CRE and the Recovery of Cities with Jeff Blau, CEO Related Companies
Willy Walker: Thanks Susan and happy Wednesday to everyone and good afternoon. If it's Wednesday, it's the Walker Wednesday webinar and I'm super thankful, honored and excited to have Jeff Blau join me today. Jeff and I have known each other for quite some time and getting Jeff's perspectives on the market in the world we live in today will be very insightful and informative and so thank you, Jeff, for joining us.
Jeff Blau: Happy to be here.
Willy Walker: Before I jump to Jeff and the questions that I have for him, we had a really good discussion last week with Andy Florance, CEO of CoStar and before Andy and I jumped in last week I invited Walker & Dunlop board member John Rice to join me to provide some thoughts on social justice in America and how corporate America is responding to these issues today. I would reiterate something that John said last week which was that time is up for random acts of diversity and that it is time for corporations across the country to take real action and to implement real goals. As Mellody Hobson of Ariel Investments said last Tuesday on CNBC, there's not a Board of Directors in the country that would accept a management team saying we will do better on something next year. We all know how to quantify issues, we all know how to put real metrics to them, and I will just put forth that I was very pleased that I could share some of Walker & Dunlop’s metrics on these issues with listeners last week. And to everybody out there who is in our industry looking for ways to make a difference, I would just put forth that platitudes as it relates to the concern over the social unrest in our country are obviously welcome and needed but what's really needed is long term action plans to make a difference on these issues and make a difference to the communities that we all work and live in.
A moment on the overall market before I turn to Jeff and get his perspectives. We all saw the jobs numbers last week be better than expected and the equity markets rally. We have seen the 10-year Treasury move up out of a band of 52 bps and 78 bps to over 90 bps during the beginning part of this week. The move up in Treasuries actually has hit sort of the floor rates that many lenders had prior to the move up and so we're now actually, for instance on Fannie Mae, 90 bps was the floor on 10-year Treasury so we’ve really only moved up to the floor which means that the overall borrowing costs out there today are very similar to where they were a week ago and we are continuing to see a significant amount of activity and volume in the multifamily market as it relates to refinancing of properties.
I would also say that during the month of May we saw some activity on the investment sales side of things with five transactions and while that's well off of where Walker & Dunlop typically would be on the investment sales side of things, it is great to see that buyers and sellers are finding a market and starting to transact once again in the multifamily space.
As we focus on opening up, Jeff's views on New York are going to be very informative as it relates to the market that has been hit the hardest by the COVID crisis. I would say I've been watching the headlines that are talking about increased number of COVID cases across the country. The one state that I've been watching very closely after having Governor Polis on the webcast a couple weeks ago is Colorado. And if you actually look at a state like Colorado that's now been open almost as long as any state in the country, what is very, very reassuring is that as their testing numbers have gone up significantly to a peak of about 8,500 tests a day, but they're averaging somewhere between 4,000 and 5,000, the number of positive tests has actually dropped from about 15 percent down to about 2.5 percent. And behind all of that is the number of new cases has gone from about 400 a day down to 150 a day and, thankfully, the number of deaths has dropped from a peak of 38 in the state of Colorado down to no deaths for two days over the last week and two or three deaths on the other days. So, if you look at a state like Colorado the data actually looks very good as it relates to opening the economy back up and maintaining or controlling the growth of the virus. But clearly as states open back up we are going to see higher testing numbers which invariably are going to drive higher infection rates coming to our knowledge, if you will, but really the issue is those infections turning into hospitalizations, do the hospitals have the capacity to be able to deal with that, and then obviously behind all that is the morbidity rate. But overall things are looking very good, as it relates to where the market is, as it relates to the opening of the economy.
And finally, on multifamily rent collections many of you saw the NMHC survey data that came out for the first five days of the month of June. Those numbers were better than the month of May, which were better than the month of April. And so collections so far in the month of June are tracking very well and that is a welcome early indicator that rent rolls are holding up in multifamily and clearly the number of loans that Walker & Dunlop and other lenders have that have entered forbearance has not been nearly as high a number as anyone had expected which are all good signs. The real question is what happens when the government stimulus dollars that have come out of the Cares Act are either extended or not extended come August, September, October and into Q3.
So, let me turn to Jeff now. So, Jeff, back in 2013 right after you became CEO of Related, you said in an interview that you did with Bloomberg there are so many opportunities not to do the right thing in this business, you have to keep your moral compass. With everything that's going on in the United States right now as it relates to both the civil unrest and social justice what are you and Related doing to do the right thing?
Jeff Blau: Well, first, thanks for having me here today. I've watched a couple of these and I'm excited to talk about the issues we’re facing. So, with regard to that question, I think that the first thing to talk about is really Related’s response to the COVID crisis.
