Raymond Chalme and Daniel Blanco Talk Launch of Paradigm Advisory Group

“This year alone we expect to see $30 billion of loans maturing on office property in New York,” Chalme said. “Lenders in particular are realizing they quickly need a plan, especially in an era when values may be in doubt, rates are rising and capital structures have grown more complex and involve multiple parties.”

Chalme and Blanco launched Paradigm after first tackling one-off asset management and advisory assignments for lenders and seeing the demand for advisory services for challenged properties. Over the last two decades the duo has inked deals for multiple Manhattan office properties including 80 Broad Street, 55 Broadway, 61 Broadway and 370 Lexington Avenue, along with multifamily assets like 40 Bleecker Street, 298 Mulberry Street and 215 Sullivan Street.

Commercial Observer visited the Paradigm co-founders at the firm’s office at 80 Broad Street to discuss why they felt now was the right time to tackle a full-scale CRE advisory business; prospects for conversions of office to multifamily properties; and their overall outlook for New York City.

The conversation has been edited for length and clarity.

Commercial Observer: What was the impetus for launching this new advisory group? 

Daniel Blanco: We went through a period of trying to get through a post-pandemic world with things changing, and Ray and I started getting phone calls from institutional equity providers.   They asked if we would mind taking a look at particular assets — like multifamily or office — and give them our high-level thoughts from a couple of different vantage points including value, timing to market and what the asset might look like over the next three to five years. Initially, it was a free consultation for about a year with everybody asking a lot of questions. 

Over the course of 2022, we looked very broadly at the relationships we had forged over the last 30 years. Those relationships were calling on us as sector experts on these various asset classes. So, the initial ethos was New York City specifically and very regional, and now it is national, which we didn’t anticipate. 

We’re leveraging 30 years of a proven track record as a sector expert in residential development and office developments. 

Ray Chalme: I’ve been in the market since 1992 and nobody wanted to be in real estate in the early ‘90s. It was the savings and loan crisis, and it was quite a devastating time, but I got  insight and the education of a lifetime in that period. The firm that I worked at was JEMB Realty, and basically everything was having to be restructured and refinanced.

Dan and I teamed up in 2004. He came from CBRE, so from more of an institutional background. We formed Broad Street Development and, for the period from 2004 until now, we got involved in residential conversions, owning office buildings and ground-up residential development. And the thesis was pretty simple: We would deal with senior lenders — without too much CMBS — and we would leverage the equity with institutional equity. We would be the owner-developer-operators for the institutional capital that needed hands-on asset management to redevelop various assets.

We were always owners and developers, and never did advisory work. And we realized very quickly from that year of talking to everybody that there was a tremendous need for our advisory services by the various lenders on how to navigate this wall of worry with the commercial maturities that were coming up. We can figure out the best outcome for them. 

What has demand been like since your launch? 

DB: There’s a wave of loan maturities coming. The wave is going to be a little later than we thought, but the amount of homework we’re doing now in preparation for the wave is significant. I thought originally we’d focus on New York, New Jersey, Long Island and parts of Connecticut. We’ve got all of those markets, but we’re also in Ohio, Chicago and Los Angeles because the same group of lenders that we’ve developed relationships with say: “You did a really good analysis here, can you just look under the hood here and tell us what you think and give us the smell test?” A lot of these banks do not have the asset management capabilities to execute business plans. They’re really smart and they’re really hard working and they know the loan balances, but when it comes to executing a business plan, they don’t have that skill set. So they’re looking to us to develop the plan. Whether we do an implementation from the plan or not, they want the framework. So right now the majority of our charge is those kinds of mandate reviews.

What are the prospects for converting some older New York City office properties to multifamily or other uses?

DB: Some of it can work. The problem you have with residential rental conversions is that you have to depreciate two things. The basis has to be bought right. When bought right, it would be a couple hundred bucks a foot, so $150 to $250. You have massive renovation costs, and then without an accretive 421-6 tax incentive program, you’re basically eroding most of your cash flow on the residential development. And the kicker is if it’s a 500,000 square foot office building, the reimagining of the residential can go to 350,000 to 400,000. So the denominator and the numerator start saying,‘“What did I just do?” It just increases the basis.

RC: You need tax incentives from the government in some form or fashion. 

