Jeff Blau to Class B office owners: “Take what you can and run”

Related CEO throws cold water on resi conversions, blasts progressives for “demise of cities”

Jeff Blau, the eternal optimist on offices and the return to work, has some doubts about the sector’s future.

The Related Companies CEO has joined other prime office landlords in championing the “flight to quality” narrative: Marquee tenants are fleeing lesser spaces in favor of the ultra Class A stock they offer, with resort-like amenities and annual rents that run up to $200 a square foot and beyond

That thesis is holding up, according to Blau. Occupancy across Hudson Yards averages around 80 percent from Tuesday to Thursday, he said. In fact, he’s so bullish on the campus’ office space that Related is converting the store vacated by anchor retail tenant Neiman Marcus into more offices.

But for the Class B stuff, it’s over. No one wants it.

The idea of converting these unwanted spaces to residential use is “terrible,” Blau told an audience of more than 60 people, including conversion specialist Nathan Berman of Metro Loft, at The Real Deal’s Midtown office last week. The problem with office-to-resi conversions, Blau said, is getting rid of existing tenants. 

“There is the 30 percent [of tenants] that will never fucking leave,” he said, adding that his advice to Class B owners is “take what you can and run.”

To Blau — whose firm’s projects, including Hudson Yards and Time Warner Center, have made it arguably the city’s most successful office developer of the past 20 years — it’s bewildering that the downtrodden asset class hasn’t attracted more bargain hunters.

“Everyone asks me why is it true that the space across the street costs $40 [per square foot] and you are $200,” he said. “That should be an incredible opportunity for someone. And I don’t know if I really have an answer. It doesn’t make sense.”

Amir Korangy, Jeff Blau, Bob Knakal (Photos by Emily Assiran)
Amir Korangy, Jeff Blau, Bob Knakal (Photos by Emily Assiran)

Blau also dished out advice for owners of “other Class A” office buildings: the 1980s-era Midtown buildings, outshone by newer competitors like Hudson Yards and One Vanderbilt, which are also stressed because of high debt costs.

“Every landlord thinks they have Class A,” said Blau. “There is a big difference between a 50-year-old, well-taken-care-of building and a new building.”

Those owners will find a way to hang on until interest rates fall and more tenants force remote workers back to the office, Blau predicted, suggesting that all they should do for now is “sit tight.”

Some audience members pushed back on the notion that a large-scale return to work is going to happen at all.

The pseudonymous investor behind the popular Twitter account Strip Mall Guy said he had to stop tweeting about remote work in part because of the hate messages he was receiving from work-from-home evangelists.

“It’s like a social movement,” said the 40-something, who struck a resemblance to his online identity: a cartoon brown-haired guy in a sweater vest. “Our next generation is very against going to the office. It’s a big issue that’s a lot bigger than a lot of us realize.”

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Even if Blau’s remote work predictions never materialize, his firm won’t feel the brunt of the pain. Related is not overly exposed to troubled assets such as aging offices or rent-stabilized apartments. It has a fundraising machine that can tap into pensions and sovereign wealth funds, and it has locked in most of its debt with rate caps — a derivative used to hedge against rising interest rates.

On top of that, Related manages $12 billion in equity or debt funds, allowing it to provide credit to borrowers as traditional banks remain on the sidelines. Oh, and it’s also pitching a $10 billion mixed-use project with gambling giant Wynn Resorts, aiming to land one of New York’s three downstate casino licenses

“We are private. We don’t have to mark-to-market,” said Blau. “So if people ask us how’s it going, we say, ‘Pretty good.’”

Progressive fears

But like other real estate honchos, Blau still has gripes with local politicians — mainly the ultra-progressive ones. The far left’s policies have ruined San Francisco, Blau said. And in New York, additional eviction protections being championed by tenant advocates would amount to a disaster. 

“I love that name,” he said, referring to “good cause” eviction. “It’s called rent-controlled.”

“The demise of the cities is the progressive left,” Blau continued. “You get these left-leaning policies that take down cities, like defunding police and homeless rights to stay on the streets and not take care of them.” 

Blau suggested that an initiative led by his wife, venture capitalist Lisa Blau, helped tip the scales in favor of Eric Adams’ centrist bid for New York City mayor in 2021. The campaign, dubbed “D for a Day,” sought to convert registered Republicans to Democrats for one day to vote in the primary election and boost moderate candidates.

“We converted 83,000 Republicans to Democrats and they voted,” Blau claimed. “If you look at the spread between Adams and the more left-leaning candidates, it was less than 83,000.” 

(In the eighth and final round of ranked-choice voting, Adams defeated former sanitation commissioner Kathryn Garcia by just over 7,000 votes. TRD was unable to verify Blau’s claim about partisan switches.)

Despite his gripes with the left, Blau said Related is continuing to invest in New York, Boston, Chicago and Los Angeles, though it may avoid San Francisco until “it finds some new politics.” Related is also expanding in Texas, including Austin and Dallas, where it acquired a 520-unit apartment complex last year. The company plans to build eight or nine new office buildings across the country.

Blau does not plan to invest in Houston, however. 

“I actually think it’s a terrible market,” he said. “It’s so concentrated on one industry” — oil — “and they have no zoning in Houston and a lot of land and lots of sprawl.”

Blau says he’s still bullish on Related’s home city of New York despite talk of businesses leaving for friendlier tax climates in Texas and Florida. The company’s casino bid includes a new 2 million-square-foot office tower and a 1,700-room hotel next to the Javits Center. 

“There are a lot of great things about New York,” said Blau. “We have as-of-right zoning. And it’s not easy to build. That keeps competition away and rents high.”