WHAT’S NEXT FOR NYC REAL ESTATE?

Jan, 4. 2010 - The Real Deal

There may be no corner of the business world more family-dominated than New York City real estate. Here, names like Rudin, Resnick, LeFrak and Durst carry an almost mythical connotation.

And for good reason: The real estate bust has made mincemeat of the army of rookie developers who entered the industry during the mid-aughts. Not so for the young scions of New York’s great real estate families. Working for capital-rich and rarely overleveraged family firms, many of these up-and-coming moguls are well-poised to take advantage of the opportunities generated by the current decline in the marketplace. For the sons and daughters of the city’s reigning real estate families, now is a time to distinguish themselves.

“In many instances, this recession mirrors the down cycles during which many of these families truly made their largest investments,” said David Schechtman, a senior director of Eastern Consolidated. “It’s turning out to be a real proving ground and education for many of the sons and daughters. They’re going to capitalize on it like no other.”

That said, some families were unable to avoid the pitfalls of the recent real estate bubble, and their children — including Alex Sapir and Billy Macklowe — have been left to pick up the pieces.

Even those well-prepared for the recession face obstacles their predecessors didn’t. New York City real estate is more crowded and expensive than it used to be, with REITs and foreign investors competing for deals with the old families.

“What this generation needs to do is take advantage of the turnaround when it comes,” said legendary land-use attorney Sandy Lindenbaum.

However, he said, “it’s going to be harder for them to do deals and put together projects that are as lucrative as the ones their predecessors did, because many of the prime sites have been built out. Where are you going to build another GM Building?”

And then there are the broader challenges of joining the family business, which can be treacherous for youngsters anxious to make a name for themselves.

“Sometimes it’s paralyzing to the next generation because they’re fearful that they won’t live up to the accomplishments of their parents,” said Ivanka Trump, an executive vice president of real estate development and acquisitions at the Trump Organization. “You have to have a level of confidence about yourself and a security in your abilities; otherwise it can be problematic.”

Powerhouse families

New York real estate has long been dominated by a small cluster of powerful families.

“When I started, there were literally a few great building families who did most of the high-rise construction,” said Lindenbaum.

Thanks to their long-term approach, many of the city’s best-known real estate families avoided overspending during the boom.

“Many of them were less active on the buy side between 2004 and 2008,” said Schechtman. “They were prudent enough not to make any buys during that time.”

When Jonathan Resnick, for example, became president of Jack Resnick & Sons in 2007, the 82-year-old company was just finishing the sellout of some 258 condos at the Costas Kondylis-designed 200 Chambers Street. The company also “did a lot of refinancing at very conservative loan-to-value ratios,” said Resnick, now 42, the son of firm CEO Burton Resnick.

Though there have been some challenges on the leasing side, including the vacant top three floors of newly renovated office building 250 Hudson Square, the company’s vacancy rate is around 2 percent, he said.

“We’ve always operated in a very conservative fashion,” said Resnick, one of the more established members of the up-and-coming generation.

During the boom, the trademark restraint of these families sometimes frustrated the younger generation, who saw deals happening all around them at a fever pitch.

“I was involved in several deals where I would have the younger generation on board, then we’d sit down with the decision-makers and they would say, ‘We can’t wrap our arms around these numbers,'” Schechtman recalled, noting that a number of joint ventures he worked on failed for that reason. “They wouldn’t allow certain levels of leverage.”

Since the market crashed, however, “those sons and daughters … are very thankful that they were told to wait,” Schechtman said.

That’s the case for Jed Walentas, 35, who runs Brooklyn’s Two Trees Management Company with his father, David, who founded the firm in 1968, and business partner Amish Patel, a friend of Jed’s from college.

“Almost by definition, people of different ages and stages of their life have different risk profiles,” said Walentas, who joined the company in 1997.

For example, he noted, his father “doesn’t think very much” of the small hotel he’s planning at 80 Wythe Avenue in Williamsburg.

Though the two usually make decisions together, “I’m interested in taking more risk, generally, and he’s not,” said Walentas, who refers to his father as “David.”

He said he appreciates his father’s more cautious perspective, especially now.

“One of the things David’s been super-successful at, and hopefully he’s going to do a good job at teaching us, is that a lot of times the best deals are the ones you don’t make,” Walentas said. “There were a lot of things we bid on [during the boom] and finished second, or thought about and decided against, that we’re very happy we don’t own today.”

Thanks to that measured approach, “we came into the recession very strong,” said Walentas. “We didn’t have stuff that was overleveraged and we didn’t have any real product to sell.”

Walentas lately has kept busy shepherding Dumbo’s Dock Street project through the city planning process, and constructing the commercial base of Hell’s Kitchen development Clinton Park, largely with the firm’s own money.

“We have a lot of cash in the deal and very little debt on it,” Walentas said of the rental tower.

Another family business, the LeFrak Organization, is also preparing to seize distressed investment opportunities.

