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- [00:03]
A
This is quite a moment. If it's not handled fast and in the right way. This is a real problem.
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B
It's gone from very small to freak accident to a real reconstruction job in the span of a couple of days.
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A
Reminds me of the immortal words of little Carmine.
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B
You're at the precipice, Tony, of an enormous crossroad.
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A
Welcome back to the promote podcast, your insider guide to the money and mania of the CRE markets. I'm Hitsan Zamtani.
- [00:36]
B
And I'm Will Krasny.
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A
A shout out to our sponsors, LoanBoss, the best in class CRE debt management
- [00:44]
B
software, Real Property Captive, the first group captive insurance for mid market owners and
- [00:49]
A
Bravo Capital, a leading HUD and bridge lender that lives and breeds capstacks. This week we write up a rickety construction elevator to the 21st floor of the of the Pfizer building where a major scare threatens to consume New York's signature office to resi project. We're going to do a 360 analysis from bricks and sticks to the financials to the all important narrative decisions. Then we check in on a battle of hearts and minds in Virginia where Blackstone's walked away from a data center megaproject. There's a growing national discontent that has to be putting some investment question marks on this mega asset class.
- [01:21]
B
Thank you for the additional reviews and questions from. For our mailbag.
- [01:26]
A
Yeah, we're pretty full now. I think you're good to go, right?
- [01:28]
B
We are. As everyone knows, for my first mailbag, I don't trust the mail. So this mail is actually full, which is great. So look out for that. And before we get into these big stories this week, let's kick it off with the punch list, our signature rundown of the newsiest news and cre.
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A
Should we start with our guy Charles Cohen? He's back and not in the way you think.
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B
We love a redemption story here at the promote. And. And Charles Cohen is back at it. He has restarted a 400,000 square foot office development in West Palm called West Palm Point. I kind of like that name.
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A
For context, he's paid off about $187 million in PGS to Fortress in New
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B
York and now he's suing them for more.
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A
That's an ongoing drama. But he's come back here in West Palm. First of all, talk about the site. A little bit of sordid history there too.
- [02:12]
B
I think he bought it in 2020. He had his own foreclosure suit on it, which he has settled. So it took a Little bit to get going. But in the intervening period, one of the Godius goats has torn it up in Palm beach, and so this market has improved quite a bit.
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A
He's got the Steve Ross halo effect.
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B
He does indeed. And there's quite a bit of pre leasing, which is what you need to get one of these things off the ground. So good for Charles Cohen pulling his back off the mat and back at it.
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A
Did you get a peek at the cap stack yet? Fortress anywhere in there?
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B
Fortress is not in there, I do not think. Though it is funny that maclow, after famously having his own PG issues with the equity office portfolio, has gone back to the well several times and Fortress has been happy to oblige him. Oblige him.
- [02:56]
A
Selective amnesia is a beautiful thing, man. All right, next one. We've been talking a lot about SF's fantastic redemption arc. There have been some big projects that have broken ground. There have been a lot of interesting takeovers of formerly distressed projects. We spent a lot of time talking about our boys conversant and new bonds and resurrection of these two mega hotels in sf. The story of the past few months in San Francisco has been one of resurgence. But it's not all rosy out there.
- [03:24]
B
A rising tide lifts all boats except for malls. So Prater Group in Presidio Bay, they walked from a deal to buy the San Francisco Center Mall and they were going to do a partial office conversion. So office market in San Francisco has been on fire. So it really says something that they walked away. They of course didn't offer a reason for pulling out of the deal, but the reasons are generally cost bust, diligence, finding, can't raise the money. So one of the three, in all likelihood, because we know it's not the market.
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A
This is a former Brookfield, obviously, and Westfield joined. Right. They'd got like a $600 million CMBS on it and in 2023 promptly handed back the keys to the bondholders.
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B
One of the poster children of the bleak days in San Francisco. Because formerly trophy asset that essentially looked abandoned and really was abandoned and now still might be abandoned. This is sort of the stepdad coming in and then also leaving.
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A
It's going to be a long road ahead. But we know for sure that one party is very happy about everything that's going on and that's the special servicer because they're getting the fees as this goes on.
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B
Yes, they are.
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A
Okay, the next one is a Will Krasny special, so I'm going to let you take it away. Anna Delvey, 281 Park Avenue South.
