Mack-Cali’s major role reversals

Unanswered questions on the leadership switch at NJ’s largest REIT abound, but the firm’s reinvention strategy is paying dividends

Jun.June 05, 2017 01:00 PM

Mitchell Rudin and Michael DeMarco

Was Mitch Rudin’s demotion at Mack-Cali a shake-up in sheep’s clothing? Or was it, as one analyst said, not a demotion at all and just “a natural and expected progression for the company”?

Rudin’s successor as CEO, Michael DeMarco, paints the leadership switch as a benign shift that was always part of the plan. “It wasn’t so much a change as a repositioning,” he told The Real Deal. “On a day-to-day basis, I run the company. I did it from the start.” Rudin, too, is all smiles about the arrangement and his new position as vice chairman, describing his role as a “ratification of what I’ve been doing and what Mike has been doing.”

Rudin served as CEO of Mack-Cali — one of New Jersey’s biggest developers, with 195 commercial properties across nearly 22.7 million square feet of space, in addition to multiple residential properties in the state — from June 2015 until early April of this year. Prior to joining the Jersey megadeveloper, he was president and CEO of Brookfield’s U.S. commercial operations. He abruptly left the company in 2014 without offering a reason, and the position he held there was eliminated; however, Rudin said he “left on terrific terms.”

TRD reached out to several industry sources, including other developers in the state, for comment on the new executive structure at Mack-Cali. Eight of them declined to comment, remarking that they did not feel comfortable discussing a competitor. Eugene Diaz, founder of developer Prism Capital Partners in Bloomfield, has been impressed by Rudin’s work but said that overall the changes at Mack-Cali seemed a bit schizophrenic. “I don’t think they know what kind of REIT company they want to be,” he said.

While the reasons for the realignment of Mack-Cali’s top brass remain murky, what is clear is that when Rudin joined the development firm it was in trouble, and he and DeMarco, who at the time was the firm’s president and COO, spearheaded a strategic shift that is proving prescient given today’s tumultuous market. 

Mack-Cali’s big problem

The Mack-Cali Realty Corporation was formed in 1997 when the Mack Company of Rochelle Park merged with the Cranford-based Cali Realty Corporation. The family-owned Mack Company was founded in 1962 and was primarily focused on commercial real estate development, acquisitions and management.

The Cali company was founded in 1949 by brothers Angelo and John Cali, who grew up in Passaic, and their childhood friend Ed Leshowitz. It began as a developer of single-family homes in Northern New Jersey and later refocused on the then-booming suburban office development in the 1970s and ’80s.

About a dozen years after the launch of Mack-Cali, now the largest real estate investment trust in the state, the company began to struggle amid a downturn in the market for suburban office properties, which made up the bulk of its portfolio. The firm’s internal growth underperformance was especially clear from 2009 to 2014, said Thomas Catherwood, an analyst who follows REITs, pointing to the company’s SSNOI — same-store net operating income, a measure that analysts use to gauge how a REIT’s portfolio has performed over a given period. “Our office REIT coverage averaged 1.4 percent annual SSNOI growth, and Mack-Cali averaged a 4.2 percent decline,” said Catherwood, who works for the financial firm BTIG.

Commercial office space across all classes in Northern and Central New Jersey has been steadily underperforming compared to both Manhattan and the U.S. overall since the mid-2000s. Office occupancy rates for Northern New Jersey have been steadily trending downwards, going from 90.5 percent in 2000 to 85.3 percent in 2005 and landing at 81.4 percent for the first quarter of this year, Catherwood said.

Jeffrey Otteau, president of the Otteau Valuation Group in East Brunswick, said, “Suburban office assets are deeply distressed, while we are seeing exponential demand for all forms of real estate in more urban places.”

Bringing in the fixers

In June 2015, aware that the status quo had to change — and fast — Mack-Cali’s board of directors brought in Rudin to succeed retiring CEO Mitchell Hersh, as well as DeMarco, a Vornado Realty Trust and Lehman Brothers alum.

Not long after the duo came aboard, they orchestrated a major shift in strategy with a plan to shrink Mack-Cali’s office portfolio to 20 million square feet from 25 million and to roughly double the number of its apartments, to 15,000, by 2018. They’re currently on track to hit those numbers, DeMarco told TRD, though the goal posts have moved a bit: The total office square footage may be closer to 21 million following some acquisitions, and the number of apartments is more likely between 10,000 and 12,000.

Part of the company’s new strategy was to focus on millennial- and mass-transit-friendly urban centers along the Hudson River’s Gold Coast, leading Mack-Cali to move its headquarters in August 2016 from Edison to Jersey City’s Harborside complex, which it is developing to include a full-service Hyatt Regency hotel, six Class A office buildings, retail and land for 2,000 rental apartments. A New York Waterway ferry stop at Harborside is “coming in the next few months,” DeMarco said. Mack-Cali is the largest property owner on the Hudson River waterfront, according to the new CEO, who says, “I was born and raised here — I have a view that you live over the store.”

Since the beginning of 2016, the company has sold 36 office buildings and a 220-unit multifamily complex for a total of $745 million. Last year Mack-Cali sold a 207,000-square-foot office building on Mountainview Road in Upper Saddle River for $19.7 million. Also last year, the company knocked down the 475,000-square-foot former Pearson Education building on a 48-acre site in the same Bergen County community after Pearson moved to Hoboken. The Upper Saddle River site is to be redeveloped, mostly as townhouses.

