83: The NYC Investment Sales Market W/ Massey, Coiley and Vargas

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This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis & 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's one of the largest investment opportunities in New York and around the world. Now here is your host, James Nelson.

Welcome to episode number 83 of Real Estate Investing Live from New York. This is your host, James Nelson. I am principal and head of Tri State Investment Sales at Avis and Young and thank you so much for joining us listening week after week. I appreciate it so much. If you have not already, please subscribe, leave your comments, your ratings on itunes, Spotify, wherever you listen to your podcast. And while you are at it, you might as well connect with me on social media at the handle James Nelson, nycstagram, Twitter or LinkedIn. And you can message me on LinkedIn as well. And I'm happy to answer your questions on the show as I have in the past. The point of the show is to make you the best possible investor and to inspire you to do incredible things. And if last week's show didn't do it, I don't know what to tell you. We had Dean Shapiro on from Oxford Properties talking about the largest private development of all time at Hudson Yards. Such an incredible story, so definitely worth a listen if you have not done so already. So for today's show I'm going to share with you a panel that I just was on that was hosted by my good friends Michael Romer and Pierre deboss and they have a great real estate education center and they did a panel with myself and Paul Massie, the founder of Massey Nacal and now B6. And with us was Chris Coyley who is the first Senior Vice President at Valley National Bank. So he gives some great perspective there. We also had with us Michael Vargas from Vanderbilt Appraisal and Richard Bachmann from the Real Deal Moderated. So I think you are really going to enjoy this and I will tell you, you should also take a look at some of the classes if you are a residential or commercial broker. The New York Real Estate center offers a New York specific online real estate education and information platform where you can find all your required continuing education classes and you can become an all access member today for just 9.99amonth and access their entire library, webcasts and other events. And they even have a dedicated Roku channel. So if you want to check this out, go to nyrecenter.com it's an incredible service that they are offering. So with that, we're going to take a brief word from our sponsor and we'll get right into that panel discussion.

Hi, I'm Mark Rose, Global CEO of Avis and Young, the world's fastest growing real estate services firm and we are proud supporters of Voice America. With over 5,000 professionals in 120 offices in 20 countries, Avison Young delivers local expertise in partnership with global reach. Because we are principally owned, Avis and Young prioritizes client success over shareholder profits through our open architecture. Our firm's experts provide value added client centric investment, sales, leasing, advisory management and financing services to clients across the office, retail, industrial, multifamily and hospitality sectors. Our culture is the bedrock for collaboration that enables each assignment to benefit from the collective intelligence garnered from a company wide database partnership Performance Learn how we deliver different@avisonyoung.com to learn more.

You are listening to Real Estate Investing LIVE from New York. To find out more about James Nelson or avison young, visit avisonyoung.com now back to our show.

So today I'm going to start off with our moderator. Our moderator is Rich Bachmann. He's a widely read real estate reporter for the Real Deal. Rich covers the competitive commercial real estate beat, daily news, analysis and features. He will bring his experience and insight to delve into the current state of multifamily transactions and investment sales. Paul Massey is a founding partner and CEO of B6 Real Estate Advisors. The investment, sales and capital advisory firm specializes in middle market. That's 1 to 200 million in 2017. Mr. Massie ran as a mayoral candidate for New York City, primarily focusing on education, housing and homelessness while also providing solutions for how to improve quality of life in the city. James Nelson is Principal and head of Avison Young's Tri State Investment Sales Group where he leads a group of three dozen professionals in the sale of multifamily office development and retail properties throughout the country. Since its inception in 2018, James sales team has closed over 50 sales valued at well above a billion dollars resulting in his being named one of Avison Young's top sales professionals as well as being on Commercial Observers Power 100 list and being named a costar power Broker. Michael Vargas, principal and co founder of Vanderbilt appraisal, has over 25 years of diversified real estate experience with a focus on the appraisal and valuation of real estate in the New York metropolitan area. Mr. Vargas is recognized as one of the most experienced professionals in the appraisal of of New York area cooperative economy and housing and luxury mansion complex type residential real estate. Chris Coily is the first senior vice president of Valley Bank. Mr. Coily joined Valley in 1990 as part of the bank's management training program. After he completed the program, he worked in the commercial lending group. Before joining the commercial real estate Group, he managed the real estate team in New Jersey before his appointment as New York Commercial Real estate division head six years ago. Now this panel really resembles what the New York Real Estate center stands for. We want to bring the New York professionals to you, the New York experts to you to provide New York specific content on a regular basis. We saw a void in the continuing education market with a lot of national providers not providing New York specific content. And today I'm really happy that we have this esteemed panel so to provide New York specific content on our commercial real estate market. And now I'm gonna turn it over to our moderator, Rich.

