Cornell University Real Estate Review

Review Cornell Real Estate

Volume 18 | 2020

Baker Program Student Achievements, Distinguished Speaker Series, International Trek to Singapore, Domestic Trek to Miami

Real Estate Industry Cornell Real Estate Conference Recap, Hodes Weill Allocations Monitor Summary, Hahne & Co. ULI Case Study

Research Articles New York City Co-Living and PACE Financing, Mumbai Slum Redevelopment, South Philadelphia Innovation Hub

1

2

Table of Contents BAKER PROGRAM

6

Distinguished Speakers................................................................................... 8 2019 Internships and Full Time Jobs.............................................................. 9 Case Competitions........................................................................................ 10

International Trek: Singapore - pg. 12

International Trek: Singapore......................................................................... 12 Domestic Trek: Miami.................................................................................... 24 REAL ESTATE INDUSTRY

34

Industry Leader Award: Jonathan Gray, President & COO, Blackstone....... 36

Domestic Trek: Miami - pg. 24

Real Estate Conference Recap..................................................................... 38 Hodes Weill Allocations Monitor Summary................................................... 46 Hahne & Co. ULI Case Study........................................................................ 52 RESEARCH ARTICLES

60

The Rise of Co-Living in New York City Author: Parth Patel..................................................................................... 62

Industry Leader Award - pg. 36

Suburban Slum Redevelopment in Mumbai, India Author: Madhura Kharche......................................................................... 68 Diverse Industries Power a Burgeoning Innovation Hub in South Philadelphia Author: Joseph McFalls............................................................................. 76 PACE Financing Emerges as a Valuable Resource for Property Owners Rushing to Comply with NYC’s New Climate Mobilization Act Author: David Lee....................................................................................... 84

Hahne & Co. ULI Case Study - pg. 52

Research Articles - pg. 60 3

Editorial Board EXECUTIVE EDITORS

SENIOR EDITORS

EDITORS

Wilson Blum

Lera Covington

Andrew Gordon

Sam Berry

Samyak Jain

Joseph McFalls

Julian Karel

Rashaad Robinson

Madhura Kharche

Joshua Lau

Ryan Sequeira

John Thompson

Ryan Meiser

Parth Patel

All manuscript submissions, photocopy and reprint requests, and subscription orders should be mailed to: Cornell Real Estate Review 489 Statler Hall Cornell University Ithaca, NY 14853 — crer@cornell.edu

FACULTY ADVISORS Dr. Michael Tomlan Professor and Director, Graduate Program in Historic Preservation Planning

Dustin Jones, Esq. Director of Baker Program in Real Estate

Find us online.

Website: https://baker.realestate.cornell.edu Email: bakerreview@cornell.edu LinkedIn: Cornell Baker Program in Real Estate Podcast: Cornell Real Estate Review

4

Letter from the Editors DEAR READERS, On behalf of the entire Cornell Real Estate Review Editorial

Board, we are pleased to present Volume 18 (2020) of the Cornell Real Estate Review.

A student-run publication

founded in 2002, the Review chronicles the achievements,

activities, and scholarship of students in Cornell’s Baker Program in Real Estate. This year, as detailed throughout

this journal, Baker Program students obtained internship

and full-time opportunities with dynamic real estate companies across the country and world, again boasted

strong performances in real estate competitions, engaged with leading real estate firms in Singapore and Miami, and explored varied topics in research articles.

For additional content, we encourage you to continue

interacting with us online by visiting our blog (https://blog.

realestate.cornell.edu/), listening to the Cornell Real Estate Review Podcast on iTunes or Spotify, and following our daily

lives as students via Instagram (@cornellbakerpre). We enjoy interacting with our readers, listeners, and followers

year-round as we cover the latest news, trends, and developments affecting the real estate industry.

The Review reflects the efforts of the fourteen Baker Program students who comprise its Editorial Board as well as two faculty advisors. The Editorial Board is immensely

grateful for the continued support and guidance of these faculty advisors, Dr. Michael Tomlan, a Cornell professor and the outgoing Director of Graduate Studies overseeing

the Baker Program, as well as Dustin Jones, Esq., our

Program Director. Their efforts have elevated the Review – and the Baker Program – to ever greater heights. We hope

that you enjoy this edition of the Review and will continue to remain engaged with the Baker Program.