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B
So finally sold. After being, I think two or three different Netflix real estate reality shows, iconic piece of the skyline. Finally sold.
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A
It's a beautiful building. The church missions house is a gorgeous building.
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B
It's gorgeous, but it's always what do you do there? It's not really an office. Can't really be resi. Event space. Sure. They had what, Photographia, the musician.
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A
Photographskia is Swedish. Something, something something something Swedish.
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B
Seriously, the only Swedish pop up thing that works is that live abba.
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A
We haven't done a Barnett breakdown of the ABBA thing. We need to do it at some point. So in 2013 our boy A.B. rosen had come in and bought this for about 50 million and change. And the idea, and this was during his buying spree where he said, I am not going to do a German accent. He said, it's a bad time to be buying okay buildings. It's a great time to be buying great buildings. Never really could figure it out from an actual business plan. Right.
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B
And the answer is it is now
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the only legal Airbnb in New York City.
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B
People know my shtick here, that this should have been a single family home. But anyway, Airbnb bought it for low 80 million ish.
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A
Close. Close to 2,000 a foot.
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B
Yeah. But it had been marketed or whispered at 120, 130. Just absurd numbers which it was never going to get. And they are using it as office space. And it's really interesting though, because New York has been not receptive and frankly quite antagonistic to Airbnb and short term rentals writ large across the city.
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A
Airbnb has become one of New York City's whipping boys. And it's been trying everything to change that narrative.
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B
They've been lobbying left and right.
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A
They sponsored the New York City Marathon. They've been doing a lot of stuff
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B
because this is one of the premier markets in the world for Airbnb. There's what, 3,000 short term rental listings now, down from 80,000 due to this crackdown. So they are not operating it as an Airbnb, they are using it as a office.
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A
This is going to be their largest hub outside of sf.
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B
Yes. Really says something. They're playing the long game here because stock hasn't worked for a real estate company, which they are to be, especially in hospitality. You need to have a New York presence. And they have had a really tough time with that. And so planting a flag in this way, I think is part of the long game to try to get back
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A
in the Graces of the city, I gotta say. A.B. rosen, his list of buyers recently has been pretty top tier. So we've got Amazon, Bloomberg, Philanthropies and now Airbnb.
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B
It's a good time to be buying great buildings, I guess.
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A
Okay, next one. Office is no longer really a four letter word and now we're seeing it in the national data.
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B
We are only a couple years removed. I remember a good friend of the POD who bought an office building, hired, I think one of the big brokerages to go shop debt and has a call and they say, hey, didn't get any quotes. And he said, oh well, we didn't get any good quotes. We got no quotes.
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C
Nothing.
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B
None.
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No debt available for this.
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B
None.
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A
How quickly the story has changed.
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B
Yeah, so national office vacancy rates declined about 10 basis points the second quarter. But it's really the breadth of the resurgence that I think is so interesting. There's 90 odd markets that Cushman tracks and more than half of them had a big dip in vacancy rates and that's happened two quarters in a row. But there is a little bit of a spread. As we've talked about, the story can
- [07:43]
A
differ widely depending on the submarket you're in. Shout out to Kevin Nguyen from San Francisco Standard pulled up some great data on the SF office market and you can see a submarket like South Financial has a vacancy rate of 28%, North Financial 30%. Whereas in Presidio and some of the hotter markets you're basically at no vacancies.
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B
A lot of the lower quality stock has been taken out of the office market through office to resi conversions, which
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A
we'll talk about in a sec next one.
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B
So America hasn't just fallen in love with Erling Holland from Norway.
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The mega sovereign fund Norgus is committing, what, half a billion dollars here to
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B
this retail JV with Asana Partners are going to buy high quality neighborhood retail assets, which is pretty much what all the big allocators are doing at this point. Bain 11 North, MCB and Echo, Town Lane and Site One. Something that five, seven, ten years ago. Oh man, we can't do retail because Amazon's going to take everything. My, how the turntables have turned. And Norgus, which is I think the largest sovereign wealth fund in the world.
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A
They were until very recently.
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B
Yes, or they were until very recently. One of my favorite stats period is that they own 2% of all publicly traded securities in the world. Given their scale, this is not an enormous bet. But it does say something, that it's their second One on retail real estate this year just speaks to how asset classes can shift. And then as soon as somebody jumps in and the capital flows are behind it, owning retail, especially grocery anchored open air right now is really, really hot asset class and great place to be.
