One-on-One with Richard LeFrak Part 3

October 09, 2018

In the third part of this interview, LeFrak Organization Chairman and CEO Richard LeFrak shares his perspectives on the effect of Brexit on US foreign capital, where we are in the development cycle and the possibility of a correction in 2017, technology in real estate, and the amenities changing the CRE landscape with EisnerAmper Real Estate Services Group Partner Lisa Knee.


Transcript

Lisa Knee: Hi I'm Lisa Knee with EisnerAmper and I have the pleasure today of sitting with titan Richard LeFrak from LeFrak Industries. So you were quoted on the morning of the Brexit vote that you thought that was going to be good for the United States and good for capital coming into the U.S. Do you still feel confident that that's a good thing for the U.S.?

Richard LeFrak: Yeah. I don't believe that the full weight of that decision has really been felt in the U.K. Yet I think that there are serious implications. There’s a complex negotiation that has to take place and then there's a chance that a significant portion of the financial service business will have to relocate from London. That’s going to have a significant effect on their economy. Now maybe they can wiggle through okay, and they do have the natural advantage of the English language, the history of having an infrastructure to support the financial service business over there; but if the feeling in Europe is that if you let one out without any- you know scars- a lot of them will be leaving. I don't think it's going to be that easy on all of them. Remember it's a little bit parallel in New York: the financial service business is one of many industries that we have, but it's the high paying one right?

LK: Yeah.

RL: You can work in the hospitality business and you don't make the same amount of money as some investment banker or trader on Wall Street. They’re both jobs- the high paying jobs- a lot of them in London are related to the financial service business so you're taking that wealth out and it's going to affect the economy there. But again, it's too very early in the game. They still haven't had the two-year announcement and all the things that have to be digested. I'm sure there's going to be some very active negotiations with the rest of the E.U. over what status they’ll be in.

LK: There's been a lot of talk about where we are in the cycle. However, people want to phrase it as what inning are in? Where are we at? I think a lot of people are afraid that in 2017 there's going to be some sort of market correction for this wonderful growth that we have had over the last couple of years. Where do you feel that we are? Are you still very optimistic for U.S. real estate?

RL: Well we're living in the low interest rate environment here. I don't know what normal is, and in my career I've seen zero, and I've seen twenty percent interest, so what's normal? I know wherever we all were on the low side of normal, right now a lot of transactions were motivated by the cost of capital. In the end you still have to have enough demand to justify whether you're building condominiums, office space, retail, multifamily -all of those things. They still need a customer in the end, so my own feeling is that in many markets now, they're saturated.

LK: Yea.

RL: Maybe too many condos, too much retail, too many hotel rooms. You have to curate where you want to be, and say well I want to be in a market where there's still some demand. The economics of the transaction, whether it's a purchase development thing that the economics don't rely completely on, these interest rates think of it as a- that's kind of the whipped cream on the cake. I got to borrow money for three and a half or four percent interest. Is there a fundamental need for whatever it is that you're investing in, and will you have a customer at some price? So I would I would give you an uneven answer, and say it's probably the ninth inning in a lot of markets, and it may be the third or fourth inning in other markets depending upon how aggressive people have been.

LK: And how important of a role do you think technology is taking in the real estate industry? Do you think they're behind and bracing enough for it? Is there something out there that excites you?

RL: Well certainly the retail business has been just disrupted by Amazon, and I'm looking around a room at you and your colleagues here and I'm saying how many of them didn't get a package from Jeff Bezos today. Probably not many. We know that the retail businesses is actually being transformed radically. But also offices are being transformed now radically because nobody has a file. Everything’s in the cloud. I don't have it with me, but often will show my smartphone and I'll say to people: I don't know is this my office? Technology is certainly changing the demand and the use of commercial space. The one thing that remains intact, is the cave. Because they haven't figured out how to put a kitchen and a bathroom in an iPad. So the cave is still fundamental. The desire for somebody to have a home, a place to hang up their clothes. So the residential business is still good. Although you know they're scratching at the surface now with some of these what I call a kind of couch surfing concepts. You know sharing. You’ve also seen a hotel business get turned on. Airbnb and real estate is being affected by technology. But I don't think we know the depths of it in all the areas yet, but it’s severe, at least with respect to the retail, for sure we know it's acute.

