The 36 hour deal – Twilio in New York City
Guest: Gabe Marans
Topics: Savills, office leasing, New York City
Transcript:
Chris Ressa 0:00
This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa, and I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.
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East End Group is an integrated facility management solutions company specializing in self performing general contracting construction, property management and building services. As a full service provider, East End works with single or multi-location accounts on local, regional and national levels.
Ressa 0:32
Welcome to Retail Retold everyone. Today I’m joined by Gabe Marans, the Vice Chairman of Savills in New York City. Gabe is a tenant rep broker specializing in the office market. I’m excited to have him here today. He’s got a different perspective than most of the guests. He is super active on LinkedIn, you can follow him there and soon to be Twitter. We just had an off the line conversation about the exciting real estate conversation on Twitter right now. Welcome to the show.
Gabe Marans 1:05
Hey, Chris, thanks for having me. Great to be here. Looking forward to our conversation. And yes.
Ressa 1:13
So Gabe, tell us a little bit about more about who you are and what you do.
Marans 1:20
So it’s a pretty one dimensional story for me. I mean, some people have these these Greek tragedies of the ups and downs. I’m New York born and bred. The the classic example that I point to as kind of a proof statement to that is I got my first car 35 after I had moved out to the suburbs. And so I spent my whole life here in the city.
And when I was at school at NYU, I wanted to do what everybody else wanted to do at that time, which was going to investment banking, which is what I was planning to do until the firm I had a job lined up for Bear Stearns collapsed in dramatic fashion. And so that summer, summer 2008 I ended up interning at studly, which is now saddles.
That was 14 years ago, and I’ve never left. You know, our focus here is tenant rep office leasing for the most part, although we do also dip into the other asset classes like industrial retail, but the whole platform is built and designed around servicing the needs of the tenant. Most of our businesses here in the New York metro area, although we’ve got plenty of clients that are national, and even global in nature,
Ressa 2:27
Amazing. First Kart 35. Did you know how to drive before that?
Marans 2:35
I did. Yeah. I mean, I was taking my parents minivan out for Georgia Joy rides before I had a license, you know, going way too fast. Way to illegally on the GWP. So I did I didn’t know how to drive. We would rent cars. You know that kind of thing. But But yeah, first car I mean, that’s the benefit of high school and college in total city.
Ressa 2:57
Did you ever think you were actually going to get to the burbs?
Marans 3:03
It was hard to imagine, but I knew at some point, the appeal of a backyard was going to be too seductive to really turn down. My wife’s from Cincinnati. So she grew up with a very large yard in a great suburban house. And so you know that that poll started to fall into place when we had our oldest Jacob. And you know, too many strollers in too small of a Manhattan apartment just became…
Ressa 3:31
Too cool. Okay. So office market nationally, they can a lot of headline news these days. What’s going on in New York from an office perspective right now?
Marans 3:49
So so this is where I really relish the unique perspective that our team and our firm really has, which is exclusively on the tenant. Because if I were a landlord and I owned office product, I’d be really scared. If I were a landlord agent and representing buildings and trying to lease them up, I’d be quite terrified. Because all the data does seem to support the anecdotes, which is it is an ugly market for the commodity space.
Now, when you were talking about Hudson Yards, and we’re talking about World Trade Center, there’s a reason most of those buildings are 90 plus percent leased because we are seeing this continued flight to quality. The big question, though, is what happens to the rest of the 450 million square foot Manhattan office market?
What happens to those buildings when you’re dealing with 20 plus percent vacancy across the country when you’re dealing with rising you know, rising burden of debt service when you’re seeing rising vacancy? And what you’re starting to see some landlords hand the keys back to lenders, but from the tenants perspective to bring the answer back to your question.
It’s an amazing opportunity, especially with these economic headwinds to Try to restructure leases. Look for creative ways to reduce your spend to reduce your cost. And landlords are all years we’re seeing a little bit of a repeat of Oh 809 2010 vocabulary where landlords are willing to play ball. And there really are opportunities for tenants to get creative in their cost reduction.
Ressa 5:19
As a landlord don’t love the word restructuring the lease, unless it’s the other way. But I understand what you’re talking about. Let me ask you a question. So that’s the opportunist from the tenant side, let me ask a different question. How do you feel about tenant demand?
Marans 5:43
Lower, certainly lower than where it was. Right. So there are two different parts to answering this question. So I think we have to address this even though it’s an old trope, it’s a tired trope, this existential threat of will the office die has been answered? The answer is very clearly no, office isn’t going anywhere. But the other question is, Will companies use the economic environment right now, to kind of hide behind that in an attempt to reduce their reliance on office space.