- [09:17]
A
Nikolai Tangen. If you're listening to this, have us on your podcast. That's it for the punch list. When we come back, some columns to examine. Little column A, little column B. Well, what if I told you insurance could become an asset instead of just an expense?
- [09:40]
B
I'd say you're trying to sell me something, but also I'm interested.
- [09:44]
A
Fair. Here's the Math. You spend 2 million on insurance annually. Loss ratio is well under 30% over five years. That's about 10 million out the door, zero return.
- [09:53]
B
Painful but accurate.
- [09:55]
A
What if 7 million of that built up in reserves that you actually owned?
- [09:58]
B
That's pretty interesting. Tell me more.
- [10:00]
A
Real property captive built specifically for scattered site gps. Top carriers issue policies for lender compliance. Reserves stay in your account and after a few clean years you're converting spend into equity.
- [10:11]
B
I like this. Because that's what the big boys do.
- [10:13]
A
Exactly. And now it's accessible for mid markets drivers like yourselves too. Check out the platform@rpcaptive.com that's rpcaptive.com, and tell them the promote sent you.
- [10:29]
B
Hi Overhead Midtown. These are live pictures From News Copter 7. We're focused on that taller building in the center of your screen. The orange construction construction teams working around
- [10:38]
A
the clock to stabilize that high rise that had been at risk of a partial collapse.
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B
Right now the city is watching what
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A
it calls an extreme, extremely serious situation.
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B
The threat of a high rise collapse in midtown Manhattan that led crews to evacuate multiple buildings nearby.
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A
This is one of those moments in the narrative of an asset class that could be a turning point. Last Tuesday, the Pfizer building conversion, which is a 1600 unit conversion in midtown Manhattan, probably the most visible project of its kind in the country, had a major scare. Project workers discovered buckled columns and bending beams on the 21st floor. And so there was an evacuation. Evacuation of that building and several buildings around it as well. I can't stress to you how high profile this project is. The cities put a lot of attention and TLC into it. It got the largest construction loan of its kind at the time. And now it looks like Nathan berman, who's the CO GP on this, is going to have to reconstruct 15 of the floors.
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B
That's a BFD that is not really in your pro Forma and when you do the sensitivity table of returns, that's little bit off the sheet there. As you said, the most visible office to resi conversion project in the country, not just because of being the largest one in New York. It's who's involved, how much money the city's given to it for buckling columns. You don't often get the governor of New York giving quotes to press.
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A
Yeah, Kathy Hochul weighed in right after Mamdani and there's been consistent press that when this podcast airs will be about a week out. And we've seen multiple stories a day. The New York Times had a follow up that had four reporters. If you're putting four reporters on a story, you're really taking it seriously.
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B
90,000 of these units are in the pipeline across the country. It is being seen as a way to revitalize urban centers and downtowns. And this guy, Nathan Berman is the most experienced person doing this probably in the country.
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A
Nathan Berman was doing this in the 90s with the tax abatement program called 421G. What is now known as the Financial District was in large part because of Nathan Berman going in, taking older office stock and converting it into apartments through this tax abatement program. He became the guy. And then for a few years he was kind of not doing as many of these because it just wasn't in the ether in the same way. But over the last four to five years, he is suddenly everywhere. I would say he's one of the most important developers in New York at this point.
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B
He's somebody who the Rudens brought into a building they owned so they could learn how to do this from him. But it's not just that. This is the single largest development loan ever given to a project like this. Madison Realty Capital gave a $720 million loan, which is just a staggering amount.
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A
This was the biggest ever single loan that they had done. This is one of those things, when this happens, you're kind of damned if you do, damned if you don't. He was asked, is the building going to collapse? And he said, no. And the headline is, Berman denies that the building is going to collapse. It's one of those like, did you beat your wife? Kind of questions. It's impossible.
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B
That's exactly what I was going to say. The problem here too is that it's so visible that any fix now has to be, what's the Warren Buffett thing about building a bridge? You have to have twice as much capacity as what any reasonable use might be. They're going to have to do way more because it's so visible. And like, nothing bad can happen here. All of these projects, no one's stealing a building like this. I haven't seen the om. I haven't seen the financial. I haven't seen any of that. But I can guarantee you that this is not like a 30 IRR that they're showing here.