DB: If you’re asking me to take a 25 percent hit in the surface area, I have to add a ton of dough to get it to the promised land. Then when I get it to the promised land, it’s going to be punitive because you are going to hit me with, let’s say, 20 percent on the low end. 

RC: It worked in the ‘90s when they did it. That’s what made a lot of these buildings convertible. 

DB: It worked because you had two things. 421g gave you a 15-year phase. And the second thing it did was, during the period of construction, you got a very favorable abatement. So as you were constructing for the next two or three years, you had a very low basis. Some version of that has to come back.

RC: Until the values are low enough, and until that price discovery happens, it can’t move. You’ll have some outliers where a building is vacant and it sells for $200 a foot.They’ll try and convert it, and spend $400 to $500 a foot to make it a rental building. I think it’s great for New York City and I love the concept, but a lot of these buildings don’t work from an architectural standpoint. You have to have operable windows. It’s not the holy grail unless there’s some backing of government incentives to get there, but I do think you can have a lot if there is. 

What types of rent concessions are taking place now to create higher occupancy in some of your Class A buildings? 

DB: The net effect of rents are definitely getting reduced. I know two deals that are occurring, including one in Downtown Manhattan, that are probably going to have three years of free rent. It’s the old Helmsley model where your rent and you repent — and you hope one day the tenant comes back. 

RC: I’m an optimist, and I do believe that it’s way overstated the scale of work from home and obsolete buildings. You go to Europe and everybody’s back in the office.

I was in France for a wedding recently, and the office buildings, besides being full, were older buildings and they’re beautiful. People don’t want to be in a steel and glass building just because it’s amenitized. If you look at some of the hotels there, they take a brick building. They build an outdoor courtyard with glass, and it is so well done. Time and money are required, but they can be adaptively reused. 

I think it will be very healthy for New York to go through this, as painful as it may be over the next several years. But I do believe that these buildings can be adaptively reused, whether it’s hotel, whether it’s residential, whether it’s boutique office like we’re sitting in now. But it’s going to take some time until the basis is found and new players come in and work on that. So the utopia is: yes, we could see where it’s going to go, but certain players need to get involved to get there. 

DB: Those assets that can work for residential development, which will happen, will remove inventory. We think that when the office market comes back, it comes back better than ever. This is just a moment in time that is not permanent. What has changed is the way people work and when they work, which is much more flexible. You cannot argue a metric where all those folks occupying residential, rental and condo inventories move back into the city to stay in their apartments. If it was a permanent change they would move out. We speak to tenants all the time, and we hear from them that it’s very hard to imbue a young associate with the cultural mores of the firm on a Zoom.

What are your near-term or long-term goals for Paradigm?

RC: A near-term goal is helping some of the partners, lenders, etc. weather what I call an interest rate storm by actively managing them. At some point there will be some type of subsiding of this rate riot in some form or fashion and you will have a more normalized market. So, if we can get some of our partners and lenders to the promised land, there’ll be either an option to potentially create office recovery funds, where ultimately there is a buyer of some of these assets. Or we make better friends with our existing lenders and continue to find opportunities with them. It’s putting us in a position where we’re checking under the hood of every deal in town, confidentially, and understanding what’s going on in the market where we were not just looking at our own assets. 

Where I see this growing is toward a handful of five to 10 key relationships where we have these assignments over the next couple of years that, in turn, lead to other types of purchases. We’ve been in the office market for over 30 years. Not a lot of people have stayed in.They’ve gone onto greener pastures for industrial and residential and student housing. We’re doing what we’ve always done for 30 years, but we’re now sharing some of that knowledge. We don’t necessarily have to own the building, but can work well with people that we’ve been working with for many years. 

DB: What is great is you’re getting looks — and you’re getting some time with some very important lenders who are showing you their portfolios over a broad base. I think ultimately when they start transacting again they remember that. 

RC: We’re in a relationship business contrary to what people think about finance being strictly transactional. That’s how we operate our business. 

DB: And candidly sometimes when we speak to a lender we’re very frank with them and we tell them it’s not a great situation they are in and they recognize that. I think there’ll be opportunities to grow some assets under management. I think there’ll be some new opportunities with some brand-new relationships. I think if you are one of the individuals or a group that is trying to help during this difficult time getting the strategies, when the market turns, that’s a wonderful position to be in to then jettison into the next phase. 

Andrew Coen can be reached at acoen@commercialobserver.com.