Winning in Today’s CRE Market with Scott Rechler, CEO and Chairman of RXR
Willy Walker: Good afternoon. Welcome to another Walker Webcast. It is my great pleasure to have my friend and extremely prominent voice in commercial real estate, Scott Rechler, join me this morning. Scott, let me do a quick intro, and then you and I can dive into our discussion. Scott Rechler, CEO and chairman of RXR Realty, a prominent real estate investment and development firm based in New York City. Scott began his career at Rex and Associates, a family company to public in 1995, where he served as CEO and chairman. In 2007, after the sale of RXR to SL Green for over $6 billion, RXR Realty was freshly founded. RXR owns 107 properties, which include over 30.2 million square feet of office and commercial space, 9,600 multifamily units, and an AUM of over $17 billion. Scott served as vice chairman of the Port Authority of New York and New Jersey in 2011, overseeing significant projects such as the redevelopment of LaGuardia Airport, which was a huge success, and the World Trade Center. He also served as chairman of the Regional Planning Association from 2017 to 2023 and was a member of the Metropolitan Transportation Authority Board. In 2021, Scott joined the board of directors of the Federal Reserve Bank of New York. In July of last year, Scott and his wife Debbie made a major donation to Northwell Health Feinstein Institute for Medical Research to advance the use of artificial intelligence in addressing health disparities and improving medical care. Rechler also serves on the boards of the 911 Memorial and Museum, the Drum Major Institute, and the Feinstein Institute for Medical Research. Scott is a graduate of Clark University and NYU. Scott, first of all, hi. Nice to see you.
Scott Rechler: Good to be here. Thank you for having me.
Willy Walker: There are a lot of people I have on the webcast who know a lot about various parts of our world. You know more than most. Every time I go on to CNBC, and you go on a lot, I'm obviously brought on to talk about multifamily, but invariably, they go straight to office, and they literally go to the New York office. And I say to my friend David Faber, “Hey, David, let's focus on something I know a lot about. I don't know anything about New York office,” but when you go on, you know everything about New York office. I think that there's a lot behind your knowledge of the New York office and what RXR is doing in New York, and if you will, the changing times we live in today. Scott, let's start with this. I went back and, as you can imagine, watched a lot of your public statements, going on CNBC, and what have you. We're clearly in a distinct market today compared to when we were at the beginning of the great tightening. I remember you and me sitting in a real estate roundtable meeting with members of Congress and senators, in the eye of the storm, when rates had gone up significantly, vacancy rates were up, and nobody was going back to the office. A lot of people, you included, said, “Something needs to be done here.” We're clearly in a different market today. Give me your general take on the overall commercial real estate market, and then we'll dive more specifically into New York office.
Scott Rechler: That's great. Thanks for having me. I've watched your webinar; it's great to see the myriad of guests and hear all the different insights and questions that you bring out to people. It's great. I remember that meeting and that period, and I was thinking about that. I keep a journal that I write in every morning, and before I write the day's entry, I read last year's same-day entries. Then, sometimes, I go back a couple of years. It's always fascinated me to get perspective of how you felt a year ago, how you felt two years ago, how the climate around you changed, and how some of the things that we expected to happen happened and some things we expected to happen didn't happen, and try to understand why that was the case. And I think going back to 2023, when we were sitting in that real estate roundtable meeting, I had just met with one of the senior people at Treasury. When I walked away, I walked away really dismayed by their lack of understanding of the scope of the challenge that we might have with this wall of maturity of commercial real estate debt that was coming due, much of which was financed at rates that were near 0% or 2%, artificially low rates, that now we're in this new interest rate regime. Even with all good investments and great execution, just the new interest rate regime would make these loans not refinance at all without injection of equity and what those challenges would be. As an industry, I think we did a good job of communicating the severity of this to policymakers. I think some of the actions that were taken by the Federal Reserve in terms of the regulatory side to encourage banks to work with borrowers that were well-intentioned during that moment in time that we're talking about, and also, the Federal Reserve used what I call their FOMC, their Federal Open Mouth Committee, where they use their rhetoric to be able to keep financial markets loose, stock market high, bond spreads tight, a sense of enthusiasm, and wealth creation that helped keep the storm off the shore and gave the industry, the banks, the chance to prepare for what was happening. People were able to establish reserves. Borrowers and sponsors were able to get to the point of acceptance and realize where values are today versus where they used to be and coalesce around that. Capital formation took place to be able to start being in a position to fill the gaps and help us re-equitize as an industry. I think that really is what played out in 2024; we were able to prevent that storm from coming to shore. I'm a believer that rates are still higher for longer and are going to stay that way; it will be a more manageable process, albeit a long process, to re-equitize our industry. That's something that I think we would see coming into it. At the end of last year, we saw transaction activity picking up, and I think we'll see more in ‘25. But before we jump into that, I'd be remiss not to know we're 30 days into the Trump administration. I think when the president was elected, there was this relief rally of people thinking we're going to have a business-friendly president. We've been overwhelmed. There is more regulatory-driven bureaucracy that's been a wet blanket on business generally. There was a sense of animal spirits that were taking hold. And I think that drove a lot of what was happening at the end of ‘24. As people were thinking about their business plans in ‘25, there was this tailwind that was taking us. I think the moment we're in right now is a little bit of turbulence and headwind as people are trying to get the rules of engagement because so much has happened. There's been this: his first 100 hours felt like 100 days. Here we are in 30 days. We're trying to grab it. Even if the policies or the long-term strategies make sense in terms of reducing costs, streamlining government, and resetting our trade agreements, that is the process that we're going through. I think it creates a little bit of a pause for decision-makers because they don't know the rules of the game. They don't know if federal funding that was supposed to be there for their institutions is going to be there. They don't know if tariffs are going to create inflation, which is going to keep interest rates higher, or create more of a spike. They don't know about what immigration is going to be in terms of having labor for construction. There's a lot of unknowns that we need to work our way through. I think part of this is by design to flood the zone, as they say, and create a moment to really generate change. But I think there'll be a little bit more weight than I would have expected at the beginning of the year as we navigate this intense moment of change.