And I do think that, whether malicious or not many companies are in fact doing that. And some of that some of that is intentional, and also kind of goodwill, because they’re really looking to reduce their overall spend.
But if I’m the landlord and Chris, this, I’m gonna kind of put this right back at you. You know, when we say restructuring, it doesn’t mean threatening bankruptcy to bring a landlord to the table, it means trying to frame something as a win win, so that the landlord sees the value in revisiting lease terms in a way that also benefits the tenant. And there are a lot of ways of doing that, you know, depending on the needs of the landlord, but tenants demand for office space is certainly lower.
One simple metric to illustrate this is office using employment in New York City has always been the single best barometer to measure how the office market is doing. And that trend line has inverted itself. So office using employment, we’re now well past 2019 levels, but the actual occupancy of office space is actually has stabilized but has trended below that those two lines aren’t correlated as closely as they’ve been for the last several decades.
That said, not every office building is built the same. And the ones that invest in themselves build out amenities and make themselves attractive to tenants are outperforming the market averages exist for a reason?
Ressa 7:33
What a what a good answer. Let me take a step back. So I think one of the numbers in my head is I didn’t realize it was 450 million square feet of office in Manhattan alone. Astonishing. So when you talk about that inversion, New York City, what’s the, I guess, least occupancy? As, as far as you can tell today?
Marans 8:02
In terms of the sub markets, you’re really talking about lower Manhattan. So lower Manhattan from a leasing velocity standpoint, is far below historical levels. And that’s excluding the top tier product, which again, is World Trade Center, and several other notable buildings. And a lot of that has to do with just the vintage of those buildings, a lot of them are old, 100 plus year old assets, a lot of them are low with dark, maybe one side of light.
And that kind of product just isn’t really flying off the shelves. When we look at Midtown South, which has historically been a hotbed for creative companies, that market has more or less held itself up. And when we talk about midtown south, which is chambers to about 34th Street, it’s about the same size market of at 90 million square feet as lower Manhattan. But when we get to Midtown proper, it really can be a tale of four or five different cities.
You know, Hudson Yards doing amazing, reaching really high rents, you know, 150 161, Vanderbilt, new construction from SL green over $200 A foot. And so you have a lot of great examples of new products that are attracting tenants. But when we think about Sixth Avenue, for example, with these commodity 1950 6070 type assets that are mostly indistinguishable from each other, there’s going to be a fight to the bottom in order to attract tenants to those buildings.
And we’re going to be seeing a lot of vacancy as many of those tenants moved to Hudson Yards moved to Manhattan West leaving behind very large pockets of vacancy.
Ressa 9:34
Okay, so like a New Yorker most people the city is not believe the city is not homogeneous and it’s multiple cities in one or multiple neighborhoods. What is I don’t even know what is like the reported office occupancy in Manhattan right now. Overall.
Marans 9:53
I think we’re probably I mean Castle, which we can debate the accuracy of the metric that most most rely on Castle, which I do not put again, I’m going to cite it. Right now for comparison’s sake, they just reported that we dipped over 50% for the first time, since before the pandemic now Nithi, normalize that number against 100% occupancy, it is really important for people to understand that at most, we were at 70, to 80%, full occupancy pre pandemic.
So we are still well below where we were, but we’re not quite as low off the where we should be, as most people think, just based on reading
Ressa 10:30
And that 50% occupancy that’s, that’s using the space, that’s people coming into the office, that’s how many, right that’s not signed leases, how, right and what’s not what’s the least percentage in the city right now, leased versus vacancy.
Marans 10:48
In terms of current terms…
Ressa 10:50
Like, you know, is the, you know, if the building 70% occupied, meaning, like 70% of the square footage is leased by someone.
Marans 11:00
God, I mean, you have examples of buildings, which are essentially zombie buildings that have in excess of 50% vacancy. And the reason why I call them zombie buildings is because landlords are not going to be able to do deals on those buildings, because to do deals within those buildings requires considerable concession packages, including tenant improvement allowances, that lenders are not going to greenlight because it’s just going to undermine the debt service on those buildings.
And so they’re kind of just sitting there. I know you want me to name?
Ressa 11:32
No, that’s fine. You don’t have to name specific goals. What I’m more curious about actually is just what is the from a percentage basis? Is Manhattan, you know, 80% leased today? On average? Is it? Is it 75? Is it closer to 90 minutes?