Sincerely,

Joe McFalls (MPSRE ’20)

Wilson Blum (MPSRE ’20)

5

Baker Program

6

7

Acknowledgements The Baker Program in Real Estate would like to thank the following individuals who participated in the 2019-2020 academic year’s Cornell Real Estate Distinguished Speaker Series: Richard Baker (SHA ‘88), Governor and Executive Chairman, Hudson’s Bay Company Bruce Batkin (AAP ‘76), Co-Founder and Vice Chairman, Terra Capital Toby Bozzuto, President & CEO, The Bozzuto Group Spencer Burton (MPSRE ’15), Director, Northwestern Mutual Real Estate Investments & Founder and CoContributor, Adventures in CRE Evens Charles, Founder & Managing Principal, Frontier Development and Hospitality Group Vince Clark (MPSRE ‘15), Investment Associate, Madison International Realty Lisa Colacurcio (A&S & MA), Managing Director, Gemdale USA

8

Neisha Colon (MPSRE ’15), Projects Director, WinnCompanies Douglas Eisenberg (AAP ’95), Founder & CEO, A&E Real Estate Holdings Sajan Hansji (SHA ’04), President, J Street Hospitality

Greg Miller (MBA & MPSRE ’15), Equity Research (Covering Analyst), SunTrust Robinson Humphrey Matthew Mitchell (ILR ’97), Managing Partner, SteepRock Capital LLC Ben Pfinsgraff, Co-Founder, Common House

Joseph Levine (SHA ‘02), Managing Partner, Mercer Street Partners

Andrew Powers (CALS ’15), Real Estate Manager, Industrious

John Lewis (ILR ’98), EVP/Chief Administrative Officer, The Harbor Bank of Maryland

Jerre Riggs (SHA ’02), Director of Real Estate, Industrious

Nicholas Martinez (A&S ’08, MPSRE ’15), Director of Real Estate Development, Holistic Growth Initiative America Maggie McCormick (Eng. ‘09), President, A&E Real Estate Holdings

Michael Dang (MMH ’07), President, MIK Corporation

Paul McPhearson, EVP/Global Development, Kerzner

Warren de Haan (SHA ‘97), Co-Founder & Head of Originations, ACORE Capital

Aly-khan Merali (MMH ’06), President & CFO, Turnberry Associates

Michael Sellman (A&S ‘04), Co-CEO, Calatrava Grace Russ Shattan (SHA ’04), EVP/ Acquisitions and Development, MCR Development Scott Walsh (AAP ’99), Senior

Development Manager, Lendlease

Every week, every semester, the Cornell Real Estate Distinguished Speaker Series attracts global industry leaders to campus to share insights and discuss important issues in the field. If you would like to participate in a future Distinguished Speaker Series, please contact Kathy Terry, Baker Program in Real Estate Program Assistant, at 607-255-7110 or kcr2@cornell.edu.

In 2019, Baker Program students received internships and full-time jobs at leading real estate companies throughout the world, including: A&E Real Estate Holdings

Fathom Companies

NYS WRI

ACRES Capital

GFG Securities

PGIM Real Estate

ADM Capital

Goldman Sachs

Rialto Capital

Basis Investment Group

Government of Japan

Round Hill Capital

Brandywine Living

Greystar

Samsung Securities

Bridge Investment Group

Hamister Group

Scope Co Ltd

CBRE

Hannon Armstrong SRE

Standard & Poor’s Financial Services

China Securities International

Hines

SteelWave

Clinton Housing Development Company

Hodes Weill & Associates

Toll Brothers

Colliers International

Hongkun USA

Ullico Infrastructure Management Co.

EB Arrow

Jamison Properties

Up Campus Properties

Exeter Property Group

Lendlease

Vitellus LLC

Experientia Development Partners

Lightstone Group

Westport Capital Partners

EY

Mount Auburn Multifamily

White Peak Real Estate Investment

Baker Program students pose with Doug Eisenberg (AAP ‘95), Founder and CEO, and Maggie McCormick (Eng. ’09), President, of A&E Real Estate Holdings.

9

Case Competitions

The Cornell team for the Colvin Case Study Challenge from left to right: Kunal Kataria (MPSRE ’20), Anangga Wirasatya (MPSRE ’20), and May Lueangwattanakit (MPSRE ’20), accompanied by Dustin Jones, Esq., the Director of the Baker Program in Real Estate.

ULI HINES STUDENT URBAN DESIGN AND DEVELOPMENT COMPETITION A Cornell team was selected as one of four finalists for the 2020 ULI Hines Student Urban Design and Development Competition. The multi-disciplinary team was made up of Lijia Zhu (MPSRE ‘21), Yu Wu (MRP ‘20), Jing Cheng (MHPP ‘21), Oscar Cheng (MBA ‘20), and Guanhwei Ren (MArch, Columbia University). The 113 entrants were tasked with creating a plan to redevelop a six-block area in midtown Miami. Cornell’s team envisioned Cubikko, a mixed-use and transit-oriented development that connected the diverse communities of Wynwood, Edgewater, and Midtown, while enhancing design culture and diversity, and mixed-income communal living to celebrate the vitality and diversity of the City of Miami..