Thanks Michael.

And thanks so much to Michael and Pierre at Romer Dubos for putting this together. For everyone who's on the panel and everyone who joined us today, James, do you think you could start us off with an overview of the first quarter and how the multifamily sales market performed?

Hi Rich. Hi everyone. And thank you, Michael, and to your group for continuing to offer this incredible programming. So happy to be doing this. And Rich, as a broker I'm always glasses half full forward thinking, so it's going to be tough to sugarcoat this one. But the first quarter was absolutely horrendous. And that being said, I think what's important to know, whenever you're looking at sales figures, these are rear view indicators because sales typically take whether it's months to negotiate, months to close, a couple of weeks to record. The first quarter is really talking about how the end of last year was and remember and many of us quickly forget because our country's been doing such a good job on the vaccine rollout. But the vaccine rollout didn't even happen until January. So a lot of these deals, the very few deals that were happening that were recorded in the first quarter were really a result of that. So that being said, you know, looking at 2020 sales volume and I'm talking about all asset classes now in New York City was cut in half 50% and then the first quarter dropped again. The first quarter was the lowest quarter for dollar volume dating back to 2009. So that being said, I am 100% confident you can quote me on this. That is absolutely the bottom of the market from a sales Volume standpoint, you know, just talking about, you know, the activity that we're having right now. Tour activity. We're getting in some properties, over a dozen tours per week. A lot more confidence in the market. We've been bringing on a lot of new, exciting assignments. The market, and there's capital there. The one difference about this pandemic and 2009 after the financial crisis is there's plenty of money out there. So it's really just a pricing issue. And yes, multifamily pricing had to reset. Okay. It's dropped about 15% since pre Covid. So now that pricing has reset, there's plenty of buyers out there. I'm not saying that there aren't headwinds, and I'm sure we'll get to that later, but I think we can finally say that the worst is behind us.

Are multifamily sales performing in line with other asset classes or are they acting differently?

They have actually fared better from a pricing standpoint with the exception of office. Office. So if you look at. And what we did was we took 2019 pricing and we compared it to the second, third and fourth quarters of last year. That really gives you a good sense of pre versus post Covid pricing. Office pricing on a square foot basis in Manhattan was only down 6%, multifamily down 15%, retail down 25% and land down 40%. So land has gotten hammered. And again, I know this panel is just about multifamily, so I can explain later. But what I'll say on office is I think the worst is yet to come. I think the fact that you've got office vacancy that has gone from 10% to 16% with the amount of sublet space tripling, the prices just haven't caught up. But I think multifamily. And remember, Rich, this was on the heels of the tenant Housing Protection act of 2019, where values already dipped. So we have had a double dip in pricing. You can now buy a multifamily in Manhattan at a five and a half cap. Okay. I talked to our brokers, and we've got 60 offices throughout the country. I talk to our brokers in Austin, Nashville, Miami. It's like nothing has happened. I mean, in fact, more the amount of capital, flight capital that is going to those markets and what it's doing to pricing is you want to go buy a multifamily in one of these southeast states. I mean, you're talking about a sub four cap. Okay, you're going to. And we'll hear from Chris I mean you're borrowing the same money, you know, the same rate whether you're buying in, you know, Austin, Texas or New York. So like for the first time in my 20 plus year career, New York is the contrarian play. And when you look at the fact if you're buying a five and a half cap and you're borrowing money, you know, in the, you know, low 3% range, you are able to get a high single digit cash on cash return, you are actually getting positive leverage. And that was not happening in 2009. In 2009, yes, the cap rates expanded as well, but you were still borrowing money at 6 to 7%. So I'm looking at this market as a moment in time to lock in incredible pricing as long as you match it with the right long term debt.

How about that Chris? Are the attractive financing rates, you know, motivated?

James is stealing all my thunder.

I'm going to tell you the layup for the done.

Yeah, you know what the capital is, it's there. You know, then if you talk to any banker these days, they're all saying the same thing. They got to show growth. You know, they want to see their stock prices go up. And how do you do that? You grow. Interest rates are so low right now that it is beneficial and people are, whether they're refinancing or purchasing, there's an abundance of capital out there. So you definitely see some repositioning. The issue that we're all dealing with is that market correction and that 15% is a real number. So on the purchase side, I think selling expectation hasn't quite met demand expectation yet. And it'll get there, but I think with cheap money out there, it's going to continue to drive. It's going to drive and there's been a lot of money that's gone to local markets. Philadelphia market really benefited from the rent control changes and now this correction. So I think that you're starting to see less, less supply which is going to create higher demand. And I think you're going to see a lot of money coming back into the market.