Very early on we realized that there was an opportunity for us to really get involved in a way more than just throwing dollars at the situation and we did a couple of very unique things that I think became very helpful to the city here in New York. For example, when Governor Cuomo originally thought that we might be short 140,000 hospital beds, he reached out to us and we, since our construction sites were closed down, we moved, for example, our construction crews from Hudson Yards and we actually brought a hospital online out of an abandoned building; in ten days we brought 700 beds online. I think that type of work, utilizing resources that we have, to do good, can make significant changes and big differences.
Also at Hudson Yards we set up - one of our buildings is right across from Javits Center which, as you probably know, was turned into a field hospital and had federal troops there supporting that hospital - and we realized early on that since all the food places were closed that the medical workers wouldn't really have any place to get food. And we opened up in our building at Hudson Yards, in partnership with José Andres and a food kitchen called World Central Kitchen, and we utilized out of work restaurant workers, chefs, from all the Hudson Yards restaurants to staff World Central Kitchen and we provided almost 90,000 meals over the course of the time that the Javits Center was open as a field hospital.
We took empty hotel rooms, obviously all of our hotels were closed, and we donated hotel rooms for frontline workers, and what was really great about doing all that type of work is that our staff, our own Related employees, came in and volunteered to do all that work. Nobody had to ask, nobody forced, and I spent a lot of time volunteering at the food kitchen with my son and it was just great to see that we can make a difference doing things like that.
And then I guess, obviously all the racial issues that have come up in recent days, in recent weeks, this is really something we've been committed to for a long time and, again, in our own way we have been trying to make a difference here. And just to give some examples, we have for many years tried to increase our percentage of minority contractors on our new developments and not only have we tried to increase the percentage of minority contractors, we've invested with minority contractors to help them grow their businesses and we've actually found it's a little bit of do good by doing good. We found that by making those early investments with contractors, those contractors have become very loyal to us and we continue to do lots of repeat business and I think that's how, doing things like that, breaking the cycle of inequality by utilizing the resources that we have and not just throwing money at a problem is a way that we can uniquely try to make change.
When we opened Hudson Yards we needed to hire 1,000 new workers to actually staff the buildings and the properties around it and so we decided instead of just doing the conventional hiring path that we would set up a job training program and reached out to more minority communities to attract people to come work at Hudson Yards and train them in the types of work that we do and bringing kind of that customer service mentality to the new workers. And so, in our own way, we have been trying to make a difference for a long time.
Having said all that, what's happened over the last couple weeks has really shown that more needs to be done in our industry, and not just for our company, but for the entire industry.
And I think getting more people attracted to the industry, doing that early on in education at schools, at colleges where we recruit to make the real estate industry more attractive or actually just to inform black students about the opportunities in the real estate industry would help us overall grow the pool of qualified talent. I think if we continue to do that over time, we will see tremendous change because, as you know, the industry today is not particularly diverse.
Willy Walker: I was just going to - let's talk about that for two seconds longer which is you're on the Graduate Executive Board at Wharton and you've got a fantastic incoming African-American Dean in Erika James and I would salute you and others at Wharton for having selected her to be the next dean at Wharton.
But last week I received a note from the dean at HBS and was actually quite shocked that for the last three decades the number of African Americans at HBS has hovered in the sort of fifties, so 50-60 students of color which, I mean, you think about institutions like Wharton and HBS that have put concerted effort into recruiting more African American students and that's obviously the pipeline for companies like Walker & Dunlop and Related. And clearly this is not a new issue. Any thoughts, Jeff, as it relates to what institutions like Wharton can do to try and get more talented African Americans to come back, do MBAs, and then come out and into companies like Walker & Dunlop and Related?
Jeff Blau: Right, so that was part of the thinking with the Dean and I'm sure we're going to see some new programs and announcements coming out of Wharton. I will also say at my other alma mater, University of Michigan, we are working with the Ross School of Business to implement programs to further, as I was mentioning, education around the industry. And, so, we're working on an initiative to kind of teach students what the real estate industry is all about, get more Black and other minority students interested in the industry and to potentially even combine that with scholarship programs. I think that type of early education is critical. There's also, you can even go earlier, and I think ultimately that could be beneficial. There are programs like here in New York called Prep for Prep at the high schools or SEO even where job training and internships are made available. We've been very active in those two organizations and I think ramping up those efforts as part of kind of our commitment to change is something that we’ll definitely put in place.