COLVIN CASE STUDY CHALLENGE Cornell’s team of Anangga Wirasatya (MPSRE ’20), Kunal Kataria (MPSRE ’20), and May Lueangwattanakit (MPSRE ’20) placed second at the Fourth Annual Colvin Case Study Challenge, a national intercollegiate real estate case study

10

competition hosted by the University of Maryland. Teams were tasked with documenting a recent innovative real estate project within its metropolitan region. The Cornell team’s project focused on the Brooklyn Navy Yard’s New Lab, a manufacturing incubator space that opened in 2012.

Ryan Christopher Sequeira (MPSRE ‘20) and Dustin Jones, Esq., Baker Program Director, advised the team.

DEVELOPERS’ DEN A Cornell team placed third and two other Cornell teams advanced to the semifinals of Developers’ Den, the Schulich International Real Estate Case Competition presented by Schulich’s Brookfield Centre in Real Estate & Infrastructure and the Schulich Real Property Alumni Association. The Cornell team that placed third featured Madhura Kharche (MPSRE ‘21), Joshua Lau (MPSRE ‘21), Jack Haokun Li (MPSRE ‘21), and Nathan Tianran Xu (MPSRE ‘21), while the semifinalist Cornell teams included, on one team, Adriano Aljure (MPSRE ‘20), Ryan Little (MPSRE ‘20), and Ryan Christopher Sequeira (MPSRE ‘20), and, on the other team, May Lueangwattanakit (MPSRE ’20), Yuyi Ma (MBA ‘20), Akhil Salwan (MPSRE ‘20), and Anangga Wirasatya

Presentation Board for the ULI Hines competition.

(MPSRE ’20).

UNIVERSITY OF MIAMI IMPACT INVESTING IN COMMERCIAL REAL ESTATE COMPETITION A Cornell team earned second place in The Impact Investing

in Commercial Real Estate Competition hosted by the

University of Miami Herbert Business School. Teams were to select projects that generated a measurable, beneficial social or environmental impact alongside an appropriate

financial return. Cornell’s team comprised Li Xuan Amanda

Tang (DEA ’20), Ryan Christopher Sequeira (MPSRE ’20), and Shang-Chi Liu (MPSRE ’20). Their project focused on developing an affordable housing retirement village for low- to very low-income senior citizens in Miami-Dade County.

THE CASE COMPETITION A Cornell team advanced to the semifinals of The CASE The Cornell team for the The Impact Investing in Commercial Real Estate Competition from left to right: Shang-Chi Liu (MPSRE ’20), Li Xuan Amanda Tang (DEA ’20), and Ryan Christopher Sequeira (MPSRE ’20).

Competition 2020 hosted by the Alumni Association of the MIT Center for Real Estate, the Paul Milstein Center for Real Estate at Columbia Business School, The University

of Cambridge, and The Hong Kong University of Science and Technology. Team members included Joseph McFalls (MPSRE ’20), John Thompson (MPSRE ‘20), Anant Wagh (MPSRE ‘20), and Yiwen Yin (MPSRE ‘20).

Competing

teams were tasked with creating an acquisition, development,

and investment strategy for a waterfront site in Brooklyn. The

final rounds of the competition were cancelled as a result of COVID-19.

11

International Trek: Singapore

12

PGIM REAL ESTATE AND THE MARINA BAY SANDS

By Wilson Blum The Cornell Baker Program in Real Estate Class of 2020 kicked off its international trek in Singapore on Monday, January 6, 2020. Singapore’s phenomenal urban transformation since its independence in 1965 has been internationally recognized as a case study in the advocacy for and potential of a strong, centrally planned and statebacked guidance of real estate development. The students had spent the prior semester studying Singapore’s approach and contrasting it against others both in the region and internationally. The first stop of the trek, PGIM Real Estate, immediately offered students an immersion into the dynamics of the local market and Singapore’s importance as a hub through which many in the international community deploy capital across Southeast Asia.

Managing Director David Fassbender welcomed Baker students to PGIM’s office for a sit-down discussion of PGIM’s Asian business. Mr. Fassbender is primarily responsible for the operations of PGIM’s value-add Asia real estate funds.

