Related’s CEO talks Hudson Yards and “complicated” projects
Blau: “Real estate has changed. You can’t just build a physical asset”
On a brisk day in mid-October, CEO of The Related Companies, Jeff Blau, surveyed the development firm’s massive project on the Far West Side with an iced coffee in hand.
“I used to run down here all the time while we were building this,” he said, sweeping his hand through the air and gesturing toward the six completed towers that make up Hudson Yards’ first phase of development.
Just 44 when he was named CEO back in 2012, the perpetually youthful executive marked his 50th birthday in April 2018 by running his first marathon.
In an industry known for sharp elbows, Blau’s seen as the nice guy who shows up to his kid’s hockey practice, to Cycle for Survival events at Equinox and to the Metropolitan Transportation Authority boardroom when it’s time to hash out a deal and Related founder Stephen Ross is in China. More than a dozen people interviewed described Blau as a consummate dealmaker — the kind of person who clicked with Ross as a student at the University of Michigan and then, two decades later, skillfully assembled the financing for Related’s biggest project yet.
This fall, wearing a dark suit and a snowy dress shirt, the bespectacled Blau could be mistaken for any one of the bankers or lawyers he’s lured to Hudson Yards, including those at Wells Fargo, KKR and SAC Capital, to name a few. It would be another month before Facebook signed a 1.5 million-square-foot lease across three towers at the project.
Although Related was once betting on retail and residential development to carry Hudson Yards, Blau said that as those sectors have softened, the project’s strong office component has been a surprise “game changer.”
So far, 91 percent of the 8.8 million square feet of office space has been leased up. Blau said Related zeroed in on the struggle companies face attracting talent and refined its pitch for Hudson Yards as the “workplace of the future,” where employees can live, work, shop and socialize.
“Real estate has changed,” Blau told The Real Deal during a recent interview at Hudson Yards. “You can’t just build a physical asset [anymore],” he said. “You have to be involved in what happens inside.” The goal is a business that’s “less subjected to market fluctuations,” he added.
Since the financial crisis, one-off developments have become more competitive, Blau said, but Related has found a niche in ultra-complex projects that few rivals will take on as it moves into higher-margin businesses, including hotels and property management.
“We strive for complicated things that others can’t execute on, so if there’s a consistent theme, it’s that,” Blau said.
That plan will be put to the test as Related embarks on Hudson Yards’ second act in a less-than-perfect market. Phase two will entail 6.2 million square feet, including an expected six residential towers and an elementary school.
The mirror-glass megaproject was never a sure thing, however. Dan Doctoroff — the deputy mayor for economic development under Mayor Michael Bloomberg — said many people doubted whether the West Side could ever be developed.
“I say all the time, [Related] were the only developers in the world who could have pulled off Hudson Yards,” said Doctoroff, now the chair and CEO of urban-tech startup Sidewalk Labs, which has office space at 10 Hudson Yards.
But Related almost didn’t get the chance.
Related’s bid for the 28-acre site on the Far West Side fell apart in 2008 after News Corp. pulled out as an anchor tenant. Only when Tishman Speyer — the fim selected by the MTA, owner of the site — walked away after the financial crisis hit, did Related get a call back.
“It was a scary time in the real estate industry,” Blau recalled.
Yet he, Ross and Beal had an ace up their sleeve. In late 2007, an investor group including Goldman Sachs, Michael Dell’s MSD Capital, Abu Dhabi’s Mubadala Development and the Olayan Group provided Related with $1.4 billion in debt and equity. The deal gave the group a 7.5 percent ownership stake in the firm.
“I can’t tell you how much it helped them get through a bad period,” said Marty Burger, president of Silverstein Properties, who worked at Related in the early 1990s and again from 1997 to 2006. “It gave them additional connections throughout the Middle East,” he added.
“Anyone can be successful in good times,” said Blau, who joined Related in 1990, only to see the bottom fall out of the economy. “Some of the best deals in history are made during bad times because people are scared and there’s pressure. People say, ‘Why waste a great recession?’ That stuff, I think, is really true.”