How about on the refinance side, has that fared better through the pandemic?

The refi market has been pretty interesting. A lot of the banks have been very stringent on their underwriting processes. They really getting payment histories which in the past we never really did. Understanding, you know, who's paying and who's not paying. You're getting, you know, your delinquency reports from, you know, from, from your borrowers. I think at the End of the day, you're going to see a lot of banks are really sticking with their existing clientele because they know what they have. You know, you're, you're really following your, your strong sponsors. But to that sense, it's still very, it's cheap money right now. So the numbers work. The banks, we bumped up our debt service coverage requirements. We lowered our leverage points. We were doing multifamily at 80% all day long. Now you're seeing that 70 to 75. You're seeing debt service coverage requirements where it was 120, 125, 130. So you're starting to see a little bit more of a conservative approach. But I will say within the last 30 to 60 days, it's starting to swing back, which is a good sign for borrowers and for purchasers.

Janet Yellen said something yesterday that I think she walked back about interest rates and how if inflation goes up, the Fed may have to look at raising rates. Do you think borrowers think that rates are going to be low for long or are there concerns about inflation?

And I think inflation is an obvious concern right now. The government has handed out a lot of money over a short period of time and we've got to figure out how to, that's got to get paid back somehow. So where that comes from, rising interest rate will do that. But I think that would really cause a crunch in the marketplace. You see toying around with ideas of getting rid of the 1031 rules. You know, these are all things that could really put a roadblock to recovery. So I think, you know, we look at interest rates as to be definitely stable over the next two to three years. We try not to go out more than two or three years on where we project rates to be. You know, we do a lot of five and seven year paper. You know, over seven year we'll, we'll talk, swap product with clients. And again, that's with the pricing curves. Everything's going in the right direction for longer term borrowing.

Paul, if there are changes to the 1031 rules, what do you think the short and the long term impacts will be.

To the 1031 issue? I don't think, I don't think it'll be eliminated. I'm listening to what people are saying nationally and smart money and heads of public companies and I think it's such an integral part of our real estate industry, especially professional investors and traders. I worry more about cap gains increases. I think I completely agree with my former partner. James Nelson was a great partner and is a great guy about that. We've hit the bottom in terms of number of buildings selling in the city. There's usually about 3,000. So it's a low velocity market. So the average person sells once every 39 years and they typically don't sell unless they have to because there's so many taxes to pay. It's much easier to refi to get access to capital. So I think people have been holding up on life decisions, settling estates, etc. So I agree with James that market's going to get better. I think that I disagree with James about we haven't seen the worst of office yet. I hope I'm right. I think the work from home thing is an utter fad that's going to fade really fast and companies like JP Morgan and Google and all the rest of the big companies are going to be really pressuring to get back to work. So I think office is going to rebound fast and it could start happening later in the spring.

Paul, not to interrupt, I mean, but I do agree that certainly there'll be an increase in occupancy. My comment was specifically about pricing. The average office building still trades for over 1,000 a foot. That doesn't make sense because that doesn't really factor in the reality that there is going to be more vacancy. There's been very few office trades and I don't think we've seen any of those buildings trade that have 20, 30% vacancy yet. So I don't know. We'll see. I know this is a multi panel, but.

No, I know, but people probably care about the whole picture, right? And I mean, look this one, Vanderbilt, where they're, where they're crushing rents, getting very high rents. If you haven't walked by that building lately, they did an amazing job the way they juxtaposed it to Grand Central and the Plaza there. And it is, I mean with properties like that achieving rents like that. I don't know, James. Thousand bucks a foot sounds pretty cheap for that building.

Michael, with all this uncertainty going on and all these proposed changes to regulations, how did owners look at that from a valuation perspective?

