors do you know say, oh, I wish I bought more in 2000, but it's tough to be that buyer, especially in incredibly uncertain times. So I want to definitely get to your ground up condos that you're doing right now in Hudson Square, but before we do, just quickly, hotels in New York. Okay. So I think even before this all hit, and maybe my stats are a little off base, but I believe somewhere five years ago we had 80,000 keys that had already grown to 110,000 keys. Many were saying we were already over hotel and now what? And I know maybe the easy answer is, look, it's repurposing these, but a lot of these hotels are in manufacturing districts where you can't even convert them to residential. I won't even get into the union considerations. So, you know, what do we do with all these hotels that are empty right now in New York? And what's, what's the outlook there?

Yeah, I mean, I think, as you said, it's zoning specific, but I think if you can think of creative ways to reposition a hotel into something else, there may be an opportunity. Or if you can go in and buy a hotel at a low enough basis and look, 60 million tourists in New York City are not coming back overnight. But if you have patient enough equity where, okay, the domestic demand is going to start to increase over the coming 12, 24 months. And I think that once there's a vaccine, and once that vaccine is widely distributed, the fundamentals for tourism in New York City are still here. Broadway is not going anywhere. The museums aren't going anywhere. The cultural institutions aren't going anywhere, anywhere. So if you could say to yourself that, you know, there's going to be a slow ramp up, you know, for tourists coming back to New York, but that eventually it's going to happen, which we believe it will, and you can go in and acquire a hotel at a low enough basis with patient enough capital that eventually, you know, you're going to fill those hotel rooms and rate is going to start to, you know, start to ratchet up. So, you know, we think that at the right basis there is a, an opportunity to go buy distressed times.

Right now that makes a lot of sense. So I want to talk about the condos that you're currently in the market with. So you've got, is it three different condo projects that are in Hudson Square, and if so, where are they in development? Where are they in the way of their sellouts and maybe talk a little bit pre and post. Covid.

Right. So there's no sugar coating that it's a really shitty time to be selling condos in New York City right now. The market is weak, especially luxury condos in Manhattan. And how we're trying to get through that is, you know, is to be patient and, you know, is to pay down our debt to be able to preserve our basis. And we still feel that ultimately our basis in these projects is low enough that, you know, if we cannot panic and, you know, slash prices to numbers where we need to sell them at today that, you know, we're going to hang on and eventually, you know, given the location of our portfolio projects, you know, we've got two ground up projects in Tribeca, you know, one of the wealthiest zip codes in New York City, or I'm sorry, one of the wealthiest zip codes nationally. You know, we great schools, you know, very desirable place to be. You know, Hudson Square, same thing. You know, we've got two ground ups in Tribeca and one in Hudson Square. You know, you look at Hudson Square, this is a neighborhood that, you know, Google is building their headquarters, Disney is building their headquarters. You know, you're within a five or ten minute walk of the West Village of Tribeca, Soho. Like these are desirable neighborhoods. And I think we, we've delivered, you know, product that, you know, that are speaking to buyers who want to, want to live in New York. The key is just to be able to live through the short term shitty market and be able to survive and sell when the market comes back. And we're positioning ourselves to do that. So we're paying down and paying off our debt. We've got patient equity that doesn't have, we don't have mez on any of our deals. We don't have a gun to our head. And we're going to sit back and yeah, we're going to, we're going to have to discount these units. We're not, you know, we're not naive to that, but you know, we're not taking a, you know, let's discount them 20% to move inventory. We're going to, we're going to be patient and I think we're positioned with the cap stacks the way they are on these projects to do that and wait it out, you know, and we'll do just that.

It sounds like you're in a very strong position to do that. I think one of the key pieces to pay down some debt and be able to wait it out. Because unfortunately, I think some of your peers might not be in that same situation or if the basis is too high where they say, look, we're never going to be able to get out from under. So just to get specific, because Michael wants us to get inside baseball, so are you. I mean, how many contracts have you signed post Covid or even just a couple examples. Is there any signs of life? I mean, sometimes I'll see, you know, you'll read in the post that a celebrity just bought a townhouse for 20 million bucks. And that's great to hear. But you know, what type of condo sales, what kind of pricing per foot, if you can get specific Yeah, I.

Mean I'll use our 110Charlton project, which is Greenwich west, as an example and as a case study. I mean this is a 280,000 square foot, 30 story, ground up building, 170 condo units, which is a lot of inventory. But we, you know, we designed and built these units, you know, kind of right sized for our target market where the check size, you know, it's a relatively small check size for these apartments. And you know, we were, you know, we, we've spent you know, a bunch of money on marketing. I think we have a really creative marketing strategy with that project and it's been one of the most, one of the most, if not the most trafficked site in Corporate Sunshine's entire portfolio. And you know, we're seeing a ton of activity and a ton of offers over there. We're still selling units even through Pandemic. All of the offers that are coming in right now across our entire portfolio. Buyers expect a Covid discount. It's not just cover my transfer tax and mansion tax and let's make a deal. Every offer is coming in at 15, 20% below ask. And you know, the needle slowly moves to the asking price. But everyone wants their Covid discount. And I think it's a, you know, I think it's a buyer psychology. It's like you could raise prices in these projects and discount them back to where the asking price is today just because buyers expect that. You know, buyers, they want their discount, they think they're entitled to Covid discount. So I think there's a psychological thing where even if they think the, you know, there's value in the asking price per square foot, there's still a discount that they think they're entitled to. But you know, again it's, it's some projects, you know, have guns to their head with impatient capital or mezz or construction loans that have maturity. Thankfully we're not in that position. So we're able to be, you know, we're able to be much more measured on the discounts that were, you know, that were that were given. I mean, you know, I'm thankful to be in the position we are, but it comes back to, you know, setting these deals up the right way up front with not over leverage, you know, not taking on, you know, expensive mezz debt that'll force a gun to your head when the cycle turns. Because we've been through these cycles, we know that eventually things are going to go up, things are going to come down and you need to position yourself up front to live through those cycles.