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A
Everything is perfectly penciled out. So everything really has to go according to plan to make this work.
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B
There was a great article in the closing with the GFP guy, and they talked about his biggest mistake. And he goes, we had a, whatever, $100 million loan. He's like, I just remember every day saying, like, this is costing us $900,000 in interest or something like that. In the last week, while he's been out here denying that the building's going to collapse and fighting the good fight in the press, that loan is still ticking, that carry is still going, and that basis is getting bigger every single day.
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A
Just to your point, Will Berman's statements and his actions that he's taken reflect the growing uproar over this project? Initially, he dismissed this as like, quote, very small. This is a snafu. It's nothing more than that. Just a couple hours later, he was quoted as saying, this was a freak accident. So this isn't one off, isolated thing. We're going to handle it. And then by the next day, he proactively went out and told Bloomberg, we we're going to reconstruct 15 of the floors. And he said the following. It will be reskinned. Everything will be leveled, fixed in place, and it will be brand new. Now, this is meant to obviously reassure the public and I'm assuming, reassure the government that has bought into this project in such a big way. But doesn't that nuke the pro forma? Doesn't that complicate conversations with lenders and LPs and I would think also complicate conversations that he's having for future fundraising, because we've talked about this, right? These are not discrete jobs that you do one and then you go raise for the other. You're doing this and at the same time, you're probably raising for six more of its ilk. As we're talking. Nathan Berman and some partners, Intervest, I believe, are doing an office to resi conversion of an even bigger project called 111 Wall street for which they got an $867 million construction loan. This is all happening. And if there is a big question mark on this One, you got to think, is this a domino situation?
- [15:57]
B
Yeah. And there's sort of been a trail of construction issues that have followed Nathan Berman across a bunch of projects. I'm not trying to damn him or anything. These are very difficult, very complicated. You're dealing with buildings that are super old. You don't know what's behind the walls. It's much harder to convert something than it is to build it new. We play with live ammo. He's a big boy. This is just what happens. He's currently being sued for construction defects at 443 Greenwich, which is a huge celebrity hub. I think Lewis Hamilton bought there. Jennifer Lawrence.
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A
Lawsuits around construction are not unusual in New York City. No, they happen all the time. But when you have such a high profile incident, everyone's going back to the well and seeing what else is out there.
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B
The local news site, the city saw that there was a history of construction safety violations at this site. That's normal. But then you go and you have a rep for one of the unions. I think it was on the steam Fitters union. What is a steam fitter? I don't even know.
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A
Isn't it the sexiest union job you can think of?
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B
It's up there, I guess. But he said that the I beams are bending like cigarettes in there, which is super dangerous. They chose profit over safety and put my members, as well as every construction worker over here in jeopardy. And Berman, of course, dismissed that claim as nonsense. But important fact here too is that Metro Loft, which is Berman's firm, they tend to self perform as the GC on these office Drezi jobs.
- [17:17]
A
This is the big point, right? The promote, in some cases almost doesn't matter because you're making your money and as we call it, FIA palooza, right? You're making your money in five different ways before you have to worry about the exit or the returns at the end of the project. Nathan Berman, for a lot of his projects, self performs. He also, as I understand it, owns a piece of the construction manager called ccm. He's partnered with CCM on pretty much every major office to resi project he's done. And our sources tell us that he actually owns an interest in that company as well. So there's a lot of no conflict, no interest happening here.
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B
Let's also just talk quickly about what actually happened. We hear I beams buckling. What does that mean? How could that have happened in a project like this? So essentially, building was built in a couple of stages and not everything's uniform.
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A
We should Say Will, though, it's not one building, but two.
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B
Yes, yes, it is.
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A
You're essentially stitching together two buildings and creating 1600 apartments in that carcass.
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B
Right. And so what happens is it's really hard to calculate what the loads are going to be. You can perform it and have the model and whatever, but, you know, in a building like this, you kind of don't know when you're stitching stuff together. There's a lot of lateral stress side to side that hasn't been tested.
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A
I spoke with someone who is a GC on big office to resi projects. I had them handicap a couple of things that may have gone wrong. So one was a couple of columns were not reinforced per the structural design. This is also what Berman is saying happened at the project. Two, it could be that the structural engineer either missed the columns or just didn't calculate how much reinforcement they needed correctly. And three, someone did something stupid. And we won't know for a long time. There's an investigation underway. Of course, we will not know for a bit.
