The Shvo Must Go On: The Bad Boy of Luxe Residential Has Become a Force in CRE
Michael Shvo is sitting in his office, high above Fifth Avenue, dressed in his signature black Armani T-shirt, singing the praises of chef Daniel Boulud.
He’s the best, Shvo said. A great chef and a terrific person. To wit, Boulud is creating a residents-only dining space at Shvo’s new Mandarin Oriental condominium on Manhattan’s Fifth Avenue and in the outpost in Beverly Hills, Calif.
Restaurateurs have been a touchy subject for Shvo lately. Back in November, Shvo’s yearslong patronage of SoHo’s Balthazar came to an abrupt end in an Instagram/tabloid brawl between him and restaurateur Keith McNally. (McNally accused Shvo of helping himself to a prime table during the Sunday brunch rush.)
“I haven’t been back since he tweeted,” Shvo said quietly of the feud, with a self-effacing grin — looking as if he did not wish to escalate things in front of a member of the press.
The McNally/Shvo dustup harkens back to an earlier stage of Shvo’s career. He’s often been dogged in the tabloids by the moniker “bad boy.” The Israeli-born Shvo began as the first of a breed of super brokers at Douglas Elliman in the early 2000s, where he surrounded himself with opulence and a non-stop party; he talked Shaya Boymelgreen into having Armani design 20 Pine in the Financial District and he got John Legend to perform at the opening. It was high living — and sometimes his antics were accompanied by hangovers.
The price of his shoes, the make of his automobile, his cufflinks, those Armani T-shirts, and much more were raked over in the press. He’s had public breakups with financiers, like with the Turkish hotel magnate Serdar Bilgili. And in 2018 Shvo had to pay $3.5 million to New York state to settle a case of tax fraud.
However, the “bad boy” reputation feels a little incongruent in 2022 given Shvo has graduated to a level of developer few have achieved.
Shvo will be 50 later this year besides. He’s the father of two young children. And over the last four years, or so, Shvo has assembled a startling national portfolio: In late 2019 he scooped up the Coca-Cola Building at 711 Fifth Avenue for $955 million. In San Francisco he closed on the Transamerica Pyramid in October 2020 for $650 million. (For that he outhustled 44 rival suitors.) A few months earlier he led a joint venture that purchased the 1.2 million-square-foot Big Red skyscraper in Chicago for $376 million. This is not even mentioning the Raleigh Hotel in Miami or the Mandarin Orientals in Beverly Hills and Manhattan.
Given the state of real estate at the moment, Shvo’s timing on all this might be genius, or it might be god-awful folly. It might be both, depending on the property. But one certainty is that — occasional social media spats aside — Michael Shvo is a serious force to be reckoned with.
This conversation has been edited for length and clarity.
Commercial Observer: You did “Sheep Station” on the High Line — I think that was the last time I saw you.
Michael Shvo: Yeah, that was 2013? We actually did another amazing art installation in Miami at The Raleigh. You know The Raleigh? It’s probably the most known hotel on the beach — and it has the most famous pool in America, according to Time magazine. We took the back of the Raleigh — which was a construction site when I bought it — and turned it into a jungle. Together with [architect] Peter Marino we made a public art installation [called “Les Lalanne,” featuring work by Claude Lalanne and Francois-Xavier Lalanne]. It was a very, very successful kind of endeavor in Miami because it brought art to the beach — truly to the beach.
We love doing these kinds of public art installations. It gets art to people that traditionally will not go to art galleries ‘cause there’s that intimidation factor. With “Sheep Station,” we got [Italian artist] Maurizio Cattelan showing up one day, and then you got kids from Avenues school that were on tour; they were asking me if the grass is real. It was really fun to see — and it ties into what we do.
We’re focused on really only buying super prime real estate — our sites or buildings are in such prime locations, very high traffic, high visibility.
Style and brands have always been such an integral part of a lot of the condos that you’ve worked on over the years. Is bringing that to the office and retail side part of the plan?
We create value by being different. That’s kind of our purpose. And it’s not only design and it’s not only the brand — it’s a holistic approach. You know my background; I was a broker, in marketing, a business developer, and when I decided to move into the commercial space I really saw this as an opportunity to take the 20-something years of experience in real estate, both on the residential and hospitality sides, and apply what we’ve learned there to the commercial world.
