Property Play: Richard LeFrak on rates, AI and the next real estate play

If I had that, I'd be petrified. The [music] extend and pretend party is over. >> Richard LeFrak has spent nearly six decades in real estate through booms, [music] busts, crashes, and recoveries. Now, it's a wall of CRE debt coming due amid higher for longer interest [music] rates. >> The rubber hit the road now. And there's going to be a lot of opportunities and [music] also a lot of heartache. >> What are some of the opportunities because, you know, that's what our audience wants to know. >> If you have patient capital, you'll be [music] able to find good real estate at the right attachment point. >> On this episode of Property Play, Richard [music] LeFrak on where the stress is building, AI and data centers, >> If Elon Musk can put, [music] you know, data centers in the moon or whatever he's thinking about and you can't doubt the guy because of what he's done in the past, all these buildings may be outmoded by that time. >> where new opportunities may emerge and why his long-term play hasn't changed [music] in 58 years. After all this time, are you still optimistic? >> Yes. If you're going to be a developer, [music] you you can't be a pessimist. >> [music] >> Richard LeFrak, welcome to Property Play. You're CEO of LeFrak organization. You've been in this business for 58 years. So, obviously, we have a lot to cover. >> You think I could find something better to do with my time? >> Exactly. I know. >> I mean, give it up already. >> But you've been through, let's think about it. Sky-high interest rates in the late '70s, early '80s. >> Mhm. >> The dot-com bubble burst. >> Mhm. >> The Great Financial Crisis. >> Mhm. >> The COVID pandemic. You've been through it all. >> 9/11. You left 9/11. >> of course. >> one Maybe maybe the worst one. >> Um all of that compared to today when we have global political and economic uncertainty. We have rising interest rates and this onslaught of AI. How do you compare today's commercial real estate market to everything you've seen? >> Well, it's not as bad as it could be. But there've been a lot better days, too. So, I would say I would say it's kind of in between terrible and okay. >> Terrible and okay. >> Terrible and okay. >> Let's talk about interest rates though because when we talk about that affecting residential and mortgage rates, how is that, you know, filtering off into commercial real estate values, et cetera? >> Well, um I would say the following. That in the last three or four years, values have deteriorated with the rise of interest rates. And I think values, depending on the property type, could be as much as 50% in some But on average, I'd say about 20% loss of value. Now, where that is playing into the business is the fact that there's a wall of refinancing that has to be done. The number I saw was about $750 billion in the next two years. That's kind of crazy. >> Does that scare you? >> If I had that, I would be petrified. If I had that, I'd be petrified. But um the extend and pretend party is over. And the banks have been more aggressive about either selling off the loans or um dis you know, trying to dispose of the assets in one way or the other. And so for ownership the truth that, you know, we kind of the rubber hit the road now. And there's going to be a lot of uh opportunities and also a lot of heartache as a result of this. >> What are some of the opportunities because you know, that's what our audience wants to know. >> Well, uh you if you're patient if you have patient capital, you'll be able to find good real estate at the right attachment point because the losses are going to be taken. Now, um this is kind of rough math, but if you say 750 billion of a debt and you say, "Well, it's about 20%." That means 150 billion has to be you know, somehow raised or lost. And so, that's a lot of money and somebody's going to be able to take advantage of that. Now, traditionally traditionally institutions uh private equity would go into that, you know, set up opportunity funds, but real estate is really out of favor today. >> Really? Because I keep hearing that investors want to get into solid assets like real estate because the markets are so volatile. >> I think that the uh generally the public uh the REITs performance has not been tremendous and I think not Of course, there are exceptions, but I think many of the private equity you know, funds have not lived up to their expectation. And you know, today you're competing with capital from you know, everybody's got their handout and everybody wants to go to Dubai or to a UAE or to Qatar and these guys need the money for their infrastructure that's been damaged in the war. So, I don't think they're writing that big checks these days. >> So, when you look domestically at the US and obviously you are invested most heavily in multifamily, but you're also in office. We keep and hotels. I know. And retail, but I'm [laughter] talking about, you know, what you're most in. Um we talk all about this office recovery. Are we really in an