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B
I worked on a development deal one time where a city inspector and us as the developer missed. I was a junior analyst. I didn't miss this. I had no idea what was going on. But we had a podium apartment project six stories over a podium garage. And we didn't put a tension rod in the middle of the parking garage podium and we built three stories. Somehow this got missed. The next three rounds of city inspections, someone comes in and goes, hey, if you guys build like another story, the building's gonna collapse because there's no tension rod. Stuff happens because we're human beings and there are mistakes. But, yeah, the cat's really out of the bag here. And so this is just full triage rebuilding this thing. Maybe there's some, I don't know, construction insurance, enough to know whether that gets paid out.
- [19:38]
A
I wonder if that kicks in here. The lender is typically first in line, right, to get paid on insurance drops, right?
- [19:43]
B
They're named, insured, they have a claim on those proceeds, but then generally like gets released to you to go rebuild it. So it just depends on the policy and on deals this size, I have no clue. This has got to be such a complicated loan agreement.
- [19:56]
A
If I'm Madison here, what am I thinking about? In general, debt funds like Madison will often issue a loan and then go and back leverage it. And in this case, I believe Madison sp, that has a repo lender, Morgan Stanley has issued this loan. So I'm assuming that what they're doing for now is just monitoring the situation, talking to their warehouse lender. Just making sure, hey, we're on top of it. We're watching what's going on. Having several conversations with Berman and the cogp. Right.
- [20:22]
B
It's really just communication at this point. I mean, it wouldn't shock me if some folks from Madison were in the Metro Loft offices. So if I'm Madison, I know how much you have in contingency in the budget because I had to approve the budget as part of the construction loan process. But I want to know, are you bringing more cash to the table? Are you filing an insurance claim? What's going on with those proceeds? Have your communications with your LPs been are they ready to put up more money? All of those things because the budget's shot right now. Even a month delay in a normal project is a real impact to the budget. Numbers are here so big though, and everything is so complicated. The labor is so expensive that it's worse than if it was just a run of the mill garden merchant builder job off the turnpike.
- [21:05]
A
The other thing to think about, there are a lot of complications that can happen in big projects, but not all of them have the same deleterious impact on leasing necessarily. And this could be actually very scary for leasing. Right.
- [21:18]
B
That's a great point. As someone who is moving back to New York and looking at apartments, the subreddits about some of these office residential conversions are real scary.
- [21:27]
A
Like they've been lit up as well in the last week or so because of this.
- [21:31]
B
Yeah, that's a really great point. This is what, 1600 units. This is going to take years.
- [21:36]
A
Leasing up this kind of project, even if everything is going great, is a marathon. It's a real undertaking. And with this giant question mark reconstruction or not, it is something definitely to think about. We've spent all this time Will, and we haven't actually talked about the other partner on this project who is one of the promotes pet characters.
- [21:53]
B
I think part of it is because there's a lot of aggravation here and this guy's aggravation free.
- [21:59]
A
We'll get to that right after this break. So will you violate any debt covenants recently?
- [22:10]
B
So funny you should ask. I have been in technical default recently. I mean, who among us, Right? But not since Q4.
- [22:18]
A
Ooh.
- [22:19]
B
And that's not because I paid off the loan. It's because that's when I started using LoanBoss.
- [22:23]
A
I can't believe how old school some of our listeners are. They're still crunching DSCRs in Excel and all that.
- [22:28]
B
Ugh, total waste of time. Risky business to boot. Loan Boss runs the entire process for me. One click Covenant testing. Incredible. Instant cash flow forecasting. Impeccable. And my favorite nerdy delight, the live forward curve. So I hate having to go download the forward curve and then it's always vertical and you got to alt HVT to have it go horizontal. Make sure the index match works like ridiculous.
- [22:52]
A
They've just got it sorted here for you.
- [22:54]
B
Much better. So thank you Loan Boss listeners.
