The Final Word: Charles Bagli on “Other People’s Money”

Then you have the REITs. They’ve somewhat eclipsed the old real estate families. They have access to capital in the markets, but there are certain rules of REITs that put a certain discipline on them.

Then you have the traders who use other people’s money, and you look at the various strategies that were out there, and it was all on making a quick buck. Some people, their strategy was buy high and sell higher; other people, if they were buying residential—not just Stuy Town, but Riverton and Delano Village—the strategy was to oust the long-term tenants and drive rents up to what they perceived as market levels. It was a total disaster at Riverton, it was a total disaster at Delano Village and other smaller, lesser known complexes, but it was catastrophic at Stuyvesant Town, and all the people that put money into it, it just went poof—$500 million for CalPERS.

You could also ask about the irony that these pension funds for public employees were investing in a business plan which was designed to oust the very kind of people that were their pensioners. It’s astounding. Of course, in the case of CalPERS, they ended up passing rules afterwards that they would never do that again.

Do you think investors have learned their lesson from what happened?

It would seem that people are a lot more cautious about these kinds of deals that promise double-digit returns—13, 13.5 percent in the case of Stuyvesant Town—and sort of blithely go along with a business plan that doesn’t make any sense, that doesn’t track. Yes, I think in some cases, I think they are much more cautious. There’s more of an emphasis on properties that generate income today, not [at] some future point.

On the other hand, you look at the prices, and buildings are trading at 2007 levels or better. There’s less debt, but a lot of the investments are predicated on the assumption things will get better, but there’s not a lot of margin when you’re getting a 4 percent cap rate.

On the flip side, do you think the industry has learned a lesson?

I don’t know about that. Take someone like Gluck: he made a fortune off a failed project at Riverton, and he’s still out there gobbling up buildings. There are people that think he’s a genius. On the other hand, I think Tishman Speyer have taken their hands off the hot stove, and I don’t think they’ll be involved in something like that again. Not to say they aren’t involved in residential projects in India or China, or even San Francisco, but I think that there’s a recognition that not only is residential different from commercial, but this special subspecies of rent-regulated properties are completely different, and if you don’t understand the politics and customs, it will eat you alive.

Can you speak about the resident lawsuit and the significance that has, not only for the industry in general, but also for the end-story of this deal in particular?

I think it’s a double-edged sword. When the courts ruled in 2009 on behalf of the tenants, it was a shock. I think if you read the law, you would say the court made the correct decision, no matter what the real estate industry said. I don’t think it was the beginning of the end. It was the end of the end for Stuyvesant Town in that, by that point there was no hope of trying to renegotiate the debt, it just wasn’t going to happen, all was lost. That was what the signal was. So, some people might argue that this was a victory for tenants.

On the other hand, you have to look at the decision and it said the conversion of regulated housing to market rate rents was illegal while you were taking tax benefits from the city, but it didn’t decide what the legal rents were and how you would calculate them so, what’s happened is that CWCapital and the real estate industry took a very aggressive position. So, you roll back the rents to a certain year and then you look at how many times the apartment has gone vacant. Every time it’s gone vacant, they’re entitled to a 20-percent bump. If it’s gone vacant five times, that’s a 100-percent increase. So, when the settlement is done, it codifies an extraordinarily high rent. In fact, so high that in many cases they can’t charge that rent because no one would pay it. So, they’re offering tenants a preferential rent, a discount off of what they would be allowed to charge. So its codifying rent increases the transition from a rent-regulated, middle-class enclave, to something else. At the time of the sale, 28-percent of the units were at or near market. Today, it’s almost half.

You’ve got two very different cultures there. You’ve got the tenants who have been there for years, in some cases decades. There are still some people there who moved in in 1947 when the place first opened. Then, in the other half, you have students and young professionals who are packed in—if it’s a two bedroom, perhaps you have four people living there and they have no intention of staying, its very transitory. Some of that is a product of the rents and their careers and some of it is that it’s a very different society; it’s a very transitory society where you don’t have people going to work for MetLife or the City of New York as a teacher or something for the rest of your life. You’re constantly reinventing yourself.  It’s a whole different society. I don’t know what becomes of Stuy Town in the future if it continues.