Other people’s money leads to other people’s problems.
Lenders used to have a strong incentive to ensure a real estate project made financial sense, as loans lived on their balance sheets. When Wall Street stepped into the picture with its mega commercial mortgage–backed securities loans, which were sliced and packaged into securities to be passed on to other investors, deals began to be structured for maximum size rather than maximum sense. Nowhere was this disastrous pattern truer than at Stuy Town.
In the second installment of an extended conversation, Charles Bagli, the city’s longest-serving real estate reporter, discussed his reporting on the doomed $5.4 billion acquisition of the complex in 2006. He also shared his thoughts on the future of the New York real estate market and how the multifamily market may evolve in the wake of a pro-tenant “pendulum swing.”
This interview has been condensed and edited for clarity. Read Part 1 of the conversation here.
There are so many epic battles that have taken place on this beat.
Yes. Manhattan is a totally different place than it was 20 or 30 years ago. It’s no longer an island of neighborhoods. It’s completely overrun with these tall glass buildings that don’t really have a lot of personality. Like Hudson Yards. It’s remarkable how quickly Related built Hudson Yards. Perhaps no other developer would have done it like that. I mean, they just went like gangbusters. I felt at one point I had to go over there every week because there was something else to see.
The way they financed that project was also fascinating, with office condos, with institutional money from pretty much everywhere. I think it’s one of the most creative packages we’ve seen.
In the beginning, [Related chairman] Steve [Ross] would tell you, “OK, we’re just going to break even on the office space. We’re not trying to soak anybody,” and they thought they would make money on retail and residential. I think that strategy is open to question.
Neiman Marcus has pulled out. So that space is up in the air, as are many others. It was supposed to be the future of retail, but I don’t know how they could tell you it’s not a mall — because it’s a mall. You’ve been through many cycles, you’ve been through many “New York City is dead” proclamations. What do you think about where we’re at now?
It’s not a profound thought to say that it’s uncertain. Office developers used to put up a building, they had a big presence lobby. They were multi stories and big open spaces, and you put the tenant’s name on the building. Gradually, they began to think, “Oh, we’re wasting space here.” And so the lobbies became smaller and they started putting retail in. And retail at that point was no longer an afterthought. It was…
The main event.
A profit center. Putting names on buildings used to be when you sign a tenant lease, if they were taking a lot of space, you might give it to them. That became a profit center. People recognized how the Empire State Building was making more money on the observatory than on all the office space in the entire building. So now everybody wants an observatory.
My view’s better than his because my view is southwest into the skyline versus whatever.
If you think about it this way, “Gee, I’m from Europe or Asia. I’m going to be in New York for four days. How many observatories am I going to go to?” And there’s only one that everybody knows internationally, right? The Empire State Building. Am I going to go to this one or that one? Well, I think it’s been shown that the World Trade Center observatory did not pull in the millions. I mean, it does business, but not what they were expecting. I wonder what’s going to happen at Hudson Yards or at One Vanderbilt. Is it going to become a place to go to?
But this is a different thing. This is a cultural shift away from the office being your central or only hub of innovation. I get why a creative strategist might need to be in an office twice a week, but why does an accountant, a bookkeeper, a human resources associate ever need to be in an office anymore?
Let’s look at history and see if that can inform us. During the dot-com bubble, you had people that were futurists. I’m not sure how you become a futurist, but they were predicting that everybody would start working at home on their computers. It didn’t come to pass.
After 9/11, nobody wanted to be in tall buildings anymore. In fact, the New York Times headquarters on Eighth Avenue was under construction and people said, “We should be building down, not up.” There was a real feeling that people were going to exit Manhattan or at least these tall buildings. You even saw American Express go over to Jersey City.
But I think that people came to realize that there was a water-cooler effect, that the sharing of information informally around the office was a good thing for the company, and that it was in those informal situations that sometimes brilliant ideas were born.