The company moved its headquarters to the six-building Harborside complex in Jersey City in August 2016.

The company also plans to sell most of its Bergen County office holdings, a total of nine buildings along the Garden State Parkway with 2.2 million square feet of office space in Paramus, Woodcliff Lake and Rochelle Park. It is the largest office portfolio in the county, and DeMarco has said the real estate investment trust is open to selling all of the buildings in a single package, or individually. Two Mack-Cali buildings in Fort Lee are not up for sale.

Along with the Bergen County buildings, the company has put 26 Burlington County properties on the market. It has already pulled out of several Central New Jersey office submarkets, including Freehold, Roseland and Cranford.

In the same time period, Mack-Cali redeployed more than $500 million in capital to buy properties that fit with the company’s new strategic plan.

Mack-Cali currently has eight multifamily projects under construction in New Jersey. At one of its previously vacant office buildings, in Morris Plains, the company is building a 197-unit multifamily apartment complex called Signature Place at Morris Plains. Initial occupancy is projected for the fourth quarter of this year.

On the Weehawken waterfront, the 10-story RiverHouse 11 at Port Imperial will bring 295 luxury apartments to market early next year. That’s being developed by Roseland Residential Trust, which Mack-Cali acquired in 2012.

Also projected to open in Weehawken in 2018 is Mack-Cali’s Marriott Hotel at Port Imperial, which will include a full-service 210-key Renaissance hotel and a 154-key Residence Inn.

While some experts have expressed concerns about a glut or overbuild of residential units in the waterfront communities, DeMarco points to the astonishing pace of rentals in the Urby, a new 69-story high-rise near the waterfront in Jersey City that recently began leasing. The Urby is the company’s joint venture with Ironstate Development. “We’re getting 140 new leases a month,” he said.

The company’s performance has steadily improved during Rudin and DeMarco’s tenure. Its share price recovered from a low of $16.90 on May 29, 2015, to $27.19 as of May 23, 2017. Michael Seeve, president of regional developer Mountain Development in Woodland Park, says the company’s leadership team deserves high marks for the two-year turnaround. “What they’ve done over the last couple of years has taken a lot of hard work and guts, and I think they deserve credit for what they’ve accomplished,” he said. “You see it in the stock price — the market has responded positively — and you see it in the relationships they have with brokers.”

The firm’s new urban focus has also served to keep it at the forefront of the industry, many experts said. “It’s New Jersey — they know it,” said Diaz of Prism Capital Partners. “The Gold Coast will have its ups and downs, but overall it looks like a good strategy for the next 20 to 30 years.”

Last spring the company paid $235 million for 111 River Street in Hoboken, which has 566,215 square feet of office and retail space.

Mack-Cali is not alone in its strategic divestments and investments. A number of other real estate companies in New Jersey have reduced, or are in the process of reducing, their exposure to suburban office space, Catherwood said, including RXR, SL Green and Boston Properties. In addition, “companies like Corporate Office Properties Trust and Liberty Property Trust have moved to overhaul their suburban office portfolios like Mack-Cali is doing, and have had success doing so.”

Developers as a whole are acknowledging a new maxim of profitability. “The office market doesn’t exhibit the same rental growth as multifamily,” Diaz said. Multifamily apartments “will ultimately provide longer-term growth and stability than office buildings will.” But Diaz did say he thought Mack-Cali was too slow in selling its weaker Class B office assets. “They should have sold them 15 years ago,” he said. “They didn’t pick the new strategy until the office market was at its softest.”

However, Mack-Cali still sees the long-term upside to the office market, and DeMarco was quick to point out that the company is by no means dropping out of the New Jersey office market entirely.

Last spring the company paid $235 million for a 13-story office building at 111 River Street in Hoboken, a once-downtrodden industrial city that is now a gleaming gem on the state’s Gold Coast. DeMarco said the company would pay about $395 million for three office buildings in Short Hills, which has some of the nation’s highest office rents outside of big coastal cities, and three at the Giralda Farms office park in Madison, which has attracted large pharmaceutical firms. “We own 100 percent of the Short Hills market,” he claimed.

Across the Hudson River, however, the company has left the New York City office market altogether. And with the recent sale of its seven-building portfolio in Greenbelt, Maryland, it has now pulled up stakes in the Washington, D.C., metro office market as well.

Building the next chapter

Experts said that Rudin and DeMarco have different strengths, which was what the company desperately needed when they were hired in 2015.

The board wanted someone like Rudin, with his strong reputation within both the financial and real estate communities, Catherwood said. “They needed someone who could engage with Wall Street and someone who could quiet the storm.”

DeMarco, on the other hand, was the “consummate New York deal guy,” said John Guinee, an analyst at Stifel. “He loves to trade assets and he understands cash flow, what he can buy when. He understands the economics of leasing.”

But over time, Guinee said, “DeMarco has evolved to more of the strategist, taking the leadership role. Rudin has evolved to the guy running the leasing and operations.”

Other market watchers agree that it will likely be Rudin who will be running the day-to-day doings of the high-rent leasing operations.

Diaz agreed that Mack-Cali was in great shape, but said there was work to be done.

“They have successfully implemented a plan, but they haven’t put up a vision. Every company has to have an ID, its own DNA,” he said.

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