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The Risk-Takers Who Transformed New York Real Estate

June 26, 2022

Adam Piore is the author of The New Kings of New York.

Award-winning journalist Adam Piore is a former editor and correspondent for Newsweek Magazine, with credits at publications including GQ, Scientific American, BusinessWeek, and many others. Currently, Adam is a contributor to The Real Deal, where he covers the real estate market.

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Gravity Exists Hello, everyone. Thanks for joining us today. We’re speaking with Adam Piore, who’s the author of The New Kings of New York. The book examines the booms and busts of the New York City real estate market over the past two decades, as told through the stories of several key developers. Adam is extremely well versed on the subject matter. Having covered New York’s real estate market for years as a reporter, he’s a former editor and correspondent for Newsweek magazine and is currently a contributor at The Real Deal [Internet publication]. Adam, thanks so much for taking the time to chat today.

Adam Piore Glad to be here. Thanks for your time.

GE So in your book, you discuss a specific time period in the development of the New York City real estate market, and you really focus in on it as a time that you call the second Gilded Age. And it seems apropos from the perspective of where we are currently with everything that’s happening in the financial markets right now. As a result of the Fed’s move and following the pandemic, it feels like an end of an era for real estate throughout the country. And I’m just curious as far as how you’ve approached the New York City real estate market as a historian and as a journalist, how you feel about the various cycles and ages and how they occur and how they interrelate and what changes and what doesn’t. What changes in the personalities and what’s eternal to the City.

AP Yeah, one of the things we wanted to do was we wanted to choose a couple big players in the New York City real estate industry and follow them through a couple cycles to just show how the cycles work and how money is made and lost. So it is very relevant to right now. I was just curious in the 1970s. The Bronx was burning. Like landlords were literally, you know, paying people to burn down their building so they could collect insurance money. So then by the time I started writing this book, people were willing to pay $250 million for a single penthouse. Not in the Bronx, but in New York City. So I was curious. I didn’t understand how things could transform that much.

I wanted to understand how New York City was brought back from the brink, you know, and how the market could change so much. But I also wanted to follow some interesting characters as they went through the market cycles. One of the things about what happened is, because of globalization and the concentration of wealth in the 1%, the disparity — the 99% and the 1% — manifested in the real estate market. So there was just a lot more uber-wealthy people who could spend, and somebody else called it the Second Gilded Age. It’s similar to the Gilded Age.

There was one architect I talked to who worked for Robert A. M. Stern, Paul Whalen, and he had designed some of these “master of the universe” buildings, and he was describing when he was building them, he was imagining people, you know, pointing to their terrace from their private jet as they fly in. But he was saying he was in architecture school at Columbia in the 70s, and he would go down and he would look at some of the buildings that had been built in the first Gilded Age. Like one of the ones he looked at, I think, was the Woolworth Building, and he couldn’t understand how anyone could afford to put all these finishes on it because the City was near bankrupt. Like why would somebody spend so much extra money to make it a building like that? But now, in the 2000s, he was designing equally sophisticated and fancy buildings with limestone and all the finishes, so it’s kind of like a second Gilded Age because there was so much wealth and so much interest in buying these buildings. What he was saying was it’s another window, and these buildings were going to be testaments to this second Gilded Age, which was going to end sometime.

And maybe it’s ending, but in terms of your question about relevance to now, you know… prices get frothy. And a lot of what happened first with subprime, you know, is, I guess, most similar to this because in order to buy the land to build and develop, you needed to bid more than everybody else. And the prices went up so much and people were so optimistic that the people who were winning the bids were those who were willing to make the most optimistic projections. And a lot of them were basing their projections, not on the income that was coming into the buildings currently, but on these assumptions about how much they would be able to grow the income.

When the party ended when the subprime bubble popped, of course, these people were screwed, and a lot of them lost the buildings. But a lot of people moved in and scooped them up and made a lot of money. And one of the groups that I was able to talk to and follow were the people from Fortress Investment Group, right? And what was interesting about them is Pete Briger and Steve Stuart, two of the main guys, they had come up during another cycle. They had graduated from college and gone to work for Goldman Sachs during the S&L crisis. So their job was there was all these assets that the banks had taken over when things crashed and nobody wanted them and nobody knew how much they were worth.