So I’m not sure if we should be holding any funerals here. But I do think that the face of it is going to be very different because there were all these components to what made an office building financially viable — the retail, the observatory or the upper reaches. Well, the retail is going to be less valuable. Even during the biggest part of the boom, there were these stores on Madison and on Fifth where you walk in and there’s one dress hanging on the rack, and there’s a hat over there, and I didn’t know what they were selling.
So there’s going to be a tremendous change. And I think the value of these buildings will go down. Will they become empty tombstones? I’m not sure.
Even if they do lose a significant amount of value, they won’t lose as much of it because New York City real estate is no longer a local asset. It’s a global asset.
That’s true. Foreign capital has always been coming in in New York, but really in the 2000s it was a deluge, because, well, where are you going to put it? Europe’s got its problems. I don’t want to go to Africa. Is Asia over? I don’t know. So where can you go? New York had this booming real estate market. It became somewhat untethered from supply and demand.
Even when I wrote the first story about Billionaires’ Row, I was looking at the projects that had not come out of the ground yet and thought they’re overbuilding — there’s only so many people that can afford to pay $5,000, $6,000, $10,000 a square foot. Some of those buildings still aren’t finished today.
It looks crazy until someone sells that $100 million apartment. People will look at 220 Central Park South, or One57 when it was a smash hit, and say, “Look, if I get it right, that’s it. It’s a home run.” It’s hard to imagine how people will stop building these things. Do you think New York is still going to go down that path?
It’s already the city for the super rich.
Right, but there’s an evolution that could happen even further.
Devolution. When I first came into New York, I loved going through the Garment District because there was an energy. There were actual workers on the street pulling a line of dresses or unloading a truck. It was very different from walking up Sixth Avenue where everybody’s inside and you don’t know what they’re doing. I liked going through the Flower District or all those different neighborhoods that made New York so interesting. That’s gone and I’m not sure that it can come back. The income disparity in New York is just really a huge problem.
I’m not sure if we should be holding any funerals here, but I do think that the face of [New York] is going to be very different.
So ultimately, if you start to see more and more young people moving out to satellite cities around New York, even the employer at some point will follow them because they want to be next to that talent. That’s what got them in New York City in the first place. Who knows what’s going to happen?
Your book, “Other People’s Money,” is a detailed look at what happened with the largest multifamily deal in New York city history: the $5.4 billion acquisition of the 11,000-plus-unit Stuyvesant Town-Peter Cooper Village. That turned into the classic case of an overheated market. A developer who was playing in the future and never really thinking about the present. How did the book come about?
I think I broke the story that that complex was for sale. It came at a time when there had been all these incredible sales of buildings, and each one was a new record. And you’re holding onto your head and thinking, when does it stop?
I also knew at the time that another complex out in Brooklyn was going to be for sale. And these were mythic places.
Are you talking about Starrett City?
Yes. And actually Starrett City was in line ahead of Stuy Town, but Stuy Town was going to be a spectacular number, so Darcy [Stacom, CBRE’s top investment-sales broker] wanted to go with it first. And this was a mythic place. It was a place where the middle class — not the rich, but the middle class — could actually raise their family in Manhattan.
When they talk about the firefighters and the teachers, this is the complex they think about.
(Related: How Stuy Town was won)
That’s the way I always understood it before I knew anyone that lived there. Now, it was also a largely white complex. So MetLife’s original sin was that they barred Blacks and Latinos from living in the complex. I began to find the history. And it was fascinating to me because it was a real place. You had sometimes third generations that were living there. In some ways it could have been the first enclosed community, because one of the conditions MetLife had for doing this project was, the schools and the churches and any public buildings that are within the 80 acres that we’re buying, we don’t have to replace them. Because they didn’t want outsiders with unlimited access to the complex.
So [in the 1940s] La Guardia [Fiorello, mayor of New York] agreed to that with the help of [Robert] Moses. It was a microcosm of what was happening in New York, where housing, even meat-and-potatoes housing, was becoming another commodity. In that change, middle-class New Yorkers were being ousted.