Interestingly, I hired a new asset manager today for one of our markets and I was explaining to him that the same people at Shvo that work on design of our Mandarin Oriental residences, for the Armani hotel or The Raleigh hotel — the marketing team, the construction team, the development team — are all the same people that are working on the commercial buildings. [We’re] focused on three main criteria: design, culture and service — the holistic approach of giving a tenant the true great experience at the office. So when you walk into a Shvo building, you’re gonna feel like you walked into a Four Seasons hotel. We just finished 711 Fifth Avenue. …
The Coca-Cola Building?
Right. Peter Marino just redid that for me. Peter Marino does not do office buildings. Peter Marino does Chanel, Dior, Bulgari. When you walk into the property it feels like you walked into the Bulgari Hotel. The service is all hospitality-trained people.
What precipitated this switch into commercial?
In the commercial world I saw — well, I still see, because we’re active buyers — an opportunity to take really super prime real estate and make it great. The buyer for the Mandarin Oriental Residences on Fifth Avenue is a pied-a-terre buyer. It’s a very turn-key, tailored product and I had a very specific buyer in mind. We’re taking that and doing that in commercial space.
We just signed a huge lease there with Core Club — that’s the private members club [Shvo anticipates that most of the owners and the C-suite executives of the tenants at 711 Fifth are or will become members of Core Club] where probably the average net worth of a member is $90 million. Nine zero. So probably the highest caliber of members — everybody from Steve Schwarzman to Howard Schultz to George Lucas. But the idea is …the whole building [711 Fifth] itself feels like a club.
So back to your question. I saw — and I still see—a huge hole in the commercial market, of really giving tenants an elevated experience. And I think that tenants will pay a huge premium to get that level of service that does not exist today.
And you’re going to be doing something similar at the Transamerica in San Francisco?
For Transamerica we’re about to start a $100 million capital expenditure program renovation at the site that will last approximately a year. Obviously, it’s the most important property on the West Coast. Probably one of the most beautiful buildings I’ve ever seen in my life. It was revolutionary in 1972 when it was built — it’s as revolutionary in 2022. Actually, at the end of this year it’s gonna be the 50-year anniversary of the building — together with my 50-year anniversary. The building and I are turning 50 a month apart.
Some of these deals were closing during COVID, right?
We bought a lot of real estate during COVID. Transamerica was the most high profile.
Tell me a little bit about the thinking behind that. Did you get good deals?
The question before that is: Why are you only focused on buying super prime real estate, right? Because I’m a believer that there’s always demand for quality, and there’s always a flight to quality. In a good market, you get a huge premium for quality products. In a bad market you have great downside protection. Through COVID — and I own buildings on Fifth Avenue with huge retail exposure — we collected 99 percent of our contractual rent throughout our portfolio, which is truly unheard of.
But COVID is a moment in time. It’s here, it will go away. I don’t buy buildings for two, three years. Remember, I’m partners with the German state pension fund. We buy real estate for 10 years-plus. Transamerica will not trade, not in the next five years, not 10 years, not in the next 30 years. So, if we could find the right assets that we’d like, that fit our investment criteria, we’re not concerned about COVID from an investment perspective. If anything, COVID was an opportunity to buy some of these assets.
In Transamerica, we’re getting rents today that are way higher than we did pre-COVID. That boost you would think is kind of surprising. But, again, the flight to quality has been so strong because people are a lot more aware of their offices than they were pre-COVID.
Closing on Transamerica during the shutdown must have been quite a story. Tell me about that.
Yeah, there were 44 bidders. There was an extremely long process and every big player bid on that asset — from Blackstone to KKR. I mean, everybody. It was eventually down to four bidders: ourself, Vornado, [Hong Kong investor Goodwin Gaw] and Ashkenazy Acquisition Corporation in partnership with HBG Holdings from the Middle East. We ended up being awarded the deal and we got a beautiful letter from Transamerica. They said, “We decided to select … Shvo because we believe that you would be the best steward of our brand going forward.”