Marans 11:49
Manhattan is about 80% leased. So we have about 100% vacancy. And so the balance of the market is 80%. lease, you know, New York City tends to be longer term leases, which are five to 10 years, sometimes 1520 years.
And so the the groundswell of change that we’ve observed over the last three years, is going to take several more years to peter out as some of those leases start to expire. So So in other words, the current snapshot of the market doesn’t purely capture the impacts of the last few years, we probably won’t have a pure picture that for another colleague.
Ressa 12:25
Understood. And when you were talking about the occupancy of 50%, and the leased space at 80%, that’s the inversion you’re talking about typically correct.
Marans 12:37
In many ways, yeah. It’s a that’s a way of putting wild scope.
Ressa 12:42
Really interesting. Give me the give me the game. Opera, optimistic view about spaces getting filled in the city over the next decade.
Marans 13:06
Because it’s, it’s in my heart. So So and caveat to every everybody listening here, this is going to be very specific to the New York metro area. And I think other markets will really vary based on on the appeal of those areas. And some of the some of the demographic changes that we’ve witnessed, but New York City is new is the United States is only true international city. You know, in terms of what we offer, it’s you can’t really draw a line anywhere from a tenant perspective.
We’ve got everything from nonprofits and government, both international given the UN, and also state and local. We’re also talking about a huge tech scene, which didn’t exist 20 years ago, of course, legal and financial, and everything in between. And so, for college graduates from across the country, New York City continues to be the place that they go to, to pursue their dreams.
And when we look at those demographic changes, yes, New York State has experienced some brain drain with people moving to other places, but New York City has not our population has actually grown since before the pandemic. And when we look at Manhattan itself, Manhattan is the compromised location, it’s a great place to go to if you’re in New Jersey, if you’re in Long Island if you’re in Brooklyn, or if you’re in Westchester.
So that’s why Manhattan isn’t going to go anywhere. And in addition, under Mayor Bloomberg, we started to heavily invest in bringing additional places of higher education to our area. So Cornell Tech is another great example of our investment in the future of New York City. And so when we look at the Labor depth and profile, there’s no other place in this country, arguably in the world that is as diverse and as talented as New York City.
And so at a certain point, the values are going to reach an equilibrium when people realize and this is the second part of the call. Question that human nature requires in person interaction, it’s been the case for millennia. And it’s not going to stop just because of a pandemic. And I know that personally, and I can’t speak for everybody.
And I know that there are other folks out there that do feel like they work better in isolation, or from a remote perspective, that’s not my experience. Nor do I think that that’s the mainstream experience. And so this need to be together to be social, to collaborate in person, to have that emotional connection is going to require working in person.
And that’s going to require having space in New York City, the part that’s missing is this hangover from the pandemic, as well as the lack of investment in many of these assets in order to bring them up to a standard that will make it enjoyable for people to work in those buildings.
Ressa 15:48
Are you sure you’re not running for political office game?
Marans 15:54
Sometimes when we’re fighting bitterly, my wife,
Ressa 15:56
I think you might be what a incredible little pitch on New York City, everyone. I think one of the stats, quite candidly, I didn’t know this. New York City’s population is up pre pandemic, over pre pandemic. That’s right, you want a good LinkedIn post, and I won’t steal it for you. If you put it up all in the next week, if you put in the 2023, New York City population versus 2019.
And just put that up, I think that’ll get that’ll end, put something snarky, like, hey, everybody down south, I know you thought New York City was, you know, a thing of the past check this out, you’ll go viral. I don’t think people really know that.
Marans 16:41
That I don’t think people realize that. Because when they look at office occupancy, they say, oh, New York is trailing Miami or Dallas, or Atlanta or Nashville. And that is true. But when you think about the benefits of remote work, it’s because people want to live somewhere where they can play.
And New York City has got a playground everywhere, the best food in the world, the best entertainment in the world. It’s a 24 hour city, and we don’t even have a casino yet. And so when you think about that, if you are going to want to move somewhere, why not move to New York, and we saw a lot of that.
Ressa 17:18
I think this is this episode’s gonna get a lot less.
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Ressa 18:09
Okay, David, you’ve done a lot of deals in New York City, you’ve got a story about a tech company in New York City. Why don’t you give us who are they and where are we going?
Marans 18:21
All right, this is a good one here. So Chris, everybody else strap in. Because it gets a little technical. But first of all the who, what, when, where, why. So the who is Twilio publicly traded tech company, the when started before the pandemic, but it all kind of came to a head during the pandemic. And the why is because of the collapse of a co working provider known as knotel.
