Money for Real Estate Post Pandemic | The Stoler Report-New York's Business Report
♪ [Theme Music] ♪ ♪ [Theme Music] ♪ >>> Michael: Is there money out there for real estate? You know, people are happy, you know, vaccines are working, things are coming back to normal. But what's coming back with regards to real estate. Okay? How's real estate reacting? And how are lenders, the individuals who have to put out the money operating in this post pandemic era? So, today I've assembled these group of banking executives to provide their insight. My guests include Matt Petrula group vice president, M&T Bank. Ben Stacks, executive vice president commercial real
estate Bank United. And last but not least, Phil Watkins, executive vice president and head of commercial real estate for Customers Bank. So, I believe that -- Ben, you're the senior citizen over here, next to me. Okay? Or Matt -- how have we seen this cycle today as we compare it to 2008, compare to 2001, how do we see it today? How are we coming out of it? >>> Ben: This is unlike anything we've ever seen. I personally am struck with how quickly things seem to have turned around. If you go back, you know, 12, 15 months, you know, people could have painted a lot of pictures that were really grim and I think we were all really worried. I personally am
surprised at how quickly things seem to have turned themselves around. And in particular, you know, things here in New York just seemed to be, you know, really starting to run very fast. So, I, I'm, I'm encouraged by this. I'm really optimistic. And boy, what a difference a year makes. >>> Michael: Yeah, but the question is, you know, are we back to business as normal? You know, different asset classes, you know, if, if you read the, the, the rags and the other information, you know, office space is still available for sublease. It's the highest number of office square foot available. It's a tough time to make lending on office. The
question of the condo market. You know, the Olshan report says, things are good over $4 million properties that are leasing over there. And then you talk about the hospitality market. I believe Ben, you know, you have a major influence in Florida. The hotel occupancy was close to 75%, but if you take
the hotel occupancy in New York, you probably lucky to be at 40-45%. So, I think it's a tale of different cities in different parts of the country with regard to that. Phil, let's talk about customers because you've been expanding and you just recently opened up two new locations around the country. >>> Phil: You hit it very well, that it it's, it's very difficult to paint the entire real estate industry with a broad brush. You know, I would definitely agree that the recovery has been, you know, broadly much faster, I think, than many expected when it was going in. But obviously asset
classes like multifamily have held up much stronger than office and hospitality and certain types of retail. But again, even within those asset classes, you know, leisure drive time hotels seem to be performing much better than say your -- you know, your downtown conference industry type hotels. So, you really have to drill into the specifics. But as you said, as well, markets are not equal. So, you know, we've recently opened up offices in Texas and Florida. And when
you look there, across most asset classes, you've really had no declines. And in fact, you know, in many, many fundamental indicators are, are stronger than they were pre-pandemic basis. So, I think we're, we're definitely bullish on those higher growth markets. But I think we similarly are, are very optimistic at some of what we're seeing from the recovery in New York City and hopefully much faster, you know, from a lot of the research and projections we're seeing them even, you know, after the great, the GFC, you know, where it took about two and a half years.
>>> Michael: Matt, you know, M&T as a major influence and I know it was just approved the acquisition of, you know, People's United. What's the bank's philosophy today with regard to entertaining new real estate transactions? >>> Matt: Yeah. Our philosophy really is the same as, as, as it's always been, which is to serve our, our good customers and welcome, certainly welcome People's customers, which is going to be tremendously synergistic for the company and as we expand our footprint. And, you know, our, our outlook is positive. We're, we're, we're thrilled with the, with the
speed of the recovery in the last few months, you know, we're speaking with a couple of clients just today and the pace of residential leasing, for example, multi-family leasing in New York, which really picked up around year end and going into, into the first quarter, the last six weeks -- the quote was the last six weeks has seen more leasing than the last six months. And concessions are down, buildings that were offering two months concession or offering one month or in some cases zero, occupancy as well, well is consistently above 90% with some buildings as high as 97% again, so that that's really strong. I think the thing that's lagging right now is still office and it seems that landlords are, are working to determine what their employees needs and how their employees are going to use their space as the return to the office before they make a new leasing decisions. But, but the market's certainly feels vibrant in the, you know, the, the change in seasons, certainly I think it does a lot to help the psyche as well. So, we're, we're bullish and we're, we're look-- we're
excited to, to, you know, serve our customers and add, add new customers. >>> Michael: You know, when we talk about the office as I was just bringing up, you know, people are saying that the, A buildings are still doing well. The ones that are really hurting of the B and C buildings, the older buildings who have situations over there. I mean, have you underwritten any new
deals in B and C office market? >>> Matt: For M&T, we've not seen a huge number of transactions, mostly refinances, as of late. So, hard to comment, we did -- we did a good sized refinance Midtown south a few months ago. And you know, underwriting is pretty similar to what it was. I think, you