Willy Walker: Everything that you said as it relates to Related working with the state of New York and the efforts that you made to create hospital capacity and things of that nature are absolutely fantastic. I went to the Tribeca Tower website which, I believe Tribeca Tower was one of the first developments that you actually worked on at Related, and as I was looking at it I was immediately impressed with the pop-up screen as it relates to Related doing your part to keep your tenants safe and it had details on cleaning, employee monitoring, airflow, elevators such as implementing nanotechnology buttons, package delivery and using the Related app. Talk about COVID as a relates to specific things you've implemented at your properties and both the successes as well as some of the future challenges that you see, Jeff, as we continue to open up the economy and as people both live in your buildings and then also head back into offices and start to interact with people in offices and retail spaces that you all own and manage.
Jeff Blau: I've learned more about cleaning technologies in the last couple of weeks that I maybe ever wanted to know. We have implemented tremendous protocols for each of our buildings to return back to work. You mentioned residential, on the residential side we actually created an entire brochure around kind of the new protocols and benefits that we put in place effectively to return to home because in many of the urban markets in which we have apartments people have left their apartments and gone to other locations, like as I can see you are now not in your office. The idea is for companies when they go back to work and open their offices, that people return back to their apartments in the urban centers. There's obviously trepidation, people are nervous about coming back to work, and people are nervous going back to the urban centers.
So, what we tried to do is put in place protocols, and you mentioned some of them, certainly extra cleaning, for our employees COVID testing, temperature checks, obviously wearing PPE, elevator spacing, plexiglass at the front, certain rules around package deliveries. We also realize that some of the amenities that people have come to enjoy around their buildings are now not open and so we actually invited some out of work chefs, again from Hudson Yards, and we hired them to provide home cooked meals in each of our residential buildings, so we have a home chef available in our apartments. We're doing some unique things on the apartment side. We worked with Mount Sinai Hospital to really codify all these protocols and we're actually providing on-site COVID and antibody testing for any resident that wants to do that.
On the office side, it did involve in a return to office protocols that we put out, it did involve a greater use of new technology. So, in all of our office buildings we have new thermal scanning equipment installed in the lobbies. We are requiring all of our tenants to have their employees do temperature checks at home and fill out a survey or a questionnaire every day before they come in confirming that they haven't been in contact with anyone that has COVID, that they don't have COVID, they took their temperature. We're also working with our tenants to stagger start times so that the lobbies are not that busy. We do have the dots on the floors and things like that to show acceptable social distancing. Our turnstiles are touchless so you can wave your hand over a turnstile and it'll allow entry. It will also tell you which elevator to take and call the elevator so that you don't have to touch the buttons. Alternatively, you can call it on your iPad. We're trying to make the whole experience as friendly and easy to use, customer service forward as possible to really make people comfortable going back to the office and so far we've had a tremendous response from our tenants as they gear back up to go to work.
Willy Walker: How comfortable are you personally in heading back into the office and where's Related as it relates to your company getting back into the physical office?
Jeff Blau: We've talked a little bit about this. I am very comfortable, I'm in the city now. The governor in New York, I believe, is going to open phase two which would allow return to office on June 22 and Related is going back full force. On June 22 I'll be there, and my entire team will be there, and I think there's two reasons – I know where you're headed with this and that's not probably the majority of people right now.
First, we have about 4,000 employees across the United States, about 60 percent of our workforce worked all the way through, either in buildings or on construction sites as essential workers. And I believe that it's important that if our field workers are doing their job throughout this that if the corporate office can be opened that we need to be there to support our team and so we are all going to be back as soon as possible.
I think another very, very important reason - I've seen a little of this from my peers and other CEOs in New York and around the country - is there's been a little bit of an attitude of maybe I'll just take a slow return and I'll let my employees come back maybe after Labor Day and kind of have a slow summer. I think our cities have been hit with something pretty traumatic and the restaurants, and the retail stores, are all suffering and we need to go back, we need to go back to work, everybody I believe needs to return to their offices and kind of get it started again because otherwise those restaurants, the coffee shop that you go to on the way to the office, the card store, you know whatever it is, those things rely on all these office workers. I’m on the Board of the Partnership for New York City and we've been talking about creating a campaign around “New York is open for business - come back to New York” and I think that's a campaign that many cities are going to have to go through now and I think the sooner we can all get back to work the better it'll be for those economies.
Willy Walker: So that's a pretty good segue to you are a landlord on residential, on office, on retail, as well as hospitality. Talk about the overall health, if you will, of those asset classes and where you are from a collection standpoint across the spectrum there. What's holding up well? If you would, Jeff, let's go from office to retail and then we'll end with multifamily because I want to dive a little bit deeper on the multifamily side given the breadth of your ownership and portfolio on the Resi side. If you could go office, then retail and, then we'll end with Resi, I'll go deeper on Resi once you've given us some numbers there.