- [22:58]
A
Check them out@loanboss.com that's loanboss.com and tell them the promote sent you. David Werner is the unorthodox dealmaker who actually put the site together. So he owned the fee at 235 East 42nd street and then he tied up 219 East 42nd street with Berman. And what David Werner does, for those unfamiliar, he's one of those fascinating New York real estate only in New York kind of characters. So what he does, he'll tie up a deal very quickly because he'll promise cash right away. Very, very minimal DD in a duffel
- [23:38]
B
bag around his shoulder in the room.
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A
Essentially a short guy with a high pitched voice and a lisp as I've been told. And he comes in, he's like I'm gonna get this done right. And he does actually get it done. So when he's tied up the deal before closing, he'll actually go and then flip the contract to the real money people. And instead of taking his nut, what he typically does is he flips some of that profit in as equity. That's the David Werner model in a nutshell.
- [24:05]
B
So this is a vast oversimplification. Imagine a wholesaler of single family homes in the suburbs. Like that's kind of what he does
- [24:13]
A
on some of the most blue chip Manhattan assets you can think of. Anyway, given that Nathan Berman is the face of this project, is self performing as a GC and might have pretty deep ties to the cm. What does a developer like David Werner do?
- [24:28]
B
I think it's what's your exposure? I would love to see their agreement. I have no idea what it looks like because if I'm a co gp, I'm going to have to bring more cash to the table. Am I on the guarantees? What's my exposure? Who's guaranteeing this thing? Not just the completion guarantees, but who is the warm body for Madison. Generally speaking, you need net worth equal to or greater than the loan amount liquidity of 10% of the loan amount or two years of interest expense, depending on who the loan is, what type of product it is, or something like that.
- [24:59]
A
David Werner has always been a Wizard of Oz type. You might actually have to look under the machine or what have you.
- [25:04]
B
This is very much the statement of you owe the bank a million dollars, the bank owns you. You owe the bank $100 million, you own the bank. This is really Madison's problem. That's what the answer's going to be from Nathan and from David Warner. Things persist here over a couple of months and look like it's going to be a bigger issue.
- [25:22]
A
Right, but this is not a one off job. As we just mentioned, Nathan Berman's doing half a dozen of these and is going raising money consistently. Imagine having a conversation with an lp,
- [25:33]
B
he's already given back one of these.
- [25:34]
A
I mean this is given back a couple of buildings. Remember he's the one who said, I've put the lender out of my mind or something like that on one of
- [25:41]
B
the projects that is a part of it. But at the same time you've got to win the battle in front of you. Obviously you want everything to go smoothly and it helps you raise the next project, next project. But you got to do the right thing here for the project itself. And that's going to be really playing hardball. There's a universe in which it gets very ugly between all of these different parties and it's too early to tell. Maybe the reconstruction gets everyone on board. He raises a little more money and you know, we have a smooth project and seven years from now it's stabilized. This is going to be a project that has three loans at least. You know you're going to have a loan. You know, midway through construction you're going have a loan at co. You're going to have a loan pre stabilization and then you're going to have perm. It's going to be something like that. You really want to be Henry Bodak on this deal?
- [26:29]
A
Oh, you know who was actually involved in this one? It was IPA randomly. IPA brokered this transaction. Really? Yeah, yeah. It's funny good for that because I remember when we broke the news of this, I got a LinkedIn message from an IPA broker saying you're making powerful enemies here. I'm like, dude, I don't care about any of this nonsense anyway. We haven't talked about the other stakeholder here, the city. The city has put a lot of stock into office to resee projects. There's the 467m tax abatement from New York State as well. So the government is watching this pretty closely too.
- [26:58]
B
What scares municipalities is the hollowing out of the tax base is if they go elsewhere and there's not enough economic activity in certain areas because the office stock is so old. And so this is a way to bring folks back into those areas, breathe life into them and increase the tax roll. So if this goes sideways and it puts a pall on the entire sector, this is 2% of all of the office to resi apartments in the country. Is this project substantial? Substantial, as a PE guy would say, or a good friend that can have real ramifications for the city's budget and for city affordability, which is a hot button issue. And it's really going to be the litmus test for whether or not Hochul and Mamdani are successful. Is New York City affordable and safe? And if we lose 1600 units of housing and buildings are falling on people, it's less affordable and less safe.
- [27:59]
A
Okay, I'm here with Aaron Kurowitz from Bravo Capital. Aaron, you've done two and a half billion dollars or so of deals so far. How are you thinking about scale going forward?
