Sunday Summary: Will There Be a New York Surprise in Tuesday’s Election?
You know what we haven’t talked about in a while? Politics!
Just kidding — that’s all anyone ever talks about! And we’re going to continue talking about it long after Tuesday’s midterm elections because human beings, as a species, are beyond help at this point.
Of course the election isn’t really dramatic in a lot of places; Mayor Muriel Bowser, for example, is expected to coast to re-election in Washington, D.C. — although she has a Republican challenger for the first time in the form of Stacia Hall.
One of the things that Hall has hammered Bowser on is the issue of housing, which real estate readers can appreciate. Hall criticized the tent camps that have cropped up around the District, which she described as “spiraling out of control,” and has advocated aggressive development of new workforce housing.
But housing isn’t something that Bowser is ignoring; at the start of her second term she set a goal of 36,000 new units of housing by 2025, and she’s about 70 percent of the way there. And in a town where party affiliation wildly favors Democrats Bowser shouldn’t have too late a night on Tuesday.
You would think that the same arguments could be made for Gov. Kathy Hochul in New York, and up until last month we would have agreed with you. Now, we’re not so sure.
While Hochul is still expected to win, the race has tightened in recent weeks with Republican challenger Lee Zeldin blasting the governor on issues of law and order. And despite being anti-abortion in a state that’s overwhelmingly pro-choice and being unabashedly pro-Trump in a state that rejected the former president by 23 points in the 2020 election, Zeldin has made inroads with at least one important constituency: real estate professionals.
Haim Chera, for one, wrote Zeldin a $30,000 check. Joe Moinian cut him one for $12,500. Stephen Meringoff sent him $47,100. Harry Adjmi has given Zeldin $45,000 over the last two years. And Peter Kalikow dropped a whopping $74,529 on Zeldin.
In fairness, all of these moguls have also given money to Kathy Hochul. (In the case of Moinian and Chera, they gave Hochul’s campaign significantly more than Zeldin’s.) And it could accurately be described as a case of hedging one’s bets. But this certainly implies they believe there’s not an insignificant chance that Zeldin will be the next governor.
And some real estate pros have been outspoken in their preference for Zeldin.
“Crime, safety, the police and the budget are huge things,” said Aurora Capital President Jared Epstein, who hosted a fundraiser for Zeldin in October. “I think we need someone that’s more conservative and will do a lot more with less because I think that’s going to be required due to the fact that more than 300,000 residents of New York City left [during the pandemic] so there is going to be less tax revenue.”
Epstein is saying what a lot of his peers are probably thinking. This week, Commercial Observer put out its annual owners magazine (more on this later) and we asked landlords to anonymously grade New York’s most prominent political actors, Hochul and Mayor Eric Adams.
Their grades were surprisingly mediocre.
On the issue of safety, both got C’s. On affordable housing, each got a C+. On livability and public transportation, they each were in the C range, too. Even on the categories where they both scored better (the environment, business-friendliness, handling of COVID, zoning) nothing averaged above a B.
“Having entered this job under less than ideal circumstances, it’s apparent [Hochul] wants to do the right thing for NYC,” one owner told CO. “But as it relates to the crime and safety issues, I don’t think she’s been supportive enough of Mayor Adams and the difficult decisions that have to be made to get us where we need to be.”
This is doubly surprising, given the goodwill and financial support that both Hochul and Adams enjoyed in the past from real estate professionals and how pro-development Hochul has been, championing things like the revitalization of the Penn District.
Is it possible the developers are the ones rethinking the big projects that they always begged for?
Last week Vornado Realty Trust (VNO)’s Steve Roth sounded an uncharacteristic note of caution about Vorando’s plans for the Penn District on an earnings call. “Hotel Penn is coming down with demolition scheduled to be completed in the fourth quarter of 2023,” Roth said before adding: “I must say that the headwinds in the current environment are not at all conducive to ground-up development.” (Honestly, when you sell a $72 million penthouse, as Vornado did last week at 220 Central Park South, we don’t know why Roth would be anything less than ebullient.)
A spokesperson for Empire State Development, the agency overseeing the larger Penn District plan, quickly rushed out a statement reaffirming Gov. Hochul’s commitment to the project, but that didn’t sound good.
Of course, national observers tend to view politics solely through a national lens, even if the game is far different on a local level. But, even there, the greater national dysfunction and internecine party divisions are on constant display.
For instance, Innovation QNS — the 2.7 million-square-foot, $2 billion project in Astoria that promises to bring thousands of apartments to market — is in danger of being torpedoed by political squabbles over how much of the project will be affordable, and who will pay for it. Could a Lee Zeldin smooth over something like that? Can Kathy Hochul? Do we really want to know the answer?