So what they would do is they were trained and they developed this skill to find a way to figure out in a worst-case scenario, if they scooped up these assets, how much they could sell them for, and then they would find somebody to buy them. So they would buy, like, credit card debt, and then they would sell it for pennies on the dollar to somebody else. But part of what they learned was to protect the downside. And that’s really what they were doing in Fortress.

One of the most famous things they did is Harry Macklowe — and this is in my book — this guy at the peak of the market, you know, Blackstone bought the equity office property portfolio from Sam Zell for, I forget how much, but they spun off. You know, it was a lot of money. It was like the largest leveraged buyout ever. And then they spun off as much as they could, and they sold like a collection of trophy office towers in Manhattan to Macklowe. I forget how much it was right now. I don’t have it in front of me, but, you know, he put up $50 million in cash, and it was at least $2 billion maybe $5 billion, I can’t remember for the whole thing. And he went to Fortress to get the final $1 billion, you know, and he called them up, and Steve Stuart was telling me he got a phone call, and Macklowe said, “I need to borrow a billion dollars, and I need it by next week.” And so what they did is they went through and they, they just assumed that everything was vaporized and they were going to have to get the money back. A worst-case scenario. And they did all this due diligence and they identified assets that they could go after in a worst-case scenario to protect the downside. And they did that in a bunch of deals. And they’re some of the people in the book who made the most money out of things crashing calamitously like they are now. So you’re going to see that now. And I don’t know if Fortress has another loan out to Harry Macklowe now. I don’t know what’s going on with that, but I was following people through these cycles and seeing, you know, how it worked.

GE Right, right. So…

AP I could keep babbling on that.

GE From the perspective of investors, the New York City real estate market has tended to mirror the credit cycle. So, you talk about the partners who founded Fortress coming up during the fallout from a different excessive period in the 80s. And again, we saw the period that preceded the credit crisis and the period that we’re just coming out of — the extended post-credit crisis period with ultra-low rates globally and the expansion of private equity and private credit — certainly had a huge influence on the real estate markets in the US. And to the extent that private equity funds have come in and become big players in the New York City real estate market, has that changed it? Are individual personalities less represented now? And is it more of a corporate story in terms of the market and how it’s developing?

AP That is definitely a trend that has happened in recent years. There’s a lot more institutional money and some of these players like Blackstone and Fortress. And then you’ve got, let’s see, well, you’ve got some REITs, like Boston Properties is big, and Vornado and a lot of institutional money. But there are still some personalities. There are still families, and there are still individuals, and sometimes they work together. There is Harry Macklowe. He’s like 80, and he owned the GM building. That’s what he ended up losing to Fortress. That’s how they ended up getting their billion dollars back.

After the market crashed, he had to sell the GM building, where a lot of hedge funds lived you have the highest rents in the City. So he was kind of ruined for a little while, but then he came back again. And one of the ways he did that is he partnered with one of these institutional funds. There’s a company called CIM. They’re kind of secretive. They don’t talk to the press that much. But it was founded by a couple of former Israeli paratroopers and a guy who was their neighbor at some point. I don’t know how they knew him. They met him in LA, but he was a famous private equity hedge fund guy.

I forget whether he had come from Apollo or someplace else. But they raised some of this money. And even people like Harry Macklowe. He was trying to bail himself out before he lost the GM building. He was trying to raise money from sovereign wealth funds. And Gary Barnett, who’s a personality, also has a lot of Middle Eastern money. These are some of the same sources of funding for some of these institutional finance places, right? And if you look at Tishman Speyer. They own Rockefeller center, but if you look in my book, they had bought StuyTown, which was the largest affordable development in the City. And it was this calamitous deal that kind of fed this backlash, which has since evolved. But they partnered with BlackRock, right? So you’re getting some of these people who… you still need somebody to think about how to unlock value, and you still need somebody who has a plan and a vision. And that’s one of the things that these people have.

I mean, Steve Ross, who owns the Miami Dolphins and did the Time Warner Center and Hudson Yards, he’s got a vision. But he’s also turned his company into like this institutional thing. But you always need somebody who is out front taking a risk. It seems like, you know? The Zeckendorfs, who are a couple personalities, their grandfather was this famous guy, Big Bill Zeckendorf.He helped build the United Nations. And they’re third-generation families, but in order to do the deals that they did in my book, they partnered with Goldman Sachs’ Whitehall fund, you know? They had this idea. They owned Brown Harris Stevens, and they were going to all their brokers and saying, “What do you need? What do you need?” And the brokers were saying, “Well, we can’t find a six-room co-op for, you know, a rich finance person moving back to the City with his family anymore. So, they were like, “Well, okay, we’ll build it, but we’ll build it at a level of luxury that’s never been built before. And we’ll build it as a condo, so you don’t have to go through a co-op board.” They had this vision and this idea based on their own internal numbers that they got from Brown Harris Stevens, but in order to finance it, they had to go to Goldman Sachs’ Whitehall fund. They gave them money, but they didn’t let them go a hundred percent, you know? So they built very luxurious, but they didn’t build as big as they wanted.

