Dana Rubinstein Sept. 21, 2009, 10:12 a.m.
When’s the leasing market going to return, or has it returned already?
Mr. Siegel: The leasing market has shown strong indications in Midtown of returning to good health. It appears that people have determined that the rents have bottomed out and they want to take advantage of the bargains that are out there. June, July and August have been well over a million-square-foot months, with positive absorption.
Do you agree, gentlemen? Scott?
Mr. Gottlieb: We’re close to the bottom. I still think there’s some potential decline in pricing through the first quarter of 2010, 5 to 10 percent. …But people have overcome their fear of making a decision and are out there again making decisions.
Mr. Siegel: Yeah. Plus, they have pent-up demand and they have to get out there. We’ve seen a lot of activity in to-be-unnamed buildings — because some of them are buildings we are agents for — but there is some significant activity still in midtown, and as I said, August was a great month.
But is it possible that all of this leasing activity is merely pent-up demand from the past eight months when nothing happened, and that this level of activity can’t be maintained?
Mr. Laginestra: Before you go past that, what you just heard is true, but what’s slightly different than perhaps eight or nine months ago is that instead of the tenants going into the market strictly to find what the pricing would be for a renewal because of a lease expiration, there’s now some real opportunity to move these tenants. And some of the spaces out there, as a result of shedding of space by certain tenants like a Pfizer, have installations that have real value.
When does the tenants’ market begin to shift back to the landlords?
Mr. Siegel: When the vacancy rate reduces to a level, somewhere between 3 and 8 percent, it’ll shift to a landlord market.
And when will that happen?
Mr. Siegel: That’s probably still 18 months away.
Mr. Laginestra: I would agree. You’ve still got to go through the process with some of the debt that’s coming due on some of the more recent purchases that were relatively short-term in duration. You know, that has to be played out, so to speak.
Do you foresee an impending wave of building defaults, similar to what may happen at Stuy Town?
Mr. Siegel: I went to a conference and said, ‘Be kind to your lender, because he will be your lender.’ And I think the last thing these banks want to do, if feasible, is to take back buildings. They’d like to try to figure out a way to work through this with their existing landlord, if they have confidence in their existing landlord. And in some instances, they might seek additional equity. The landlords will have to go out and find partners, probably at a number that’s below what they paid, but on a long-term basis, at least they’ll stay in the picture and have some chance of recovering their investment.
And I don’t think, personally, that Stuy Town or Peter Cooper will go under. I think they’ll have that recapitalized, some new powerful ownership. Not just Tishman Speyer–there are investors in that, including BlackRock and the Crown family and others. I just don’t think they’re going to let that go away and their investment disappear.
Mr. Laginestra: You just have to keep in mind that when you talk about debt, there’s different levels of debt. So a lender, as Steve just referenced, doesn’t really want to participate in the ownership, because they’re lenders, they’re banks, and they’ve got other primary businesses. But there are tranches of mezz debt which are going to be treated differently, and some of those will disappear.
Mr. Siegel: You know, it’s interesting. When you think of the buildings that are out there, only one has gone back to a bank, and that was 475 Fifth. When you look at the buildings where big chunks of space are going to be coming available, they’re owned by landlords that aren’t going to default. Merrill Lynch, and let’s assuming they’re [leaving] World Financial — effectively, they’ve vacated a good portion of it now, but they have a lease until 2013 — Brookfield’s not going to go into foreclosure, and they’re not going to give that up. You’ve got 85 Broad. It may take who knows how long to re-lease that when Goldman Sachs leaves. It’s owned by MetLife. They’re not going to default. I mean, there’s that type of ownership for the most part.
And there is a cadre of to-be-unnamed, because we won’t name them, owners that are less institutional and less stable, but those are the ones that I was referring to earlier that I think, in some way, shape or form, will work through their issues with recapitalizations and reduce their own positions and the banks will work with them.
Do you think that’s true of the old New York Times building and 11 Times Square?
Mr. Gottlieb: Well, Steve and I are the agent for 11 Times Square.
Mr. Siegel: I know 11 Times Square has no issues.
Mr. Siegel: None. Prudential is the institutional partner, plus there’s a lot of activity in the building.
Mr. Gottlieb: I can’t speak to the old New York Times building.
Siegel: Nor can I. There’s a lot of wealth behind it, but I have no idea what their intentions are.
Mr. Laginestra: Yeah, they have other interests, like Apthorp and other things, that they’re dealing with. So who knows?