Over the years, Blau has taken his own advice.
In 2009, at the height of the financial crisis, Related launched a fund management business targeting underperforming assets. Headed by Goldman Sachs alum Justin Metz, that arm has raised more than $6 billion to date. And with more than 50 borrowers, it has diversified beyond distressed deals alone. Related now originates and acquires debt and invests in multifamily projects, though it is not in the business of predatory lending, Blau stressed. “We’re in the business of providing debt and getting repaid,” he said.
Related’s increasingly diverse portfolio is also a hedge against an economy that’s heading for a correction after a record bull run.
For example, Related’s plans to develop 12 Equinox-branded hotels would be a “huge part” of the company’s business going forward, Blau said. Through the hotel business, the developer will also enter new markets, such as Seattle, Chicago and Houston, that Blau said are growing faster than core markets. “This is actually the biggest change in the hotel industry, maybe since the W,” he said, referring to how the luxury hospitality brand popularized personalized hotel stays.
Industry observers said the foray is coming at a good time — when national hotel chains are struggling to compete with boutique offerings. Even without Equinox’s loyal members, who will likely patronize the hotels, travelers will be apt to stay at a hotel they associate with fitness and health, said hospitality consultant Bjorn Hanson. “There’s a halo effect,” he added. “It plays into people’s aspirations when they travel.”
But even the most successful firms run up against intractable forces.
For Hudson Yards’ second phase — which Related filed plans for in 2018 — those forces are Trump and Chuck Schumer. The president and U.S. senator from New York have clashed over how to fund the $30 billion Gateway Project, which would build a new railroad tunnel between New Jersey and Manhattan. The proposed tunnel would run under the second phase of Hudson Yards, which was to be completed by 2024.
But in late December, the New York Times reported that Related was no longer providing a timetable for completion. If it weren’t for that funding disagreement, the developer would be ready to break ground.
“That will delay this, definitely,” Blau told TRD during an October tour of Hudson Yards, arguing that the tunnel is “for the greater good of the city.”
“It’s pretty frustrating,” he said.
Blau is more accustomed to being the person making things happen.
Doctoroff recalled Related’s early bet on the High Line in 2005, at a time when the city needed buy-ins from 38 landowners who wanted the old elevated rail line to be demolished. Instead, elected officials proposed a rezoning that would allow owners to sell the air rights above their buildings to developers throughout West Chelsea, but there was a question about whether there’d be a market for those air rights.
“Jeff Blau stood up in the meeting when the High Line property owners questioned whether or not the air rights would be worth anything,” Doctoroff recalled. “And he said, ‘We’re buying.’ That swayed everybody.”
That sort of confidence is what helped make Hudson Yards happen.
To date, one of Related’s singular feats has been raising $17 billion in debt and equity for Hudson Yards from an array of international investors. As recently as November, it secured a $1.25 billion loan from Wells Fargo, Deutsche Bank and Morgan Stanley using 55 Hudson Yards as collateral.
“They found capital in every single part of the world,” said Matt Borstein, global head of commercial real estate at Deutsche Bank, a longtime Related lender that provided $4.5 billion in financing for Hudson Yards. Borstein said that when Ross and Blau pitched the bank on Hudson Yards, they meticulously laid out their vision for a new neighborhood that would be an economic engine unto itself.
Blau in particular, Borstein said, urged the lender to think of Hudson Yards not just as a collection of buildings but a city within a city, and the financing not just as a loan but a “bridge to billions of dollars in more loans.”
Though snags with Gateway may stall phase two, Hudson Yards is already a success — something certainly not guaranteed when Related signed a $1 billion long-term lease with the MTA at the start of the financial crisis.
But when asked about that gamble by TRD in 2011, a year and a half before the project even broke ground, Blau’s answer was both confident and prescient.
“Hudson Yards could be our greatest accomplishment yet,” Blau said. “It’s the future growth corridor of the city. It’s where companies are going to go.