If Innovation QNS was in Miami, it would doubtless be voted on not by the politicos but by the broader populace — like Stephen Ross’ plan to redevelop the Deauville Beach Resort and the redevelopment of office property on Lincoln Road, both of which are the focus of ballot measures Tuesday along with several others that voters will decide.
Let’s talk fundamentals
A lot of the political anxiety of the moment is tied to economic anxiety, and this past week didn’t improve the psychic state of things.
Like a kid being told, like it or not, he has to take his medicine, real estate recoiled this week when Jerome Powell shoved a big, 75 basis point rate increase in its mouth in an attempt to curb inflation, marking the sixth such increase this year, with another hike probable in December. (The Dow fell more than 500 points as a result.)
“The Fed is more or less doing its job,” Kevin Fagan, head of CRE economics at Moody’s Analytics, told CO. “It’s executing its game plan of tightening monetary policy until they see real indications in many different data metrics that they just haven’t seen yet. They haven’t seen those inflationary metrics slow down on a sustained basis yet.”
We hope inflation is curbed soon, because we saw some unpleasant numbers in the real estate market this week. Leasing activity in Manhattan dropped 40 percent from September to October, according to a new report from Colliers.
And there’s been a persistent problem in the debt markets since the second half of the year: Nobody knows how to price anything.
“At the end of the day, I think the vast majority of the market right now is definitely looking more apprehensive right now, just trying to take a little bit of a pause trying to figure out what’s going on,” said Matt Stearns, head of originations at Black Bear Capital Partners. “People are looking for reasons to not do deals.”
The words looking for reasons to not do deals should rightly haunt real estate watchers.
Indeed, the workforce remains resistant to coming back to the office. The human resources provider Traliant released a survey of 2,000 people that found 18 percent of workers would quit rather than return to the office full time. REITs like Hudson Pacific Properties are reporting dropoffs in their number of office leases. (It should be noted that Hudson shed one such office property last week at 6922 Hollywood Boulevard for $96 million.) And even hot office markets like Miami appear to be leveling off in terms of foot traffic back to the office, which is still well below what it was in 2019.
What about multifamily?
This is not to say that there aren’t people out there who are bullish in certain sectors.
“Affordable housing is by far the most defensive commercial real estate collateral for obvious reasons,” Stuart Boesky, the CEO of Pembrook Capital Management, told CO in this week’s cover story. “When things are a little rough, more people are looking for affordable housing. It’s very recession resistant. There’s no doubt that the demand is higher than ever because rents in market-rate units have skyrocketed. So, as far as being able to fill the units and get affordable rents, it’s pretty much a slam dunk in almost every market around the country.”
Indeed, if you’re looking at a schmancy multifamily rental project and you’re a big-name developer, the money is still available. Onni Group, for example, just scored $700 million from Blackstone for Onni South Lake Union, a three-building, 1,097-unit project in the South Lake Union section of Seattle. Likewise, Billy Macklowe and Senlac Ridge Partners nabbed $142.9 million for their mixed-use development at 120 Fifth Avenue in Park Slope. (Incidentally, Macklowe’s father, Harry, was slapped with a lawsuit on Nov. 2 from BankUnited for allegedly defaulting on a $14.2 million loan at 310 East 53rd Street.)
And JPMorgan Chase is rolling out a new proptech platform called Story, to aid multifamily owners and operators in managing their portfolios and scaling their businesses.
So multifamily and categories like, say, industrial are doing reasonably well. (Speaking of the almighty industrial asset, Amazon swallowed 568,500 square feet of industrial space at 2505 Bruckner Boulevard in the Bronx last week.)
CO Says Relax!
Between politics and lawsuits and rate hikes and poor office attendance, it’s worth noting some good things. Friday’s job numbers came in above expectations. That’s good.
And, despite the bad leasing report from October, there were plenty of notable leases we saw this week: Bank OZK moving to 280 Park Avenue; M&T Bank (and a few others) taking space at 277 Park Avenue; Freeman Spogli & Co. expanding at 299 Park Avenue; Welcome Homes (an online building platform) renewing at 41 Madison Avenue; NeighborWorks going to 505 Eighth Avenue.
Brooklyn even got in on the action with Altana (an artificial intelligence platform) taking space at 25 Kent in Williamsburg, and Morgan & Morgan (a personal injury law firm) choosing 203 Jay Street in Downtown Brooklyn.
But, to unwind in a real estate sort of way, may we suggest leafing through CO’s annual Owners Magazine.
This is where the best and the brightest landlords in New York opine on the state of the market and what they’re seeing. It’s an invaluable gauge on where we are.
And, in addition to the owner questionnaires, we also asked landlords about (and reported on) the state of lending right now; their opinion on Eric Adams and Kathy Hochul (which we mentioned earlier); how they see the long-term future of ESG; how South Florida’s Billionaires’ Bunker (aka Indian Creek Island) is preparing for rising oceans; and what they think of their peers.
Don’t forget to vote!