Willy Walker: As you think about the bets you're making in RXR, which are not insignificant, you also know a number of the major players inside of the Trump administration personally and professionally. Do you have a long-term positive outlook on it? When I had Mohamed El-Erian on the webcast back in January, he said that the issue with it was that it’s a 100-yard dash over four years. The first part of it could have a lot of puts and takes that will make the first part very tumultuous. Long term, the outlook is probably net positive, but there could be a lot of times when you're thinking, is this going to be net positive or net negative? As you're sitting here 30 days in, are you still net positive on the long-term outlook as it relates to what's going to happen under the Trump administration?
Scott Rechler: Let me say I'm positive about the prospects for the United States of America because our country is like no other country in the world in terms of how well it's positioned. When I travel around, 90% of our investors are non-U.S. sovereigns and pensions. I speak to them, and their view is if they were going to invest in any one country, it would be the United States and maybe their home country. But everything else doesn't compare in terms of the secular and structural tailwinds. I think about the U.S. coming out of COVID-19 and now into this period as almost like a post-World War II moment for us, where there's been so much innovation and an acceleration of innovation that now can be harvested. We're seeing AI and we're seeing science and research. It can transform the way we live, work, and do things at a much faster pace than before. On top of that, there’s the amount of investment that's happening in deglobalization with people bringing things closer to home in supply chains. Decarbonization is now even a little bit of re-carbonization. The biggest thing is this whole digitalization and everything that goes with that, data centers, AI, etc., is going to create a significant amount of macro investment and macro GDP growth. I think that's going to give us above-trend growth. But we've got to get through these little humps. To answer your question, I'm long-term positive. I think you said it well. We have to get through this moment in time here to see how it plays out. Now, it doesn't come without risk, obviously, because when you're making so many dramatic moves. I think some of it is necessary. It's hard to change a bureaucracy in some of the challenges and layers of regulation that we have in the U.S. without making some bold moves. But sometimes, that can go to places that no one really anticipated. Long term, I'm very bullish on the U.S. investing with a mode of that long-term perspective and with a view that even if we take a little hiccup here or there, as we think over the next, five and ten years, the U.S. is going to be outperforming the rest of the world.
Willy Walker: You made your comment about the Federal Open Mouth Committee. And when I first heard you say that, I thought you were throwing a dart at Chairman Powell and the others who were on the FOMC. But actually, as I hear you explain, you actually think that they did a pretty good job in the sense of using their rhetoric, using their speeches to basically foreshadow what they were going to do from a policy standpoint that allowed for the markets to stay relatively calm and not as volatile as one would think after the blow-up of SBB and other things. Am I interpreting your comment correctly?
Scott Rechler: Yeah, absolutely. It's meant as a compliment in the context that it enabled them to keep loose financial conditions without actually reducing the short-term rates. That positions them to be where they are today. They have optionality to evaluate what's happening, what are these policy changes, what's the implications of those policy changes, and then reduce rates or not reduce rates with the benefit of that knowledge. Last year, they did a very aggressive rate reduction to loosen the markets. They would have been where they are today. They may feel they need to raise rates today. They're in a spot that gives them very good optionality.
Willy Walker: I heard you, pre-the September cut, where you were asked whether it matters whether there's this 25 or 50 basis point cut, and you basically said, “Doesn't matter.” Given that the ten-year moved up 90 basis points post-cut announcement of 50 basis points, do you think that if they've done 25 at that time, and obviously 20/20 hindsight is 20/20 vision, we can all look back and sort of say, but just curious because you seem to be very indifferent about whether it was 25 or 50; it really wouldn't make that much difference. Do you think that the way that short-term rates came down and the long bond surge would have been any different had they done 25 on that first cut rather than 50?
Scott Rechler: No, I don't think so. I think I said that, as you said, in September. Here we are today. I think it looks more like having done 50 because it got to a full point. And now again, they're in a position where they can really be patient, where if they did 25/25, maybe 25, would they be a little bit shallow? But I think that was a moment of an inflection point. That was really an inflection point to say we're done raising, we're starting to come down. This is why I'm saying, “It doesn't really matter if it's 50 or 25.” I think what the bond market is saying is that when you look at the macro data, the economy is extremely strong and there are segments of the economy that are driving that aren't interest-rate-sensitive. So, this transmission that the Federal Reserve usually has by using monetary policy is not as effective as it historically has been. Because the big companies could have raised bonds at a point when rates were low. Did that and don't have maturities coming up, or the big tech companies that are investing are cash rich, and they're investing with their cash on their balance sheet. The consumer that has been strong, has locked in their rates. They're in their single-family homes, an average rate of 4%. This transmission isn't as powerful. Frankly, it's also not as bright. It's hitting different segments and sectors of the economy differently. One of the negative byproducts is that it's creating more of a pronounced K-shaped economy, where the lower segment of the economy people have to borrow on their credit cards, people that are renters versus homeowners, smaller businesses that don't have access to long-term bonds and debt markets. They're suffering, and they're more challenged in this environment. But there's no easy answer to this because they'll also be challenged with higher inflation that will reduce their power and how much they can get with every dollar. This unique circumstance, even the housing market, where we are today, where rates of housing are coming down. I saw the status this morning that new permit filings for multifamily are down 50% off their peak. Same thing you're seeing in single-family homes. We went into this cycle with the housing shortage. We're going to come out of the cycle with even a greater housing shortage than we went into the cycle with.