office recovery or is it just New York and San Francisco? >> Um well, I think we are in a in office recovery. Uh and there are, you know, some factors in addition to um you know, nobody's working from home anymore. Nobody's hoteling anymore. And you're getting a lot of resi conversions in office buildings taking supply off the market. And I think all these things together, you know, have strengthened the market. It's not great unless you're on in the Park Avenue corridor in the best buildings in Midtown. >> In New York City. >> Yes. And and by the way, it's an awful business. You know, for your listeners, it's a business that requires a tremendous amount of capital to re-tenant these buildings, tenant acquisition costs are pretty severe right now. >> Much more difficult than multifamily. >> Well, you become a banker. If you think about it, because you start off by lending the tenant two two or three years of rent. So, you have to be able to carry through that. And so, that's really I call it a rich man's sport. You know, your cost of capital has to be uh low enough to be able to make money when you're lending the tenant money to fit out the premises, giving them free rent, paying a broker. So, it's it's it's um you're better off uh buying stock in Vornado or SL Green or Boston Properties if you want to be in that business. >> And you talk >> it, by the way. The So, I'm I'm a victim, too. >> A victim. >> I'm a victim, too. >> You talk about the conversions. You know, there's been a lot of back and forth that obviously not every office building can be converted to residential. We've seen some issues here in New York City. We had a building bend. [clears throat] Little bend in a building when they were doing that. >> Very scary. >> Pretty scary. >> Um do you believe in investing in those conversions or do you think it's just a quick play one-off? >> I I think it's a great use for that that those assets. But the it's a tricky business because first of all, you're dealing with the geometry of the building. You know, does it actually work for an apartment house? And then the expense in converting it. And there's always an unknown because, you know, it's an existing building and you saw the bending of the steel. Somebody made a mistake. >> Clearly. >> Um, but on the other hand, uh, you're starting off with a structure. You're starting off with a roof. You're starting off with elevators. You're starting off with a lot. So, you got a good head start on it. But again, it's a it's it's it's a subset, but it could be a very good subset. I wouldn't discourage anybody from doing it. And you know, reuse of properties is you know, the terminal value of the property, if you can extend the useful life of a property, it makes it, you know, the the returns get much better. >> Um, since we're in New York City and obviously you have a big concentration in New York. Also in Miami as well. >> I do. >> But I want to talk about New York for a second and if you bring up New York, you have to talk about Mayor Eric Adams. >> Yes, you must have to. >> Yes, you must. >> You have to talk about Mayor Eric Adams. Apparently everybody's talking about Mayor Eric Adams. >> Yeah, we're a year in. We're coming up, you know, against the midterm elections nationally. But there was a lot of fear, especially in the commercial real estate market, about Eric Adams coming in. One of your colleagues, Barry Sternlicht, was very unhappy when I spoke to him the day after the election last year. What in your view has changed in New York since his election? >> Uh, you mean that he doesn't seem to be having that big an effect on the property market? >> You tell me. >> Well, uh, well, he he well, for sure for sure the the taxes, that's a whole different story. but if you're just talking about the office development, I think frankly he's the beneficiary of those other factors. You know, general expanding economy, high stock market, back to work, you know, no no more hotelling, right? Work from home, that's all gone. And then the expansion of the, you know, the tech industry in New York, the media industry in New York, which gets the benefit of all that. So, he's not he, but his administration is getting the sunshine that that throws off. >> But there was a lot of fear that, you know, companies as well as residents were going to flee Manhattan, we're going to flee New York City. You talk about the pied-a-terre tax. Um >> Well, I I'll I'll give you an interesting statistic. >> Okay. >> Okay? Which I was told, so I'll ta- take it with a sense of uh you know, uh that I'm not I'm not endorsing it, but one of the major financial institutions, the average age of the employees 27. What else you have to know? You don't have to know anything else. Because if if uh HR is the most important part of these in- industries, and they all want to live here, then, you know, that's that overcomes all the politics. >> So, the fears were overblown. >> The fears were over- I think the fears were overblown about, you know, office and corporations wanting to be here. I was had