Joined by Cuong Nguyen, Head of Investment Research – Asia Pacific, the pair walked students through current market trends and discussed PGIM’s various approaches to investing across the region. The persistence of the longest real estate bull market in recorded history has created an interesting atmosphere for global real estate investors.

Asset prices are at levels not seen since prior to the Global Financial Crisis, and Singapore’s market is one of the region’s most expensive. Investment managers have been challenged to find suitable deals in what has become an increasingly competitive market. Benett Theiseira, Head of Asia Pacific, joined the discussion to provide an overview of PGIM’s operations in that region. More money has shifted into real assets as the bull market continues and construction costs have skyrocketed. This has combined to inhibit supply growth amid a red-hot property market that has seen valuations continue to rise ever higher.

While competitive market conditions have made finding suitable investments challenging, opportunities still exist.

Su Lin Wee, Head of Asset Management – Southeast Asia, joined students to walk through some of PGIM’s re-positioning of Singaporean retail properties. As an island nation with a relatively small manufacturing sector, Singapore’s economy is primarily driven by consumption.

The same retail trends that students have become familiar with in the United States have been simultaneously

occurring in Asia as well. One advantage that has allowed Singaporean malls to remain strong investments is their frequent location above transit hubs. This deliberate positioning is the result of Singapore’s strong urban planning.

With this built-in demand, mall owners such as PGIM can confidently invest in property improvements to keep up with a retail environment that is shifting in response to the rise of e-commerce and consumer desire for “experience.” The PGIM team accompanied students to one such mall in the Tampines area that is slated to undergo a major renovation to shift tenants around and open more, smaller retail spaces to meet these shifting tastes. After lunch with the PGIM team, students headed back towards downtown for an exclusive tour of the Marina Bay Sands.

Students were greeted at the entrance to the Marina Bay Sands Expo and Convention Center by Maunik Thacker and George William Roe, Senior Vice President of Marketing and Executive Director of Hotel Operations, respectively, at Las Vegas Sands Corporation. Opening in 2010 at a cost of approximately US$8 billion, the Marina Bay Sands is one of the most ambitious and well-known casino resort and conference properties in the world. The site comprises over 6 million square feet, including the Shoppes at Marina Bay Sands (1 million square feet), The Sands Expo and Convention Center (1.2 million square feet/45,000 attendees), The Marina Bay Sands Casino (160,000 square feet/600 table games/1,500 slots), and the Marina Bay Sands Hotel (2,560 rooms). Mr. Thacker walked students over to the scale model of the property to give a brief history of the site’s development before splitting students into groups for a tour.

Starting with the Shoppes at Marina Bay Sands, Mr. Thacker walked his group throughout the mall, pointing to the presence of many high-end retailers. The mall boasts the world’s largest Louis Vuitton store, which sits suspended on a floating island in the bay in front of the mall – surely one of the most unique high-end retail boutiques of its kind.

Students were then led through a discrete entrance into the ornately decorated interior of the casino. Due to the Singaporean government’s view on gambling, the presence of the casino is not well publicized – only a few plaques around the mall indicate the various entrances onto the gambling floors. Though foreigners are allowed in for free, Singaporean citizens must pay hefty fees for the same privilege, typically S$150 for a one-time entry or S$3,000 for an annual pass. These fees have not tempered enthusiasm, however, as Singaporean citizens represent approximately

13

one-third of all visitors to the property. After viewing the interior of the casino Mr. Thacker accompanied students into the lobby of the hotel and up for a tour of the Sands SkyPark overlooking the Singapore Coast. At a height of over 650 feet, the park features the world’s largest infinity pool, which has quickly become one of the most shared social media posts in the world and has helped cement Marina Bay Sands as one of the world’s most iconic resorts.

At the conclusion of the tour Messrs. Thacker and Roe sat down with students at the ArtScience Museum for a roundtable discussion of the performance of the hotel, operational challenges, and future development plans. Remarkably, the hotel has run at nearly 100% occupancy since opening and today boasts an average daily rate (ADR) of approximately S$600. The resort attracts both high-rollers and VIPs thanks to its gaming operations, which further drive sales at the mall, in addition to the throngs of visitors to Singapore who want to spend a day lounging in the SkyPark. To this point, Mr. Thacker pointed out that the average stay at the hotel was approximately 1.5 nights per guest. Interestingly, the average length of stay for a visitor to Singapore is approximately four days. Therefore, the majority of hotel guests are staying for a night or two at the hotel in order to experience the SkyPark before heading to more affordable hotels for the rest of their stay. From an operational perspective, Mr. Roe elaborated on the challenges of turning over rooms at such a high rate across a 2,500-room hotel. Recent initiatives have significantly improved the room turnover rate by incorporating wireless technologies that provide real-time information to housekeepers so that no extra time is wasted. The result has been the continual customer satisfaction that has sustained Marina Bay Sands’ success.