Willy Walker: That's a super big concern. I know you're developing here in Denver and I have dinner tonight with the mayor of Denver. I was looking at permits for multifamily. You want to talk about a cliff. Denver was one of the hottest markets in the country in 2022. Today, there's no new building going on here. One of the things I'm going to try and convey to the mayor is the fact that we need to do something to try and attract investment in multifamily or the housing crisis as it relates to home affordability is going to continue to skyrocket. As I looked at where you all are, Scott, most people think about RXR as a big Manhattan office owner. But you've been doing a lot on the multifamily side outside of New York, so listeners can understand where you all are, if you will, placing your bets today. You're doing a lot in Manhattan as far as investing in the office, repositioning the office, and recapitalizing the office. Then you're also doing a lot of development across the country. You're in Dallas, Denver, Phoenix, Raleigh, and Tampa, and you're moving into Atlanta, Boston, and Charlotte. Is all of that expansion out of New York residential or are you also doing commercial in those markets?
Scott Rechler: We have started in those markets on the residential side, the multifamily side, and the BTR side. Then what we've done is we've expanded to credit. We have a big credit business that, again, is primarily focused on multifamily gap financing, construction financing, platform, strategic type, and restructuring type stuff across all those markets. We've been doing that as well. We started this in 2019 when we began to think about expanding. We said, “What do we understand from our time in New York?” We had built a big multifamily business in New York. What we saw was driving New York as an urban ecosystem, is it created this magnet for talent. The talent came, and as talent came, that attracted more companies, and more companies came. We attracted more talent. It created a quality of life that was compelling for people to live here, even though the cost of living may have been higher than in other parts of the country. In 2018, when Amazon was talking about HQ2, there were a lot of our clients that were talking about, “Okay, well, we want to be in New York, we want to be in San Francisco. We also want to go more distributed to where that talent is.” We began what we called this “eds, meds, and well-led” strategy of going to markets, good education systems, and good healthcare systems that tend to be a proxy for where talent will migrate. Good leadership that's investing in quality of life, job training, and infrastructure affordability so that these would be places that people would want to live long term. That's the list that you rattled off, where we identify places that are compelling for us, as well as the New York metro up to Boston. We are as well in those markets. We're targeting there. We also do a lot of public-private partnerships. We're in New York, we're big master developers of downtowns. We're rebuilding Terminal Six at JFK Airport in Raleigh, North Carolina. In a place called Apex, we're doing an 1100-acre, $3 billion master development. It's a public-private partnership with the state. We've been able to actually transport some of that to those markets. I was pleasantly surprised by how smoothly we're able to transition because they're more complex than just buying multi. When you said we developed, we also buy multi. We've been more of a buyer lately than we have been of a developer on the multi-side.
Willy Walker: Talk about that as it relates to you seeing the opportunity to buy at cap rates that are more attractive than a build yield of 6%.
Scott Rechler: Where rates are, it's harder to pencil out ground-up construction today. There has been a wave of multifamily in terms of new developments, record levels, and new development that started in 2021 underwritten in this low interest rate environment. That's coming to a point where it's stabilizing or beginning the lease-up transition. Now, the math that was underwritten at that time is obviously different than it is today relative to interest reserves and inflation costs. They're out of balance in that context. Many of those developers and sponsors were hoping the short-term rates or the long-term rates would come down and they'd be able to refinance themselves out. And now they really haven't. We've been tracking the number of those developments in our core markets with very good developers, higher-end types, we call them more hospitality-driven multifamily products. As they're finishing, whether they even sometimes before they even start leasing, we will come in and buy them and take the lease-up risk or while they're going through their transition or when they're getting completed. They need to refinance, but they need a significant investment to be able to pay that down to actually get new financing today based on where the debt markets are. There's been a bid-ask a lot in ‘24 in terms of where the buyer is and where the seller has been. We started to see that come in, and again, we're willing to think longer term, particularly in these markets. We believe in migration continuing and that now we're going to get through this oversupply in ‘25 or ‘26. If you're holding for the longer term, we'll see that rent growth. We underwrite to be able to take advantage of those opportunities, again, selectively in the right markets, the right submarkets. We just bought, for example, in Paradise Valley, Arizona, and Scottsdale, Arizona, an old mall site that the developer spent years getting ready for a mixed-use redevelopment. We bought a 400-plus unit multifamily just right before it got completed. Whole Foods, parks, all that infrastructure in place in a place where there's really no multifamily. The home sales are $3 million each. We're looking for those unique things, and they're out there. That's the type of stuff that we've been actively pursuing.
Willy Walker: You talked about hospitality, like multifamily. I know this may be the same asset in Phoenix. But your Abbey downtown Phoenix asset actually has extended stay opportunities in it where it's fully furnished to people who can do extended stays. Talk about it. It seems that concept, quite honestly, Scott, was something that we used to see a lot of ten years ago, and I haven't seen a ton of it recently. Is that the same asset you're talking about? For a moment, as it relates to that product on extended stay rather than just normal multifamily?