the occasion this uh last week to go to Nolita, which is a small community in, you know, kind of west uh east of SoHo, north of Little Italy. I think that's where they got the name. And if you saw the vibrancy of all the young people sitting out eating and enjoying themselves, so if HR is the critical component, and every 25-year-old, not everyone, but many of the 25 year old didn't want to come and live here and that's who's occupying these offices. Hey, you know, you got to be pretty bad to scare them away and they're not scared away. >> And what about residential, whether it's on the condo side or on multi-family rent control, as you talked about the pied-a-terre tax? >> Well, we've had 70 years of rent control, 70. So, we see how well that works. You know, we just haven't produced enough supply here and it's that simple and, you know, I say, "Well, you can't love developers and hate property owners." And we have a little bit of that syndrome right now in the administration. So, yes, they want everybody to build, but once you build it, they want to, you know, kind of punish you. So, we'll see what You know, one of the things in Landami's administration said was uh buy us for us buy us, meaning that he wants the city to be involved in the development of the, you know, like the Sunnyside Yards that they're talking about and so forth. And I always use the analogy uh if you wanted to have your kitchen renovated, who was the last person you would go to? The government. Right? [laughter] So, I I'm not sure I'm not sure that that's going to be a success, but I wish I wish him all the good luck in the world, you know, if that's what it takes to make the city a better place, you know, I'll benefit anyway. >> But you're not afraid of him anymore. Or you never were. >> Yeah, you know what? After 58 years, I've seen so many of them come and go, right? So, I mean, I you know, it's it's a moment in time. >> Um to South Florida, where you're also invested. Yeah. Um there's talk of, you know, bubbles down there. There's huge investment but someone very much in your space, Steven Ross, putting lots of money into Florida, South Florida. >> a city. >> He's building a city. Um, you're invested there as well. Do you feel that it any respect given that we're kind of past the pandemic and some people are moving out of Florida because of, you know, concerns over climate change, concerns over the, you know, rising cost of property insurance. Um, do you still still feel bullish on Florida? >> Well, we we didn't have any hurricanes this year, so >> No, not this year. But they'll blame that on El Niño, right? >> Yeah, but maybe maybe property insurance will go down next year for a moment in time. Um, you know, the projections for South Florida are that the population is going to be 30 million people in like 10 years. You know, the business is not that complicated. You know, you it's we're a service industry to people. You know, follow the people and you know, that's where the real estate will be useful. >> And you feel that the people will continue to flow into Florida. >> You know, there are problems with Florida but you know, it has the zero taxes and the sunshine. So, you know, you know, that overcomes some problems, too. And yes, you know, there are issues with the infrastructure that the state is, you know, under road, you know, traffic, no mass transit systems. There's plenty of problems, education. Got the same problems here. I don't know, you know, education system, mass transit. Well, we have a good mass transit system here, but you know, crowded roads. Washington has it, too, right? >> Yeah. Yeah. >> So, I mean, that that just means there's a lot of people who want to go there. So, I'm not the right now, I think the soft spot in South Florida is that we don't have a lot of the amount of foreign buyers, which is substantial portion of, you know significant portion of the public or the the market down there that um they've diminished the number. Now was that because of our current policy about immigration or getting arrested at the border or who knows what what's on their mind, but they'll come back. >> So given that you bring that up, what do you think the current administration's impact has been? Obviously they you know just passed a housing bill, they're trying to make housing more affordable, but with rising interest rates, the Fed increasing rates, that hits commercial real estate hard. What's your overall view of what the current administration has done to your business? >> I'm not going to say anything bad about Trump or you trying to >> I'm not asking good or bad. >> No, no I'm I'm kidding you. And he's been a friend for 60 years as you know, so >> Well, he's in your business. >> He's in That's how I know him. Um I think everybody realizes that we need more. And the federal government is doing what they can to provide more. Of course some of it is counterproductive because the tariffs have definitely raised the cost of construction. You know, some of the materials that we need are much more expensive. >> And