That's great to hear and we really appreciate your sharing and the candor. So we are starting to get some questions. Come in. So I only have one last question to ask, and it's amazing to see. So you've been with cape, you said 17 years, and maybe some of the younger people out there listening, thinking about their career trajectory. I mean, oftentimes you see people hop from one shop to another, and here you are 17 years later, and you're the president and the partner there. So obviously you did something right. But maybe talk a little bit about that journey and your decision to. To stay there and grow with the company.

You know, some people, you know, want to find themselves in more of a corporate environment where, you know, you're working for a Vornado or related and, you know, you're overseeing one aspect of the business. For me, you know, what was most appealing about joining Cape 17 years ago? Joining a small shop. I mean, there's advantages and disadvantages to being with a bigger company. But for me, it's like the advantage of being with a small entrepreneurial company is that you have exposure to every aspect of the business, which I think for me personally was like the best thing I could have done with my career. So I would say, like, you can go with a related. You can go with a Vornado. There's a ton of advantages to that. But there's also a lot of advantages to aligning yourself with a smaller company where you're going to be able to see every aspect of the business, including how to get the deals financed, how to build them, how to manage them. And I would say that keep your options open to working for a smaller, more entrepreneurial company, because I think you're going to get a lot more experience that way than being, I'll use the word pigeonholed. I mean, that's maybe not the right word, but to being in charge of one small aspect, but not really getting exposure to all of the other, all of the other things that go into being a successful developer.

That's great advice. Really appreciate your sharing that. So I'll now jump over the questions. And for those of you who would like to ask questions, please put them in the Q and A box. So first question we have from Sarah Liu has to do with the timing. So again, very challenging to estimate how long is this going to take to get through. But, you know, we're clearly in a correction right now whether you're talking condo sales or rentals. So, you know, how long are we going to be in this for. And when do you think we start seeing a recovery?

I mean, I really think it's going to be a couple of years. I mean, I, you know, when are we going to return back to the new normal? I mean, we're going to need a vaccine. You know, the vaccine is going to need to be widely distributed and you're going to need to get people to take it. And then I think even after that, it's going to take a little bit of time. So, you know, you know, that could be, you know, a year from now, maybe it's next summer before you have a vaccine and it's widely distributed and available and then, you know, things aren't, I don't view it's going to be a V shaped recovery where, you know, right after people, you know, take a vaccine, things are returned to normal. I think it's going to take some time. So, you know, on the new deals we're looking at, you know, we're kind of underwriting. It's going to be, you know, 24, maybe even 36 months before you start to see a really robust recovery. I mean, James, I'd be curious to get your take on that as well. I mean, what's your view on the recovery?

Yeah, no, I think you hit on it and a vaccine would certainly be a big help to accelerate that. I think it's just getting the critical mass and I think it's getting companies to come back to the city. I mean, there's no doubt why I'm hearing now that some of the apartment vacancy is as high as 20%. Office has only gone from 10% to 12%. But we're watching the sublet space build up. I think we're close to 17 million square feet of sublet, which sounds like a really scary number, but you got to remember Manhattan's a 450 million square foot market. But I was really hopeful when I heard JP Morgan said they were going to come back and Goldman Sachs and they tried and then with mixed success. And you have some of the tech companies out there obviously saying that might be a year. So I mean, the key is you have to have people come back to the offices because until you do that, the young professionals who are living with their parents right now, they're not going to come back into the city. But as soon as the offices are open and people feel like they can get here safely and, and work together safely, then I don't want to say that multifamily demand snaps back overnight. But I think going to your earlier point about even about the hotels, I mean, everything for a price. I mean, there's never going to be an issue with filling up every last square foot of office resi or a hotel room. But at the end of the day, yeah, the pricing is going to have to be attractive. And maybe there's any positives. Maybe New York becomes a little more affordable. We are at 1 o'. Clock. I am reading some of the comments and questions. I mean, I think this has been incredibly helpful. We really appreciate your transparency and we've got some congrats on that Astoria financing. The fact that you could, it really speaks not to your track record, to your company's track record. You said so many good things today. I mean, doing the right thing, following through, I mean, incredible lessons for us all. So, Dave, I really want to thank you for joining us today. We really, really appreciate it.

Sure. Thank you, James, and thank everyone else who participated and listened in and hopefully you were able to get a few things out of it. Absolutely.

Thank you for tuning in this week to real estate investing. Live from New York. Please join your host, James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on demand. We'll talk again next week.

J.