Scott Rechler: It's a different Phoenix asset that's downtown. This is in Scottsdale. But they are similar in the sense that the way we think about this is its condominium-like quality finishing amenities and services for a renter. We target this renter by choice. If you look at our average, for example, our rent-to-income ratio, it's 18%. If you look at our average stay on things that have been in our portfolio for a while, people have been with us for over 30 months. This is not a transient. I'm renting to get the homeownership. I'm renting because I want to be here. That could be younger millennials who are renting for longer or empty nesters who have sold their homes and don't want to move into a new home and like this type of community that we build. One of the things that we have done is we've partnered with Korman out of Philadelphia, who has the brand AVE. They also have AKA Hotels for 50 years and have been doing furnished units in their multifamily buildings, and they have a corporate sales force. With them as a partner, we've expanded around the country. We build the breadth of that corporate sales force and our product where we're able to actually offer people who are relocating or working with local universities or hospitals that have people have to be there for periods of time, six months at a time. Where all you need to do is come in with their suitcase and toothbrush, all the furniture is in the apartment. We bring a level of hospitality and services not only to them but to every resident that's in the building. Because it's co-mingled. One part of the building is co-mingled within the building. We think it elevates the whole experience. For us, it generates higher returns on those apartments. Our average stay is over six months. It's not like one-month stays. It's like over six months a stay. As I said, these corporate clients are repeat customers. If you're at the Mayo Clinic and they're coming in to bring people there, the family has a place to stay where they're comfortable and treated well. Then we also use a whole bunch of data and digital tools to be able to provide a more customer-specific level of services, understanding which of our amenities are being used in each of the properties, adjusting to make sure that the ones that are being used are the ones that we put the most investment in and maybe repurposing other parts of the property. For our revenue management, we do sentiment analysis too. When they're talking to what we call our REO or residential experience officer, when they're chatting back and forth, we do use natural language processing to see on an anonymized basis whether we are getting more positive words or negative words. We don't get documents and reports; we get to see how people feel about being in the building. If something looks negative, our teams can immediately react to it and get ahead of it. We're positive about what's driving that. Can we replicate it? Then we even use it for predictive analytics to see if we think a resident will be renewing or not renewing. What drives that? When we have got that down, we're able to take the vacant units and push for higher rents in our vacant units, knowing that our expire residents are likely to stay. It's a whole ecosystem that we built and a whole operating system that we built. When we buy a building, we implement this operating system. About 20% to 25%, depending on where it is, of the units are going to that furnished unit program.
Willy Walker: Fascinating. Your stat on 18% rent to income clearly shows the capabilities of your team in identifying the product for the demographic, if you will. Because as you and I both know, that's a low number relative to most rental housing in America today, which is in the high 20s and low 30s. That's really quite something. Talk for a moment, Scott, about Project Kodak. I'm going to use this as a segue back to the New York office sector. Talk about what your team did on Project Kodak, because I think for those of us, there are plenty of people on this webcast today, Scott, who don't understand. But for you and me, who are old enough to remember, we used to put Kodak film in the back of our cameras. Talk about your team's Project Kodak and how that's driven the decisions you made in the New York office market.
Scott Rechler: I'll just take a step back. We try to be very strategic. Every year we spend like 60 days, the last 30 days of the year in the first 30 days of the year, writing a white paper. We've been doing it for almost 20 years. We try to drown out the noise of the market. We try to do that because there's so much noise, and it's so easy to get sucked into it and not see clearly with your intelligence, your insights, and you’re speaking to your customers, and clients. What's really driving this? From a macro perspective, what might impact your business or your clients, and a micro perspective. Then come out of that with a sort of clear conviction. I think it's one of the reasons we sold our company in January of ‘07. I think we were able to drown out some of that noise and believe in what we believed in, or we came back to the market in August of ‘09. Similarly, I think it was that. But it forces you to face reality. Part of this is you can't sugarcoat things. When we write this paper, we write it first. We don't share with anyone because we want to be able to be intellectually honest with ourselves. We don't want to have to think, “Well, an investor might read this, or an elected official might read this, and they may have picked up the wrong message.” One that we did two years ago was Project Kodak. There was this assessment as to whether there is going to be a future for the office building. Our view was that people were going to be returning to the workplace, particularly in cities like New York, but that not every office building was going to be the same. There were some buildings we recharacterized where we said we were going to be digital. For those who don't know, Kodak was a company that made cameras and film. They didn't move into the digital world fast enough because they were focusing on film. The point was that a film was becoming obsolete. You shouldn't be investing in film. You should be investing in digital. We broke our portfolio up between what assets we thought were digital and which ones we thought were film. We came up with a whole series of metrics to be objective because the first couple of rounds, our teams weren't objective. These are all their babies. We had to get a little bit more objective in terms of location, quality of the building amenities in the building, and then the neighborhood access to public transportation. What type of customers and clients are in our buildings, surrounding our building, etc? We had a whole slew of these situations, and then we went through that rating, and we did it independent of capital structure. Because our view was if it was digital, we would then seek to reset the capital structure to meet whatever the rents are today. But if it was a film, it had to be reset for different uses and different purposes. We were going to be disciplined about not putting any good money after bad. The other big thing for us was we didn't want to use that 18-month period from then to now to kick the can down the road. We want to aggressively invest in the buildings, reset the capital structures, and release the buildings that we think are digital for the future. The alternative one, we want to either cut them loose and not waste time on them or cut a deal that we can restructure them for another purpose along the way. It got high profile because after we did this, I had this meeting with the Financial Times reporter, and we were talking, and I said more than I should have said. Of course, it's like on the front page of the Financial Times that I’m saying that I’ll throw the keys back to the lender; we haven't done any of that in the mix with this. But it was really more to communicate to our stakeholders and our counterparties internally how we view the world. We weren't going to put good money after bad and subsequently expanded it. We basically did that for all the buildings in Manhattan that were in play and characterized them as digital or film and have been executing a plan around that. Over the last 18 months, we've invested $1.7 billion into digital assets in Manhattan, where we've reset the basis by buying debt at discounts or restructuring debts and creating B note structures, extending our terms five years, releasing the space in the current environment, and or coming out with a situation where we have a portfolio that's got good capitalization that reflects the post-COVID world and the type of places where tenants want to be. Of the 10,000,000 square feet that we've done, 4 million have been our assets, 6 million have been new that we went to investors that looked at offices on investable and bought their LP interests and have taken it through the same process itself. I would say the most acquisitive player in New York, particularly on the strategy over the last 18 months.