And so for those of you who are familiar, you know, running up from about 2012 Until about 2019 Dotel styled itself as a primary competitor to we work, but through various different mistakes, either proven or theoretical. They, they ended up collapsing. And so we had put Twilio into a full 40,000 foot floor in a lower Manhattan building. And we had negotiated this great deal where they had rights to expand and where the all the furniture was provided. And the wiring was covered.
And it was an amazing capex sensitive deal for this growing tech company that wanted to conserve their cash in order to help them grow faster. And so what happens as knotel starts to collapse, well, no hotel collapses, and Twilio is kind of in the gray area. They’re occupying space. But their agreement was not directly with the landlord, who is and was Savannah.
And so what we did, essentially over the course of 12 hours, although really from start to finish, it was 36 hours, we were able to hammer out a direct agreement with Savannah that preserved all of the goodies that we had initially negotiated for Twilio with an Hotel, including getting all the furniture retaining all of their options.
But the big kicker is because of the profit margin that Nortel had built in, we were able to reduce Twilio spend by 50%, and lock in their per square foot rate at a number that was below what they were paying. And so to kind of summarize the major takeaway here, we were able to get them more flexibility at half the rent at no cost to them, because of the unfortunate demise of a game provider
Ressa 20:31
36 hours
Marans 20:35
in so 36
Ressa 20:36
I think this is an interesting piece that we haven’t talked about a lot on this and I don’t think it was made headline news a lot.
At the end of the day coworking is leasing a large space, and then subleasing smaller spaces out to other people, they essentially say, if I can put some things into this bells and whistles, operate it better, and therefore, I can charge a higher rent and I’ll get a higher rent than the guy who actually owns this building, or the woman who owns this building, or company who owns the building.
And what I think you bring up an interesting point, generally, is while they may be more capex friendly, because they’ve got these fresh, new spaces, they’ve invested in with a lot of sharing of things, and they provide the flexible lease terms in general, there in order to make it work, they’re going to have to charge more than the landlord otherwise would because they’re leasing from the landlord. That’s where their profit margin is.
I bet you, I bet you that wall. And this is not a knock on you. They made a deal with Twilio directly. And it was less than Twilio was paying Dotel, I bet it was more than they were getting from Dotel.
Marans 22:01
So so interesting, wasn’t it was not it was lower than they would have lower than that. And so. So there are several different where you could see a scenario where it would be at all times it’s the case, but just because of the timing. So you see your logic is 100%. Right, the difference is no tell it sign their deal pre pandemic negotiated or deal with the pandemic when there was no leasing velocity in the market. And so we were able to leverage that at the full expense of…
Ressa 22:30
Let me ask you, for cash tenants who are more focused on occupancy cost versus upfront cost, do you recommend that they go to non co working spaces because the rent on a per square foot basis will probably be higher if they’re willing to invest.
Marans 22:51
So I think that there are a lot of reasons why companies decide on co working or flex or serviced office Call it what you want versus traditional space. If all you’re looking to do is save on capex, then there are going to be a lot of sub leases on the market that should be evaluated in addition to serviced office and flex. They’re also deals that are in landlords buildings that are built. So I did another deal for a company who I won’t mention because we’re active right now in the market for them.
It was also a no till deal, hotel went bust, they handed the keys back to the landlord. It was fully furnished and wired. And we did a direct one year deal at Market Rents with that landlord. And so the only difference nuance in that story is that they were not a pre existing hotel tenant. So yes, the capex sensitivity is pretty important. But I think the most important evaluation metric when deciding which path to follow is lease term.
And so if you need to retain flexibility to decide whether you’re going to grow or shrink, go in the direction of serviced office flex and or short term sub leases. Traditional leases generally require longer term because the landlord’s are amortizing the deal costs over a longer period of time.
And so if you have the ability to entertain a longer lease term, or you have certainty about your headcount moving forward, then certainly on a per square foot basis, it is more cost effective to sign a traditional lease and build the space out furnish it yourself.
Ressa 24:18
I think that’s something that that little piece there is just doesn’t make headline news ever. And if you’re in real estate, I think it’s logical to understand that but if you’re not and you’re shooting headline news, I don’t think people outside of our space in commercial real estate, whether you’re in office or retail, kind of grasp that concept. I you know, as a landlord, we’ve we don’t have a co working space, but one of the things like you think about is you’re leasing to this group.
In order for them to make it work, they need to get more rent than charging that and so that they’re pretty confident in their model that they think you know, and some of these owners have owning these buildings for a long time. And yes, there’s the part of they need to innovate and maybe some people haven’t. But they still know real estate pretty good at how the market works. And so it’s an interesting thing that’s happened, anyway.