Mr. Thacker continued the discussion by walking students through recently announced plans for expansion of the property. As one of two Integrated Resorts (IRs) in the country, the Singaporean Government granted permission for Las Vegas Sands Corp. to build a fourth luxury hotel tower of approximately 1,000 rooms and a 15,000-seat entertainment arena. The project is expected to cost approximately S$4.5 billion and will involve connection into the existing underground infrastructure linking the hotels and the conference/mall/casino operations across the street. While high rollers and VIPs enjoy staying at the existing Marina Bay Sands Hotel, Mr. Thacker indicated that these new luxury hotel suites would specifically cater to these types of visitors in order to boost gaming revenue

14

and provide a more exclusive environment than is currently possible amid the bustle of the existing hotel and SkyPark.

These attractions will also soon receive a facelift in order to refresh rooms and provide more exclusive service. Closing out the discussion, Messrs. Thacker and Roe gave students a brief rundown of their career paths and some advice for charting the right path before gathering for a picture with students in the Rainbow Room.

also spent considerable attention on commercial properties in the Asia Pacific region. Prosperity and Suntec REITs are among the firm’s only composite REITs and are collectively valued at over S$11 billion. These vehicles have properties in Singapore, Australia, and Hong Kong, and are comprised of a mix of office, retail, and industrial products. They also have multiple REITs focused on South Korean assets across all of the major asset classes.

ARA ASSET MANAGEMENT & HOUSING AND DEVELOPMENT BOARD

By John Thompson

The visit was rounded out by Eric Zhiliang, head of ARA’s Greater China Research group. Mr. Zhiliang is responsible for constantly modernizing ARA’s management practices with ever changing advances in proptech and data mining.

In his presentation, Mr. Zhiliang focused on macroeconomic trends facing the Asia Pacific region, such as the rising prosperity of China’s middle-class, while only hinting at the more proprietary statistical tools that the company uses to parse the likely troves of user and market data that it is constantly collecting via their properties.

On Tuesday, January 7th, Baker students began their day at ARA Asset Management’s Singapore headquarters. In just under two decades ARA has become one of the largest money managers in Singapore. Founded in 2002 by CEO John Lim, the firm manages S$87 billion ($62.5 billion in USD) across 26 countries and four continents. Students were graciously welcomed by members of ARA’s REITs and Research teams.

First to speak was the CEO of REITs and Business Development, Chia Nam Toon. Mr. Toon energetically walked through ARA’s various REIT portfolios and explained why these have remained a favorable investment product in Singapore, more so than in other Asia Pacific countries. ARA remains one of the top REIT managers in Asia Pacific, Toon contends, because it has developed a number of pure-play portfolios across various sectors and market areas. Most recently, ARA acquired a collection of 33 upscale, select-service Hyatt hotels and used this as a platform to launch ARA U.S. Hospitality Trust, its first REIT focusing on U.S. lodging assets. Mr. Toon attributed ARA’s success to its disciplined approach to asset management and its nimble ability to roll out new investment products.

For example, in addition to its U.S. lodging REIT, ARA has

Following the visit with ARA, Baker students headed north out of the CBD and into the “suburb” of Toa Payoh in central Singapore for a meeting with the highly regarded, and often imitated, Housing and Development Board (HDB) administered by Singapore’s central government. The HDB has been central to Singapore’s rise in the international world of social programming. Students were first given a tour of HDB’s public displays consisting of scale models of the entire island as well as interactive exhibits showcasing the agency’s efforts to continue to provide relevant, sustainable housing for Singaporean citizens. As is true in the U.S., Singapore’s first prime minister, Lee Kuan Yew, recognized the importance of home ownership for each of its citizens in order for them to have a stake in their country. The HDB was set up by Mr. Yew in 1960 in order to achieve this goal and has since housed up to 82% of Singapore’s population.

15

The Baker students learned through the tour that continual improvement and reinvestment has been central to the agency’s longevity, and that its current focus is directed towards providing energy efficient neighborhoods with a strong focus on community-building and mobility. This is possible in large part due to the short ground lease terms, often as short as 30 years, that are unique to Singapore and that allow the government to reclaim and repurpose sites according to local planning needs. The agency has taken a people-centric approach to its communities by addressing the daily and weekly needs of its residents. For example, HDB flats in Punggol, Singapore’s first “eco-town”, are oriented around the man-made Punggol Waterway, which provides outdoor recreation, green energy, and increased local biodiversity.