Willy Walker: Briefly, because I know you could spend a lot of time on both of them. But as I think about a film asset and a digital asset, film asset 61 Broadway, and Digital Asset 1211 Avenue of the Americas. Talk for a moment about why you're looking at a conversion on 61 Broad and why you're putting $300 million into 1211.
Scott Rechler: Church and the right examples. 61 Broad, which was filmed as an office building, didn't make sense. We're able to get the lenders to cut A note, B note structure which brings our basis down to about $200 a foot. And the building itself is a residential building, and particularly in New York, we have new legislation that you have a 90% abatement of taxes for 39 years if you convert an office building to a multifamily, which is a big amount. This is a 21,000-foot floor plate C-shaped floor plate with 21 apartments per floor. We build that to a 7% stabilized NOI yield, to me, right down the fairway for a conversion, but I wouldn't have done it had we not been able to get the banks to bring their basis down and our basis down to justify this.
Willy Walker: 200 a foot is what your basis is now. What's your conversion cost?
Scott Rechler: We should all be in for a sub. I want to see like $800,000 a unit.
Scott Rechler: Again, 7% NOI yield, great amenities. There's a Whole Foods across the street. It's got subway stations right there. Because of the tax abatement scenario, that was a bit of a game changer. Rates were even doing five Times Square with Apollo on that, too, because you're able to do it. If you look at Third Avenue buildings that were never really penciled out, Green's working on one, the Pfizer building. They're now going to be through conversion. I was meeting with the governor yesterday, and I said, “This is the kind of policy. You're the mayor of Denver. You've got to think outside the box.” This is what we were saying two years ago to the policymakers. This is going to be a period of 10 to 20 years of empty, obsolete buildings slowly atrophying the urban ecosystem and neighborhoods in New York. Or if you put the right policies in place in five, or ten years, we can create these dynamic 15-minute walkable, live-work cities. But if you don't, it's going to be a painful process. To their credit, they came up with something that's worthy that a number of us have taken advantage of.
Willy Walker: Scott, you've said it before we go to 1211. Because I want to hear about the digital strategy. I've heard you say that 80% of the Manhattan vacancy is in 30% of the actual buildings. Is there the ability to draw circles around where 80% of the vacancy sits in 30% of the buildings? You're very big in midtown, for instance. You all have made your bets in midtown. Is that midtown over downtown, or as it relates to generalities about where that vacancy is sitting? Is it more due to location, or is it more due to vintage in the sense of A, B, or C class office buildings in Manhattan today aren't getting a bid, whereas a class-A office building at Main in Main or one Vanderbilt to talk about an asset that the company was sold to has in Manhattan? Talk for a moment about that as it relates to what makes something film versus digital in Manhattan right now. Is it location, or is it just vintage?
Scott Rechler: I wouldn't use vintage because we have some 100-year-old buildings. The Empire State Building, I would still say is a digital building. I don't mean building all day long. I use age. Give a shout-out here. The reality is, it's not vintage. It's a combination of location, and the quality of the building, and some submarkets are worse than others. The lower Manhattan in particular. If you're not in the World Trade Center, the Brookfield, and the Financial Center, those buildings are leasing. But when you get outside of that, it's a very tough market. If you are leasing, rents are half of where they used to be. I'm not even sure there are enough tenants to lease that space. They're very challenged. In Midtown, you could have buildings in Times Square because of Times Square that aren't leasing. That's why I take five Times Square. It's harder to get there because of the activity there or the side streets in midtown. These old side street buildings aren't on the avenues. They're really challenged in Midtown. I think that's why you have to be very careful when people talk about the price per pound of an office building. This isn't like in ‘08 when people buy pools of loans, and they're like, “Wow, look, I'm getting this at this price per pound.” It may be that price per foot because that's all it's worth, or it's worth less than that. That's the challenge. It's much more a stock picker strategy than a big macro bet, even in New York, where there's a tremendous amount of leasing activity in New York. It's no different than, I think, this January just came out with like 3.6 million square feet of leasing, last January's 2.6 million square feet. I'm sure the last ten years averaged 2.6 million. We're already back in the 2000, ‘18, ‘19, and Midtown South on leasing levels in New York. That's the positive. That's why going back to 1211, we identify the buildings that have broken capital structures or institutional ownership that may be anxious about what's next and how to create value. But if you don't have that, tenants want to be there. Sixth Avenue, Rock Center, and tower tenants want to be there. Now, this is a situation where an institution that had 100% ownership, like a lot of institutions, last year looked at the office as an investable, and they get these appraisals that show that what was worth X is now worth 10% of X. By the way, to keep that 10%, you need to invest $500 million to really put the capital in and everything else that's going to get leased.
Willy Walker: Like 270 Park.
Scott Rechler: Right.
Willy Walker: You’re basically walking through the numbers on 270 Park but go ahead.
