Veteran NYC Real Estate Developers Talk to EisnerAmper: Part 2
In this second part of our real estate development podcast, Lisa Knee, an EisnerAmper tax partner, talks to veteran NYC real estate developers, Daren Horning of Hornig Capital and Chris Schlank of Savanna. The key discussion areas in this half of the podcast are the effect on public transportation on a property’s worth, the balance of catering to tenants, and what makes a great overall property. They also discuss technology – how every generation is now expecting some sort of smart working, smart environment – and how they incorporating the new must-haves within properties.
Lisa Knee: Welcome to part two of our real estate podcast with Daren and Chris.
Chris Schlank: And I’ll say one thing about emerging markets in the boroughs. You know, we’re in Long Island City, we own the City Court building, which is right on top of transportation. We just bought the Falchi building, which is relatively good transportationally served. But when you start pushing out, and you look at deals like 95 Evergreen and Bushwick, although that’s pretty well served by the JMZ, and the L, which is now going to be the L no more.
I think if I look at what’s going on, the borough emerging market office, if it’s not well served by transportation, is going to be the big laggard, and I think there’s a big fallacy that was sort of developed by the brokerage community and maybe the investment community, trying to make themselves feel good about investing in secondary markets with not-well-served transport. I think that’s going to be a big failure. The previous guest that was here earlier was talking about the Brooklyn navy yards and that whole area, and while the city is putting a lot of money into the Brooklyn navy yards, I find that a very, very difficult proposition. There’s a couple large buildings in that immediate vicinity that are outside of the Brooklyn navy yards’ gate that are very hard to get to. You’ve got to take a train, a bus, and a bike, and I’m telling you, those are going to suffer a very, very slow and painful, painful lease-up death.
Daren Hornig: Well, wait, we looked at one together. It was a four hundred thousand square foot monster. I mean, I have a very good sense of building and flow, and we were like turning in circles, not knowing which way was East, West, North, South. Remember that?
CS: Yeah, yeah.
DH: And I mean I think the cost was, I’m just going to say less than two hundred dollars a foot, which on a price per pound sounds about right, but then we both turned around and said “this thing is just crazy, and where are these people going to come from to fill this”. In not only the navy yards, and they’re building some great product there, and then you go to like sunset park, if you have the navy yards and you have industry city, and then you have the adjacencies in sunset park, it’s hard to compete against proven product that has tenancy, that could drop a price point to the low to mid-teens, and just beat you for an absorption play, and then you got to absorb around them, and our numbers were like mid-thirties. And then how do you get there? Right? I think one of the big things, and I’ll say this, the mistake I made on 95 Evergreen, I think was the right building at the right price, and I think our timing was good. I always drove there, and I never took the train from Manhattan to really get a sense of the distance and proximity. And I said, I’ll never make that mistake again. So, whenever I look at a building, I may go there the first time and drive there, because I live in Long Island, so it’s just easier for me, but learning from my past, I take the train there now and just get a sense of where the mindset is of a Manhattan business going to an emerging market.
LK: So, that’s why the 7 and the L, you mentioned before about Long Island City, that 7 train just makes everything so easy to get to. The train station’s great, you know, everything’s over there.
CS:I mean, from our building from One Court Square, you can get to 53rd and Lex in four minutes.
LK: Right. So, what other neighborhoods do you think are going to benefit just from their location of being on a train line? Is it, besides following the artists around and seeing where they keep moving, further and further out of the city, just to be able to pay those rents, are there other neighborhoods that you are keeping an eye on, without disclosing any trade secrets to anybody, but that you’re interested in, or you know, can Long Island make a recovery, can, I mean Staten Island is always going to suffer from not being able to get access to it.
DH: Yeah, I’ve been in business since 1991, right, so twenty-five, twenty-six years. When I got in the business, rents in Long Island were about twenty-five, thirty dollars a foot. Last week, they were twenty-five, thirty dollars a foot. They don’t move. Right? It’s very, very hard to get anything entitled and built in Long Island, and it’s shocking, but over time, tenants tend to shrink, they get more efficient, they don’t need as much floorplate, and you can move pretty easily. In New York City, it’s not the same. Right? In New York City, especially in Manhattan, you saw what happened downtown. They took the old building stock of commercial buildings and converted it to residential, and they got absorbed very quickly. So, Manhattan particularly, and even you’re seeing this now in Brooklyn, there’s always this change of the modernization. Looking at the Hudson yards, where these tremendous tenants are all choosing to move there, and they’re paying a lot of money, but they’re getting more efficient space. They’re getting higher speed elevators, they’re getting more fixtures per foot, so you can have greater density. They have bigger egress corners. So it’s those markets that I think are going to evolve quicker. You know, it’s hard to say what that next market is, but I still think it’s going to be Manhattan, Brooklyn, Queens. Bronx is going to be this core that’s going to keep evolving. But seeing new construction on commercial particularly, it’s just hard. Right? You gotta get big numbers, you got to have the right floorplate to get the absorption. Chris is building, you know, a great building on 56th street, that I think is unique because it’s catering on the smaller tenant, with smaller floorplates, which people haven’t built, but there’s definitely a demand for, of how they are going to fill in on these given locations. And you can’t go wrong Plaza district, obviously.
