Money for Real Estate | The Stoler Report-New York's Business Report
♪ [Theme Music] ♪ ♪ [Theme Music] ♪ >>> Michael: Oh, crystal ball, tell me, is there money for real estate? Are the banks lending? Are the funds lending? Are the governmental agencies? I don't know the answer. So today I've assembled this group of leading bankers to provide their insight on money for real estate. My guests include Andrea Wagonseller, who is the senior vice president commercial real estate at M & T bank. JJ Weinstein, also known as Jacob Weinstein, who's the senior vice president for commercial real estate and bridge lending at Customers Bank. And last but not least, Brad Dubeck, or Bradley, who is the market executive for New York and New Jersey at the gorilla Bank of America. So, gorilla, you're the big, you're the 800 pound gorilla. You're out there. The bank is out
there. What are you doing today? >>> Brad: This has probably been one of the most liquid real estate financing and investment markets that we've seen in the last decade. So, things are changing a little bit with rising rates. There's still a lot of folks and a lot of liquidity chasing deals and chasing financing. What I would say Mike is that our business is really built very intentionally around the right clients. And it's designed to
operate regardless of the market cycle. So, we want to be there importantly to support our client base regardless of where the market's headed. You know, I think it requires us to be better underwriters and have more conviction about the opportunities we put forward when the conditions become a little less certain.
>>> Michael: When, when did this change? Okay? Is it -- many people are surprised when I, when we speak and they say they had their best year in 2021. >>> Brad: Well, there was certainly a lot of pent up demand coming out of the pandemic. And the reopening trade was certainly something that was very strong with our clients and led to a lot of new business in the real estate financing space. Heading into 22, at least to me is where we started to see the market become a little less certain. I think a lot of folks did a lot of transactions. They had seen,
you know, terrific growth in their portfolios, and whether or not they intentionally decided to take a pause or maybe interest rates started to rise for the first time at the same time, that seemed to mark a little bit of a slow down. >>> Michael: So, what happens with the interest rates? You know, they were great and people were locking in these five year deals, some under 3%. Okay? You know, it was really a different time. Now the rates are up. The 10-year T is over three. People wanna lock in rates. And that's a question
of, are you locking in rates of commitment? Are you locking in rates of closing? What are you seeing? >>> Andrea: So, it's interesting in the market right now. It's been years since we had a fundamental shift in rising rate environment. And, and I would say that many lenders actually might not remember being in that type of environment. And so I think that when you look at
conservative underwriting, you know, maybe, you know, like our institutions, we don't need to change a lot of, of the way that we're looking at deals. But I certainly think it, it changes the picture for our customers and, and the way that they're thinking about leverage and, and what makes a smart acquisition move and, and the type of leverage that they want to use. So it is bringing about some separation and disparity in the market. Whereas I think when we started this year, you know, we were all chasing the same deals. You know, debt funds were going after multifamily and, and places where you thought you had a traditional, you know, home run for a particular type of lending, those lines are much more blurred now. >>> Michael: Rate at commitment of letter, rate at the closing -- what are you doing? >>> Jacob: So, I'll speak to floating right deals. You know,
they always have been on a, from a bridge standpoint or construction lending standpoint, subject to, you know, floating until the day of closing and then floating after closing. But I will say there is a little bit of concern with negative leverage, you know, becoming a, a factor where cap rates haven't moved that much, but interest rates have moved. And so now you have people potentially closing on assets where the cost of financing is upside down relative to the, to the cap rate. And so, you wonder sometimes how some of
these acquisitions are gonna bear, you know, make money at the end of the day. >>> Michael: You were saying we, before we began the taping that it's, it may be smart to not invest in real estate, if you're an investor, because you're getting over 3% on a 10 year, and you don't take a risk or reward on that. >>> Brad: Well, I think Andrea said it. Rates have been low
for so long that many investors and many bankers haven't seen any other environment. So, when you see the risk free rate move up as high as it has as quickly as it has with an expectation it may go higher, you have to look at the math, taking the risk asset and the non-risk asset and deciding whether or not you're being paid sufficiently for taking risk and doing all the hard work that our clients typically put in in value add real estate. >>> Michael: So, here's my question. What, what are the assets that you like? If you -- what are the assets that you limit your risk? >>> Andrea: Well, I think of course, as most other bankers would say, we like multifamily. You can reprice easily in, in, in inflation driven environment, in rising rates, you can, you can react quickly.