know, we're certainly sensitized wrench down a little bit, probably I don't know, on the order of 20% or so from where, where we were previously though, we were never really underwriting in cases where we proceeded to be top of the market ramps, we were, we were always sort of sensitizing a bit anyway. So -- >>> Ben: I would agree with Matt. I mean, we just haven't seen a lot of transactions, but, and, and so, you know, I think to the extent that we have stuff that we wanted to keep, you know, we would certainly be interested in refinancing it. And you know, we would try to, you know, take as much into consideration in the underwriting as we possibly could. But I think the reality is, especially with respect to office and, and especially in New York or at least, you know, many of the major CBDs around the country, we just don't know what the, what the ultimate effects of this are going to be. I mean, you know, our company in particular, we're starting our return to office process this coming Monday. And
as we were talking about before we started filming, you know, that's going to mean a lot of different things. I mean, it's, it's gonna, I think again, you know, here in New York, will mean a slow, you know, repopulation of the offices, you know, people getting used to, [clearing throat] excuse me, getting on the subway or the bus or the train. You know, I think there's a lot of things that we forgot over the last 15 months, the things that we were very, you know, also very kind of scared about that, that that happened. And it's been a very
stunning kind of 15 months here of, you know, horrible things. And I think it takes time, as with any kind of trauma that you go through to try to, you know, get back to some semblance of normal. And, and I think that really applies to the office market where pre-pandemic, and certainly for the past, you know, say three to five years, there has been at least some densification efforts in offices, where companies are trying to make more efficient use of space by putting more employees in smaller spaces and smaller square footage allocations. You know, that's slowed down a bit pre-pandemic, but still, you know, I think the trend was really to, to try to densify space and get more efficiency out of it. That has
been completely turned on its head. And I think, you know, we, we just have to see how this is going to work. Yes, there's a ton of sublease space on the market. You know, I think that's
certainly a worrisome trend. But also, I think that the office, you know, functions in, in a, in a really important way in business that camp-- can't be replicated on, on Zoom. I mean, I, you know, we can talk about the virtues or not of Zoom. I
mean, it's wonderful that we can all sit here and do this and in the safety and of our own homes or offices. But, you know, it, it, there's no replacement for getting out and seeing customers and, you know, and spending time with other colleagues, you know, even being in the office, where, you know, you're walking down the hallway and say, oh, I had this idea and I, you know, go over to, you know, Bob's office to talk to him about it. I mean, I, I, it just, you know, this is such an antiseptic environment on Zoom and it really doesn't lend itself to collaboration or efficiency or anything like that. So, I think there's this poll that will bring people back to the office, but I also don't think it's going to be the same. >>> Michael: If you want to build a business relationship, it's really difficult to do it via virtual meeting. I think, you know, there's body languages
talk and touch over there, I think it's really very, very difficult to do that. And especially, you know, Phil, as you just mentioned, you're opening up in Texas and you're opening up in Florida. If you're going to new markets, you have to be there on the ground. I don't think you can do this over
there. And I think real estate, you know, it's an asset that you want to see. You want to physically see the neighborhood. You want to see what's going on over there. And I think that's an important virtue. One topic, you know, that everybody's always been scared about besides the hospitality is the topic of retail. How do you look at retail today? Because you know, if you walk around Midtown, you see some of the restaurants packed, probably busier than they've ever been, because of the outdoor seating. But how, how do you see that, the retail
market? >>> Phil: High street retail really depended a lot on whether it was that neighborhood use retail, some of the restaurants in, in locally driven area, you know, neighborhood driven areas that I think, as you said, Michael, are gonna, you know, are in some cases, ones that survived are seeing benefits. But you'd differentiate that from some of the corridors in Soho, Madison Avenue, 5th Avenue, where stores were really, you know, calling it marketing dollars. Right? And they were, you know, they were spending, you know, very, very large sums of money on very high escalated rents. And you saw that start to come down even pre-pandemic. You know, those rent levels were falling dramatically, because they just couldn't get you to justify that and replace this store. So, you
know, I think that's going to be a trend that you probably see continue. Again, I don't think high street retail is going away. It certainly continues to serve a function there. I think it just couldn't justify the, you know, the sort of astronomical rents that were happening in some of those corridors. You know, candidly at customers retail is just not an asset class that we've focused on, you know, significantly. Our retail exposure has just been very, very low. And so, as a
result, you know, we were, we were very happy and fortunate in that, you know, during the pandemic. But I don't think we're necessarily changing our outlook on that. You know, we, we do it very selectively for, you know, either a very specific transaction or a customer, you know, serving a customer. But by
and large, it's not an asset class we look at a lot. >>> Michael: Matt? >>> Matt: Yeah, I agree with Philip. We do have a decent sized retail portfolio. Most of it is, at least in New York is, is urban retail ground floor of buildings. We have some high street exposure. And then outside of it, we really have no, as a company, no, no regional mall exposure, really.
