Why Real Estate Dynasties Are Breaking a Cardinal Rule to Never Sell

Summary

WSJ What’s News: Why Real Estate Dynasties Are Breaking a Cardinal Rule to Never Sell

Release Date: November 12, 2024
Host: The Wall Street Journal
Episode Title: Why Real Estate Dynasties Are Breaking a Cardinal Rule to Never Sell

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Introduction

In this episode of WSJ What’s News, hosted by Justin Baer and Tracy Hunter, listeners are provided with an in-depth analysis of significant developments across various sectors, with a special focus on real estate dynasties deviating from their long-held traditions. The episode also covers noteworthy updates from Wall Street, regulatory actions, and major corporate strategies influencing global markets.

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Real Estate Dynasties Breaking the "Never Sell" Rule

Overview:
The core of this episode delves into the unexpected trend of prominent real estate families, such as the Rudens and the Kaufmans, choosing to sell their core properties—a move unprecedented in their storied histories.

Key Discussions:

• Historical Context and Shift in Strategy:
  Justin Baer introduces the topic by highlighting that over the past 24 months, New York real estate families have sold approximately 10 office buildings, a sharp increase compared to fewer than five deals in the previous decade (08:23).

• Reasons Behind the Sales:
  Peter Grant, a WSJ reporter, explains, "The families now are under the same sort of financial pressure that the entire office industry is under. After Covid, the return to office was a lot weaker than landlords would have hoped. Demand is now down. Cash flow has tumbled. They're facing debt maturities. And that's putting a lot of financial strain on them, so they have to look to sell" (08:53). The decline in office space demand post-pandemic has led to decreased cash flows and mounting debt obligations, compelling these dynasties to reconsider their traditionally conservative investment strategies.

• Impact on Family Wealth and Generational Transfer:
  Grant further elaborates on the broader implications: "Most of the families are going to be okay. Nobody should be worrying about them. However, they're not getting as much as they would have gotten before the pandemic... they're no longer transferring these assets from generation to generation. In the past, these handoffs would always produce wealth for the next generation" (09:16). The reduced sale prices compared to pre-pandemic valuations mean that the anticipated wealth transfer and sustained income streams for future generations are now at risk.

• Internal Family Dynamics and Financial Strain:
  The episode sheds light on the internal tensions within these families. Grant notes, "There always has been tension within these families. Everybody has different financial incentives... now the case is that instead of getting quarterly distributions, there's something called a capital call, which means that partners have to pony up a certain amount of money to make new capital investments in these buildings. That greatly increases the kind of stress that's on these families because some of the family members just aren't going to have the money" (10:05). This shift from receiving regular income to having to inject capital exacerbates financial pressures and familial disagreements.

• Market Responses and Conversion Trends:
  When asked about the buyers of these sold properties, Grant responds, "The buyers of the building tend to be investors who are planning to put these properties to a different use, primarily multifamily, primarily apartments" (10:59). The conversion of office buildings to residential apartments is becoming a prevalent trend, driven by sustained demand in the multifamily sector despite the downturn in office space utilization.

Notable Quote:
"Instead of getting quarterly distributions, there's something called a capital call, which means that partners have to pony up a certain amount of money to make new capital investments in these buildings." — Peter Grant (10:05)

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Wall Street's Resurgence: Rise in Bonuses After a Drought

Overview:
Transitioning from real estate, the podcast explores the Wall Street environment, highlighting a notable increase in employee bonuses—a first in three years.

Key Discussions:

• Factors Driving Bonus Increases:
  Tracy Hunter explains, "If you look back at 2022 and 2023, there weren't a lot of deals... rising rates, it became more expensive for essentially everyone from consumers to big companies to borrow money... that fueled confidence for both companies and investors and got these businesses rolling a bit" (05:34). The easing of financial constraints and renewed economic confidence have catalyzed more deals, positively impacting bonus distributions.

• Beneficiaries of the Bonus Surge:
  According to Hunter, "Probably the biggest winners this year were those that help companies sell debt out to investors... they should see a bonus increase of 25 to 35% over a year ago. Stock underwriting... between 15 to 25%... stock traders also looking like they're getting a nice raise of 15 to 20%" (06:19). The debt capital markets, equity capital markets, and stock trading sectors are the primary beneficiaries, reflecting the areas experiencing the most significant deal activities.