We were awarded the contract, signed the contract. They had to get all kinds of documentation permits cleared up for the closing. And, then as you recall, the world shut down. We were all sitting there waiting and waiting and waiting for the city to reopen. But we got a substantial price reduction. We had originally planned to buy it for $711 million. Due to COVID, we asked for a price reduction, and the final price was $650 million.
It was definitely an endeavor between a six-month bidding process and COVID, and they can’t close — it was a bit of a roller coaster. But I think that we showed the perseverance and the determination to sit there. Transamerica also was quite appreciative that we stuck around.
Did you have second thoughts while the thing’s closing?
No, no, never. I’d buy that building all day long, every day, again and again. It’s a great asset, that will be the greatest asset of San Francisco.
You’ve been through at least two other major crises — the great financial crisis and 9/11. Give me your thoughts on how this stacks up in comparison to those.
You know, I’m a religious Jew, and I remember saying at the outset of this: “I don’t know what’s going to happen but I know one thing — it’s not the end of the world.” Because God promised this many years ago: He’s not going to destroy the world. So, if we know it’s not the end of the world, that’s the most important thing.
Next is — what action do we take? I remember after Sept. 11, I was a real estate broker. And I recall having clients that would call me and say, “I left the keys with the doorman, sell my apartment, I’m never coming back to New York.”
But if you would have bought any real estate in New York City on Sept. 10, 2001, you would have made multiple times your money. The lesson there is real estate is not a short-term game. At least not the real estate that we invest in. We invest institutional capital, predominantly from Germany, but they are long-term holders; nobody’s looking at real estate for less than five years, most of them 10 and above. If you have the power to sustain, if you’re not taking too much leverage, these ups and downs in the markets — of course, they affect you, but they don’t have huge long-term effects.
We shouldn’t look at the pandemic as a panic situation, we should look at this as a true opportunity to buy great real estate. And we’ve done that. We deployed a few billion dollars on great office buildings that all panned out. And we are getting today rents that are way higher than pre-COVID. That just teaches you that we come in and we come out of these things instead of looking at this massive shift in where things are going, which is not what I believe is going to happen. We believe that the market will recover. I’m buying high-street retail right now — Fifth Avenue, Madison.
Yes, because I believe retail’s overshot the negative. That “really” comment from you is exactly why I’m buying. Because it’s got a strong negative connotation. But that means it’s an opportunity. Do we really think that Chanel and Dior and Hermès are going to disappear from retail and are going to sell everything online? The luxury customer wants to feel and touch and wants to get service. Now I’m not buying Madison on 80th, I’m buying Madison in the low 60s by Fifth Avenue. We have a very microstrategy on kind of pinpointing real estate where we feel like we’re at the bullseye; we’re buying the prime of the prime in key cities. Beverly Hills, Fifth Avenue, downtown San Francisco. It’s a very microstrategy, and very, very focused.
I think that there’s been a true earthquake in the retail market. But we only buy retail that has super strong credit tenants. If it’s LVMH-backed or Prada or Chanel. Those types of brands have always paid the rent, they’re gonna continue to pay the rent and they’re not going anywhere.
Are you at all worried about interest rates rising?
We have a little bit of a short memory; interest rates rising from, you know, zero to 50 BPS [basis points], 75 BPS, I was young enough or old enough to remember when the interest rate was, like 7, 8, 9 percent! I think that there’s definitely going to be an effect on cap rates. But I think that we’re going to see that, at minimum, the effects of the interest rate rise will be mitigated by the increase in rents and inflation. We’re following it. But we’re not making some great changes in our investment strategy.
Can I ask if you resolved that whole situation with Serdar Bilgili?[“SHVO and Deutsche Finance have signed a settlement agreement with BLG Capital,” Shvo said after publication. “As per the agreement between the parties, DF and SHVO have acquired BLG’s equity interests and BLG will no longer maintain ownership interests in any of the properties in which they were collectively invested, while maintaining a share of future profits derived from the projects.”]
What about condos? You’re doing Mandarin Oriental in Beverly Hills and here — are you hungry to build more residential or is that not here on your radar at the moment?
I’m hungry to build the right thing at the right place for the right person at the right time.