The company, founded in 1901, is known for its aversion to debt and its build-and-hold strategy. The LeFraks avoided making New York City purchases in the overheated boom-time market, instead focusing on construction at their long-held Newport portfolio in Jersey City.

The company, which famously developed Lefrak City in Queens, even sold off $300 million worth of Brooklyn and Queens apartments at the market’s height in 2007. The move “turned out to be very prescient,” said Jamie LeFrak, 36, a principal at the company, and son of Richard LeFrak, the chairman and CEO. (The two run the company along with Jamie’s brother Harrison, 38.)

Looking to diversify its portfolio, the company then began acquiring properties in California, including the 2008 purchase of a Beverly Hills medical building for a record $866 a square foot.

The expansion outside New York was largely the sons’ doing, Jamie said.

“That was a pretty big achievement on our part,” he said. “It would have been very unusual for us 30 years ago to have any kind of significant holdings outside New York.”

Along with their father, they’re looking to make more acquisitions throughout the U.S. and abroad amid sinking prices.

“This is the time,” said Harrison. “We’re very focused on new opportunities as a result of the financial crisis and the gigantic correction in real estate prices.”

The company recently invested in the FDIC takeover of Florida’s BankUnited and in the real estate loans of now-defunct Corus Bank. The endgame, he said, is to “become very large owners of a very extensive condo inventory throughout the United States, in six or seven major markets.”

For some well-positioned families, the current downturn is less a threat to survival and more a teachable moment.

Samantha Rudin, daughter of Rudin Management president William Rudin, has been at the company since 2007, working on retail leasing and the St. Vincent’s Hospital redevelopment. In addition, she sits in on the company’s executive committee and attends nearly all her father’s meetings.

“I felt like I was in school before the recession, and now I’m in a more intense form of schooling,” said Rudin, who is 25.

Justin Elghanayan, 31, son of Henry Elghanayan, is a vice president at Rockrose Development.

“My father is always drilling into me to see the downside and cover yourself for it,” said Elghanayan, who has done residential and office leasing for Rockrose and lately has been focusing on details of the company’s recent division (Henry now runs Rockrose, while his two brothers head TF Cornerstone).

In fact, many up-and-comers view the downturn as an opportunity to distinguish themselves not only by safeguarding the investments of previous generations, but also by making some of their own.

“There is a tremendous silver lining in this down cycle for the offspring of established families,” said Schechtman. “They’ve got generations of experience behind them and they have the capital.”

“It’s in climates like this that there’s real opportunity,” added Trump, pointing to her father’s purchase of 40 Wall Street in the early 1990s. “I don’t think the opportunity in the commercial space has really hit yet, but I think there will be amazing deals to be had.”

While Donald Trump made the Trump name famous worldwide, he learned the ropes from his father, Fred, who developed some 27,000 apartments and row houses in Brooklyn and Queens.

Along with her two brothers, Donald Jr. and Eric, Ivanka has been charged with the company’s global expansion, particularly the Trump Hotel Collection.

Right now, she said, “things aren’t being built, so the opportunity is in acquiring.”

Success not guaranteed

Despite these advantages, the success of the next generation is by no means assured.

Even the most powerful family can’t entirely shield its children from the harsh realities of the recession.

Benjamin Levine, a project manager at his father’s company, Douglaston Development, has been working on leasing at the Edge condos in Williamsburg. The 500-plus-unit project came on the market in the spring of 2008, just before the market crashed. As of last month, only about 25 percent of the units had been sold.

“It’s frustrating, because the economy sucks,” said the 25-year-old Levine. “It doesn’t matter how good of a job you do right now; the market can’t recognize it.”

Levine, who previously worked as an analyst at Credit Suisse, said being in the family business is unique.

“When I was at Credit Suisse it was totally different,” he said. “On the weekends, I didn’t sit on my couch and watch football with my boss and tell him I love him.”

Some real estate moguls may be delaying or reducing their children’s involvement in the industry.

For example, Matthew Moinian, son of embattled developer Joseph Moinian, is currently in law school full-time and “not involved” in the family business, according to a spokesperson for the family. That’s very different from the image projected in a 2008 New York Observer profile that identified Matthew, who at the time was 23, as the point person on Moinian’s W Downtown Hotel & Residences, which has since hit a number of snags. The spokesperson said Matthew’s role in the project was exaggerated in the Observer.

By contrast, some scions saw their roles ramped up because their parents were unwilling or unable to guide them through the boom-time hysteria.

Perhaps the most-cited example of this is Alex Sapir, who took the reins in 2006 with his father, Tamir, facing a bevy of legal problems. Industry insiders say Sapir is now losing millions amid troubles at his projects, including the condo hotel Trump Soho and condo William Beaver House.

During the boom, the younger, less-experienced Sapir “overleveraged everything and went a little crazy,” said one industry source, who asked to remain anonymous.

The $420 million Trump Soho — a partnership between Sapir, the Bayrock Group and the Trump Organization — received a total of $350 million in financing, including a $75 million mezzanine loan which industry sources say is in danger of being foreclosed on, though the property is scheduled to open in February.