Well, yeah, I mean just going back to what the market went through in 2020, but even before that with the 2019 Tenant Protection act, it's been the most challenging time for valuation. With 50% fewer transactions. It was the hardest year really to figure out what anything was worth. So whatever from the ownership side, if you had a business plan, your expectation about what your return was going to be based on stabilized expenses, that is out the window. Your vacancy and collection, you know, initially maybe you underwrote at 0 to 2% when during the heyday of 2017 and 2018, you know, that line item, you know, also went out the window. So all of the best plans that the ownership side had put in place, you know, all of that was disrupted in 2019 and 2020. So beginning in 2020, we were expecting that that would be the year that we would get more price transparency and more information about where valuation stood, given the new rent laws. And so Covid basically completely disrupted that. And we spent the year, and I'm not shy to admit this, but we really spent the year basically giving our best guess about where values were, you know, without the ability for us to review a large amount of data and transaction information. We knew, you know, we knew what potential buyers and investors were hoping they would be able to get property for. You know, most of that at distress level, you know, 30, 40, 50% off. But you know, we didn't see many sellers jumping into that type of environment. So we had a kind of a complete lack of transparency. The only thing we knew was that values are down so that your revenue is going down, all of your expenses are going up. And so that was just a tremendous multi level hit from the ownership side on valuations. And we're still trying to figure out exactly where it all is going to land. But we really need those transactions that we're hoping to get this quarter and next quarter to really figure out, you know, what are the new, what are the new expectations from the buyer side and what are the owners willing to capitulate to?

I'll put this question to everyone on the panel. Who are the buyers and sellers, you know, post the Tenant Protection act and you know, through the pandemic, who's actually been transacting.

It's been almost all private, ultra high net worth and surprisingly, or maybe not so surprisingly, a lot of foreign investment. So if you look at related sale on Union Square for over $200 million, went to an Argentinian family office, European family office, bought down on Christopher Street. But it's mostly private, high net worths. I mean there is some institutional investment that it's really focused on either fair market or the 421A buildings where your future is locked in for the next 30 years. So obviously KKR, you know, with Rublin Brooklyn portfolio, you know, Invesco has been active, you know, looking at fully affordable deals. But again, where, you know, your future is kind of locked in. But if you're Talking about kind of bread and butter, New York multifamily. It's always been a private investor game and you know, one of the sales that I think exemplifies kind of the correction in the market and I think in this case, you know, the pendulum swung too far. But we had a mixed use building on McDougal street right off Bleecker. Big vacant restaurant, 72 units above half vacant, tons of work needed. Pre Covid we had a contract out for 32 million dollars. 60 days later we contract closed for 22 million. So you know that was just showed up at the closing table of the check. So I think a lot of the private buyers today, there's certainly contrarians but they're buying price per pound. And yes, I started off by talking about some of the cap rates that are available. But you know what they're really looking value and there's a lot of it out there right now. So I think all these changes and I saw a question in the chat about good cause eviction and we can certainly get to that. But all this regulation, all this flight capital, I think it's priced in and that's why the values are where they are.

Right now we're seeing a lot of our existing customer base pretty active, you know, and, and there's a lot of gunpowder out there. So you know they're trying to find deals and, and you know, that's what I said before about the expectation of what somebody's asset is worth and what, you know, what the reality is. You know there's, there are people out there thinking three cap or three and a half cap is still, it's still real. We're mid fours and even low fives, you know, we're seeing more. So you know that's, those deals are starting to get done, but definitely on the private side as opposed to some of the larger publics.

What about the sellers? Who's selling now are there for sellers are these families who are doing estate planning.

We're seeing, we're seeing forced, we're seeing some forced sales, you know and again these are, you know, just coming off of people at the ferments or you know, had some collection issues on their properties. But that's what we see on the banking side is somebody who's struggling a little bit and they want to get rid of an asset and go into something else.

If you're a multi family owner, especially a regulated property, you're running a business and you have to be expert in running regulated properties. So what we're seeing in some cases, I agree with Chris that there are some maturity defaults looming because loan values have shifted. So someone might need to come up with a significant amount of equity to reset their loan. But also, I think one of the things that I've noticed about the whole Covid period is, and this relates to a lot of things, it's moved people ahead a year or two or in some cases five years on their whole life plan. So if you're a multi family operator, a private operator in New York, at some point you are going to exit the market and retire. I think they're probably in that bucket of. There are a bunch of them, they're in that bucket who just have thrown their hands up. A resolution of what's going to happen Based on the 2019 rent law changes is going to take a long time to sort out. And until a lot of that sorted out, people, you just really don't have a sense of where, where the market's going to go. So we're seeing a lot of owners saying, you know what, I've had enough. I've worked my whole life, I've run these properties. I was going to make a move and retire and I'm just gonna do it now.

I would just to add that we surveyed our sellers from last year. Half of them had owned their properties for over 20 years. And I think what this shakeup has done is, to Paul's point, a lot of them said, look, I don't have another cycle in me.

Or in one case, there was a great quote from you, James, a month or so ago. I love that quote.