And then that building they built, 515 Park Avenue. It did so well. It had this level of luxury that had never been built before — kind of this gated condo in the sky — that Whitehall was willing to let them do what they wanted, and they did that at 15 Central Park West, which was the most successful condo ever. So successful that people in the industry started calling it Limestone Jesus. And that sort of led to what is now called billionaires row, which was, again, buildings for not even the 1%. For the 0.01%. And one of the reasons is — and I trace the market forces in my book — but one of the reasons is because once you start getting a certain price for the land around the Park, only the highest bidder is going to win for the next land. And only the people who are willing to bid the most are going to win, and the way that you bid the most is you build for the .001%, you know, who are willing to pay $200 million for a penthouse.

GE In your book, you discussed the role of how some of the investment banks were involved in these transactions. And increasingly, we’re seeing the involvement of private equity and investment firms. You mentioned BlackRock, obviously Blackstone, Apollo, Fortress. Has there been a shift from your perspective in the tone of development as investment banks using traditional financing that was basically broken up into different tranches — different loans, different bond issues — versus these monolithic entities, the private equity firms, the private credit firms that are able to amass a lot of capital? Did it alter the nature of the deals? The tone of the deals, the pace of the deals, their emergence?

AP Yeah. So initially, because I really was focused on the first two decades of the millennium and real estate — although I was looking back to the 70s — I tried to go back to the recent history through some of the characters and their backstories. But yeah, I followed the first two decades. And so, in the first [decade] during subprime, Lehman and some of these other places, they were issuing all this commercial mortgage-backed security CMBS, and then getting it and packaging it and getting it off their balance sheet. So, it was immensely profitable, and they didn’t really worry about risk. And then subprime popped, and everybody got screwed. Lehman Brothers went bankrupt, and then people had to go elsewhere for financing.

And for a while, actually, the only money was coming from overseas. So, you were getting the Middle Eastern sovereign wealth funds. There was that visa program, EB-5, where Chinese investors, if they put up $500,000, they could then get a green card. And it all was foreign. Then once the market stabilized, some of these investors came in. But I think the people that you’re talking about, the smart ones had a lot of dry powder, and they used that to scoop up distressed assets on the cheap. So that’s how they played a role.

One of the things that happened is people were searching for returns and profits, right? Just like before, but interest rates were so low. So there was a lot more investment in building for the wealthiest. Like, at one point — I think it was around 2014, 2015 — 5% of New York City condos or apartments that were sold went for over $5 million. But 50% of the new construction was targeting that demographic. So, it did change that. And some of the people who did that were Vornado. I don’t know if they qualify as an institutional investor. They’re kind of a REIT, but they have the same kind of corporate polish and due diligence. They’re the ones that built on Central Park West, and they sold a condo for $250 million, which was a record at the time. And same with CIM, who I mentioned, these paratroopers with the former Apollo guy working with Harry Macklowe.

One thing that happened early in the book in the 2000s was you had people like Ken Swig, but also Tishman Speyer. A lot of these old, really large apartment buildings were sold and then converted into condos, but in order to win the deals, people relied on overly optimistic projections, and they paid more. And the only way they could make a profit was to get rid of rent-controlled tenants. So they overestimated how many rent-controlled tenants were going to leave. And it was very politically unpopular. It caused this huge backlash. Then, you know, Tishman Speyer and Ken Swig and I forget which other places, they also lost these deals. And it was, you know, the Blackstone’s and the Fortresses of the world that moved in and bought the distressed paper and then actually worked things out with some of the tenants.

I mean, Blackstone got Stuy Town.