Mr. Siegel: We don’t know anything about it. In fact, I think we’re agents there, too.
Are there any steps being taken in the real estate industry to prevent the sort of over-valuation of buildings that occurred during this most recent cycle?
Mr. Siegel: I don’t think over-valuation is a correct terminology. Valuation relates to the building’s cash flow and the residual value perceived by a prospective buyer. While we got to $1,000 a foot, in London they were selling at $2,000 a foot. And there’s no question in my mind that it has the potential of returning to those levels. But a lot of that was motivated by available debt at very low cost. Mezzanine debt and bridge loans. That will go away, and so for valuations to increase substantially again, it’s going to be a much more conventional structure: 30 or 40 percent equity. …If rents rise, they’ll create a rise in values. Right now, values are somewhere in the neighborhood of half to 60 percent of where they were at their peak.
So you’re arguing that buildings weren’t overvalued?
Mr. Siegel: It’s just this term I don’t like…
O.K., forget the term.
Mr. Gottlieb: Let me answer the question. The group of buyers that chased all of these office buildings, and Stuy Town and others, there was so much competition that consistently each of those buyers had these extremely aggressive expectations as to where pricing and values would go. Unfortunately, the market doesn’t just move in one direction. So, while they were overly optimistic, as we come out of the down part of the cycle, people are going to be too pessimistic. So it’s really self-regulated. You know, if there’s a buyer out there who wants to pay $1 billion for an office building that’s really only worth $800 million…
Mr. Siegel: Or, is it worth $1 billion because he’s happy with 3.5 or 4 cap because he’s got the kind of capital that can wait for the market to return to rise? Remember, when these valuations really started to rise, office buildings were $300 to $400 a foot. There was a lot of people who became very, very, very wealthy in between. It’s sort of like a chain letter. Somebody buys at $400, sells it for $500. Somebody buys at 5, sells it for 7; and then sooner or later it gets to $1,000; then there’s nobody out there for $1,100 or $1,200. And the cash flow itself doesn’t cover the debt. There were lenders out there giving debt zero interest accrued for 10 years because they also believed the residuals would pay off all the debt, it would pay off the owner with some substantial profit. You went from $1,000 to $1,200–at a million-foot building, that’s a $200 million increase.
Mr. Laginestra: That’s where I was going to go. I was going to say it’s like man bites dog to write about a Stuyvesant Town. Those people were so successful in so many other instances during the period leading up to this, that’s it not fair to pick on one little–you know, the deal’s not little–but one deal.
Mr. Siegel: …And there were a lot of politics involved, and all types of issues which are not real-estate related. And somehow, I think, these are very smart people, as I said earlier, I think they’ll get through it.
Mr. Laginestra: And they hit the cover off the ball at 300 Park, at the Chrysler building, etc, etc etc..
Mr. Siegel: Rock Center….
Mr. Laginestra; Yeah, so it’s a little man bite’s dog.
What does that mean, man bites dog?
Mr. Gottlieb: It’s an old newspaper term.
Mr. Laginestra: The newspaper doesn’t want to write about dog bites man… because it’s too common. I’m showing my age, I guess.
Mr. Gottlieb: Remember the Post headline, ‘Headless Man Found in Topless Bar?’
That’s a classic.
Mr. Laginestra: That’s what I’m referring to. Nobody buys a paper and says hey, ‘Mrs. McCarthy bought a quart of milk.’
That’s an important thing to understand, though, when there are complaints about us not writing positive stories.
Mr. Gottlieb: You’re just reporting the news.
Mr. Siegel: You are man biting dog. You’re not looking for good news out there, you’re looking for something that’s got a little bite in it.
Mr. Laginestra: Newsworthy.
That’s a nice way to put it. But is there any way to modulate the optimism-the pessimism swing back and forth?
Mr. Gottlieb: It’s like Google stock. Should it be valued at $85, should it be valued at $700 a share, or should it be valued at its current level? No one tells the investors in Google or any public company that they’re paying too much or too little for stock. It’s truly self-regulated. And if a seller of a property hires CBRE, they’re looking for CBRE to basically get the best value for them. As product is marketed throughout the community, there’s typically competition. There’s little competition today, but in that frothy market, there was an awful lot of competition to buy assets. And some people were motivated by their fees.