I think, you know, the, like Phillip said that I don't see any of it going away. Certainly, it's changing and, and the, the growth in retail rents between, you know, probably 2010 or so in 2015-16 was on the order of a hundred percent in some of these high street locations. That's, you know, we can't expect that we're going to get back there and, and today, you know, we're, we're certainly, high street is down probably 50%. And I've heard anecdotes where it's even more in certain, certain, certain locations. And the idea that, that you can justify a loss leader location just simply so that you can put it on your shopping bags or, or have a flagship, it just doesn't, it doesn't seem to exist anymore. As we look back, you know, it kind of feels like maybe that was an unsustainable thing and that's kind of proven out now. The only other thing I'll add is
that we're, we're hearing some green shoots in the sense of, of hyper-local fulfillment centers taking leasing some locations in New York that were former retail locations. These all sort of take use of almost like a mini warehouse allowing for like, you know, hyper-local last few block type of, of fulfillment for, for, you know, deliveries in re-- in real time. That's, that's a nice, ben-- you know, a nice positive happening in retail, although they're not certainly not paying the rents that we once saw. >>> Ben: I think the bigger issue for New York was that, and Matt touched on it that, that the retail rents really ran away from, from some more fundamental concepts in, in the, in the period, kind of leading up to 15-16 and you know, and I think there were probably some unrealistic expectations about continued rent growth and, and, you know, continued demand in the face of, you know, let's be frank, the whole Amazon effect that's been around for quite a while. You know, in a previous
life, certainly, we did a big study about the effects of, of Amazon and other, you know, internet influences on retail and, you know, you, you, we never ended up, [clears throat] excuse me, with, with any kind of positive effect on, on, you know, brick and mortar. I mean, the only, the only kind of saving grace for brick and mortar was the omni-channel retailers that, you know, figured out how to kind of navigate, you know, all different channels of, of sales and, and, you know, you still see that going on. I mean, you know, Peloton started as online only, they went into stores, Warby Parker did the same thing, they went into stores. You know,
now even I, I see that Google is opening up a store at, at 111 8th Avenue. So, I mean, I think that, you know, fundamentally, you know, you know, companies still like the retail environment to be able to, to connect with people. And I think in the future, the personal connection will be, you know, a huge driver of sales and, you know, you can buy, you know, toilet paper and paper towels online, you know, or a whole bunch of other things that you don't really need to go to the store for. But, you know, you're not going to spend $2,000
for a Peloton, unless you can go sit on it and talk to a salesperson in the store. So, I think all of this stuff is changing. And I, I would note that the dichotomy between the retail exposure we had in New York and the retail exposure we have in Florida through the pandemic has been stunning and stark. I mean, the retail properties in Florida that we had just, you know, they were doing well pre-pandemic and they, they certainly continued throughout by and large did really well. And I think part of that is to part of Matt's point,
which is, you know, in New York, retail rents were really kind of running away from fundamentals. In Florida, they really didn't change that much. That tells me too, that there continues to be demand for traditional brick and mortar retail, but it's going to be less over time. So, I think just kind of going forward, it's, it's definitely something to be careful of and you definitely have to pick your spots with, with the right sponsors.
>>> Michael: Here's a two prong question and specifically for Phil and Matt and Ben to answer it also. Private equity firms, private lenders have become major players in the market. And many, some of you are doing something called note on note financing. So, let's talk about private equity and what you're doing, Phil specifically, with note on note financing.