GE The final question I’m going to ask you, and, and I don’t want to put you on the spot, but as you’re aware, following the pandemic, there was this media story that New York City’s time had passed. That New York was no longer a go-to place because of the decentralization of the financial services industry, which had been such a big part of the City’s economy and draw. That perhaps the City was less culturally relevant. And in the people who are going out and saying, “This is the end of New York. The pandemic and the rising rent, driving people away, et cetera.” To a certain extent, some of the older developers that you’ve talked about — the people in their 70s and their 80s — they made their money initially during the down cycle in New York City following the early 70s near bankruptcy of the City. They were people who took a big bet on the City’s recovery when it was down during that kind of gritty, “the Bronx is burning,” “Taxi Driver” period for the City.

So, my question to you is, as somebody who’s followed the market, what are your thoughts about the people who are calling the demise of New York City as a Mecca that draws people and as a marketplace, [and will it] in the long run, continue to be a very competitive market for real estate and jobs?

AP Yeah. Well, I’d say a few things. One is that I worked at Newsweek when 9/11 happened, and I covered 9/11 from Ground Zero, but I remember working on a story about how nobody was going to build a skyscraper or work in a skyscraper ever again. Like, actually calling people and people [were] predicting that. And it seems ridiculous now, but people actually backed out, and there was an article that a lot of people were doing [this]. But skyscrapers were still around, so there’s a certain element of that.

The other thing I would say is — and I’ve heard this from people — is like there’s a problem now with New York and office space. I live in Fairfield, Connecticut, where 30% of the town commuted to the City. A lot of them are in finance, and now I go and I see the parking lot is empty. But as somebody pointed out to me the other day, there are a lot of other factors going on. I mean, people in New York used to worry about London as the main competitor, but then Brexit passed, right? So London is not really that attractive anymore. Then you have the Chinese crackdown on Hong Kong and China. So, there’s a lot of Chinese money flowing into New York City. So, there’s those factors to sort of counterbalance this thing. But the other thing is that there’s no indication that demand for residential in New York City is falling at all. In fact, just last week, the median rent for a New York apartment reached higher than it’s ever been.

And in fact, in order to make the 40 times monthly rent, you would need to make $150,000 just to qualify for a median rent apartment in New York City. What is in trouble is…there’s not enough housing and the market factors…there’s just a voracious demand. I mean, young people want to live in New York City. It’s an exciting place to live. It’s vibrant. And if you look at a place like Hudson Yards where new office space was built, that’s state-of-the-art office space. That’s, that’s not going to have a problem. They’re like 98% leased. It’s the old office space which might have a problem. And you also had the retail apocalypse even before COVID, right? Because everybody was buying stuff from Amazon.

So, New York already had a problem there. And so there is a bunch of office space that is distressed. You know, the banks have been extending, and a lot of loans are coming due, and it’s going to be harder and harder to refinance. And there’s going to be a lot of stuff that could be picked up, and we’ll see what happens. But one of the things that happened in the 90s after the S&L crisis down in Wall Street is there was this tremendous glut of Class B and C office space. And so what the City did, and I followed this in my book, is they changed the zoning laws so you could convert it to residential. And I was just talking to Giuliani’s former planning czar the other day, [and] it wouldn’t be that hard to pass. Just some pretty modest zoning changes to convert some of this office space that people don’t want. If, in fact, it’s true that the days of everybody working in the office are over, you can convert that to residential and definitely fill it with people.

Do you know what I mean? And so the market forces will fix that. And also, you know, it’s not going to be pleasant. Like, so for your readers, the people that have the dry powder, I mean, this is a — I don’t know when the market’s going to bottom out — but it’s going to be a pretty good opportunity. The people who are over-leveraged on the office space are going to have to give it up, and somebody else is going to go in, and they’ll have a much lower cost basis, and they’ll be able to turn it into something.

But in terms of the GM buildings and the Hudson Yards and that type of stuff, there’s always going to be demand for the top-of-the-line office space. Because not all of it is top-of-the-line, so, the question is just [can] the more antiquated stuff that we have seen in the past be converted into residential? And there’s just almost infinite demand for residential space in New York City. I mean, it’s been a while since I was young, but I really enjoyed living in New York City when I was young. And I wanted to get back there as soon as I could when I lived in other cities. There’s no place like it.

GE Adam, thank you so much for taking so much time. I’ve kept you for longer, uh, perhaps than I should have. You’ve been overly generous, perhaps with your time. But thank you so much. The book again is called The New Kings of New York by Adam Piore. It’s published by The Real Deal. And we’d like to thank you all for joining us today.