Now the best thing for any author is an agent and a publisher came to me. I mean, I couldn’t sell a book about [Robert] Durst, but these people said, “Well, we think there’s a book in this.”
When I started digging into it, it was so much fun. I went to the La Guardia and Wagner Archives out in Queens, and it turns out one of the archivists lived in Stuy Town. And I said, “This project was announced by La Guardia on his Sunday morning radio show during World War II.”
He snaps his fingers, doesn’t tell me what he’s doing, walks into the other room, and a few minutes later comes back with a transcript of the radio show.
Wow.
My eyes lit up and it was like, “Whoa! This is my first chapter.” A key figure in the development was Robert Moses. And when La Guardia berated MetLife for barring blacks and Latinos…
Robert Moses, of course, had no problem with that whatsoever! [Moses was notorious for policies on housing, transportation and infrastructure that discriminated against Black people.]
The deal was announced and they sent a letter to the planning department, “I want this done in like six weeks, approved.” So I find this letter that La Guardia had written to the chairman of MetLife: “Gee guy, if a tenant otherwise qualifies to live in the complex, you can’t prohibit a Black or a Latin family from moving in.”
Written across the top of this letter in pencil is “not sent.” Now, oddly enough, for a letter that wasn’t sent, here I find a six-page response from the chairman of MetLife with the notation across the top, also “not sent.” And he’s like, irate. To put it in vernacular, “You bum. If I knew you were going to do this, I would have never agreed to build Stuyvesant Town.” So he absolutely flatly refused. The back channel for these letters I’m sure was Robert Moses.
And as MetLife is preparing a lawsuit to defend against this racist barrier, who’s advising them? You get these letters from Moses. Now, ultimately what they did was, MetLife decided to build their Black project, Riverton [in Harlem], where the apartments were similar, the parquet floors, the lobbies weren’t as nice. And it was built around a courtyard, but it was one-tenth the number of units as Stuy Town.
Let’s fast forward to ’06 when Tishman Speyer came in and bought it for $5.4 billion.
(Related: What’s the deal? Did Stuy Town break a world record price or no?)
From the experts that I trusted, former housing commissioners and other folks that I knew in the real estate industry, this number was entirely unsustainable. And the cost of the transaction was not merely the price tag of $5.4 billion. With all the other contingencies and funds that had to be established, the cost was really up to about $6.1 billion.
The only way it would work is if you could oust all the tenants. Under New York law, that was just not going to happen.
The rent projections were almost a vertical line. How was there such a big disconnect between what the appraisers and the lenders thought about this, and what was actually playing out on the ground?
I think what had happened is you had a situation where the financing for all those projects during that period was coming from Wall Street, unlike the past, where you went to a commercial bank and borrowed money and it was on their balance sheets so they were very much looking over your shoulder. You have these Wall Street guys, and particularly in this case, Rob “Big Loan” Verrone [then at Wachovia].
Rob, from Paterson, up the street [Bagli lives in New Jersey]. He had gone to the bank and said, “I want to be the biggest big loan maker.” That was his whole thing, to steal Lehman’s thunder and Lehman thought they were going to get that deal.
The situation was great for Wall Street, because unlike the commercial banks, they never carry this loan on their books. What they did is they made money by making the loan. They then took the loan, sliced it up, combined it with other loans and then sold them to investors. So this was never on their books. There was never an incentive to ensure that this was a viable project. It was sort of like, “that’s somebody else’s problem.” And in the very beginning [Tishman Speyer executives] thought they were going to get a billion dollars from the two biggest pension funds in the country, in California.
I read the book a long time ago, but the page I remember is what hits people took. A lot of bloodbaths. Then you look at Tishman Speyer and that loss — if I remember correctly, it was $56 million, which is peanuts for a $5.4 billion deal.
If you added up all the fees, it was a wash. A wonderful illustration of the craziness there is that in preparation for the sale, MetLife had hired a landscape architect to gussy up the place.