Yeah. And we're also. Thank you. And we're seeing some owners. We have one client who owns over 100 properties in New York and they said, look, I've got all my eggs in one basket. I've got to diversify. I think that's also, you know, we were kind of in the great position years back where it was like, okay, well it's New York or nowhere. Because we're, you know, we're really the only market to. And now, yeah, there's options out there, there's other cities. And I think some, some of these long term owners who want to stay in the game are also diversifying. They're getting into other markets and they're also getting into other asset classes as well. They're thinking, you know, maybe I don't want to have everything rolled up in multi.

You know, to Michael's point, earlier, we came into Covid still looking for this price discovery. How do you Separate out now the impacts of the pandemic from the impact of the Tenant Protection Act. And do you have to sort of sort through the first one before you can figure out the other one?

Which is the question, how much of the price decline is attributed to that Housing Protection act and how much is based on Covid? Is that the question?

Yeah, that. And then like when you look at the recovery, how do you evaluate how prices will correct?

I've got an answer to that. You know, it's multi pronged because the question is multi pronged. And first of all, to Michael Vargas, you're completely off the hook on not having data points and being in the dark. It's unprecedented. You guys have done a fantastic job of trying to help us all figure things out. But I think if you look at rent regulated properties and this will prove itself out, I believe in the data you went from buying things at a four cap with a business plan where you're going to roll and improve units and drive to an 8 cap, which is a great solid return. And the rent regs turned everything on its head. So you went from buying the few data points that we have at a six to six and a half cap. And the fear is with inflation that you talked about and taxes increasing, you're driving now to the 4 cap. So you've got a depreciating asset. I think that'll prove itself out. So I think that's a reason why these rent regulations are, are really detrimental. And I'm someone who believes that we should figure out a way to have a lot of affordable housing, especially in New York, because we don't want to be a barbell society. And then I think the effects of the virus were basically immediate and severe, where, you know, occupancy went from 95% in institutional grade buildings to 60% and rents are down 25 to 30%. But I think that's gonna bounce back really quickly. I mean, my kids are all in their late 20s and two of them bailed out of the city the minute the virus hit, like, you know, as soon as their leases were up, like a lot of kids did. And now they're racing to get back in here and complaining that they think they missed the bottom. So I think the same way with the office market, the rental market's gonna correct the institutional owners that we know over year. Danny Stonehenge is back up into the 90s in terms of occupancy. Rents are still lagging, he's telling us, but again, I think that'll correct quickly. So I think if you really focus more on what the effects of the rent regulations were to values, you're going to find the answer to where we are and where we're going to go forward. Does that make sense to you guys? To James, to Michael, to Chris?

Yeah, I mean, I would say I completely agree with that. If I had, you know, I mean, if I had to put a number on it, I'd say, you know, let's say, you know, the Tenant act, you know, caused 20 to 30% decline during the worst part of COVID Maybe we, you know, the decline, you know, it caused an equal measure of decline. But the road to recovery for that piece, I think is more imminent than the legislation going forward in terms of our valuations. What we're trying to do is see a year or two out from now, where does the market stabilize? Where do rents stabilize? Where do expenses for landlords stabilize? So we're trying to project where the market's going to be with recovery, with people back in offices, with vacancies going down, with the decline in rents abating or eliminating altogether. So we're looking at a year or two from now and trying to figure out what's the stabilized income, what are the stabilized expenses two years from now? And it looks a lot like where a building may be operated at 2018, but at a 30% less in value, which again is attributable to the tenant act of 2019. So how the impact of that legislation, and Paul mentioned it earlier, that that's really going to take a lot longer to really shake out and figure out where, you know, where all these assets are going to land in the long term. Once that, you know, once that all, you know, once we get a little bit more clarity about that, because as I mentioned before, we were just basically ready to treat 2020 as the year we got more clarity about that legislation. So now we're looking at, you know, use this year for stabilization. Next year, you know, we'll have a better idea of where, you know, where these assets are. But you know, we're expecting it to be at, you know, 20, 30% lower values than at peak, for sure.