Marans 25:15
Yeah, and I’ll only add that your view is 100%. Right? You know, that’s why you’ve seen this migration away from this whole buy wholesale sell retail version of flex, and sure. And you’ve seen like the rollout of of landlord own products like Tishman, Spire, the Durst Organization, Silverstein, because there’s this recognition that there is this desire and need in the marketplace.
But whether we like it or not, the current providers in the market aren’t meeting that level. There’s just news today that industrious is signing a consulting and management agreement with Nuveen. And so you’re gonna see more and more of these stories where landlords see the value and want to capture some of that upside, and aren’t willing to take on the risk of signing a long term lease with it. Yeah.
Ressa 26:04
And if you’re the flex provider, you’re signing a long term lease with a liability and your your income streams are on a short term basis, which is a risky proposition itself.
Marans 26:18
So it’s easy to see how brilliant Adam Newman is in you know, in the 10 years that he’s lived in a rising market, it’s when things aren’t rising, that really requires a closer look at the business model.
Ressa 26:28
Well, the Twilio story is fascinating. I am curious, you’ve probably gone through the least negotiation that’s taken, you know, over a year, how, how in how do you get it done in 36 hours? You know, one you needed, you needed to willing participants, because where attorneys didn’t get involved for, you know, and just back and forth, and back and forth. Red Line, red line, red line, red line, how do you make that happen?
Marans 27:01
Yeah, so there have been a few instances where we saw some of these deals get done. It hurts me to say this, but you need a healthy dose of fear that applies to both parties in order to keep them focused on the deal at hand. And in this case, it was the lack of an utter agreement between two parties. Twilio had no legal agreement with Savannah to stay in place. And Savannah had no legal agreement to collect rent, from Twilio.
And there was also a lot of background noise about potential legal action with Nortel and their new acquire new mark. And so there was this desire to clarify the situation that encouraged everybody to move rather quickly.
There are other environments that I’ve lived through that have also mimic this, you saw Hurricane Sandy take out a lot of buildings downtown, a lot of those companies ended up signing leases for temporary space elsewhere in Manhattan, those deals came together very quickly. We saw the same thing after 911 with companies migrating from Lower Manhattan to other parts of Manhattan.
And so you really need extenuating circumstances plus a healthy dose of fear in order to bring that together. I’ve been part of other deals that have happened over also hours, but not quite 36 hours, I’ve seen 72 hour deals come together before. But but the Twilio deal was was rather unique in terms of the speed,
Ressa 28:18
I will I got a lot of quotes that I’m going to be quoting you on LinkedIn. So untagging you from this. And Twitter extenuating circumstances in a healthy dose of fear. That’s how you get deals done quickly. Because let’s go to the reality. You have a tenant use, they engage you that they want to see that they’re interested in being in Manhattan, how long before you sign a lease with that tenant?
Marans 28:48
So the fastest I’ve ever done it, okay is 30 days, what’s the normal
Ressa 28:52
in New York right now?
Marans 28:56
I think you’re probably talking about, so when we talk about starting a process for your average sized tenant, which I’m going to say 5 to 20,000 feet, you’re talking about six to 12 months, when you get north of 20,000 feet and start to approach 100 or 100 plus, there are more complications involved with it. Less, less common for you to find build space that you could slide right into. And so you’re planning for construction contingency. That’s really the major block.
And so in this market, you’re seeing construction take six months, sometimes longer plus time for design. And so at a minimum we’re talking about six months to get started for longer. For larger deals, you’re talking about closer to 24 months, he can be done that 30 Day deal happened because we found built space that would they were able to slide right into and as I said before, it was extenuating circumstances that led to severe.
Ressa 29:51
Okay. This is great. I really appreciate the time today. This, I’ll let you know when this comes out. But really appreciate you coming on, what a education for me and I think the audience of Retail Retold to get the office perspective, in particular, the New York City office perspective. So everyone check out Gabe on LinkedIn, he puts out some really cool content. And thanks for coming on.
Marans 30:24
I appreciate it. Chris. Thank you.
Ressa 30:28
Thank you for listening to Retail Retold. If you want to share a story about a retail real estate deal that you were a part of on our show, please reach out to us at retailretold@dlcmgmt.com This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you are a retailer, broker, entrepreneur, architect or an attorney Also don’t forget to subscribe to Retail Retold so you don’t miss out on next Thursday’s episode.