>>> Michael: You can reprice quickly in certain markets. You can't reprice in New York City, especially with the 421a's and the, the rent regulations are having an affect. >>> Jacob: Yes. Although I think we averted a bit of a crisis with good cause eviction not making its way through the, the system. That would've really hurt the ability to, to raise rents and justify those low cap rates that people are paying today. So, I would say yes, on the rent stabilization,
historically rent stabilized product, but you know, for market rate assets, that's really, I think what's driving the continuous, you know, kinda low cap environment is people just baking in a lot of rank growth into their performance, which is, you know, it's hard to say it's market by market, whether or not there's there's room to, to run on that play. >>> Michael: So, you're like the new kid on the block -- not in banking, but you're the new kid in the block with regard to the bank. Okay? The bank is maybe eight, nine years of age and they're evolving, they're growing, you know, they're over $20 billion in assets and all of this. So, what are you
looking to do? What is, what is your role and what type of loans do you like in this environment? >>> Jacob: It's, it's sponsorship oriented. Banks always should be, in my opinion, and always will be client first, sponsor first, relationship first. So, what we're looking to do on the, the new bridge lending platform we have is sort of your 65% LTC, LTV taking some leaning into a business plan that a good sponsor is executing. Taking the NOI from here to, to up here. And at, at its core, that's really, that's really what it is.
>>> Michael: Big question. What's a good sponsor? And, and, and I, I pose this as a really interesting point. You know, there are some very young people who have gone into the business. They've worked for X, Y, Z developer. They've been with somebody, you know, let's say they went with Stellar Management, they work with Jeff Levine, they work for Related and they wanted to go out on their own. They don't have a track record. They literally don't have a track record personally, they have a track record working for X, Y, Z, over there. How do you take and how do you get to be accepted
to do banking with Bank of America, M & T Bank and Customers? >>> Brad: Look, I think Mike, you have to be able to demonstrate some record of success, whether it's with the firm that you worked with, or as an individual with the transactions that you acquired and brought the business plan to success. We look at in terms of sponsorship being defined as not only those who have a demonstrated track record of success, but they have the character, they have access to capital, and they're really thoughtful about these business plans. >>> Michael: 4 C's of credit that -- >>> Brad: 4 C's of credit. It doesn't, it does never get old. >>> Michael: All of you have been relationship, because he was also on M & T Alumni -- >>> Andrea: [chuckles] Yes, absolutely.
>>> Michael: One time in -- >>> Andrea: It's a family reunion. >>> Michael: It's a family reunion. But what happens is, they have made investments over the year, over the years, and they've stayed with people who, who are, who are small, who are huge today. Okay? How do you look at somebody new?