Ivanka Trump has been involved in marketing the project and designing the interior of the hotel (she told The Real Deal the hotel is on track to open February 1st and that “over 55 percent” of the units have been sold.) But it’s Alex Sapir who has taken much of the blame for troubles there.

“He was the one who put the price up through the roof,” said one source, who called the would-be mogul a “cautionary tale.”

“If the project was reasonably priced, it would have been a huge success. Same with William Beaver,” the source added.

Then there’s Rob Speyer, who at age 37 spearheaded Tishman Speyer’s now-infamous 2006 purchase of MetLife’s Stuyvesant Town and Peter Cooper Village with BlackRock Realty for a record $5.4 billion.

While Rob, now the company’s co-CEO, was undoubtedly seeking to make a name for himself with the deal, insiders say Stuy Town wasn’t necessarily the result of youthful indiscretion. Others firms were vying for the property and, Jerry Speyer, Rob’s father, has said publicly that he have made the deal himself if Rob hadn’t.

Moreover, if Speyer somehow pulls off a miraculous save, he may yet redeem himself. “Rob Speyer could really distinguish himself as a superstar if they hang on to that property,” said one source.

At times, the up-and-coming generation has proved to be more cautious than their forebears.

Billy Macklowe is already viewed as something of a hero in the industry after taking over his father’s company, Macklowe Properties, in the wake of the disastrous $7 billion purchase of seven Manhattan office buildings from the Blackstone Group in 2007.

“Billy did come in and was very effective during the workout,” said Lindenbaum, noting that Billy is “somewhat more restrained” than this father. “That’s why he was able to come in deal more easily with the workout. He’s a different personality.”

Ted Clark, the director of the Center of Family Business at Northeastern University, said the offspring of company founders often “want to be known for doing something special. They have to be their own person.”

Double edged sword

Joining a family business comes with unique challenges, which can be exacerbated by difficult economic times.

“Whatever the advantages that you are being given, you’re also disadvantaged because you’re going in as a family member,” Clark said. “For the rest of your life, you’re the child of the owner. In many ways, you have to prove yourself more.”

Raphael De Niro, 33, a broker at Prudential Douglas Elliman and the son of actor-turned-developer Robert De Niro, called it a “double edged sword.”

“It some ways it helps me to have a famous parents,” said Raphael, who is also an aspiring developer. “In other ways it hurts me. Some people don’t believe that I’m The Real Deal.”

Trump said she has often battled assumptions about her abilities. “I just realized early on that there would always be people who would assume certain things about me or about my abilities or make rash or snap judgments,” said Trump, who writes about such pressures in her book, “The Trump Card: Playing to Win in Work and Life.” “There’s no way to control it, so I just disregard it.”

Younger generations also put pressure on themselves to match — or exceed –their parents’ success, said Andrew Sciame, son of FJ Sciame Construction founder Frank Sciame and a project manager at the company.

“You’re growing in the shadow of a big oak tree,” said Sciame, 30, who joined the company full-time in 2003. “I want to be like [my father] and make him proud, but [also] be my own person.”

Family businesses must also grapple with how and when to cede power to the younger generation.

In order to avoid future conflict over who would take over the company, Henry Elghanayan and his two brothers, who founded Rockrose together in 1970, decided to split and divide the business between them. The move cleared the path for Justin to take over Rockrose some day.

“We didn’t want to have a situation where in five to 10 years, all my cousins and I would be in conflict,” said Elghanayan, who described the process of splitting the companies as “emotionally complicated.”

There are eight cousins on that side of the family, six of whom are not yet involved in the family business. “Instead of waiting until things devolve into conflict, we thought we’d bite the bullet and set things up for the next generation,” he said.

Clark said it’s often a smart strategy for family businesses to break into pieces.

“Sometimes you have to cleave things off and go your separate ways,” he said.

The Resnicks, too, have recently coped with succession issues. In 2007, then-president Scott Resnick left to form his own company, clearing the way for his brother, Jonathan, to become president.

“He wanted to get out from under my shadow and the legacy of his grandfather,” Burt Resnick told the New York Post at the time.

In addition to these obstacles, New York’s next generation of real estate leaders face more competition than ever before.

In the past, Lindenbaum said, “we didn’t have REIT’s, and there was very little foreign investment.”

Lindenbaum said while the old real estate families are still firmly entrenched in the city, “there’s been some dilution of power.”

Raphael, whose grandparents converted manufacturing buildings in Soho in the 1960s, is currently working with his father on developing a Nobu Hotel and Residences in Miami, after their plan for a similar hotel in New York fell through. The two also want to expand the Greenwich Hotel brand throughout the country once lending loosens up.

De Niro said one of the biggest challenges in terms of development is “the restrictions and barriers to entry in New York, particularly when it comes to ground-up construction.”

“There are far fewer untapped neighborhoods, if any, then there were in my parents’ and grandparents’ day,” he said. “We have to be more creative.”

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