CS:I’ll just say one thing about you know talking about what areas do we think are the next, and - I couldn’t tell you if I knew. I wouldn’t be here, I’d be out there. But I could tell you that what we do is when we focus, when we buy in the boroughs, we want to be right next to transportation. Transportation is what creates 24/7 live work play. Look at downtown Brooklyn, look at financial district, right, no one wanted to work in the financial district, god forbid live there, but now it’s a great place to live and work, great restaurants, and so it’s a 24/7 live work play. It happens to be probably the best served area in New York City for public transportation. Every train goes through a one block radius there. Same thing why we like downtown Brooklyn, we have a big development site in downtown Brooklyn because it’s an awesome transportation. Same thing why we like Citicorp Center because it’s right on three train lines. Literally on top of three train lines. So, that’s what develops a 24/7 live work play. I love Hudson yards, I think what Related did and Oxford did is out of this world, you know, it could have gone one way or the other, and they put a massive, massive resources behind this. However, if you look at the Hudson yards, and what’s happening, the 7 train is already obsolete. It was obsolete before it opened. The transportation when Hudson yards gets fully developed is going to be an absolute nightmare. Think about getting from the Hudson yards to LaGuardia or Kennedy. Total, I mean just getting to this, there was an infrastructure, I think, mishap there, where first of all, they didn’t spend the extra billion dollars and have a stop on 42nd and 10th and they made it red, so they brought it all the way down, it’s a mile and a half, two mile run, with only one stop – a big, tragic mistake. And second of all, it’s one train line, and it’s completely obsolete. So, they’re going to have an issue there. It was not well thought out I think on the transportation side.
DH:I think the 7 train was the driver to get things built there. I think with today’s infrastructure, and the ease of Uber, Via, Juno, Lyft, and everything else.
CS:Juno just got bought by Gett.
DH: Did they?
CS:Yeah. Two hundred million bucks.
DH: Hm, way to make that investment. I don’t know. I think the Jury is still out, if it will be a transportation nightmare. I mean, I find everything in Manhattan, above ground, very challenging. I think below ground, if you get there, and yes, the trains are crowded. Last week, I went out to Williamsburg, I took the train to Union Square, and I had to wait two trains to go out to Williamsburg. You know what? I dealt with it. It wasn’t the worst thing in the world. It wasn’t July and I wasn’t sweating. But, it’s interesting. I mean there’s going to be a tremendous amount of density. You know, it will be packed 8am to 9:30am, and 5pm to 6:30pm. But I think that’s part of New York City and New York City living, but I think people will be working there, and will be willing to walk you know north, south, east or west, to get to the closer train lines. I remember when Scott Rechler brought the Starrett-Lehigh building, and everyone’s like, you know, I can’t believe how far that is, and that seems to be in the center of the action these days, based on what’s happening with the Highline and all of Chelsea moving west, so who knows. I mean, I hope it works. I have a nice property there that hopefully we’ll build and put a few people in.
LK: So, we talk a lot about tech lately, whether it’s not just the tech tenants, but what people, other tenants are requiring, that they want to have those amenities, that are making it more attractive to come into the buildings, not just the millennials or gen z, or whoever the next generation is going to be, but even every generation is now expecting some sort of smart working, smart environment. So, when you are looking at your projects now and you are trying to attract people, and you’re seeing how development has changed, how are you incorporating the new must-haves within your properties?
CS:I think these amenities, these people that say I need this, that, and I need a dog-washing stand, I think it’s a total waste of time and money, and it’s just a gimmick for people, landlords to not do their job correctly and to do what everybody tells them. We spend a lot more time. We look at buildings and we look at design, and we look at doing prebuilds for tenants, especially you know three to five, to six thousand square foot spaces. We spend a lot of time on the design. The paradigm of how people use their space has changed you know over the past year and a half, dramatically, and it changes every six months. So, we’re constantly looking at our prebuilds and coming up with a new design, and new this, and new that. The funny thing is, and what we’ve really started to push back on is we have a lot of sort of TAMI tenants. We have a lot of office space downtown in the financial district, and you get these you know companies that are growing, maybe making money, maybe not making money, run by you know two twenty-four-year-olds who just got out of diapers, and they come and they tell you that they want exposed concrete floors, exposed ceilings, and you know glass office fronts. And if anybody’s ever worked in an environment like that, you know it’s untenable. It’s so loud, it’s terrible, it’s uncomfortable. So, we started pushing back and telling these guys, no, you can have this and that, but you can’t have that, because we want to make sure that the space that we build is adaptable for the next tenant when these guys leave or go out of business. So, we’ve started pushing back on what these young little kids want, just because it’s our property, and we know what, in the end of the day what’s going to happen.