>>> Phil: It's well-documented that even, you know, coming out of the, the GFC, there was an increasing share of, of private, you know, private capital filling a lot of the debt stack. You know, some of it, it was by design, right, coming out of some of the increased regulation and lower risk tolerance that that came about after, you know, after 2008. And I think, you know, generally I think it's a healthy thing for, you know, for banks. How we viewed that rather than sort of a competition of is, you know, are they are, is private capital stealing, you know, a portion of the pie available for banks, you know, we viewed it as a partnership to fill capital stacks. And so,
what we've seen is as banks across the board came up with lower leverage levels out of the crisis, which again, I think is, is a good, you know, a good fact pattern. There are two ways to fill that gap as an equity investor or developer, or I guess three ways, either come up with more equity, put mezzanine financing in behind that lower leverage bank financing, or, you know, really move towards where we've seen a lot of growth is the private funds providing whole loans. So, sort of stretch senior loans that are, that, that get up to that additional capital that developers gain. And then we provide leverage to those debt funds, obviously in a senior position, on a lower basis, using a note on note financing. And we found it to be
a very attractive product for us to get good risk adjusted returns we think at leverage levels we like, we have we're lending to sort of top quality sponsors, you know, usually multi-billion dollar debt funds. But it also have the ability if there are bumps in the road to work with the underlying developers, and you know, we're able to, to maintain a sort of current and healthy position. And so, we've seen it as a really strong growth area, you know, both, to bridge loans, land loans and, and a big part of our construction financing, underlying construction financing has been through this, this product. And you know, kind of going to the markets. I mean, we're doing some in New York, but we've seen a lot of activity in Florida and Texas, you know, we're really a lot of the, you know, strong and as well as some markets it's across the Southwest and west toward a lot of the, you know, developed strong development projects are, are popping up. >>> Michael: Matt? >>> Matt: Yeah, we're probably a little more old-fashioned than, than Phil. We-- you know, we prefer to be, to have the seat at the table with the end user of the real estate. And so, but
what that means, if there's a stretch situation. So rather than note on note, which we've, we've done here or there as a, you know, in a, in a, as a private banking type of an accommodative structure, typically it would take the form of, of, as Phil said, like A note B note situation or, or, or other senior and mez, maybe have someone in behind us to take, to take a first loss position. But it is important to us that we're, we're we have a seat at the table with the, the end user of the real estate and, and that it's a part of a broader relationship. >>> Ben: Just, just from our perspective, you know, we, we've, we would do that structure more in a corporate facility kind of construct, where we're going after the, the entity that is doing the lending and we have a direct relationship with the entity and whether they've made a direct loan or they're, you know, say originating, you know, agency paper or something like that. You know, we would go to the entity and structure something where we, where we take a basket of notes as collateral for a credit facility to that company.
So, as opposed to being, you know, specifically on a, on an asset by asset basis, we prefer to be at an upper tier credit risk with the entity, taking the notes as, as, you know, as collateral. Yes. I think there's some room for that. You know, certainly the, the proliferation and success of the debt funds, maybe we can talk about that too, is, you know, is, is pretty impressive. And, and, you know, they're, they're certainly very active and I think there's a lot of opportunities because of their activity that are coming to, to lenders, like, like the three of us. So, it's definitely something that we're doing and looking at, looking to do more of in the future. >>> Michael: So, here's the question. What do you see, you
know, with the return to office and other things taking place? When do you see the market adjusting, you know, to, to a level that not happy days are here again, but happy days are coming sooner than later? Is it six months from now? Is it, is it after Labor Day or is it we have to wait for 2022? >>> Matt: It's a process that's just beginning and maybe we'll see some more of a bump at the end around Labor Day, where, where companies are calling their employees back to the office. Some assemblance of norm-- of normal probably happens in mid-22 would be my guess. It's going to take some time to come back. >>> Ben: We need to tourism back too, right? And so, it's not just the, the Midtown folks or the commuters or the, the folks occupying office buildings, it's the fuller return of, you know, domestic and international travelers that's really, to me the bellwether. And to that, to that end, I don't really see that happening until next year, you know, kind of get fully back to normal if that's what you want to call it. So, I think that's the last and biggest potentially key component of the full recovery.
>>> Michael: I think we need tourists coming back, but I also think we need students coming back, because many apartments are occupied by students. We need foreign investors to come back who want to take advantage of, let's say the 8% or 10% discount plus closing costs on condominiums. And I, and I think, you know, things will get a little better, but it's going to take time. And I think one thing that I didn't bring up and
I just want to end it shortly is safety. Okay? People need, we need safety in the city of New York and around the country, so people will feel comfortable buying property, operating properties, going around. And I'd like to thank all three of you, Phil, Matt, and Ben, and I'll see you next week. ♪ [Theme Music] ♪