And the only challenge is now, you know, potential headwinds moving forward. I guess maybe it is appropriate now to talk about good cause eviction because that is on a lot of owners minds. So for those of you that don't know, and I've got to give the tenant advocacy groups a lot of credit, it sounds like an incredible thing. Who wouldn't want good cause eviction? But it is, let there be no mistaking, universal rent control. So if someone is in the apartment, they have the right to renew at the lesser of one and a half times CPI or 3%. And if you want to challenge that, you have to go to court. So good luck with that. You know, the good news in speaking to Revni and Chip is it's not going to happen this year. You know, Albany already got the eviction moratorium extended. You know, they were able to raise their budget. So, you know, but, but I don't think it just goes away. There's an overwhelming, you know, shift in Albany to the left. There is somewhere between 23, 24 supporters of that bill. I think they need only 25 or 26 to pass. The reality, some of these politicians sign on the bills, but when it comes back to the table, will they ultimately go through with it? We're hoping that staved off. But the challenge for a lot of these institutional investors, it's very hard to play the game when the rules change. And we certainly see, seen that in the past with Stuytown and some of these other situations. But I'm glad Paul brought up those stats on the occupancy and the rent change because that's absolutely right. And the good news is, yes, people are coming back, but rents down, concessions. But the problem is if good cause eviction happens and now you have to lock in those rents at a low point, that's really not fair. And probably for a separate panel, but agreeing with Paul, you know, on the need for affordable housing like that doesn't, you know, incentivize developers to build, you know, new projects or invest in buildings if people are going to just, you know, basically squat in their existing units.

Well, you know, James, the whole thing that's troubling about the rent regs and universal rent control to me is more of a fundamental thing that I can't believe that the legislators, legislators in Albany thought about. Because if you consider the fact that the city's budget is proposed this year to be $99 billion, and you know that 45% of that comes from real estate taxes from buildings just like we're talking about, I think you're gonna possibly cause the city to have massive budget shortfalls because you've got buildings where the rents are frozen. You don't have an ability to fix up units to get rent increases, even modest ones. Your taxes are likely going up. Your, your operating expenses are subject to inflation. So the net, the net income of your building, which is how they measure how Much you can be taxed is going to be quickly eroding. Our tax base is eroding. And if you think about the City's budget, that $99 billion, it's not terribly variable. You've got bond payments, pension payments, employee costs. So maybe the city's budget is 10 or 15% variable. The first thing that are going to get hit our social programs to help folks who struggle. And that's exactly who the politicians are trying to help with the rent reg freezes. So the come around on this is going to hurt a lot of people. And then you get to universal rent control. How do you administer that nationally or statewide or I don't get how that works. And that will come with the same detrimental effects that the current regulations are bringing. I think we have to look at support for people on the housing side. But you've got to have programs that don't undermine the whole system and yet really help us be a city that's not a whole bunch of rich folks and a whole bunch of folks struggling. You want a middle class and you want support for people who need support for housing. So all these regulations and rules have the negative effect of basically causing less investment, less housing creation and our housing shortage gets worse.

Yeah, I mean I certainly agree with that and really hope that our elected officials come to their senses and understand kind of the trade offs here. And as much as I'd like to hope that they'll come to their senses, I think the next lever that they're going to pull is probably on those tax class 2As and 2B's where a lot of investors feel safe in those 10 unit and under buildings because they say my taxes can only increase by 8%. And I'm hearing now they might be looking at that again. You know, how about the co ops that have been getting a free ride. What about you know, the single family homes now? But that's going to be very tough for the politicians as well because that's the third rail. Right. If you start telling, you know, single family homeowners that you're going to have to raise, you know, their taxes, that's not going to work.

So those single fan, those same single family homeowners can also be referred to as voters.

Right, exactly. So I mean we're all. This is such an important election coming up with who our next mayor. And Paul, I wish you were running again.

Would have loved it, would have loved the job.

Yeah, yeah, I wanted to second that nomination. You know, not to make this a political show but you know what, you know, James was mentioning about additional headwinds going forward for, you know, commercial real estate. And a lot of it relates to, you know, policy and legislation. And you know, it seems like, you know, these days in terms of every topic, but let's just focus on real estate for now is everything's got a swing one far away or the other and you know, there doesn't seem to be a center that's holding. And you know, so eventually the city is going to have to kind of grapple with that, that, you know, when do we get back to, you know, a situation where we're not so anti landlord and anti owner. You know, there can be a pro tenant legislation without having to be anti owner and anti landlord, you know, and I think, you know, Paul would have made a great mayor, I think James would make a great deputy mayor. But if it's not going to be you two, I hope in the future we get somebody, you know, who has most of the time we get people who running who don't, you know, who haven't run a business, who haven't been owners of anything. And, and that's where a lot of the understanding about the negative impact where you think you're going after something and the actual, the impact is felt the other way. So you know, you're looking to ownership and wealth side to pay for everything and eventually it ends up harming the people that you're trying to. And I think that's going to happen. You know, that's one of the headwinds we're looking into now is that, you know, we're trying to find a point of stabilization but additional legislation like good cause eviction or just to talk about these things really continue to disrupt the market.