So Rob [Speyer] takes over, and one of the first things he does is hire a big-name landscape architect. I had this vision that they bought like 10,000 trees. So they’re going around the complex and here’s a little corner where there’s some mature plane trees, and then they decide, “OK, we’ll plant a bunch of them there to make that thicker.” And what they’re doing is hurting the plane trees because they’re digging holes into the roots of these other trees. And the area became known to the tenants as “rape alley” because you could see everything before, but now with all this extra vegetation, it was a blind spot.
That’s a great metaphor for the whole transaction.
I had written the original draft [of the book] and I got it back from the publisher but I’m continuing to do reporting. And somebody mentions the name of this woman that was a pension adviser. A woman that struck fear in the heart of people like BlackRock and Blackstone because her word was gold. And if she said, “up,” the pension funds would do it. If she said, “down,” they wouldn’t do it. So what happened I think is CalPERS committed $500 million and she said, “What are you doing? This is not going to work.” And they said, “We’ve already committed. We can’t get out of it.” But with CalSTRS, which was also supposed to come in for $500 million, she told them, “Don’t do this deal.” And they said, “But we already committed.” So what they ended up doing was ratcheting back how much they put in.
There was never an incentive to ensure that this was a viable project. It was sort of like, ‘that’s somebody else’s problem.’
I was having a hard time finding her. I had a friend who was a private investigator. So I said, “Marty, can you get me a phone number for this lady?” And he gets it and I call her on like a Sunday afternoon. So I’ve got to listen to her berate me for calling her at home on a Sunday. And that’s the kind of person she was, but she had to get this off the chest. So I listen. Then she tells me this wonderful story about sitting in this meeting after it’s clear that this was a disaster and Rob [Speyer] had come out to assure the pension fund that everything was okay.
And they’re passing out these pictures of the complex and the new landscaping and everything. And she says, “Okay, well, this is fine, but where are the numbers?” She went wild about how this was unsustainable, that they were already in trouble at that point. And then she calls up BlackRock and says, “What the hell are you doing?” BlackRock would not talk to me for the book.
I believe the Speyers did talk to you.
I had known Rob for a good part of my career. When he first graduated from Columbia, he came to work at the New York Observer. He was an intern and I knew Rob and even though he drove me crazy, we got along. So when I got wind that the sale was going to take place, he promised he would talk to me about it.
It seems like the 666 Fifth Avenue deal was very much driven by Charlie Kushner. Which makes sense knowing that family dynamic. But here, was it more a Rob Speyer thing than a Jerry Speyer thing?
In the case of 666, I think Jared was involved, but I do think that dad was the primary driver there. In the case of Stuy Town, this was Rob’s project. It was Rob in the negotiations.
I do remember there’s an anecdote about bidding on Hudson Yards. Rob and Jerry go for a late-night walk and they’re having sandwiches.
Tuna fish sandwiches.
There was one year where Steve Spinola was in the Senate office writing the legislation when I talked to him.
Correct. And they’re like, “yeah we’re not doing this.” What are your thoughts more broadly on the city’s multifamily market now? A lot of the reforms that happened last year have changed the entire tenor of the market. A lot of the big money that was flowing in has pulled back and there’s been very tangible changes to incomes in these buildings. Do you think the multifamily market will become less of a gambler’s den going forward?
Absolutely. I think we’re seeing the pendulum swing in the other direction. If you look back during the 12 years of the Pataki administration, the real estate industry was in the driver’s seat. Every year when rent laws would come up for renewal, they’d move to make them more pro-landlord. In fact, there was one year where [former REBNY president] Steve Spinola was in the Senate office writing the legislation when I talked to him. And I was shocked — not that he was doing that, I was shocked that he called me.
It’s the brazenness of it.
I was talking recently with a major builder and owner in New York and I said, “You got nobody to blame but yourselves.” And he agreed with me, although he wasn’t happy.
(Write to Hiten at hs@therealdeal.com. To check out more of The REInterview, a series of in-depth conversations with real estate leaders and newsmakers hosted by Hiten Samtani, click here.)