- [28:07]
C
There is a divergence between optimizing for scale and optimizing for quality. And when you're running a debt fund, you have to pick, you have to say, am I really fee driven and do I want to maximize how much I could put out? And the other business model is, what we've chose is slow and steady. We want the reputation to proceed ourselves. Investor returns, that's more important for us than volume. If you look at some of the REITs they were forced to deploy in the realm of 2 to 8 billion a month. First the AUM gobbled right, as your sweatshirt says. But then they were forced to like regurgitate that AUM more rapidly than they really could. And it forced them to pick terrible deals. Their returns are negative. To just go for scale for scale's sake, that's a short lived business model.
- [28:56]
A
Thank you, Aaron. And where can people find you?
- [28:58]
C
People could find us@bravocapital.com.
- [29:10]
A
The quest to build data centers is really a battle on two fronts or three fronts. You got to get the power right, then you got to get the money to build this thing. And you got to have the political buy in at every level and the community buy in to make this happen.
- [29:24]
B
Are you saying that then you get the woman after you get the power and the money, you got the Estonia Montana, right?
- [29:31]
A
Come on. I set you up with it the bullshit. No.
- [29:34]
B
Yeah, okay, fine. Then when you get the money, you get the power.
- [29:37]
A
So Blackstone is walking away from this massive data center project that they had planned in Prince William County. Let's just talk through it. TikTok it.
- [29:46]
B
This has been going on for a long time because Virginia, as we've talked about, has been the bullseye data center central right data center alley, Dulles Airport. What's happening though is that this is one of the more affluent communities in the United States and with political juice, yeah, with political juice pro proximity to the Capitol, quite literally. Guess what? People don't love having massive data centers that have weird noises. Increase your utility bills.
- [30:13]
A
That noise seeps into your skull.
- [30:15]
B
Matthew, what's happening though, I think, which is so interesting, is that you're having boards of supervisors, zoning boards approve projects and then the people still back out anyway, the developers still back out, given the backlash from the public.
- [30:31]
A
Just put some scale on it. This was bigger than Hudson Yards. I think they were planning to build 22 million square feet of data centers, 34 buildings and 1.7 gigawatts of capacity. So we're major project here.
- [30:43]
B
This is QTS.
- [30:44]
A
Basically. Blackstone did a $10 billion take private of QTS which became their data center arm. And the way that they've positioned it is this is Blackstone's lens into the AI boom.
- [30:55]
B
They can sop up so much capital and that's really what they're looking for is how can we put out tons of capital in a way that's in a secular tailwind that's defensible to our LPs and we think has a range bound investment outcome.
- [31:09]
A
Adding to that point, when you look at the base of LPs that they have AI is a strategic imperative for many of them. Some of the world's biggest sovereign funds out of the Middle east as well, countries like the uae, Saudi, et cetera, have made getting into the AI race early a cornerstone of their theses long term investment theses. And Blackstone and Brookfield and companies like that are ready, let's go, let's get all that money.
- [31:32]
B
They're also doing it for retail investors because if you're a single digit net worth person and you want exposure to AI, how else are you going to get it? You're not getting into anthropic, you're not getting into OpenAI, but you can get into Blackstone's data center public vehicle. And they've really been trying to grow this. So this, it was a joint venture with Compass Data centers.
- [31:51]
A
It'll be good to say exactly what happened initially, what was struck down.
- [31:55]
B
To make a long story simple, what happened is that they needed rezoning, approvals got them. A court voided it. Then Blackstone took the fight to the Virginia Supreme Court to try to appeal it and then decided the litigation wasn't worth pursuing, which is really saying something because this is a tens of billions of dollars project. Even if you spend $40 million in legal fees, the optionality, as everyone loves, is still pretty the expected positive value. So they were seeing the writing on the wall, not just legally, but also the backlash that has gone here. And this is not the only project which is seeing this. Lancaster, Pennsylvania has seen a lot of pushback to a coreweave and Blue Owl data center. Carolina's just had the same type of thing happen where a developer backed out. We talk about income inequality, inflation, cost of living increases, and I think the public is really seeing the zoning and power regulations as a rich get richer issue. It's, oh, you want Blackstone, you want John Gray, you want all these massive companies which are making billions of dollars. You're giving them stuff for free and you're making me pay for it. Real estate, one of the great things about it, touches everything. And right now you have to know what's in the zeitgeist. And the zeitgeist is not.