Notable Quote:
"Probably the biggest winners this year were those that help companies sell debt out to investors." — Tracy Hunter (06:19)

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U.S. Political Developments and Regulatory Actions

1. Trump Administration’s Appointments:

• Key Appointments:
  President-elect Donald Trump is strategically assembling his administration, with notable appointments including South Dakota Governor Kristi Noem to lead the Department of Homeland Security (00:46). Noem, alongside Angela "Tom" Holman and Stephen Miller, will play pivotal roles in shaping immigration policy and enforcement.

• Implications:
  Noem’s previous actions, such as deploying National Guard troops to the southern border and resisting Afghan refugee resettlement, signal a stringent approach to immigration. Her leadership is expected to drive policies aimed at curbing illegal border crossings and executing large-scale deportations.

2. Justice Department vs. UnitedHealth Group:

• Antitrust Concerns:
  The Justice Department has filed a lawsuit to block UnitedHealth Group’s $3.3 billion acquisition of Amedisys, citing concerns over market dominance in home health and hospice services (07:37). This move aims to prevent the consolidation of healthcare services under a single umbrella, which could stifle competition.

• Implications for the Healthcare Sector:
  UnitedHealth’s acquisition strategy, including the prior purchase of LHC Group, indicates a trend towards consolidating healthcare providers to offer comprehensive services. However, regulatory pushback highlights the balance between business growth and market competition.

3. Elliott Investment Management Targets Honeywell:

• Call for Corporate Restructuring:
  Activist investor Elliott Investment Management is urging Honeywell to dismantle its sprawling conglomerate structure by separating its aerospace and automation businesses (07:37). This recommendation comes after Honeywell’s share performance lagged behind the broader market.

• Potential Outcomes:
  If Honeywell heeds Elliott’s advice, it could lead to more focused business units, potentially increasing operational efficiency and shareholder value. However, Honeywell has expressed openness to shareholder perspectives while indicating a willingness to engage with Elliott (10:12).

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Tech Industry Updates

Meta Platforms and European Regulations:

• New Ad Options:
  Meta Platforms is introducing an option for European users of Instagram and Facebook to receive less personalized ads for free, responding to EU regulators' demands for a non-intrusive ad experience (11:37).

• Regulatory Challenges:
  Despite the concession, there is skepticism about whether this move will satisfy EU regulators. Tech reporter Sam Schechner suggests that Meta’s offer may not be sufficient, indicating ongoing tensions and potential for further negotiations (12:10).

Notable Quote:
"Meta, for its part, has been making more noise about how the fact that they think some of these rules are going to stifle innovation... they've told regulators that this will hurt their bottom line." — Tracy Hunter (12:23)

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Market Movements and Economic Indicators

Government Bond Yields and Stock Market Rally:

• Market Dynamics:
  A rise in government bond yields has paused a typically vigorous stock rally, with the S&P 500 and Nasdaq experiencing slight declines of 0.31% each, and the Dow also slipping (07:37). This indicates a cautious investor sentiment amid changing interest rates.

Impact of Rising Yields:
Higher bond yields often lead to reduced attractiveness of stocks, as fixed-income investments become more lucrative. This shift can temper stock market enthusiasm, especially in growth-oriented sectors.

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Conclusion

This episode of WSJ What’s News offers a comprehensive overview of the shifting landscapes in real estate, finance, politics, and technology. The unexpected decision by established real estate dynasties to sell core properties marks a significant departure from tradition, driven by economic pressures and changing market demands. Concurrently, Wall Street's rebound in bonuses reflects renewed business confidence and deal activity. Political appointments and regulatory actions underscore the intricate interplay between government policies and corporate strategies. Finally, tech giants like Meta Platforms navigate evolving regulatory environments, balancing innovation with compliance. Together, these narratives paint a vivid picture of the current economic and political climate, providing listeners with valuable insights into the forces shaping today's markets.

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Notable Timestamps and Quotes:

• "The families now are under the same sort of financial pressure that the entire office industry is under..." — Peter Grant (08:53)
• "Probably the biggest winners this year were those that help companies sell debt out to investors." — Tracy Hunter (06:19)
• "Instead of getting quarterly distributions, there's something called a capital call..." — Peter Grant (10:05)
• "Meta... has been making more noise about how the fact that they think some of these rules are going to stifle innovation." — Tracy Hunter (12:23)

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Produced by Pierre Bienname and Anthony Bansi, with supervising producer Michael Kosmidis. For more updates, tune into WSJ What’s News daily.

Transcript

[Tracy Hunter]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news there. [e-mail] WashingtonWise.

[Justin Baer]

Wall street welcomes back Fatter bonuses and real estate dynasties are beginning to do the unthinkable sell their core properties.

