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View from the top: 2016 about recalibration

By Amanda Marsh

RXR Realty CEO and chairman Scott Rechler hangs a sign by his office door, which he changes out each quarter to inspire the people in his organization.

The current sign reminds them to “Regularly Recalibrate, Calibrate Reality.” He explains: “Reality is changing every day, and you need to take a step back and look at the world.”

It was reason enough for EisnerAmper and Bloomberg to bring together leading decision makers on February 24 to discuss major issues impacting the commercial real estate industry this year and beyond.

The forum, held at Bloomberg’s 731 Lexington Avenue headquarters, featured Rechler, Clarion Partners managing director Drew Fung, CCRE co-CEO and co-founder Anthony Orso, and Lightstone chairman and CEO David Lichtenstein.

EisnerAmper tax partner and real estate services group chair Kenneth Weissenberg led a lively discussion on the volatility in the market, including impacts from banking regulations, instability in emerging markets, oil and commodity prices, monetary policies, and global terrorism.

RXR Realty CEO Scott Rechler, Clarion Partners' Drew Fung, CCRE's Anthony Orso, EisnerAmper's Kenneth Weissenberg and Lightstone chairman David Lichtenstein.
RXR Realty CEO Scott Rechler, Clarion Partners’ Drew Fung, CCRE’s Anthony Orso, EisnerAmper’s Kenneth Weissenberg and Lightstone chairman David Lichtenstein.

Given those impacts, he asked, what asset types and markets are holds, sells, or buys, and what are panelists’ strategies going forward?

Rechler, who focuses on New York, said everyone is taking a step back and looking for price discovery. People want to buy safe yield, global capital is still pouring into the U.S., and the flight to safety has preserved value on core assets in markets like New York.

Markets that might suffer are second-tier assets in second-tier locations that rely on CMBS and other financing.
Fung had just returned from Canada, which makes up 45% of overall non-U.S. buyers in New York, and he expects that interest to continue. Asia will still embark on a flight to quality and safety in the U.S., although capital flows from China may slow down. “At the end of the day, most of the high-quality markets in the U.S. — even the secondary cities — will experience and increase in institutional interest.”

Orso noted that if you follow the money, it’s in apartments. Ever since Mel Watt took over Fannie Mae and Freddie Mac in 2014, we’ve seen a steady increase in agency financing; in 2014, it was $60 billion; last year it was $90 billion; and this year could be $100 billion.

The weakest market is high-end condos in New York, said Lichtenstein. The backlog of home sales in the U.S. is six months, but New York condos selling for $25 million or more have a backlog of 40 months; $10 million and above, 30 months. “The 57th Street corridor is somewhere that you don’t necessarily want to be.”

Despite global and economic volatility, New York is holding its own. Rechler credited the boom to the 21st century economy.

“It’s a globally integrated, technologically driven, and idea-based economy,” he said. “What’s the No. 1 most important ingredient for a company to be successful? It’s talent, and NYC is a magnet for talent.”

Lichtenstein credited former Mayor Michael Bloomberg for adding a whole new dimension to the city when he spurred technology growth here.

Lightstone recently rented out an apartment in Long Island City to a Google employee who makes $2.2 million a year. “I had never seen a guy renting with that kind of paystub,” Lichtenstein recalled.

Overall, he noted, data job earning power is 2:1 over non-data, which will spin off into restaurant, theatre, clothing jobs, and more.

Orso argued that while the TAMI sector makes a lot of money, it’s the folks at the top taking in the lion’s share. “The younger folks can’t afford apartments in Manhattan, Brooklyn, or LIC anymore. Where do they live? You face a problem of those people going elsewhere.”

The key, Rechler replied, is to continue to offer affordability and lifestyle. RXR is focused on redeveloping and revitalizing areas like Yonkers, New Rochelle, Hempstead, and Glen Cove. Each of these locations have great transportation access and can provide a residential lifestyle for half the price of Brooklyn and LIC.

However, while there’s an opportunity to manufacture real estate and create value, the everyday markets and investors are nervous right now, Orso noted. “

That might change. I agree the economy may be doing better, and while this is a year of a new president, I’m not counting on whomever gets selected to solve the problems we have in the capital markets.”

And any model telling you when we’re headed for a downturn is malarkey, contended Lichtenstein. “It’s trying to figure out where an onside kick will land, who’s going to win the election, or who will be the top team in the NFL,” he argued. “They all don’t know what they’re talking about. It’s just not predictable. From China to Brazil, who can figure this out? There are a billion variables.”

“That’s why I say to regularly recalibrate and calibrate reality,” Rechler added.

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