Paul, is there a common ground there between the landlord and the tenant size? How do you bridge that gap?

Absolutely. I think the big picture answer on common ground is let's. And this is something the prior administration has failed at. We have zoning in the city that dates back to the 1961, 62 era, where unlike a lot of cities we have had as of right zoning. So developers and their equity investors and their banks could know if I acquire a site, I can build X depending on what the zoning is and I can partake in programs where I get tax abatements as long as I create a certain amount of affordable housing. And those programs were in place now the city makes a lot of the major developments a one off negotiation for affordable housing. And then right now the current tax abatement program, the big one the 421A is sunsetting and there's uncertainty about people allowing it to continue. So all this uncertainty makes developers and investors who are the best and most successful in terms of housing creation. Certainly the city is not stellar with development or managing its own housing is throwing, effectively throwing a cold bucket of water on the market. If you thought about the opposite, where we just allowed our zoning to rule and allowed our tax abatement programs to exist unthreatened so people knew what they could make, there'd be a lot of housing created. We need a lot of housing. If you think about the fact that our buildings are on average 85 years old, just that is going to cause us to need to create new housing. And actuarial demographic experts will tell you that our population is likely to increase over the next 10 years. So we need more housing for that. And people are struggling to live here who are middle class and folks who need help. So more housing we create, the easier it is for tenants. Rents will be more reasonable. There'll be a bigger housing stock for people to pick from. So I think the answer really is in finding a way to create housing on a scale that hasn't been created in the last 15 or 20 years. And that'll eliminate a lot of these pressures that are affecting, you know, the average New Yorker.

I couldn't agree with that more. And there are two proposals on the table right now. And Paul already alluded to this. Affordable New York. And if you are not in the ground by June of next year, you do not qualify for this program that has created thousands of affordable units. And it was working. And you know, the challenge there was, the opponents of that are saying that too much of that development was done with the option C, which is for 130% of AMI. So that's someone who's making 100,000 a year and can pay a $2,500 rent. They're saying we need more deeply affordable. But you know, if they push that requirement down and make it too great, and there's also discussion, are they going to make this new tax abatement contingent on prevailing wage. It gets to the point where, you know, if a developer is providing that deeply affordable housing, like 60%, you know, you don't make money on that. Right? So, you know, deeply affordable land needs to go for sub $50 a buildable foot. And then you get basically fee developers that are just doing it for that. But you know, that's not going to get projects built around the city. So look, I mean, they could tweak the existing affordable New York a little bit. But if you make, you know, it too onerous, you're just not going to see anything built. But there's an opportunity on the table right now that I think our politicians are going to squander. And with the current state of the hotel market, I mean a lot of these hotels just aren't going to open up again. We were over hotel before this all happened and the governor came out with seemed like a good proposal. Hey, we're going to give flexibility. We're going to allow office and hotel buildings to be converted to resi as long as 25% is affordable. And then what's happened is everyone kind of tacks onto it. And after our governor's difficulties, he had his own battles to fight. And so it ended up with some Senator generis who was also the lead on shooting down Amazon. And now they've got this slush fund for $100 million and their proposal is just to give that to some, not for profits, to maybe buy a building or two. Whereas you have all these hotels on these side streets where they're built, 25 footers built deep on the lot. So currently they do not allow permanent residential long term housing as of Right. So if you could simply go in and say we're going to allow in some of these manufacturing zones that previously only allowed transient use. We're going to allow full time, we're going to bring back the sro. There was nothing wrong with that. That would be something very doable. Right. But instead they're going to just take this hundred million dollars and they're going to blow it on one building and maybe they'll get a couple hundred units out of it. So, you know, look, there's opportunities out there. We just need the right leadership in place to execute on it.

You know, talking on the banking perspective, we're seeing a lot of the pivoting in certain asset classes. You know, whether it's office or even the hotels, you know, we're in New Jersey, Florida, we're seeing that activity. When I first read that, I'm like, that's, that's almost the way you got to go. You know, there's, there's so many, so many hotels out there that we need to do something with. But now you got to throw in the hurdle of construction costs going through the roof. Materials are crazy right now. So hopefully that settles down a little bit. Some of the projects that we were financing through Covid, we saw 20% increases in costs. So those are Things that fortunately for, for our clients, they did their homework up front. But these are all hurdles that makes your typical developer a little concerned to jump into the ground these days.