Jeff Blau: Right, so what I'd say on office is I think there's going to be a tale of two cities in that sector. I think the class A buildings have held up tremendously well, I mean literally to 100 percent collections and I think there's several reasons. One, the newer buildings typically have large credit tenants in there that can afford to make the rent payments and have made rent payments for the most part. There are some bad actors out there but for the most part they've made their rent payments. The class A buildings typically have large lobbies that can accommodate all these new technologies and separation that's required. They typically have large high speed destination dispatch elevators that you don't have to touch and have lots of room in them and they typically have brand new HVAC systems where you can dial up or dial down fresh air circulation and other ways to make sure that things are clean. And they typically have healthy kind of expense budgets so they could afford to bring on the extra cleaning staff and PPE that's required. So, I think that class A buildings come through this very strong with little to no change.
Also, there's a question that everyone likes to talk about, what's the future of office, is everyone going to work from home, are people going to go back to work. I think people, at the end of the day, we've gotten used to this technology and it actually has been an incredible tool, we've all been able to run our businesses while this has happened but I think this is a terrible way to operate a company. The loss of culture, the lack of innovation, the lack of creativity, I think it ultimately takes its toll on companies. How do you hire new people and get them to understand your culture on Zoom? It's very difficult. So, I do think people are going to go back to the office and, in fact, those companies in the class A buildings have already reached out to us and said that they need more space because they were either in trading floors or bench seating and those companies can afford to do something about it because the last thing that a Fortune 500 company wants to do is tell its employees that they need to come back in bench seating right now and so I think there'll be more demand from that sector.
Go to the other side, you have the class B buildings. You've got lower credit tenants that may not be able to pay. They've got small lobbies. They've got small elevators. They have smaller companies in there that may have to do more work from home because they think it works or they can't afford to keep as much space as they as they could.
People ask me all the time – like, for example, all these office REITS, the stocks are down and so on, is that a good buy or not a good buy. I don't think there's one answer. I think you really need to study who has newer buildings versus older buildings and I think there's going to be real differentiation in those markets.
On retail it's also a little bit of a tale of a couple different cities. Retails been probably one of the hardest hit sectors, obviously hotel maybe slightly worse, but retailers have been going through change for a long time. People say this all the time, but I think we are really seeing acceleration of trends that were happening and so, many of the retailers are not going to make it through this obviously. Neiman Marcus filed, JC Penney's, J. Crew. My guess is that there's many more and so I think, ultimately, we have too much retail in this country. We’re both friendly with Bobby Taubman and if you ask him, we’ve heard him say this over and over again - there's 1,200 malls in this country, he thinks that there should only be 300, and of those 300 only 100 ever make any money.
So that is a dramatic change to the retail landscape. I think this will accelerate some of that. My biggest concern are the small retailers - restaurants and local shops that make certain places like Hudson Yards and Time Warner Center very unique to New York. And we are doing everything that we can to make sure those restaurants and small shops make it through this and stay in business while at the same time really pushing our credit tenants to pay their rent and make sure that they're doing their share and doing what they're supposed to be doing to get through this.
So, in terms of numbers, I think the numbers in the mall REITS have been hovering around 20 percent collections. We've averaged 40 percent in our urban centers. Now what's interesting, we have a whole other group of retail that we call burrows or big box retail, which typically has Home Depot, Target, TJ’s food, a lot of that has been open throughout this as essential workers, essential companies, and we've been collecting 70 plus percent all the way through in that type of center. So, again, it's a little bit - I hate to answer just how's retail - I think it's geographic based and an asset type based.
Willy Walker: Jeff you talked a moment ago about how successful your product is going to be in the office space given its newer product, its scale, its size, its finish, all the things that are going to bring people back into the office and it all makes perfect sense to me. When you think about the fit and finish on a Neiman Marcus and Hudson Yards and the amount of capital that was invested there, what are you and your team thinking about if that space has to be repurposed - what can that type of a space turn into? Does it remain retail, does it get turned into office, what have you all been looking at as a relates to if there are failures, as they clearly have been announced, and space is given back to you, what can you do with that physical space?
Jeff Blau: Right, so we have Hudson Yards, we have about 700,000 feet of rentable retail space in that center. Neiman's is probably 30-35 percent of that space. As you know, they did file. They have not told us if they're accepting or rejecting the lease at this point so we don't have any more information but if it were to head down the path that they were not going to reopen, and I don't know the outcome of that yet, we would probably look to convert that to office space because the office market has been very, very strong and I ultimately think department stores are not the attraction that they used to be. I mean, in days past you would never open a mall or a center without an anchor department store and that was the formula for every mall across the country.