>>> Andrea: In addition to what Brad mentioned -- I think those are really important points. I think that something that's coming up a lot in our environment right now is how do they behave in these different market cycles? You know, what does their resourcefulness look like as a developer in the capital that they're able to raise or how do they treat their banking relationships more importantly? What does happen when something goes sideways on an asset? Because we -- even the best of the developers will have those situations. We're talking a lot about how are they going to treat the bank, should that happen in the future? So that's another way -- >>> Michael: I think, I think a great example of that was 2008. When 2008 came along, because the banks were more lenient in their underwriting and everything else, a number of people on my show and during my seminars would say, look, even the best have to give back properties. It's the way they
give back the property. It's the way they work with us. Okay? That's what, that, the character of the credits of the four Cs is the important point. It was a, it was a bad loan. If something happened, it wasn't done intentionally. Now, if you're fighting it to the end, then you, then you have to remember in the future I'm not gonna be there. You know, and I think that's the situation. Let's get to the topic of every -- as you said, everybody loves multifamily. And everybody
loves industrial. What, what are the banks cautious? What don't you want to do? Because prior to the show, we were talking about note on note financing, which you were really not into. M & T does it on a limit, limited basis on relationships over there. Customers, two years ago decided when they had Sam and Phil come to the bank, they really wanted to focus on note on note. So, explain to my
audience what note on note, and then we'll hear from the other people why they don't feel less comfortable on that. >>> Jacob: At the end of the day, it's sort of financing a loan and it's, it's single asset, right? So, you're not doing a, a warehouse line or repo line against a number of loans. It's focusing on that one business plan at the property level, that one fund, usually that is your underlying borrower, right? And then the -- >>> Michael: And how much money on that loan? What, what, what do you, what percentage are you lending to that lending source? >>> Jacob: Right, so that, that I think is, is important because it, while the whole debt stack might be higher leverage than we might do on a -- that I might do on a whole loan basis, at the end of the day, the note on note basis, at, you know, X percent of a 75% LTV loan is, is lower, and gives us comfort that ultimately our basis is very well insulated. >>> Michael: And what about your pricing? What are you getting on the pricing? >>> Jacob: So, it, it varies with business plan widely. >>> Michael: How low could it be? How high could it be, you know? >>> Jacob: You know, I mean, I'm brand new to the bank, so I've only seen a couple transactions go through the pipeline. But it's, it's also changing on a daily basis
with, with repo line, you know, spreads, widening and, and CLO, spreads, wide-- pricing widening. So, it, you know, on a predevelopment loan, it's wildly different than a, you know, a multi-family asset that's partially leased and it's just finishing off a business plan. So, it's, it's hard to say kind of where pricing is exactly, but it's, it's lower than the funds for sure, as it should be by a substantial margin. >>> Michael: Mm. Andrea? >>> Andrea: So, M & T has always looked at these on a sponsor by sponsor basis. And, and for us, it has traditionally looked more like a private banking type facility. We are looking now at some more institutional type
lending and how we might explore some of the capabilities of People's United, who were working on integrating at the moment, and to see if that brings about any new capabilities. But I would say for us being a type of private banking facility, as we've, as we've traditionally looked at it, we're highly reliant on guarantee and, and structure. >>> Michael: So, you're structuring is totally different.
>>> Andrea: Sure. >>> Michael: And, Bank of America? >>> Brad: Look, I think it's fair to say, we don't, we don't want to exclude any good opportunity to support our clients or any asset type or any, you know, specific way of lending. We don't do a lot of note on note, and we look at assets and financing opportunities based on the strength of the business plan and the sponsor. And that's really the, the, the best way that we've been able to be successful, you know, lending to our clients.
>>> Michael: The C and D office market, people -- I, I did a show in Connecticut. I had a large office owner who basically said I got space and when the leases come up, these people aren't gonna renew for the same amount of space because people aren't working five days a week in the office, they're working in different situation. So how do you look at the office market in, in the metro area? Because you have New York and New Jersey. You're in the same market region, and so are you. What's your thoughts about the C and D?