Scott Rechler: If you're an institution, do you really want to go to your investment committee and say, “Okay, we've lost 90% on paper, but they have the market because that's what the appraisal says.” And there are these $500 million. A lot of institutions don't want to deal with that. They want to clear their books of it. The bulk of the 6,000,000 square feet of space that we bought last year was those LP interests that didn't want to deal with it and were anxious about it. Or, in this case, more of an institutional investor who said, “Listen, I want to hedge my bet, and I want to better go to my board and say we'll find 51%.” What we're bringing in is an operating partner that has a clear view of New York that's going to put up their own money for 49% to validate that we're not putting good money after bad because they would not make this investment if they didn't think it was the right thing to do. That was the strategy. The issue here is the top of the building is a tenant, Ropes & Gray Law Firm, that we're moving up the block to 1285 Avenue Americas because our tenant, which was moving to 1345, both expanding, by the way, that was Paul, Weiss. This institution has now a large amount of space to be leased, a big capital project for the anchor tenant, which is Fox and News Corp, which has a 17-year lease, a mortgage that's coming due. A lot of issues that can sound scary, but I think our coming in gave them confidence to want to move forward and be able to go to their board to do that.
Willy Walker: You're a lot in there. Your comment about leasing. I was pulling together some notes for this. I noted that CBRE reported a 19% increase in 2024 in their global leasing activity. The U.S. was 24%, and in the U.S. office, it was at 28%. I do think that I did a media day yesterday, Scott, with a bunch of reporters. One of them, who will go nameless, has been writing consistently in a major publication about how awful the office market is and how kind of Armageddon is right around the corner. I think the leading indicator is the number of big leases that are being signed right now. But you also mentioned Ropes & Gray expanding space. You are a believer that remote work is here to stay. Yet here you have a major law firm that is both moving and taking on more space. Can you put those two statements for me or there's a little bit of a disconnect there between?
Scott Rechler: Think the nuance, my point is the genie is out of the bottle. People can now have technology like we're having this technology and be able to communicate virtually in this context. I think the other thing that people have realized, which we've always said, and you've said, “There's no replacement for face-to-face work. There's no replacement for ideation. There's no replacement for mentorship, apprenticeship, growth, and collaboration other than face-to-face work.” Where we see it playing out is that the smaller companies are bringing people back to the office generally full-time. Some are letting Fridays be a flex day. But they say, “If you have a situation at home, if you have something to do with your family or issues like that, that you don't need to make that commute just to turn around and go home, we can find a way to work and use this technology.” I don't think remote work is here to stay. I know these terms are a little bit I think using technologies to have this. Do you have some hybrid capacity and flexibility to create a strong work-life balance that you may not otherwise have been able to create? The companies that I think are using it well. I have done it in New York. We're obviously ahead of the curve of the rest of the country because the financial service firms have been really driving that. That's obviously spreading technology to other places. I think what we're seeing, and I was maybe one of our large customers today who's basically said, “They've had like almost in high school, have signings now.” I think this is a forced pendulum swing right after some of these firms have let people be flexible for 4 or 5 years, you've got to say, “Okay, the game's over," Jamie Dimon's comments last week. The answer is, “This is the policy. If you don't want to work here, you can go work somewhere else.” Now, we needed the job market to get to a point where it loosened enough that we had the ability, and companies had the ability to say that. We need the economy to get stronger enough that people would say it. We needed enough momentum from companies doing this to say it. But I think that's off the table now as an issue. I would say, if anything, to me, where I worry about office usage broadly and demand in the longer term is AI. I think that the remote work answer is if it's 3 or 4 days a week or five days a week. But in 3 or 4, you still need the same amount of space. What we're seeing in New York is companies that thought they were going to use less space, took less space. Now they are immediately expanding because they didn't take up enough space. But AI is going to be an area where I think, over time, there's going to be some subsets of the workforce that are not as much in demand. I think that's more the commodity space, more call center, and administrative back office type space that will potentially marginalize more permanently the amount of office space in the country.
Willy Walker: I was thinking about your comments on Jamie, Scott, in the context of our discussion today and how he was the one who got out—I think similarly the federal government in Washington, D.C.—saying get back in the office is going to fundamentally change that market. Obviously, the asterisk to that back to what you and I talked about previously is all DOGE’s efforts and the number of people who are going to be losing their jobs in the federal workforce, and what that does to D.C. as it relates to everything from office to residential to the D.C. market. I actually wrote about Peter Linneman. Because when Linneman and I did our webcast in January, Linneman was very bullish on D.C. I wrote to him last week and said, “Hey, Peter, with Musk really making very significant cuts right now, are you still bullish on D.C.?” Peter's response to me was, “If he's successful doing what he has stated he's planning on doing? No.” Interesting to exactly your point of the first hundred hours of this administration, not the first hundred days, how quickly this change is happening, and how there's both good and bad. But clearly, as it relates to a bet on the DC market right now, I think many people coming into the Trump administration probably thought, “Hey, it's going to be great. You're going to be back in a pro-growth market, and D.C. will get its act together.” Now, all of a sudden, with the degree to which DOGE is going into the federal bureaucracy, one might take a pause there. You don't have any exposure to D.C., correct?