labor costs because of immigration policy. >> And labor costs because of immigration policy and AI build out because they want the same stuff that I want, but they're willing to pay more for it to to get it now. Uh and so there's a whole host of reasons why construction is expensive and getting more expensive. But we still have to address the affordability issue. And really uh I you know, I've said this publicly, you know, where are you AI? Where are you? We need you because we haven't had really great productivity increases and efficiency increases in building in 30 years. I mean, watch how they build a building. What did they do? They use their hands. >> But there are multiple, multiple, cuz I've covered them, AI companies in the construction field, in the real estate sector >> how come they haven't made a course >> They're just starting. >> Yeah, well, so where I see the big cost saving from the AI, to be honest with you, was in soft costs, software. Because when you have a set of drawings, that's a bunch of digital information. >> Right. >> I can take that to a building department and theoretically, AI ought to be able to come back with their objections in like 10 minutes, if you listen to them. >> companies that are doing that now with AI already. >> that that would be, you know, cuz time is money, and that would be a big time saver. And maybe we'll get more efficient designs. And, you know, soft costs amount to about 30% of the cost of the project. So, if if you can eliminate some of the soft costs or reduce them, you'll get some more affordability. >> Well, you mentioned that AI is taking away some of your resources because of data centers. Now, I know you're not invested now in data centers. You told me you once bought one data center >> one You built one a long time ago. >> one a long time ago. >> it off quickly. >> No, I didn't sell it. >> Oh, you didn't? >> I It was in an office building. >> Oh, I see. >> So, now it's an office building again. And that's the uh what I would say is the uh interesting and difficult fact about data centers. Because are they going to outmode themselves? You know, is Are they going to get so smart that they don't need all that electricity? And they don't need all the equipment to function. >> They don't need all that real estate. >> don't need all that real estate. And then, what do you do with that building? It's I I don't see I don't see it being repurposed for much. >> So, given what you're saying, do you feel that the data center sector is overbuilt? There's too much money going into it? >> Uh you know, I I You can't make a judgment because you're judging on what the technology is going to be in 10 years or 15 years. Now, if you if I have a lease from Google or Microsoft or something and I'm financing a lease, I'm not really in real estate. I'm in the lease finance business. Uh but if you say to me, "Well, I have a property and I got a 5-year lease, but I need 30 years or 20 years to pay down a mortgage on it and I'm taking a chance that 5 years from now I'll be able to renew the lease." Yeah, it's good could be you know, what what have you got at that point? So, you know, I would say it's on a case-by-case basis. Now, if Elon Musk can put, you know, data centers in the moon or whatever he's thinking about it, you can't doubt the guy because of what he's done in the past. All these buildings may be outmoded by that time. You know, in which case investors will not be happy. On the other hand, if this this sensational demand for the this product continues, 15 years from now when the lease is up, the tenant may just say, "Hey, I need it. I got to keep it. I'll pay you whatever you want." >> So, you don't seem particularly concerned about these centers. >> I I think it's on a case-by-case basis. I think if it's if it's if it's if the technology doesn't change and the demand for the for the for the These are industrial buildings. So, it's a bit electricity factory basically. So, it really depends on does does AI outmode the current type of facility that it's currently functioning in. Now, my experience and the reason I mentioned it before was that I built a data center and it had all the bells and whistles at that time and 5 years after we did it and we had a lease on it, so it was not a financial problem, but 5 years after we did it, the from that leased it kind of semi abandoned it because it was yesterday's news. Outmoded. Outmoded. So, you're making a a bet on technology. I don't I you know, I it's to me it's not real estate. It's infrastructure financing. You know? >> But you talked about how it's sucking away resources from the rest of >> the you know, the the money's that are involved I mean that these things are you know, it's 5 billion, 10 billion, 15 billion. They're big big, you know, construction projects and they can afford to pay a premium to get what they want fast. So, you know, it's the same steel, the same concrete, the same electrical equipment. A lot of it is mimics what we put in a building. >> So, it's pulling away from construction