[Peter Grant]

From the very beginning. They realized as long as you held onto these properties, they would continue to gain in value. And that was the message that they passed on from one generation to the next. And what's happening right now is that the office market looks so bleak that it no longer makes sense to do that.

[Justin Baer]

Plus, the US Justice Department hits the brakes on UnitedHealth's expansion in the home health and hospice care industry. It's Tuesday, November 12th. I'm Tracy Hunter for the Wall Street Journal. This is the PM edition of what's the top headlines and business stories that move the world today? President elect Donald Trump is continuing to fill out his administration as he prepares to return to the White House, according to people familiar with the matter. Trump has chosen South Dakota governor Kristi Noem to lead the Department of Homeland, fleshing out the team that will oversee his immigration agenda. Noam will join anti immigration hardliner Tom Holman, who will serve as Trump's border czar, and Stephen Miller will be his deputy chief of staff for policy. They'll be responsible for implementing Trump's plan to crack down on illegal border crossings and conduct the largest mass deportation operation in US History. A Trump transition spokeswoman and a spokesman for Nome didn't immediately respond to requests for comment. If confirmed, Noem would oversee an agency with a wide ranging mission. The department is responsible for natural disasters, cybersecurity and transportation security in addition to its central role in immigration enforcement. Noem was elected as South Dakota's first woman governor in 2018. In 2021, Nome sent 50 National Guard soldiers to the southern border and expressed concern about allow Afghan refugees evacuated after the fall of Kabul to resettle in her state. In a separate development, Trump also announced today that he would nominate former GOP governor of Arkansas and presidential candidate Mike Huckabee as U.S. ambassador to Israel. What questions do you have about Trump's campaign promises and how they may be implemented and what they mean for you? Send a voice memo to wnpodsj.com or leave a voicemail with your name and location at 212-416-4328. We might use it on the show in business NEWS the Justice Department today sued to block United Health Group's $3.3 billion acquisition of Amedicis, alleging the deal would give the health industry giant too much power over the market for home health and hospice services. The government's move represents an effort to stem the roll up of different healthcare services under a single owner. UnitedHealth last year acquired one of Amedisys major competitors, LHC Group. UnitedHealth also owns the country's largest health insurer, UnitedHealthcare, and its Optum arm includes a sprawling network of physician groups, clinics and a large pharmacy benefit manager, among other assets. Ameticists agreed to United's takeover back in June 2023, and after amassing a $5 billion stake in the company, activist investor Elliott Investment Management is calling on Honeywell, one of the few remaining industrial conglomerates, to break itself apart. Honeywell has avoided being broken up like its peers General Electric and Dow Chemical, but recently its share price underperformed the broader market, leaving the roughly $130 billion giant vulnerable. In a letter sent to Honeywell's board, Elliott is calling for big changes. It is recommending Honeywell separate its aerospace and automation businesses. Honeywell makes everything from home thermostats to aircraft landing gears. It gets about 40% of its annual revenue from the aerospace business, which makes engines and cockpit systems for Boeing and others. A Honeywell spokesperson said the company appreciates all shareholder perspectives and looks forward to engaging with Elliott and obtaining their input in US Markets. Today, a rise in government bond yields put a pause on a vigorous stock rally that has propelled major indexes to records. In recent sessions, The S&P 500 and Nasdaq slipped 0.31%, respectively, and the Dow loss raises in bonuses come back to Wall Street. Bonuses often make up a big chunk of pay for employees at financial firms, and for the first time in three years, they're on the rise. Justin Baer is a senior writer for the Wall Street Journal, and he joins us now. So, Justin, what's going on? Why are we seeing this rise in bonuses after so long?

[Tracy Hunter]

If you look back at 2022 and 2023, there weren't a lot of deals. Companies weren't necessarily the direction of the economy, and so they weren't merging or acquiring other companies as often as they had. With rising rates, it became more expensive for essentially everyone from consumers to big companies to borrow money. So that gave them less incentive to make the kinds of investments that you would need to finance. That all kind of began to change as we got into this year. And all that sort of fueled confidence for both companies and investors and got these businesses rolling a bit.

[Justin Baer]

Who will benefit the most from this bonus increase?

[Tracy Hunter]

We cited a survey and analysis that a pay consultant does every year. And what they found in talking to a lot of these firms was that probably the biggest winners this year were those that help companies sell debt out to investors. So think of bonds, think of loans. That was one group that is certainly in line for bigger bonuses. Also true for those that do this mentally similar role in the stock market. So they help companies sell shares, sell various derivatives based on stocks. And they did quite well as well for the debt capital markets folks underwriting bonds and other debt structures primarily for companies, they should see a bonus increase of 25 to 35% over a year ago. That's according to Johnson, the pay consultant, stock underwriting, otherwise known as equity capital markets. They'll see a nice bump, Johnson estimates between 15 to 25%. Stock traders also up looking like they're getting a nice raise of 15 to 20%. And as far as the advisors to companies over mergers and acquisitions, they're looking at a 5 to 10% increase.

