After seven months of due diligence, developer Michael Shvo bet on New York real estate emerging from the coronavirus pandemic last week — by making an offer to buy a building on Fifth Avenue.
“What we’re facing now — we don’t know the end of this, but we know eventually there will be an end,” he said.
With the global economy in limbo, Shvo spoke with The Real Deal’s publisher Amir Korangy as part of a live series of webinars in which TRD discusses the coronavirus crisis with major industry stakeholders. During the hour-long talk, the developer invoked the Bible, quoted Batman and said he’ll always be bullish on New York City, even if its density has made it vulnerable to the outbreak of Covid-19.
“I want to invest in New York City, that’s where the people are,” he said.
“There are selective groups that have a lot of cash, dry powder — us being one of them — that will look at opportunities,” he said. “We’re not looking at opportunities because ‘Oh my god, coronavirus came.’ We think the seller may be more motivated. Today, you’re pricing coronavirus into anything you do. That’s the reality… we’re in the middle of the storm.”
Over the last 18 months, Shvo and his partners have acquired $3.5 billion in real estate around the U.S., including Chicago’s “Big Red” office tower for $370 million and the Transamerica Building in San Francisco for $700 million. “The strategy has been very consistent,” Shvo said. “We were buying — and we still are — buying core assets and opportunistic investments.”
With the market turned on its head, having credit tenants is reassuring. “The Chicago Housing Authority ain’t going anywhere. Neither is Northern Trust Bank,” Shvo said of his tenants in Chicago. But the fear is real. “This is like the Hunger Games right now,” he said. “The strongest will survive. Some of the smaller companies can’t.”
In general, he said the full impact of the pandemic on Class A office prices won’t be known for a few weeks when rent checks come due. But he predicted cap rates would likely contract. Shvo disagreed with the idea that the pandemic would alter the way employers think about office space.
“I do not think all of a sudden you’re going to see a massive shift that people don’t need offices and don’t want offices,” he said. “They need human interaction. They need to go somewhere.”
Shvo, who began his real estate career as an agent at Douglas Elliman, said he doubted that residential living would change significantly post-coronavirus. (“Nobody’s buying apartments right now, so all the virtual tours are fantastic, but no one is buying apartments,” he said. “I would suggest to brokers in today’s world that you’ve got to educate yourself so when we come out of it you can capitalize on [your knowledge].”)
Shvo said the key to staying sane while quarantined is to maintain a schedule and he has insisted that Shvo employees get on Zoom calls to see each others’ faces. “Wake up at the same time, shower, exercise,” he said. He invoked the Biblical story of creation and said that God catalogued each animal one by one. “The point is, we are creatures that need structure.”
Although pandemics wouldn’t be factored into underwriting, he said force majeure clauses will be scrutinized. “You’re going to see a lot of lawyers overthink and over negotiate these clauses,” he said.
During the conversation with Korangy, Shvo dished about deals and weighed in on everything from WeWork to the fate of the hotel industry. He summed up real estate’s new reality this way: “Until two weeks ago, you woke up, ran to make more money, ran to buy buildings,” he said. “Now you want to make sure you have food, toilet paper and a job.”
Shvo, who owns the Raleigh, Richmond and South Seas Hotels in Miami, said he had to shut them down because of coronavirus. “It’s obviously not great,” he said. He had planned to close the Raleigh in June anyway, in order to build a 200-foot-tall residential tower.
In general, he predicted the hospitality business would rebound, starting with lower-end hotels. “People are going to continue to travel, it’s in our DNA.” Hotels and restaurant owners that are highly levered or rely on small margins would have a tougher time re-opening. Right now, many are operating out of fear. Again, he referenced the Old Testament, re-telling the story of Noah and the flood. “After the flood, God told Noah I’m never doing this again,” he said.
After invoking the Bible several times, Shvo said it’s important to have something that roots you during tough times. “With my tax thing, overnight, all of a sudden life changed,” he said. “There was fear. You’re not in control of your future. Thank God I went through this. I can tell you, the darkest moment of the day is always just before dawn… It really makes you appreciate what you have on a day-to-day basis.”
He also dished about recent deals, including the $700 million acquisition of the iconic Transamerica Building in San Francisco. Shvo said his group’s experience working with brands — whether Aman or Armani — gave it an edge over other bids. “Part of the deal is they’re keeping their name on the building for 99 years,” he said.
Shvo ended with the following advice: “When you go through hardship — and I’ve been through enough hardship — you know who your friends are,” he said. “When you’re worried about your lenders, your tenants… the way you treat tenants and lenders treat you… this will go away, but we’ll all remember how people behaved when things got tough.”