Yeah. Chris, you talked about inflation earlier, and I was noting over the weekend that Warren Buffett held his annual gathering of Berkshire Hathaway shareholders. Of course he did it virtual, but he was in Las Vegas for, for the virtual show and he's talking about a national boom in the economy and the market. But he's also talking about the fact that he really worried about inflation, which could get kicked off by exactly what you were saying about building supply price increases that are 3 and 4x what they were a year ago. Inflation for our business would be another cold bucket of water that would slow us down for quite some time. I mean, it would lift asset values eventually, but in the short term, you'd be charging more at the bank. Construction costs would be up. Not an ideal scenario. I'm not sure that's anything we can control from here, but it's something to watch.

What does it take to convert from a budget cost to convert a hotel to apartments? And I guess if you start like, what kind of basis would you need.

From the purchase Rich, if they just changed the zoning and they allowed some of these current hotels to allow for it, very little is the answer. I actually don't think it makes sense to convert office buildings. I mean, the cheapest office building that has sold since COVID was over $600 a foot. And if you're completely gutting a building to change use, you're talking minimum three, three fifty a foot. So now you're going to be in when all said and done for close to 1,000 a foot. You know that's condo level pricing. Right. How are you going to create affordable. But the hotels, if it was just actually changing the use and making those previously transient used for permanent very little. So again, that's why, like this opportunity is right in front of us. And I just hopefully they don't, you know, completely screw this up.

And I think we're going to save a portion at the end for questions from the audience. So if anyone has anyone, you know, please send them in. So who does everyone like in the mayor's race? It's coming up like really quick.

Right. It's amazing that New Yorkers wait until as long as they do to really focus on this. That's something I learned from my own experience. The. I mean, it's six weeks away. Six, six and a half weeks away. And I think it's Completely up in the air. And I think, you know, the Republican candidate, you know, will perennially struggle. So I think the mayor's race might be happening in June on the Democratic side. So this is, you know, has the real possibility of deciding who our next mayor is. And I don't think, I think you've got Andrew Yang as a front runner, but, I mean, that could move around a lot. And, you know, the rest of the rest of the ticket, it isn't clear. And I think, you know, a lot of the voters are completely undecided as well. It's amazing.

I think whoever it is, we get on one of these panels.

Yeah, no doubt. And what'll be interesting, and I really hope we have record voter turnout. And to Paul's point, it's going to happen at the primary. And so it'll be very interesting to see if Jeff Blouse, you know, he made a big push and I, you know, applied in for this to say, you know, look, if you have not registered for a party, you should certainly do that in time. I think February 14th is the deadline, and even if you wanted to change party affiliation, you could do that, you know, for just this, this voting cycle. So, you know, but yes, the winner certainly is. The case with our current mayor was decided in the primaries. If I'm not mistaken, our current mayor only received a couple hundred thousand votes. Right. So. But I am optimistic in that it looks like the front runners are all willing to at least have a conversation. Right. With the real estate industry, for so long, we've been vilified where it's like, if they even talk to us, they're guilty. And so I've been pleasantly surprised that all of the frontrunners are willing to talk to us and get our input. And so that's what we need. We need a public private partnership. There's no way that you can tax your way out of this. We, we need prosperity. We need companies to continue to come to New York, grow. And so we need a strong leader back at the helm.

I like Andrew Yang because of kind of the big picture conversation he has in terms of, you know, like, if you think about strong leaders in New York, I'm big on Michael Bloomberg because he was a big picture thinker, like, where's the next High Line? Where's the next out of the box idea? Where's the next Cornell Tech Center? Where's the next. Which is the next company like Amazon, who could come in here and bolster up our tax base and create lots of jobs? And are we going to embrace that. I don't know what the next big idea is, but if someone's. That was part of the appeal about Yang as a presidential candidate. He was talking about big picture stuff. And I think people have missed that recently in New York. So that's a real positive for him to me.

I mean, we definitely need that. Paul, and I was kind of with you, but his latest comments on a housing plan are pretty scary. So on one hand, he, he did say that he actually liked the idea of the SROs, but then he also said, hey, let's just spend $40 billion, right? And the public sector can't just throw money at housing and hope for it to fix itself. I mean, just look at Nycha and look how incredibly well that's happened. So I hope his plan is not just throw money at the situation so that that would be my only question for him. I mean, it doesn't seem like there's a lot of details behind that plan except, you know, just the dollars behind it.

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 on Wednesday mornings at 7:00am Eastern Time and 4:00am Pacific Time, as well as always on demand. We'll talk again next week.