Mr. Laginestra: What the three of us do is, we are brokers, but what we do is offer consultative advice, and what we do is steer our clients, who work very hard in their own businesses, through the markets and through the ups and downs and try to create value-added benefits for them to act at certain times versus other times. It’s what we do. So, it’s really tough to just draw a flat line and say that’s the way the market should be, through some type of regulation.
You’ve been together 25 years?
Mr. Laginestra: At a minimum.
Do you still like each other?
Mr. Laginestra: No, not really.
Mr. Siegel: Yes! We love each other. We are family.
Mr. Laginestra: We love each other.
Mr. Gottlieb: But, still, it’s Steve’s birthday on Sunday and we’re not buying him an expensive gift.
Mr. Siegel: It had better be huge. I might be ending our relationship.
How old are you?
Mr. Siegel: 32.
Mr. Siegel: Would you tell me how old you are?
Mr. Siegel: Well, you can because you’re still in your 20s.
How do you know?
Mr. Gottlieb: We checked you out before we met you.
My age isn’t online.
Mr. Siegel: Yes, it is.
Mr. Laginestra: We care about each other on and off the court, and we care about each other, not only professionally, but we care about each other as friends and as family. And we care about each other’s families.
Do you see each other outside of work?
Mr. Laginestra: More than I’d like. Yes, absolutely.
Mr. Siegel: We don’t constantly socialize, but we see each other.
Mr. Laginestra: We have other friends.
Mr. Siegel: But also, geographically, one is in Westchester, one is in New Jersey, one is in the city.
Mr. Laginestra: But we see each other off the court.
Mr. Siegel: We go to dinner and lunches, and we don’t talk business necessarily all the lunch, just a portion of it.
Mr. Laginestra: We communicate regularly, even when we don’t see each other. We email each other. We speak to each other. There’s always something happening, both professionally and personally, that keeps us engaged with one another.
How has the business changed over the past quarter-century?
Mr. Siegel: Much, much, much, much, much more professional. Clients expect more.
Is that a good thing?
Mr. Siegel: It’s a wonderful thing because it cuts the wheat from the chaff. The cream rises to the top, to use a bunch of ridiculous clichés. I go back longer than the boys here, but always, always, the most singular, highest focus I had in the businesses I was involved in or I had input as a manager, was to bring the level of professionalism way up, so we would not just hire that broker, who would go out and show five spaces and each one you show he says that’s the best till the tenant agrees with you. We understand the balance sheets; we analyze every aspect of the tenant; we plan strategy with them alongside their CFO, or whatever level we happen to be involved with. This is not just, ‘Let me show you some space.’ Yes, it’s a wonderful, wonderful thing, because we go into a client, and they look at you as value-added.
Mr. Laginestra: And we get involved in every aspect of the process. It’s not just about space, as Steve was just saying. It’s the financial implications. It’s how they utilize their space. It reinvigorates and changes their culture from time to time by making certain moves. It identifies them in different ways.
What would you say is the healthiest part of the brokerage industry right now?
Mr. Siegel: leasing. There are some sales. I can’t say there are none any longer; 825 Eighth was sold; 452 Fifth is about to be sold; 70 Pine; 72 Wall downtown. The condo interest of the St. Regis just went into contract last week or the week before. So there is sales activity bubbling up, but by far, the healthiest part of the industry is leasing.
What do you think of the mayor’s race?
Mr. Siegel: I don’t think there is a race.
There is a race!
Mr. Gottlieb: I think it’s fair to say that we’re all very supportive of the Bloomberg administration.
Mr. Siegel: I would agree.
Mr. Laginestra: I would agree 100 percent.
Mr. Siegel: I just think he’s done a good job for the city, I think he has no partisan interests that affect his decisions. Doesn’t mean every decision he makes is right. But he’s not influenced by all that political B.S. that exists, for the most part. I respect the people he surrounds himself with, the deputy mayors, etc. I think the status quo is good.
Mr. Gottlieb: We live and work in a clean and safe city.
How would you describe the leasing market?
Mr. Gottlieb: If you called up people at other firms, I think they would tell you that they had the busiest August of their careers, people that have been in the business for 15 or more years. Across the board they’ll tell you that they’ve been busier in the last month than they have been for that same period of time in a very long period time. Even during the best parts of the bull market. …Don’t forget, busy in August means deals closing in September, October, November. So we think, absent any sort of pick-up in the financial markets, that leasing velocity will continue at a steady state, in excess of a million feet a month.