Editor’s note: Lessons from a crypto meltdown

Stuart Elliott
Stuart Elliott

It feels like a Madoff-meets-millennial moment. 

The crypto party has come crashing down with the spectacular collapse of Sam Bankman-Fried’s FTX, the world’s second-largest cryptocurrency exchange. The fallout will be huge, with the company owing customers more than $8 billion. 

How exposed will real estate be? Not very, it seems — even condo developers touting they would accept crypto payments generally converted it to cold, hard dollars when a deal closed, as we write in a story on page 42.  

But the whole tenor of the debacle surrounding the frumpy 30-year-old and what it says about our financial system (including real estate) might be the broader takeaway.  

Back in the day, when you ran a multibillion-dollar company into the ground, you would hide from the press and dispatch your lawyer to deal with inquiries and irate investors. 

These days, you share your feelings in breathless play-by-plays on Twitter. 

A friend of mine in the crypto world whose company was caught up in the FTX fallout was particularly taken aback by a sympathetic New York Times profile of Bankman-Fried. The story said: 

“He has also found other ways to occupy his time in recent days, playing
the video game Storybook Brawl, though less than he usually does, he
said. ‘It helps me unwind a bit,’ he said. ‘It clears my mind.’”

Heaven forbid the world’s formerly second-richest millennial should feel too stressed out by owing money to more than 1 million people, with some losing much of their lifetime savings. (To be fair, there is still a SEC and Justice Department investigation playing out that might send SBF to prison.)

A former regulator compared FTX‘s rise to Bernie Madoff’s Ponzi scheme in terms of the ability to seduce sophisticated investors and regulators into ignoring red flags.

Is real estate suffering some of the same delusion right now? Trying to hide systemic breakdowns? Are we in a world where we all wear kid gloves working from home and everyone gets a prize? Won’t that make the landing that much harder when the problems emerge into plain sight? 

It’s a question worth considering when you read our cover story this month, about the developers still building office buildings in New York even though less than half of workers go into the office regularly.  

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The story, by Kathryn Brenzel, looks at how big developers like RXR and Rudin are pursuing huge ground-up office projects.

Since the pandemic began, buildings constructed since 2015 have been responsible for 100 percent of net absorption in the U.S. — so maybe they are onto something.  

Still, as Brenzel notes, “there are some lenders who won’t touch office at all, even [the] trophy assets.” See the story on page 32.  

The challenge for Class B and C office buildings will be much greater, and many owners will likely face distress. As Suzannah Cavanaugh writes, while there is much talk of converting obsolete offices to residential buildings, just 3 percent of New York office buildings fit the bill for conversion, according to Moody’s. See page 50. 

And the broader landscape for lending right now amid higher rates suggests the check is about to come due. “A lot of people are just deer in headlights,” said Mike Comparato, head of real estate at asset manager Benefit Street Partners. See page 22.  

That’s not to say there aren’t solid opportunities out there. 

We profile Teddy Sagi, an Israeli magnate who has bankrolled some of South Florida’s most ambitious real estate players. (Under-the-radar billionaires are our favorite kind of billionaires to write about.) See page 36.  

We also take a deep dive into the South Florida developments of Related Companies’ Steve Ross. The billionaire known for Hudson Yards and Time Warner Center has taken bigger and bigger swings in Miami recently (maybe not surprising, since he owns the Dolphins).  See page 52. 

Finally, we turn to the West Coast, for a story about a legal loophole that has opened up a bonanza for California developers. In a state where it’s tougher to create new housing than almost anywhere, developers are getting the automatic right to build thousands of units when cities don’t come up with a plan to address the state’s severe housing shortages in time.  

Whether it’s California dreaming or a millennial’s mirage, you have to come back to reality sometime. 

Enjoy the issue.