HDB communities are constantly reinventing themselves so that they remain dignified and desirable places to live – for children, elders, and young couples alike. The HDB tour gave Baker students some meaningful perspective to ponder over a dinner of local chilli crab, particularly as they wrestle with an increasingly dour affordable housing situation in the U.S. market.

CAPITALAND, GIC, URA, AND CBRE

By Ryan Sequeira Halfway through the international trek for 2019-20, the Baker students continued exploring the real estate markets of Singapore and Asia-Pacific. Beginning the day with CapitaLand, one of Asia’s largest real estate investment management businesses, the group met with Benjamin Ng and other representatives from its Corporate and Strategic Planning team. CapitaLand’s real estate portfolio is well diversified, spanning nearly all asset classes including commercial, retail, office, industrial, logistics, integrated development, urban development, lodging, and residential.

With a presence across more than 200 cities in over 30 countries, the company focuses on Singapore and China as its core markets, though it continues to expand into new

16

through high-quality products and services. Unlike most other malls in Singapore that are built on or around transit stations on the principles of Transit Oriented Development, the Funan Mall is relatively distant from transit connectivity.

To make up for this and to attract visitors, the mall has been positioned as a destination in and of itself with retail, two office towers, and a serviced apartment tower. In addition to its mixed-use offering, the mall houses an edible rooftop garden and Lyf, a co-living space created to help residents forge connections with the thinkers of tomorrow.

Lyf is targeted towards young urban professionals and the transient workforce that is price sensitive and also interested in a communal lifestyle that extends to shared rooms, workspaces, and recreation, with avant-garde interiors to match.

markets such as India, Vietnam, Australia, Europe, and the USA. CapitaLand is considered a REIT pioneer in Singapore, having listed CapitaLand Mall Trust in 2002. Over time, CapitaLand’s REITs and business trusts have expanded to include Ascendas Real Estate Investment Trust, CapitaLand Commercial Trust, Ascott Residence Trust, CapitaLand Retail China Trust, Ascendas India Trust, and CapitaLand Malaysia Mall Trust. Among these diversified holdings, retail in Singapore still holds a dominant place in the portfolio. In a market that has per capita retail offerings significantly lower than developed markets like the U.S., Canada, Australia, and Hong Kong, CapitaLand boasted AUM of S$19.7 billion in 2019, with a 99% occupancy rate and average tenant sales of over S$94 per square foot. Engaging 448.9 million shoppers every year with over 3,000 tenants, the portfolio has Revenue Under Management of S$1.31 Billion.

The next stop on the itinerary was GIC, formerly known as the Government of Singapore Investment Corporation. GIC is the sovereign wealth fund of Singapore and invests the over S$100 billion foreign reserves of Singapore with a longterm focus. The fund is mandated to not invest domestically and is thus diversified across global assets. The group was hosted by Richard Massey and Han Hwee Chin, both Senior Vice Presidents who presented GICs vision for investment and the role of real estate in the portfolio. The real estate portfolio is diversified across asset classes and geographies, skewing towards office (34%) and retail (19%).

GIC believes in investing across four quadrants: private real estate, private real estate debt, public real estate debt, and

The team presented various success stories including Plaza Singapura, The Atrium at Orchard, and Bugis+.

However, the focus of the visit was the Funan Mall where the Baker students were hosted. This is an example true to CapitaLand’s vision of enriching people and communities

17

listed real estate equity.

Given its global holdings, GIC is extremely cognizant about macroeconomic risks and keep tabs on capital allocation by comparing merits across markets and hedging foreign exchange exposure. In seeking the best risk-adjusted returns across the globe, each investment is scored against a specific risk-adjusted hurdle rate based on the country hurdle rate with added premiums for the market and other risks. Risk factors such as returns, quality, construction, management, and leverage are scored against this investment hurdle rate before investing, and these factors are updated at regular intervals.

A target market allocation of 4-5 countries has the most diversification benefit, beyond which a new market is determined by a resource allocation and resource optimization exercise. Core markets with >5% of the real estate portfolio include the U.S., UK, Germany, Japan, China, and Australia, while opportunistic markets that contribute meaningful alpha commensurate with the resources utilized are India, Indonesia, and Vietnam. In managing the portfolio, GIC uses global insights that include conventional databases, internal data, and alternative data sources such as geo-location, online review and ratings, social media sentiments, consumer credit, and other metrics. The presentation concluded with an investment thesis on the future of student housing with its defensive demand characteristics, positive market fundamentals, attractive financing spreads, and currently abundant acquisition opportunities.

