US about real estate right now. It has been a good hedge against
inflation. Inflation is a problem at the same time.
Interest rates are going up at this end. We have some real problems with some
office occupancy. Right.
So you've got a lot of topics in there. First, if you think about what's
happened over the last year, we've had the fastest rise in interest rates and
in probably 20 plus years. And the impact on real estate is pretty
significant. Now, you break down different parts of
real estate because real estate is broad.
So on stabilized assets, buildings that people own, whether it's apartment
buildings or office buildings, in a way, inflation is good for those assets.
Right. Rents rise.
They go up. And if you did a good job managing your
assets, you might have fixed rate long term debt.
So cash flows increase. So in this in that bucket of real
estate, inflation is is a great hedge. Inflation is great for.
For real estate assets. If you're in the funds business and
many, many of your viewers are, whether their credit funds or equity funds.
This is a great time for that business. The banks, as you know, have stopped
lending or have certainly pulled back significantly.
And so the private credit markets are booming because where they were
competing with the banks in the past, they, in effect, could make bank type
loans at two times the rate. So that's a great opportunity for credit
funds, equity funds. We haven't yet seen real distress.
We might start seeing that in the next couple of months.
So I think the funds management business and real estate is going to be very
strong going into twenty three. The difficult part for real estate is,
is anything you want to do new? New development is difficult.
There's not a lot of financing. There's not a lot of construction loans.
Costs have gone up. So it makes it harder to build.
So it depends where you are in the real estate markets
as to what the impact is. The office sector, as you mentioned,
that's that's a whole topic unto itself. And I think really people that people
ask me all the time, tell me about the office market.
And really the office market is very bifurcated.
And I don't think there's one answer again.
What we have seen is a real dispersion in values between older buildings and
and brand new buildings. And it's not just new, it's new with the
right features, the right amenities that tenants are looking for today.
So we're seeing more and more corporations thinking about how do they
get people back to their office and thinking about using the physical space
as the attraction to bring people back. But truthfully, people don't want to go
back to old kind of quiet offices that are dark and have bad air circulation
and long waits in the elevators and no amenities.
So what corporations are doing is investing in their office space, not for
occupancy, but for talent attraction and retention.
And I think that's where you're really seeing the buildings and the new
buildings that are focused on this, that have the right amenities, that have the
right HBC circulation, that have hospitality type services, that have
great air and light and the right type of buildout out.
The buildout in office space is changing tremendously where we used to see kind
of the old Mad Max version of a build out with, you know, private offices on
the exterior wall and assistance offices or cubes inside.
That's really not the way office is built today.
We're seeing much more collaboration space teaming space, meeting space, food
service tables around food where people are using for gathering and working as
opposed to private offices. So this type of office of the future, we
think can be successful and is successful.
The data is there today for these new buildings.
So we compared brand new buildings across markets in the United States, not
just here in New York. And you look at new modern buildings
with the right features, the right amenities, and the demand for those
buildings is tremendous. And at the very same time, you can go a
couple blocks. If you take Hudson yards, for example,
we just opened last last week, actually, our first tenant moved in yesterday at
50 Hudson Yards. 50 Hudson Yards is a 3 million square
foot building. It cost us over four billion dollars to
build this building. And it's essentially 90 plus percent
leased at this point. We're getting the highest rents in New
York City in that building, over 200 dollars a foot in that building.
And because it is it has all those features and amenities, it is new.
It has all those things that we're talking about.
You can go three blocks away and find as much space as you want in be buildings
that's probably listed for sixty dollars and they can't lease it.
So I want to come back to the B and C in a moment, but let's stand A because even
with everything you say about the A, are people needing a little less a space.
I mean we had the Mets situation actually in yards where they gave back
250000 square feet. Are you seeing that more broadly with
people saying, yes, I really like a but I don't need as much of it.
So not really. So there's a couple of.
SITUATION, So Metta, actually what Metta did is when we made the deal with them,
there are. And one of the anchor tenants, along
with BlackRock in 50 Hudson yards, when we made the deal for them to move into
50 Hudson yards. That was three plus years ago, four
years ago. And they needed space immediately.
So they took some swing space in 30 with the intent to move into 50.
So that's the space that they are not staying in today.
Everyone thinks there was this big announcement, but that was that was the
plan. So they are moving the employees that
they haven't in 30 Hudson yards, which was which were in swing space into 50.
That answer your question. There are companies like Metta today
that are pulling back on office space in general, but that has nothing to do with
their build out of the space that's in the tech sector is pulling back.
They're cutting costs that's based on their business, that's based on kind of
what's happening in the broader economy. If you if you ask Metta about their
office space per employee in their new types of build outs, and so they have
actually stepped back, rethought about the office space of the future.
And it's all the things that I talked about, much fewer private offices.
Much more gathering and meeting spaces. And when you when you take this seems
when you take the same number of employees and compared the old build out
and the new build out, the mix of public space and private space is completely
different. But the total square footage per
employee is the same. Now, if they if they're pulling back
because of general economic issues, it's not a real estate issue.
An office space issue. Let's come back to the B and C
buildings, as we call them. I've read about so-called zombie office
buildings now in New York City. They're really empty.
How bad a problem is that? What are we going to see with the
fallout? And by the way, does that also create
some opportunities and bargains to pick things up cheap?
Right. So I think it is a pretty significant
issue for New York City. You've had some companies leave New
York. You've had some companies suffer through
the economic downturn and Covid and supply chain and all the things that
have happened and have vacated space in those big buildings.
The problem is there's not there's not a lot of tenants that want to release
those spaces. So we're seeing a vacancy in the B
buildings increased significantly. We're seeing the vacancy in the not just
A buildings, but in new product, a buildings, which is I'll create a new
segment. So you'd be a and new A in new A is
virtually no vacancy. So there could be opportunity.
I don't think the opportunities to buy those buildings because you can buy them
cheap. I think there's a potential opportunity
for a conversion. It's a very difficult process.
Everyone likes to talk about it. But you often these buildings don't go
from 100 percent occupied to zero and then you can convert.
So it'll go from 100 to 80 to 70. You still have lots of tenants in there.
It's hard to convert. You've got zoning issues, cost issues
and tenants. So I don't think you're going to see a
lot of it. People are talking about it.
I don't think you're going to see a lot of actually happen.