Today I actually don't think they're that important, and I think things like retail and fitness and Whole Foods become much more anchor attractions than department stores. If we were to convert the Neiman's and put a tech company in there with 2,000 employees, I think the traffic generated from the incremental office space would bring much more business to the retailer's down below than even a different department store, if there even was one to take that kind of space. I'm very bullish on ways to kind of repurpose centers, even the malls that are now going to have close department stores. Typically they were end caps on wings of the malls and I think the opportunity to close those down and build apartment buildings or suburban office around those malls - remember the malls were based in the center and communities grew around them so they’re typically in great locations. I think there's good business to be had out there.
Willy Walker: If we’re talking about smaller retailers, Related owns Equinox as well as Soul Cycle and I love the, if you will, fitness focus and you just talked about fitness being such an important component of not only the office environment but also the retail environment. What are your thoughts as it relates to the reopening of Equinox and Soul Cycle as it relates to usership? If you look at things like Peloton stock price, Peloton obviously has benefited dramatically from the stay at home orders and I would put forth that the idea of people going back into a Soul Cycle studio where you're really kind of shoulder to shoulder with a person on the bike next to you is probably not what most people right now are envisioning as sort of the ideal workout experience. So, similar to sort of how you deal with the space being hit hardest that might need to be repurposed, what's the thought at Equinox and Soul Cycle as it relates to what the new normal looks like?
Jeff Blau: I would say a couple things. In terms of fitness in general I think post COVID, I think the demand for fitness, wellness, will be greater than it's ever been and I think it's been proven in this pandemic that those that were healthier had better success in fighting this virus. I think it has really pointed out the state of kind of health in our society and I think there's going to be a renewed emphasis on that and so I think there’s actually going to be more demand for working out and staying healthy post COVID.
The issue, obviously, is how do we make these spaces safe for our members, for Equinox members. And Equinox has launched, you may have seen online, tremendous kind of safety and kind of return to the health clubs and fitness clubs protocols, including very similar things to what we're doing in the office buildings - temperature checks and filling out online on their app, questionnaires, and spacing and PPE.
We opened, Equinox opened in Texas last week, or two weeks ago now, and they are back to essentially almost pre-COVID usage levels in the clubs, spaced out by time but in terms of people per day. We were very excited to see that. Soul Cycle also opened there. Now with Soul Cycle we had to do as you suggest, more separation of the bikes, so following the six-foot rule and so on. We've limited capacity in the studios and the Soul Cycle studios that have opened are completely sold out, days in advance, and we've added more classes to kind of allow the same number of riders but over multiple classes so they're not as packed in. So, there will be changes to the business model, de-densifying kind of the usage, in some cases possibly requiring reservations, but everybody's going to have to change their business model a bit. I think when we get to the other side of this pandemic and a vaccine is here, I think, as I said, the interest in Equinox and health and wellness is going to be greater than ever before so I'm pretty optimistic about the future there.
Willy Walker: There are a lot of people who have been trying to sort of figure out urban versus suburban. We've clearly seen over the last decade a real urban migration across the country where not only have companies moved from suburban locations to urban locations, but people have sought an urban setting and particularly young well-educated Americans have migrated to the urban core. Right now, given COVID, there are lots of people who are sitting there saying where are things going to go from here, are people going to want more space and move out of multifamily to single family, are people going to want to get out of the densification that exists in the urban core and move out to suburban communities, whether that's in a single family or a multifamily setting. What's your thought given where Related has been investing across the country as it relates to that sort of urban-suburban trade off decision. Do you think that, if you will, the brains and the investment continue to go to the urban core or do you think we start to see some more migration out to suburban communities and suburban office?
Jeff Blau: So look I think, our chairman Steve Ross always likes to say when things are bad you can never think about how they're going to get good, and when things are good you can't imagine how they're going to get bad. And I often think about that, and I think there's often a lot of overreaction in bad times. And so, you're seeing everybody say I'm going to move out of the city, I'm going to move to the suburbs and people projecting that suburban home prices are going to go through the roof. I actually don't think that's going to happen, there might be a little bit of that in the short term as we kind of get to the other side of this vaccine, but there's a reason that people have been moving to the cities for the past 20 plus years. People love to be in cities, people like to be around people. People like to go out to restaurants and go to music clubs and it's a place where art and culture come together and that intellectual talent resides, and that's why companies ultimately have moved headquarters and continue to move into cities.
So, I think there's going to be this period of 12 to 18 months where people are kind of feeling their way back into the cities and there might be more usage of the suburbs as people might be on half shifts in their office, 50 percent working. So, I think there will be a little bit of that but, ultimately, all those reasons that people love cities still hold true, and will hold true post vaccine, and I think that the cities are going to come back. New York has been kind of one of the great cities around the world and I would say don't ever bet against New York.