Scott Rechler: Correct. But just to the point more on a macro basis, the fact that they made that statement, and I know the real estate roundtable in the industry has been hammering home at the Biden administration to do this for a long time, and it's been so disheartening that it hasn't happened even when they made claims that it was going to happen, but the fact that they said, “Everyone back to the office,” spreads to markets like New York, it spreads to the tech. It makes it culturally okay to say everyone back to the office. While D.C. I agree with you on, an important point to make is when we choose markets, we avoid markets that don't have a diversity of industries. We don't invest in D.C. We don't invest in Houston. We don't invest in Seattle because we're investing in places that have a diversified group of industries. Because living in New York, I've been here where I've seen finances growing, and now it's not. Tech is growing, but now it's not. You need to have enough industries that are diversified, that make for an economy that can live with the pullbacks of each of these things and doesn't expose you to one shift.
Willy Walker: I think our friends at Carlyle CoStar and General Dynamics would like you to think that the D.C. metro area is more diversified. But I take your point very well. It's still a government town. One of the other things that you mentioned, Scott, that I think is so interesting is it relates to working from home to a great degree. The way I've looked at it in the evolution of the way we've worked at Walker & Dunlop is that it's a benefit. I woke up this morning, and unfortunately, I had to hop on a call at 7 a.m.. I didn't get a break until you and I were going on here. I got stuck at home. I was supposed to be in our Zoom studio in the office. It's a great benefit that I can just hop on here, do this with you, and then hop into the car and go into the office. But it helped me work through a challenging day that threw a curveball at me first thing. But at the same time, as I think about Jamie and Jamie saying, “Back in the office.” I think he very clearly believes the cultural issues that you and I just talked about, and we both said numerous times are very important to the growth and sustainability of corporations. But I also can't help but think that he's building a $3.5 billion headquarters in New York that's going to be delivering in the next, I don't know, year or two that he sat there and said, “If I'm not proactive on this policy, I'm going to have a massive edifice built in the middle of downtown Manhattan that isn't going to have everyone back in it,” and that that helped drive his policy from the beginning. That's not a criticism of it. It's what forces people to take an outside stance because you didn't hear it from any of the other CEOs of the major investment banks until Jamie came out and basically led the way.
Scott Rechler: Goldman was pretty early in it as well. But I think just to your point, what's interesting with JPMorgan is two things. One is the comments that are going viral that Jamie made where I think, in their Ohio headquarters that they had there. It wasn't even in New York; where he made those comments was at a town hall in Ohio. The second thing I'll say going back with them again, they built this headquarters. It appears now, based on what we're in our conversation with them, they've grown out of that headquarters. A lot of the space that they had leased for interim use while they were building the headquarters, they're extending those leases long term because they need more space. They've been hiring more people. I think we're seeing that in a lot of instances. Some of that is, frankly, the counter to my point of AI, which is that they're investing in technology. A big percentage of their growth is on the tech side, the AI side for cybersecurity, and better service to their customers' new products. That's where there's a lot of expansion happening as well. It's an interesting dynamic. I said, “New York right now feels as strong as it's ever felt in my 30 years of doing business here.”
Willy Walker: Yeah. I will say on the AI topic, I keep testing AI to see if it can help me with my questions for the Walker Webcast. There's not a piece of an AI search on you or our conversations today that I pulled up from a ChatGPT request for information other than the very generous gift that you and your wife made last summer for medical research using AI, which I thought was interesting here. That might have been one of the reasons that I picked it up because I was actually going to underwrite additional medical research using artificial intelligence. Talk for a moment, Scott, because I found it to be really interesting. The mall conversion that you're doing with the White Plains Mall in partnership with Cappelli and Forman. I found that to be one where you talked previously about the Broadway asset, where the floor plan allowed for you to be able to create 21 units per floor. It had a floor plate that would work. Talk about converting a mall into 860 residential units.
Scott Rechler: Yeah. Going back to our coverage of obsolescence in general, I frequently make comparisons between what I expected to happen in the office market and what had happened in the mall space. When e-commerce took hold, there was a period of time when everyone said malls were dead. The answer was some malls were dead. Not all malls were dead. David Simon's malls and other malls that were well-located, were invested in then becoming entertainment destinations and outings. People still went to them because they were convenient to get to and it was a great place to go to do something. If they were just going to shop, they would go on Amazon or some other outlet like that. The malls that couldn't position themselves to ultimately provide that level of experience became obsolete. Let's say there are half the malls that used to be when that first started, and maybe they'll be half the malls later because this obsolescence takes a long time to play through. But the downtown White Plains Mall basically emptied out other than the Department of Motor Vehicles that was there. And just sad, as white elephant in the middle of this downtown, a block away from the train station, which was 30 minutes away from Grand Central New York, across the street from a Ritz-Carlton residence and restaurants. This was another public-private partnership with the city realizing that this was a blight to their economic engine, to their attracting people downtown White Plains. Working with the city, we were able to get changes to the density and tax incentives that enabled us to buy the mall with tear down and build the first 440 units, park, and retail. We actually just announced that instead of building the next round, the units where we're building are built to suit the New York Power Authority on the other side of the park. Their current headquarters is adjacent to us and will also be converted to residential. It triggers what you want to trigger. It's triggered a reinvigoration of that downtown. We're now going to give people this five-star living in this beautiful, residential community that's going to be 30% to 50% less than renting in New York City and a 30-minute train ride to New York City. This transitory development makes so much sense. That is the concept. Not too dissimilar to what we bought in Paradise Valley that the developer there was doing with the mall that they bought, which they tore down and have been doing this big mixed-use community with housing. I think the beauty of that is these old malls are in these incredible locations that otherwise would have been developed, other than the fact that there's more there. Because the mall was there, you have this blank canvas when you tear it down with this very mature community around it.