[Justin Baer]

That was Wall Street Journal senior writer Justin Baer. Thank you so much, Justin.

[Tracy Hunter]

Anytime.

[Justin Baer]

Coming up, real estate scions are rethinking a key part of their business. That's after the break.

[Tracy Hunter]

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[Justin Baer]

Families who built multigenerational wealth through real estate. Empires like the Rudens and the Kaufmans are breaking a cardinal rule. Never sell real estate. Investment banking firm Estill Secured says that New York real estate families have sold about 10 office buildings over the past 24 months. In the previous decade, there were fewer than five such deals. Peter Grant is a reporter for the Wall Street Journal and he joins us now. So, Peter, why are these families selling now?

[Peter Grant]

Well, the families now are under the same sort of financial pressure that the entire office industry is under. After Covid, the return to office was a lot weaker than landlords would have hoped. Demand is now down. Cash flow has tumbled. They're facing debt maturities. And that's putting a lot of financial strain on them, so they have to look to sell.

[Justin Baer]

What does it mean for these families when they do decide to sell?

[Peter Grant]

Well, most of the families are going to be okay. Nobody should be worrying about them. However, they're not getting as much as they would have gotten before the pandemic. A building on Water street just sold for close to $100 million five or six years ago. It would have gone for maybe twice that much. Also, they're no longer transferring these assets from generation to generation. In the past, these handoffs would always produce wealth for the next generation. The buildings, even in tough times, would get through the tough times and they'd once again be producing a lot of income. And this would be great for family members, and they would be continually cash flowing.

[Justin Baer]

And what about now? Are they all in agreement, or is there tension between family members about whether to sell or not?

[Peter Grant]

There always has been tension within these families. Everybody has different financial incentives. Some family members need that cash immediately. Some prefer to have quarterly distributions. In the past, it's been a matter of how much money do we get. What's happened now is that to save these buildings, a lot of capital has to be invested. And just the opposite is now the case. Instead of getting quarterly distributions, there's something called a capital call, which means that partners have to pony up a certain amount of money to make new capital investments in these buildings. That greatly increases the kind of stress that's on these families because some of the family members just aren't going to have the money.

[Justin Baer]

So who's buying these buildings?

[Peter Grant]

Well, that's a really good question. The buyers of the building tend to be investors who are planning to put these properties to a different use, primarily multifamily, primarily apartments. There's still a lot of demand for apartments in New York City, but there isn't as much demand for office. So it does make sense to convert these. But what has to happen to convert this office property is that the prices of the building have to reach such a low level that it makes sense for these new investors to step in.

[Justin Baer]

That was reporter Peter Grant. Thank you so much, Peter. Great talking to you.

[Peter Grant]

My pleasure.

[Justin Baer]

We exclusively report that Meta Platforms plans to give European users of Instagram and Facebook the option of receiving what it says are less personalized ads without paying a fee. Meta's new ad option comes amid pressure from European Union regulators who say users should have access to a free version of the company's app with less personalized ads. But as technology reporter Sam Schechner told our Tech News Briefing podcast, it's unclear if the new concession will satisfy EU regulators.

[Tracy Hunter]

Each time I think this story is over, it continues a little longer. I wouldn't be surprised if there are more twists and turns. Meta, for its part, has been making more noise about how the fact that they think some of these rules are going to stifle innovation. Our sources have told us that they've told regulators that this will hurt their bottom line. And publicly they about how they say less personalized advertising will hurt small businesses that use their platform. EU regulators have several more months left in this probe that they have launched, and so it's possible that they will say no, you need to sweeten your concession offer a little bit more.

[Justin Baer]

And you can hear Sam's full interview on tomorrow's Tech News Briefing podcast. And that's what's news for this Tuesday afternoon. Today's show was produced by Pierre Bienname and Anthony Bansi, with supervising producer Michael Kosmidis. I'm Tracy Hunt for the Wall Street Journal. We'll be back with a new show tomorrow morning. Thanks for listening.

[Tracy Hunter]

AI could be the most transformative technology since the advent of the Internet itself. So how can we start putting it to work? Find out in the latest episode of AI that Means Business, a new podcast from Google and custom content from WSJ.