Willy Walker: So on that, if you think about sort of the COVID crisis and where it's hit both states as well as cities, your portfolio on the Resi side is very concentrated in the major U.S. cities and in many instances, if you will, in blue states - New York, Massachusetts with Boston, Illinois with Chicago, California with LA, San Francisco and DC. And we've clearly seen the COVID crisis put significant pressure on not only the city budgets but the state budgets. As we think about opening back up and as we think about where Related has significant properties, what's your take on sort of that - I don't mean to put it into political terms of blue versus red but that has sort of been a delineating line – and more importantly I guess Jeff, is government revenues and taxes as it relates to if we're running up big deficits right now on a state basis and clearly at the federal level, what does that mean as it relates to tax rates and what does that mean as it relates to population base going forward in some of these big cities were Related has made very significant bets?
Jeff Blau: I'm going to take that and combine it with a little bit of your last question about people going back to the cities. You know, again, I think that there had already been in place a trend to advance to what had historically been called secondary cities, whether it's Austin or Denver or Charlotte or even slightly suburb cities a little bit. For example, we are still in California but we are building, we're about to start construction in Santa Clara right outside of San Francisco on a 13 million square foot development on 250 acres that we own there right across from the 49er’s stadium and if you think about that market it's the home to Apple, Facebook and Google all around us. I think those businesses, the tech companies, have come out of the COVID situation probably stronger than ever before and so for us it's not just a focus on those couple of urban centers but I think doing something that's a little bit more less vertical and more spread out, but still creating a city center, a main street where we will have office, retail, residential, hotel, restaurants, as a main street in a kind of suburban type location, semi-suburban type location. I think is a way for us to kind of go to other areas and continue to create great places like we've done in the urban centers.
We also, as you know, we have rolled out the Equinox hotel concept and kind of with that we have used that to anchor developments in Austin, a city that we hadn’t typically developed in before. Dallas is on our list, San Francisco as a site. Nashville is certainly a place that we're going to look to bring that product. I think it allows us to enter a market with a brand and a concept that's a real differentiator because it's very hard to sit in New York and say I'm going to develop in Nashville and do this and you show up and there's a lot of smart people there that have been doing it for a long time. Just because we're a big company it doesn't mean that you're automatically successful there, you have to really do something that's going to make us stand out and so that was really our way to differentiate our product in those markets, and once we kind of get over to the other side of this COVID situation we're going to continue to pursue those markets because I think there's going to be some great opportunities there as well.
Willy Walker: The Equinox hotel concept is one that I absolutely love. Given the weakness at the high end on the hospitality side are you all basically moving forward with those development plans on those sites you have or are you doing more of a let's wait and see how things kind of move forward? You had opened up your Equinox Hotel in Hudson Yards which I'm assuming has gotten hit extremely hard during this downturn and we'll see how it comes back up. What's your view as it relates to the roll out on Equinox?
Jeff Blau: As you know, I'm generally optimistic about most things but this is a tough one, the hospitality sector I think is going to suffer for a while. Equinox Hotel at Hudson Yards opened up to incredible success and reviews and it was really on a roll and just to watch it every day being closed it kills me a little bit. But look, like I said, as strongly as I felt that people are tired of kind of all this Zoom stuff and will return back to their office pretty quickly, I think there will be hesitation. I would jump on a plane for an hour meeting across the country on a moment's notice typically. I think there's going to be hesitation to do that for a while and use the airlines and stay in hotels, and I think people now so familiar with this technology will say I can avoid that trip and do a Zoom call. I ultimately think it comes back, but I think it is a much more delayed response than the office situation. We have downtown Los Angeles underway with an Equinox, and a couple others pretty far along, but we're going to see how fast that comes back before major expansion there.
Willy Walker: We've talked about Related really having an incredible, not only portfolio, but brand at the high end of the market whether it be in office, retail or multifamily but you all also are an absolutely huge and fantastic owner and operator of affordable and workforce housing in the multifamily space. You've got I think over 60,000 units in that portfolio. First of all, hats off to you and Related for having been such a big supplier and owner of that asset class, at a time when it's more needed than ever. How are the fundamentals in that sort of segment holding up as a relates to rent collections and then what's your outlook as it relates to the focus between the luxury brands that you all have been so successful at developing recently and then sort of that core affordable and workforce housing mandate that Related has carried for as long as Steve has had the company?
Jeff Blau: So, you're right, I mean Stephen founded the company on the affordable housing business and it is at our core, it's part of our culture. We are today one of the largest owners of affordable and continuously invest in preservation of affordable housing and new development of affordable housing. It's where we have created lots of opportunities in minority communities in terms of providing affordable housing, in terms of hiring workers from those communities, in terms of construction in those communities and, as you said, it's more important now than ever and we have a renewed, or increased emphasis, on that today coming out of the recent situation.