in other sectors. >> Right. And and by the way, financing, too. It's not you know, they need money to build these things and they borrow some of it. It's not all coming out of the cash flow. >> And is that potentially why we're not getting more multi-family the way we need it? >> That's certainly you could point your finger at that for sure. >> Okay. >> For sure. >> Um you know, I always ask the guests on this podcast about what the big play is because we're the property play. So, again, you've been doing this a long time. Your plays may not have changed your strategy is what I mean. But for you, what has the big play always been in your sector? >> For for me >> For LeFrak. >> For LeFrak. Well, um I like to think we're we have some unique attributes. Okay. And one of them is is that we're self-financed. Okay. That I don't have third-party equity in my business and that we generally can do things at our own pace. So, I've never made an IRR calculation because I'm not interested in the terminal value of anything cuz I keep assets for 50, 60, 70 years sometimes. >> You buy and hold. >> I build and hold. >> Build and hold. >> Okay. And that's the riskiest part of the business, the development and And so, um the last three or four decades, we've addressed ourselves and even prior to that when my when we were doing the Frack City, we've addressed addressed ourselves to these big projects that involve uh tying up large tracts of land, entitling them, and then developing them. Now, there's two types of profits in the real estate development business. One is land profit and one is a development profit. Most people are not interested in dealing with the land profit because, you know, it's expensive and risky. Because we have the privilege of time and capital, I can afford to take the that the really long view of these things. And so, what we've been involved with for the last 40 years and even now in Florida are these big projects where we've been able to buy land at a very favorable price and develop it over time and create equity in the land value because as I create critical mass in these projects, the land I didn't play with yet goes up in value. So, but that's a I think pretty much unique attribute that that we have to take on those kind of things. >> Well, you described yourself as you called it a cave when I talked to you earlier. >> Well, no. I said that you you said what was my favorite property type and I said, "Well, a cave." And the reason the cave is I used that and it's a little facetious and I'm sorry to be facetious, but the reason I used the word cave is because basically, human beings are living in something some form of a cave even today. Now, it may have a golf simulator. Right? A podcast room. You know, co-working space, dog washing, paddle courts. >> amenities. >> It has all the amenities, but it's the it's the cave is the cave and we're short in the US somewhere between what 4 to 8 million caves over there. Well, it's not caves, but the homes. >> Homes. >> You know, but I mean I was being a little facetious, but uh and so I to me that's still the favorite least risky property type because I don't know, can you can you uh live in your iPhone? >> No, and you can't live on the moon yet. >> And doesn't have and it doesn't have a kitchen and a bathroom either. So, they you know, it's a fundamental need of people and you know, if if you do it correctly it has a very long life. >> Well, let me circle back to where we started. Given what we talked about interest rates and it devaluing commercial real estate right now. >> Right. >> After all this time, are you still optimistic? >> Yes, I'm got it to be a developer. You you can't be a pessimist. >> Why? >> Bec- because it's just the nature of the businesses that you're looking at into the future and you're saying, well, if things going to be better and I always think that things going to be better. I mean, the country still has a growing economy. People most not all people, but a substantial number of people are doing pretty well. Okay? I just read that uh the median income is now $87,000 a year, which is not terrible. Uh so, I'm optimistic about the future of the country uh and you know, the real estate follows that. It it just follows it. And you know, so Yes, I mean, there are problems now, but those problems are you know, somebody else's you you know, your cloud is somebody else's silver lining. Isn't that correct? So all the problems that are going to be faced in the next year or two with the financing markets, with this you know, the devaluation, with the equity required, well, somebody's going to take advantage of it. And especially today and you know, when you're talking about high cost of replacement, if you can buy the assets at a discount to replacement and a significant discount to replacement and you're patient, you will have something that you're happy with. But if you think it's going to be a quick turnaround, it isn't. It's just not going to be a quick turnaround. >> The optimistic Richard LeFrak, thank you so much. >> Thank you.