Remaining under the aegis of the Government of Singapore, the next stop on the itinerary was the Urban Redevelopment Authority (URA), the planning agency tasked with making Singapore a great city to live, work, and play. Baker students were hosted by fellow Cornellian Daveen Koh and a colleague who together walked the group through the two-tier strategic planning approach of developing Concept Plans and Master Plans to guide the physical development of Singapore in a sustainable manner. The Concept Plans are designed for a long-term horizon and allow for flexibility in planning while envisioning mega-projects and infrastructure, while Master Plans are designed for shortterm statutory plans of 5-years that are extremely detailed in terms of land use, form, and other requirements while at the same time considering local development needs.

The dual nature of this planning allows the private sector to confidently develop specific goals and outcomes while

18

allowing the government to modulate the plans based on the changing requirements of the city-state.

In addition, these plans do not adopt a top-down methodology but instead adopt a participatory planning approach allowing the government to achieve the vision of all citizens. Uniquely, the participation comes not only from common citizens but also from the industry, a process which allows changes to be made and facilitates ease and flexibility of the system with increased convenience and efficiency. Unlike other planning agencies, the URA is tasked with the sale and leasing of state land to attract and channel private capital investment into development sites supporting economic and social objectives. The students were exposed to the end-to-end processes of planning the current and future of Singapore, including the successful use of policies and taxes to control land prices in the city, thereby avoiding the typical boom and bust cycles of real estate markets.

The last stop of the day was at the Asia-Pacific headquarters of CBRE, specifically its Global Workplace Solutions division, which strives to improve the experience of work and help organizations leverage their real estate

investments to drive business change. Hosted by Peter Andrew, Executive Director of the Workplace Centre of Excellence, the group was exposed to the thought process behind Workplace Strategy, Experience Consulting, Change Management, and Occupancy Management that helps clients identify opportunities to reduce and/ or reallocate costs, more effectively manage resources, improve employee engagement, and make decisions faster.

The local office was a shining example of the possibilities of leveraging design and technology to deliver an effective work environment that creates an emotional connection between employees and organizations, in turn creating a destination that supports the physical, cognitive, and social needs of the individual.

GUOCOLAND AND THE FAR EAST ORGANIZATION

By Wilson Blum

and guest and meeting areas before proceeding to the Wallich Residences. The residences are among the most expensive in Singapore and comprise floors 39 to 64 directly above the office space. Amenities are spread out over four different floors, with a concierge service and infinity pool on floor 39, a private library and theatre or floor 52, and a glass cantilevered observation deck on floor 62. Students were able to walk through one unit currently on the market for S$10 million and were impressed with the finishes and panoramic views of Downtown Singapore and the coast.

After lunch, Baker students ventured into the Holland Village area for a meeting with the Far East Organization. Owned by the Ng family, one of Singapore’s wealthiest, the company is the largest private property developer in Singapore, having developed over 750 properties across the country since its

Baker students began the fourth day of the trek with an indepth tour of Singapore’s tallest building, Guoco Tower. First opened in 2017, the tower was developed by GuocoLand, one of Asia’s premier luxury developers. In addition to its location above the Tanjong Pagar MRT station, the property, known in Singapore as an “integrated development,” consists of over 100,000 square feet of retail and dining space, 890,000 square feet of office space, a 223-room five-star Sofitel Hotel, and the 181-unit Wallich Residences.

British billionaire James Dyson made headlines recently for the purchase of the super-premium penthouse on the top floor of the property for US$54 million.

Valerie Wong, General Manager of Commercial Assets at GuocoLand, walked students through a scale model of the development prior to the tour. The design is a product of the world-renowned architectural firm Skidmore, Owings, & Merrill, which has completed projects such as the Time Warner Center in New York City, the Burj Khalifa in Dubai, and the Polestar Tower in Sweden. Ms. Wong then answered students’ questions about the challenges and complications of the development. Located in a historic district and above an operating subway line, construction had to be carried out incredibly carefully to address the needs of both commuters and local residents. The project’s geotechnical firm, ARUP Singapore Pte Ltd, received the 2019 Geotechnical Engineering Award for its excellence in managing the phased construction of such a complex project.