I think it's one of the biggest issues facing our country in the cities and so we are working with governments, both federal, state and local governments to help increase funding towards those initiatives and using sometimes non-cash benefits to make things happen, whether they’re density bonuses that cities can use to allow more development of adjacent market rate housing. Whether it's conversion of housing authority properties from old kind of out-of-service buildings into new modern affordable housing. These are things that we definitely focus on and will continue to focus on. We also have developed a fair amount of workforce housing which is that middle area - kind of not traditional affordable but workforce housing – police, teachers, and I think that's another critical component that cities are missing and we will continue to do that.
With regard to the luxury portfolio you had asked me once, does branding, can you really differentiate in the luxury space with market rate? We have been very, very successful in doing that. About probably 15 years ago we sat down and realized that we had enough economies of scale to actually create a brand, and that's not typical in the multifamily space. Typically, you've got an XYZ, not particularly a great name, like Glenn's Landing or some other name of a multifamily property that doesn't really mean anything.
Willy Walker: You should see our portfolio, Jeff, it’s filled with them.
Jeff Blau: So we realized that we could really create a brand and we did that with our Related Rentals brand and then our Reserve Collection where we really by increasing amenities in the building, but not just another room, a gathering space, but we program and we host events, we create community within our buildings, whether it's wine tasting, or educational, or kids programming, and we've gotten a tremendous response to that. Whether it's staffing - we bring all of our building residents through customer service training and the idea was that if you live in a Related rentals building it's essentially like living in a Four Seasons - all the typical hotel services and training that went into a Four Seasons employee is what we do on the residential side. So, if you get off the elevator and the porter is vacuuming the hallway, what that porter is supposed to do is turn the vacuum off, stand aside, say good morning or whatever it is. All those little cues are things that we have taught and trained our staff to do and I do think that we get a premium in those buildings for that.
So, in terms of rent collections across the portfolio, like the other assets we talked about, I think it really does vary by product type. So the market rate, our high end market rate product has held up extremely well, people in those buildings typically have high credit scores and have savings and for the most part have kept their jobs and so collections have been 95 plus percent during this period of time.
In the affordable space you have an interesting dynamic in that a large majority of the rent is paid through government subsidies, whether they're Section 8 or local subsidies, and fortunately the government is still making payments and so we've been able to collect all that and that's somewhere around 75-80 percent of our affordable revenue rent that we get. So, it's really to 20 percent and even in the 20 percent I think we’re somewhere in the mid-70’s collection. But if you take mid 70’s on 20 and 100 on 80 you wind up back in a pretty good place.
The softest spot we probably had was in the workforce component, so I would say in there. It's unsubsidized, at least the rents are typically unsubsidized, the developments are often subsidized, but the rents are not, and I'd say our average income in those buildings probably $80,000 to $100,000 and there's where you had a lot of job losses and so our collections were down in the 80’s in that segment. Not terrible. We are working with all of our tenants that have been affected by COVID, and again hopefully these were furloughed positions that ultimately come back and we'll kind of get back to business in the next month or so.
Willy Walker: Similar to my question as it relates to Equinox hotel and what you see happening in the hospitality sector, COVID hasn’t only impacted the United States obviously, it's impacted the world. Related has been making a number of investments recently outside of the United States, you've got a joint venture in the UK with Argent and you've got another big venture in the Gulf region. What's your thought now Jeff as it relates to international expansion of Related versus sort of, if you will, the focus in the United States where there's still plenty of opportunity for you - what's your take on domestic versus international given what we're seeing across the globe, not only the COVID crisis but just sort of economies around the globe and who kind of comes out of this looking either better or worse than they did heading in?
Jeff Blau: We have historically been pretty domestic focused. As you mentioned, we did do a couple of things. We did a big retail center in Abu Dhabi in partnership with one of our investors. In London we actually opened up an office. One of the things when I think about expanding - and we have offices now throughout the U.S. in New York, Chicago, LA, San Francisco, Boston, DC, and then London was a place that we always saw a great opportunity and thought it to be a city very similar to New York that we knew so well. We saw all these deals coming in and we'd go run over there and go look at a deal but, ultimately, when we open these offices it's always about people first, it's not deals first, and so we passed on many deals in London that we thought were good deals but we didn't feel that we were properly prepared with people, and ultimately this is a people business that we're in and if you don't have the right people in place it doesn't really matter how good the deal is. So, we were fortunate, we had the opportunity to acquire a company called Argent that was a spin-off of two pension funds in London and the management team joined us, they were the original developers of Kings Cross in London, and now we have 130 professionals in London, super talented, building Facebook and Google's headquarters as part of Kings Cross.