- [33:07]
A
I mean, data centers have broken out. I have lefty Instagram friends, and a lot of them are posting anti data center stuff on their feeds, especially in
- [33:16]
B
the more educated pockets like Prince William county in Northern Virginia. These are people who are saying everything's getting worse and it's because of the thing you're putting up on the old Johnson farm around the corner. What's crazy is that the demand for compute though, is still not going to be met.
- [33:33]
A
And the fundraising is reflecting that. Right. The Starwood $10 billion fund that they just raised.
- [33:38]
B
10.2, don't forget the point two, half of which is Starwood itself, investing the cone.
- [33:45]
A
Wow. And more than a third of that allocation is going to data centers, which I believe is 2x what it was last time around.
- [33:51]
B
Yeah. And I think Barry had the quote that defines the real estate epoch right now, which is the firm has never been so excited and so terrified at the same time.
- [34:01]
A
That's perfect. I want to make this point very explicit. A firm like Blackstone, when they do these kind of things, they rejig every arm of their business and the head honchos worldviews to reflect that investment thesis so Blackstone is now an AI infrastructure company above everything else that they do. Steve Schwartzman's philanthropy has been directed to AI research efforts. John and Mindy Gray just announced a big grant to use AI to advance cancer research. Half of the running videos are now talking about infrastructure and AI and data centers and all that. It's kind of staggering to see in practice how they turn the entire ship in that direction. Right?
- [34:43]
B
It really is. I just want to put some stats in the tape just so we have. Yeah, the four biggest US data center markets are Northern Virginia, Atlanta, DFW and Chicago. And they added 2 gigawatts in the last 12 months, which is 33% increase in supply. So we talk about like multifamily. And if you're in Dallas, you say, oh my God, there was 7% of supply, had it. Vacancy is going to be 78% forever. But right now, across those four markets, there are few fewer than 75 megawatts available. And supply is falling further behind, given a lot of these projects now being stalled or put out. So despite everything, the demand is here. You don't shift the entire armada at Blackstone for something that doesn't have massive secular tailwinds, massive supply demand fundamentals that are attractive. And this has that for sure. You want to put $20 billion of equity capital against this because where else are you seeing it? Where else are you seeing 33% supply increases just get absorbed like that with plenty behind it, and it seems to
- [35:46]
A
be increasing just like they did with the multifamily stuff with the build to rent stuff. I think there's going to be a pretty concerted ground game to handle some of these challenges as they come up, because, okay, they pulled out of this one, but if this keeps happening, they're going to be in some serious trouble.
- [36:01]
B
This isn't a public equity where you can press a button and buy it. It's not even a private equity where it's an access game. And if you're in the right spheres of influence on the west coast, you can be one of the SPV Bros in anthropic. To build these assets which power those things, you have to go to real people's land. You have to go in front of the community meetings with 25 people who might be the backup snowplow driver for the county.
- [36:24]
A
You got to have a certain hokey charm to your institutional pitch.
- [36:27]
B
You need a ground game, and it's really like winning hard hearts and minds one person at a time.
- [36:37]
A
That's it for the Promote podcast this week. Will the Pfizer conversion end up being a poison pill for office to resi? And can the sheer quantum of capital being bet on data centers overcome the rising backlash against them?
- [36:49]
B
Some of those steel girders might have taken too many GLP1s. But anyway, we'd like to thank our sponsors without whom we would just be two guys talking over the Internet in their 30s. Attend? Not for that much longer.
- [37:02]
A
Ouch. So thank you. Bravo Capital, a leading hut and bridge lender that lives and breeds cap stacks. They are@bravo capital.com real property captive.
- [37:11]
B
They're the first group captive for mid market owners and you can find them at rpcaptive.com and Loan Boss, the best
- [37:17]
A
in class CRE debt management software. Find them@loanboss.com we're two episodes away from our 70th. Every 10 episodes, we're going to try to do a special episode. Do we want to tell people what it's about yet or what do you think?
- [37:29]
B
Yeah, let's not do the Bill Simmons thing on the rewatchables where we don't tell people the movie. So we are going to be covering the Reichmans.
- [37:35]
A
The Reichmans. I'll see you next week, man. Thank you.
- [37:38]
B
Thank you.
- [37:39]
A
Ciao.