DH: To Chris’s point, when you’re pre-building and you’re spending your own money, and you’re making the bet on that tenant, they want a look and feel and environment. If you listen to the tenants who, a lot of them do not know what they’re doing and they just have these crazy designs, you’d be prebuilding space with a foosball pit table, a ping-pong table, and a kegerator, and then hope to get a lease. You’d probably get a lease pretty quickly, but who knows if that tenant will last.
CS: And I’ll say one other thing: the reason why I think all this amenity space is going out the window is because the way that tenants and the people that run companies are now designing space, you’re desking. Nobody has any privacy anymore. You go into an office and everybody’s sitting you know three inches away from each other. Everybody’s got their earbuds in, no one has a phone, and no one’s talking, right? But you’re sitting next to some guy eating Chinese food, and you want to throw up. So, what do these people do? All of these people, I know tons and tons of people that work in these desking environments, all they do is they want to get out of the office and walk on the street. They want to go to Starbucks, Pain Quotidien, they don’t want into go into the foosball room and see the same idiot that just pissed them off because he was eating disgusting food. So, the paradigm of, oh synergistic whatever, and everybody’s going to hang out together, is out the door. Everybody goes out, in the elevators, on to the street, and that’s the beauty about New York. You don’t need internal amenities because you have the most amazing amenities at your doorstep. And people now, with the new way people use space, don’t want to see their neighbor, anymore. And, actually the design of this synergistic thing, where trying to create this synergy by having people work close together, done the complete opposite. It’s totally alienating the work force.
DH: It’s amazing how much it changed. Like I said, I started this twenty-five years ago, as a broker in Newmark. Rule of thumb was one piece of two hundred and fifty feet per person. That was the rule of thumb. Now it’s down to like a hundred, hundred and a quarter. So, that density changes the design of a building, right, so if you look at what Related in Brookfield is building, you need more elevators to get those people up and down. You need the elevators that have the queue where you press the floor, and it gives it more efficiency there
CS: More Toilets
DH: You need more toilets. So you need certain things in a building to be able to support more people based on this design. On a personal basis, I have an office. I need to sit in an office. I need to shut my door. I don’t even want glass walls because I don’t want people looking at me.
CS:I don’t want to be looking at you either, that’s for sure.
DH: We won’t go there. But, I personally like my privacy, and I do a lot of work with companies that have workstations and the people, they talk on the phone, they whisper, and if they have a real phone conversation, they have to get up, and go inside one of the conference rooms to have a private conversation, which just almost creates it being inefficient, because then you have to leave your work area to have a talk.
LK: So, just some fun questions at the end. Do you have a favorite building in New York City? I mean I know I can’t stop - every time I stop and walk through Grand Central I have to stop and look around and just pinch myself to be in the building. Is there a building that you just turn around in Manhattan, or are they all just…? And something in New York, not outside of New York.
DH: I like old architecture. I like interesting designs and interesting façades, which you don’t see anymore. Nothing against third avenue, because we are sitting in third avenue right now –
LK: No, there’s nothing interesting where we are at right now.
DH: It’s like third avenue like skipped a generation of design, of what these guys built here, and It’s sad. But you go through mid-town, or particularly like meat-packing district, Greenwich village, Soho, where you have the cast iron buildings. I like character. I like character, I like creativity, and I like a building that speaks to me. I hate going into a cookie cutter building where you just walk up, go upstairs, everything is linear, and there’s no design…..
CS: 475-10 on 36th street on the west side of the street, I love. That’s where Ian Schrager was, Martha Stewart was there, it’s a great big beautiful kind of old-school but great shaped building. Actually that’s one of my favorites.
LK: That was early on, nobody could get there either, right, transportation wise, when we used to go over there, it was not so easy to get there.
CS: It still isn’t
LK: It’s still. And there was no restaurants around there, when he first moved in,
CS:Now there are.
LK: Yeah there certainly are. So, one last question, now that we have baseball season in full swing, where would people find you? Yankee Stadium, City Field, or some other…
CS: At all of them. Daren doesn’t work that hard.
DH: I don’t work that hard, and whoever’s winning I tend to gravitate there.
DH: You know it’s funny because my brothers and my father bust my chop on this - I grew up a Met fan, because I loved the Mets, and you know Mets were great in the ‘80s, but you know starting in the ‘90s, it was just hard to tolerate the Mets, so I went back Yankees but, you know with baseball, I’m more, I’d say I’m sixty, seventy percent Yankees now, but I’ll watch a Met game.
CS:They went 23-5 yesterday, the Mets lost to –
DH:I know, atrocious.
CS:I mean, how do you do that? How do you do that?
DH: New York Giants, and hopefully the Rangers are going to win tomorrow night.
CS:Yeah, I hope so.
LK:Excellent! Well, gentlemen, thank you for your expertise, and this great insight, and thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.
Lisa Knee, tax partner at EisnerAmper, discusses east coast real estate with Daren Hornig from Hornig Capital and Chris Schlank from Savanna.