And with that team we have really embarked on a program to build workforce housing for Brits or Londoners as opposed to very high-end luxury housing. There is a tremendous housing shortage in London. We have about 13,000 units in the pipeline now and many of these will be institutional for-rent product, another product that's unusual in that market. Most product is for sale or individual units that are owned by individuals that are then rented. And so the idea to bring our kind of luxury customer service driven market rate housing product to London and go into that market was something that we think is very attractive and because of the price point that we're looking to compete in there, I think will be less affected by kind of any short term downturn in the economy and I’m very, very positive about continuing operations there.
Willy Walker: As we start to wrap things up Jeff, you talked about teams. You have a lot of both knowledge as well as, if you will, interest in two teams particularly because Steve owns the Miami Dolphins and your alma mater Michigan has a typically fantastic football team. Will we see the Dolphins and the Michigan football team playing football this fall and, if so, are you going to be in the stands or are they going to be playing and the stands don't have any fans in them?
Jeff Blau: That's a rough question with a lot of inside information, but I'll just give you my own opinion, so don't take this as an official statement from the NFL. But I would guess, I think that there's a movement for football to be played and my guess is that there won't be people in the stands this year, both in Michigan and the NFL. But, again, that's my opinion, that's not an official statement and I think it'd be great to get sports back on TV. I think people are dying to watch live sports and I think if the players and the networks can figure it out that’s what will most likely happen.
Willy Walker: Given the rivalry between Michigan and Notre Dame, I know it's going to be hard for you to give Notre Dame props, but I would say the leadership that Notre Dame took on saying that they were going to open back up in the fall for the fall semester, I think was somewhat of a tipping point if we look at sort of schools opening back up and getting both university students back to universities, and then hopefully secondary schools back in the fall. Any thoughts as it relates to schools reopening and the University of Michigan reopening?
Jeff Blau: Again, my opinion, not an official word but I do think they are trying very hard to get those schools open but they are definitely planning for a situation where there's a combination of remote learning and in person. I wouldn't be surprised if large lecture halls are done remotely or by Zoom and smaller classes happen in person. I think that type of combination will occur. I also think that they're going to, and this is not just Michigan, I think many schools will look at eliminating the breaks so there's less travel back and forth and so you might go until Thanksgiving and then it ends from there and not have that break and make it up. I think school will happen, but I think it's going to be a different setup next year.
Willy Walker: Notwithstanding what sounds like extremely good positioning for Related, clearly there will be specific assets that might not have the rent collections that one would hope for or a retail property that has some weakness to it. But what's your thought Jeff as it relates to what we're going to see in Q3 and Q4 as it relates to the overall commercial real estate industry? And I know it's a broad question, but do you think that we've seen sort of the worst as it relates to the impact of COVID or do you think that there's sort of a slow burn taking place here as we move through the rest of this year with potential defaults on debt and kind of a reshaping of the industry into 2021-2022?
Jeff Blau: I definitely think there's going to be some more pain to come. The PPP programs are expiring, many of our tenants in the industry have been relying on that. Most of the commercial lenders have entered into forbearance agreements with borrowers that needed it and so nobody's really had to battle with their lenders yet and you haven't really seen any major defaults of foreclosures. I think those forbearance agreements will expire and there will be troubled assets. So I think it's yet to come.
We set up, well in the last downturn in 2009, we formed a company called Related Funds Management to really do just this, to really focus on opportunities that came out of the last downturn in the real estate sector. When we started that funds business it was all about utilizing our skills, our people, our resources, as an operator/developer to create execution opportunity. We probably bought half or more of the half-built buildings in the United States during the last downturn in our funds business, and it was because we had this great team that we had an ability to execute.
It's very easy for a bank to foreclose on an over leveraged office building because they know how to operate it. It's another thing for a bank to foreclose on a construction loan on a half built building where they have 200 people working and what do they do the next day and we started getting all these phone calls, would you help us out, can you take this over? And inevitably that business plan would require capital and so we realized early on that there was an opportunity. Our funds business now manages almost $8 billion of capital. We just did a big capital raise Fund Three and I think there's going to be a lot of opportunities in that space.
Willy Walker: I am sure there will be and I'm sure that you and your team will do very well, I don't want to say take advantage of the situation because -
Jeff Blau: Not take advantage, right.
Willy Walker: You’re not taking advantage of anything but I'm sure that you will be able to execute and also, quite honestly, provide capital to a market that is very much needed. Jeff, it's been a pleasure, it's great to see you. I'm glad to see that you're doing well and that you're healthy and that your family’s healthy. Thanks for all your insights today.
To those of you who joined us, thank you for taking an hour out of your day and out of your week to tune in and I hope everyone stays safe and healthy and thanks again, Jeff, for joining me today.
Jeff Blau: Thanks for having me. Take care.