Willy Walker: It's super fascinating. I think one of the things that I find to be really interesting is how you build RXR and I know this is one of your sort of core tenets of building enduring partnerships. There are a lot of developers out there, Scott, who focus on, “We've got the capital, we've got the know-how. We're going to go build it. We're going to own it. We're going to own every piece of the process. We'll vertically integrate. We'll do development and own, and we'll build funds around it.” I have to say, as I was doing research on , everything you have built in the number of partnerships that you've created, whether it was a Capella or Corman in that asset, whether it's your Aries fund that you've raised, whether it's the other projects that we've talked about here, we've partnered with people. It's really, I would say, a defining characteristic of RXR in the way that you approach partnership.
Scott Rechler: Absolutely. I would even say I'll take a step further, which is partnering with the community. One of our big tenets is our public-private partnership, formally or informally, which is that we believe that part of our mission is to build stronger communities. It’s doing good, and doing well means doing better. That's our company value. A lot of us have served in public service roles. I appreciate how policymakers and elected officials have to deal with their challenges. We approach these partnerships as a win-win-win. At the end of the day if we win, you lose, we're both going to lose because we're never going to get it done. It's not going to work. But if you can structure things where everyone involved wins, then you're going to be successful. You're going to all be in it together. That's how we have approached these. Whether it's the airport, to your point that we're building in our JFK, that's a public-private partnership with the Port Authority. We brought an airport manager out of Vancouver as our partner and co-developer. Everyone can't be everything. We try to actually institutionalize a lot of ourselves where we can and integrate that and build that institutional knowledge. But we know where we have our gaps, and to the extent we have those gaps, we try to fill them with partnerships.
Willy Walker: Final question to you, and it's one I asked Linneman a month ago when we were together in Philadelphia. As you look, obviously, all of real estate is local, and there are good deals and bad deals. There are great bases, and there are bad bases, etc. But if you had to make generalities as it relates to asset classes, what's the best stay-rich asset class today?
Scott Rechler: I think rental housing, multifamily, single-family rental, and other types of rental housing, as a generality, is probably the best risk-adjusted return place to invest. Because I think we have some near-term dislocation like we were talking about with the need to recapitalize the maturing debt, the absorption of the supply that's coming into the marketplace. But those headwinds are going to very quickly turn into a marketplace with tremendous tailwinds where the amount of demand is going to overcome the amount of supply in the right markets. This is not going to be solved overnight as interest rates are higher. It's going to slow down supply. It's going to be one of the great national issues that we're going to be facing, which is how do we create enough housing? For every price point out there, to be able to address the demand is going to require building a lot more, but a lot of policies that enable us to build a lot more.
Willy Walker: Then your “get rich” assets and your “get poor” assets.
Scott Rechler: It's a good question for us. I think the poor would probably go back to not being an investor that's a stock picker on certain segments. There are, I think, a lot of players that are being suckered by low price-per-foot numbers of office buildings around the country or even, in some cases, multifamily where at the end of the day, they're low for a reason. I think you really got to a point today where you just can't allocate capital. You have to have a really good understanding of the nuances of each submarket, the nuance of each product, and be able to figure out how you can actually differentiate and create value around that product.
Willy Walker: Then ‘the get rich.’
Scott Rechler: I think ‘the get rich’ is in this for the long term. I think that's a big piece of where we are. I'm not a market timer, although we try to find the spots where there are inflection points. But I think it's building a business that gives you a unique competitive advantage. Stay focused, find adjacencies, and keep leaning into it. One of the things we use it alluded to a little bit is that I pride ourselves on not just being a builder of buildings but being a builder of businesses that do well. We started a student housing company and co-founded American campus communities. We had one dorm, grew to a larger student housing company in the country, and took public in ‘04, sold The Blackstone for $13 billion—that's building real value versus building one building.
Willy Walker: Let me try and push you a little bit harder, though. An asset class that you say right now is the get-rich? Is it data centers? Is it an office? Is it multi? Is it retail? Is it hospitality or is it seniors housing, student housing, or some other?
Scott Rechler: If you're saying without any risk-adjusted return, I think to myself, what we're doing on the office side, right where I look at where we're buying. This is a generational investment opportunity. Our average price for New York office goods is sub $500 a foot for eight caps. I think this is going to be one of those moments we're going to look back five years from now and say, “We wish we backed up the truck more than we did.” That's a moment's time, I would say, data centers. I worry a little bit about data centers because it reminds me very much of what happened in the Internet bubble where everyone was building this broadband connectivity and these Internet companies, and everyone was going to be the leader. Except that, then there are only a few leaders and we had this big bubble burst. The question is, how much does that infrastructure play through? I'm going to play that. It would be in the build as the developer and then sell it—not a bad whole long term right now.
Willy Walker: Go back to what Linneman said, “Stay rich, multifamily; get rich, office; get poor, data centers.” Scary how much you and Peter tracked each other on what you just said. Scott, thank you. It's always great to see you. I'll see you at our next roundtable meeting, if not before, in New York. Greatly appreciate you taking an hour to give all of your wonderful insights on what's happening in the markets across the country and specifically in New York.
Scott Rechler: No, I appreciate it. It was a lot of fun. Great questions. Thank you.
Willy Walker: I appreciate it. Great to see you. Thanks, everyone, for joining us today. We'll be back next week with a very interesting Walker Webcast to talk about the privatization, or not, of Fannie Mae and Freddie Mac. I have three guests joining me on the pro-privatization and the no-privatization side of it, Mark Zandi, Jim Parrott, and Jim Millstein are going to join me to go at it. I hope many people can join us next week for that hopefully very engaging debate about privatization or not of Fannie and Freddie. Thanks, Scott. Great to see you.
Scott Rechler: Thank you.