LK: Are you making accommodations for this on your new projects? Are you thinking about how you’re planning?

RL: Well in SoLe Mia we’re building a shopping center, but it’s what they call a lifestyle center. A lifestyle center is an experiential place, not a traditional shopping center. Because if you want a pair of socks you get them on Amazon. You have to create an experience for people. Whether it's a more restaurant centric, activity centric you got to build a bowling alley, and the kind of movie theater that they bring the food to you.

LK: Lay back in the seats.

RL: Yea, lay back in an airline chair, and they bring the food. You have to build a great kind of park or amenity to draw people. You have to make it very walkable, very friendly it's not what they used to do. So yes, we have to adjust for that.

LK: I see there's such passion in you and what you do every day and I know there's passion because you're very philanthropic. So what charities do go out there and support, and I’m sure every charity, but is there something out there from…

RL: Well something I'm particularly proud of now is the skating rink in Prospect Park. I love charities or philanthropy that effects, and the public has access to. We had the opportunity to make the naming gift for the big skating center in in Brooklyn and Prospect Park.

LK: What's the full name?

RL: It's called Lefrak at Lakeside. Lefrak. In Brooklyn its Lefrak.

LK: I want to make sure everyone understands that. In New York it’s Lefrak.

RL: Right. So it's been widely popular. It’s a magnificent facility. It won a design award as a civic improvement, and it's great to go out there and see little kids enjoy themselves. It’s family. It’s a family sport. We support- I personally have been vice chairman of Museum of Natural History. Again, that's a very accessible philanthropy. My wife's on the board of the New York Philharmonic, my son's on the board in New York Hospital. So I mean we have a whole bunch. Of course I support Amherst College where I where I went to school. We have a variety of philanthropies that we support. But the things that I enjoy the most, are the things that the public gets to use. That’s what I like because I think that's important. People understand that no matter how much success you've had a wealth that you want to use it. Everybody can have access to or enjoy something, whether it's knowledge or going to Museum of Natural History skating rink you name it.

LK: So is there anything that keeps you up at night? Or nothing keeps you up at night? Or everything keeps you up at night?

RL: My wife's dogs keep me up at night.

LK: Your wife's dogs not your dogs.

RL: No. I mean of course every place that I'm working in, you can find a reason to worry. In other words, Miami is going to be under water any minute, New York I'm going to get a terrorist attack, Los Angeles is going to have an earthquake. I mean you can find things to fret over but if you're a real estate developer, a developer especially, everything you do is being an optimist about the future. I take on a project in Miami that's going to take me 20 years to do, am I going to be pessimistic about something? I have to say yes there’s going to be bumps along the road, but I have confidence that in the life of this project this can be successful. So yes I mean I've seen horrible things. I mean you know we've all witnessed some things, whether it's a financial crisis or 9/11 all these terrible things that have affected people in all kinds of ways. In 1982, when interest rates were sky through the moon, everybody was complaining, and there's a lot of tragedies out there. But if you're real estate, the developer, if you're not optimistic don't go in that business because you can't take your temperature. If you want to have your temperature taken every day there's a place you can go, it's called Wall Street. You can go to Wall Street and they'll take your temperature every day you can open up the New York Times or the Wall Street Journal and look at your start position and you’ll know how you’re doing. I never know how I'm doing until the end I have to wait I have to wait till the end. In the middle I don't know how I'm doing you can't change your mind when you're building a city, or you're building a building. You can't say in the middle never mind you're committed. So you have to be an optimist.

LK: So I want to thank you so much for sharing the afternoon with us and on your insights on real estate and more specifically telling us about your family in your history thank you very much.

RL: Thank you for coming.

About Lisa Knee

Lisa Knee is a Tax Partner and Co-Leader of the national Real Estate practice and leader for the national Real Estate Private Equity Group with expertise in the hotel, real estate, financial services, aviation and restaurant sectors and is a member of AICPA, New York State Society of Certified Public Accountants and the New York State Bar Association.

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