>>> Brad: Mm-hmm >>> Michael: And then I want to talk about the A and B also. >>> Brad: I think it's important not to be too broad in sort of a view of an asset type, you know, it's easy to, to see that there's more risk in office than other asset types at the moment. And it's clear that there has been a flight to quality and more differentiated, better amenitized assets that are well located are doing better than the ones that aren't. But the story hasn't been fully written either about the, the how's pandemic, you know, office work balance. So, you know, we look at each transaction on a case by case basis. And there are transactions that we will
support in the office space based on the unique criteria that and the unique business plans that we see. >>> Andrea: I think the unique opportunities are where you might have the opportunity to bring a class B or class C building up to a class A building. >>> Michael: In, in a similar manner, okay? What's your thoughts about taking that class C or D building and converting it to residential, or a hotel? >>> Jacob: I haven't, I haven't seen a, a deal like that yet. I haven't thought fully through that, but -- >>> Michael: Let me put it to you this way. I, I don't wanna be your credit committee, but let let's look at it this way. When the building is a office building, and there's the tape measure rule, the 100 feet rents for 130 feet at a certain level. When it becomes a residential property, that 100
feet becomes 80 feet, because now you have to take away space for the elevators and the other effect. It's a big difference on the asset. So, you know, you have to take that into consideration. You, you also have to take into consideration
zoning, updating the, the amenities in the property. It's, it's a, it's a big deal. It's not that easy. And you really can't build everything as a shelter, which is another subject. Speaking of shelters and what's your thoughts about shelters and student housing? >>> Brad: As far as I know, we're not involved in the shelter space at all. Student housing, we have some activity
there and can be a great opportunity depending on the, again, the business plan, the location and the sponsorship. >>> Jacob: Not against it, just, you know, with a new platform, probably focusing on the, the core food groups a little bit more. >>> Michael: Okay. So, we let's, let's take the other core food group. Let's take the one which people would say,
hospitality. How do you look at that? I mean, I have a mixed emotion on hospitality. What's your thoughts? >>> Jacob: Well, I would turn to the, the bankers that have dedicated hospitality groups. We don't do very much of it at
Customers. Some, but not, not a, a huge amount. >>> Michael: Prior to the show, I was talking to Brad about this topic. And Brad specifically said he likes limited-service hotels. >>> Brad: Yeah, we like limited service. I personally like it because, you know, there's an aspect to hospitality that's an operating business, and there's an aspect that feels like real estate. You know, you rent the rooms every night, every
morning you have zero vacancy, you rent 'em up again. It's easier to underwrite room rate and room revenue than it is ancillary revenue. So, there's a lot of very successful deals happening across the hotel spectrum. And again, I wouldn't exclude full-service hotels. But I think what's happened through the pandemic, it's been obvious that the full-service hotels that were more dependent on ancillary revenue from meeting space and from food and beverage are the ones that have been the slowest to recover. >>> Michael: Andy? >>> Andrea: M & T has traditionally done a lot of hotel lending. We do have a specialty group that, that runs
that business. So, I can't pretend to be an expert. >>> Michael: I know it well. >>> Andrea: Yes, I'm sure. You know, it, it seems like it
certainly took a hit during COVID. We're certainly, you know, working with our sponsors to work on those assets. I think if a bank was interested in, in growing that part of their business, it's a good opportunity, because sometimes for regulatory pressures, there's a limit to what we can do for sponsors. And, and, and I do think there's some great opportunities and assets that are doing well.
>>> Michael: And, and I, I think that in the same manners I brought up before, 2008, the people, you know, we know that the hospitality industry got hurt. But it's a question of how these people reacted and handled the business plan and made a deal with their banks to defer interest, something like that. So, let's go to the asset that people when you -- when I bring it up, people will shutter. Retail. >>> Jacob: I mean, retail is so situational. And there are retail corridors and retail assets that have tremendous reason to exist. And you saw collections really generally maintain during the pandemic and were bounce back very quickly and have the sort of income demographics around them that will always make that retail center viable. You know,
I was reading about New York City having, you know, kind of rent, sort of a bottomed out. And there seems to be a lot more activity. Some, even some bidding wars going on on some, some, some, you know, New York City or Manhattan really retail assets. So, I don't think we can paint it with a wide brush
and say that retail is -- >>> Michael: I, I think you bring out perfectly, because you look at retail in a different manner. I would lend on retail up in the Bronx on Bruckner Boulevard any, you know, every day. I go into Queens and do the same thing, in Astoria. Neighborhood, places are continuing to do well. Okay? The bagel store, the pizza parlor. Okay? The local pharmacy. All of this over there are doing well. You
can't -- as JJ said, you, you really can't paint that brush, that retail has a stigma on it. Okay? Because it isn't there. I mean, and then you look at companies like Urban Edge, which is the spinoff from the Vornado, they're doing well. And what they're also doing is, they're looking at retail in a different manner. Okay? They're saying, we'll change the type of occupancy. Because if you look today, the medical centers, they're all opening up in retail. All, all of the facility -- a significant number of that, okay? So retail, I think is asset by asset and also by sponsor. What's the
bank's involvement with, especially since you have New Jersey, where you have a significant number of retail. >>> Brad: Mm-hmm. Well, like I said before, there's really no bad asset class and retail continues to evolve. You know, there was a transition happening in retail before the pandemic and it's changed course a little bit. But we're seeing a lot of retail very strongly come back. We're
seeing people out shopping again. And that's creating opportunities to, to buy assets and finance them and execute business plans. So, for the right location and in the right, in the right markets, it can be a great investment.
>>> Andrea: I agree. I think we've seen really positive results from all the neighborhood retails and those are the deals maybe that we've done in the past couple of years. I think we also are thinking very highly of power center type retails, grocery anchored, where you have some nice credit tenants, and you can build around those. They're, they're highly successful right now. And, and the bank has an appetite to look at those. >>> Michael: What about, what about conversions of office buildings to residential? I'm talking in more in the suburbs.
I'm not talking New York City. Because I know RXR has done that. A number of people have done that. Especially in New Jersey and the -- and other sections. >>> Brad: You know, one thing is we should never underestimate to the creativity of the folks in the real estate equity business. And, you know, finding the opportunity to take the hotels that close permanently in New York or old office space and reimagine it into something that's relevant and can make money. And I think we're gonna see more of that
both in New York City and around the country. And, you know, to the extent, it makes sense and the it's compelling. There's gonna be debt capital that follows that. >>> Michael: What about the, the WeWork type of business, the office sharing? What's your thoughts about that with regard to the asset class and also with regard to the percentage that they may occupy within an office building? >>> Jacob: So, I will say, I think I was part of the cohort of bankers that was probably pessimistic about WeWork's long term viability [chuckles] when it was, you know, growing. And I was wrong. I mean, they seemed to have a sustainable
business model and -- >>> Michael: They still -- money. >>> Jacob: But you know, it's not like demand completely dried up and not all this -- >>> Michael: Oh, demand is, has been there. Okay? I think that's the situation. But there were buildings, you know, that were dependent completely on the WeWork or the other company. Now what's interesting is you have companies like Industrious, who is, is now owned 30% maybe by CBRE. Knotel, which is owned by the Newmark Group. So, you've seen
a lot of the, the shift in ownership over there. But when you're underwriting an office building today, you know, which could be B or C or even an A building, how do you look when you hear it's a WeWork, or a similar company like that, a Regus or something like that? Andy? >>> Andrea: I think we were always hesitant to see too much concentration of any given tenant in an office building. And, and so we always had some skepticism, you know, about whether their business plan I agree that they've, they've had several cases of being very successful. So, I think that we continue to value it, or, or evaluate it on a total concentration level. >>> Brad: Yeah, I would agree with what Andy said. It's also clear that tenants are demanding sort of a more curated experience and more amenities, whether that's in brand new buildings. But for older buildings where an
Industrious or another provider can offer some of the amenities, some of the, the meeting space and some of what makes it attractive to be in the office to the tenants in the building, that, that definitely seems to be a trend. >>> Jacob: I com-- I completely agree it, you know, it's all about concentration and that would be true of any tenant. >>> Michael: Right. So, looking at my crystal apples over there, they are relatively bright based on sponsor, based on asset class, and based on condition. Hopefully, you know, oil prices will go down. Hopefully the inflation will
re-- also be reduced, and things will become brighter. And hopefully, you know, we, we won't have the 27th variant of the, of the COVID over there and so on. But I'd like to thank Andy, JJ and Brad, and I'll see you next week. ♪ [Theme Music] ♪