Students then toured the retail, office, and hotel properties, receiving an inside look at Sofitel’s unique room designs

19

founding in 1960. In 2018, the company led a consortium that was successful in acquiring the development rights to a highly sought-after land site in Holland Village for S$1.21 billion. The consortium has plans for a S$1.8 billion integrated development that will have two towers of 33 and 25 stories, respectively. The two towers will house over 400 apartments, a 10-story serviced apartment tower, and five levels consisting of approximately 80,000 square feet of office space situated above an additional 145,000 square feet of retail space. The project is yet another example of Singapore’s unique ability to foster transit-oriented development that offers live-work-play components in areas that need more of such uses. Developers, with the support of the government’s able central planning, have embraced the types of mixed-use projects that have been slower to catch-on in other areas. The result has been a responsible increase in the density of key areas around the country. As urban cores continue to densify, the importance of these kinds of developments providing a balance of uses – and open space – will substantially increase.

The students were excited to have a chance to sit down for a one-on-one conversation with Jonathan Ng, grandson of the company’s founder and currently Executive Director, CEO’s Office. Jonathan graciously answered student questions about the challenges of private development in Singapore. The Holland Village site, due to its varying uses, was awarded a 99-year ground lease by the Singaporean Government, a major advantage not always enjoyed by other projects. One key difference in how developers in Singapore seem to approach value differently than a typical U.S. investor is the concept of reversion. In general, in the U.S. an investor expects to receive a large portion of their return upon the sale of an asset. The existence of the ground lease, which in some cases can be for as little as 30-45 years, forces developers in Singapore to view this potential reversion as a zero-sum game. Therefore, in

20

pricing the value of bids at government auctions, companies must ensure that they are achieving target returns through income alone, with the assumption that the reversionary interest in the property will be discounted and eventually be zero. For companies such as the Far East Organization, Ng indicated, this is not a major problem as they are extremely long-term, if not indefinite, holders of assets and therefore they usually are able to achieve these types of returns.

Students concluded the visit with a networking reception set against the backdrop of the various full-scale models of for-sale apartments, which, since going on the market in December of 2019, are approximately 50% sold.

ASIA PACIFIC REAL ESTATE ASSOCIATION, MAPLETREE INVESTMENTS, KEPPEL REIT, AND FRASERS PROPERTY

By John Thompson On the last and busiest day of the trek, Friday, January 10th, Baker students visited five different real estate firms and rounded out the trip with a reception for Cornell alumni from around the island as well as the executives of the companies visited throughout the week. Cornell alumna Sigrid Zialcita, CEO of the Asia Pacific Real Estate Association (APREA), welcomed students for the first morning session. Zialcita handily navigated the students’ questions concerning

macroeconomic trends in the Asia Pacific region, with a particular emphasis on the growing demand for REITS as investment vehicles.

Ms. Zialcita pointed out that the Asia Pacific region has, rather quietly, enjoyed decades of growth with very few setbacks. When asked what factors have been responsible for such sustained growth, she pointed, without hesitation, to China. It is no secret that the Chinese economy has enjoyed a long period of continued growth, and the rising tide of China’s economy has raised all other Asia Pacific countries, as over 50% of the region’s GDP is tied in some way to the country. Moreover, the growing affluence of the Chinese middle class and their tastes and habits have bolstered the surrounding region’s growth. As in developed economies, Chinese consumers enjoy travel and are heavy

consumers, and much of that spending stays in the region.

Even as low wage work has left China in the wake of this economic shift, it has shifted to other Southeast Asian nations like Vietnam and Indonesia rather than leaving the region for other parts of the globe.

Ms. Zialcita closed the discussion with a conversation on Singapore’s REIT structure, and the growing popularity of REITs in the region. Singapore, which APREA has duly chosen as its home base, has had a long-established marketplace for REITs that has been incredibly successful.

As a result, other players in the region have looked to her and APREA for guidance on how to establish a REIT structure on their own exchanges. The largest of these potential players happens to be the Chinese government, which is making strides to introduce the investment structure into its own marketplace.

Following the visit with APREA, the group headed to the Harbourfront area to visit with a handful of fund managers.

The first stop was with Mapletree Investments, where Regional CEO of Europe and USA Michael Smith walked the students through Mapletree’s current investments as well as its plans for growth in those regions.

Mapletree Investments, Smith explained, is a wholly owned subsidiary of Temasek Holdings, which in turn is a holding company for the Government of Singapore’s state-owned investment companies.

Unlike CapitaLand, which is only 51% state-owned, and GIC, which invests across all different types of assets, Mapletree operates with complete autonomy and has a global presence of direct investment in real estate projects ranging from core office in Singapore to ground-up development in the Americas. In addition to its more traditional asset types, Mr. Smith noted that the firm has taken an increasing interest in alternative assets, like data centers, and the firm now has the industry’s fourth largest global logistics portfolio.

Mapletree’s investment strategy seemed to align closely with Keppel REIT, which was the next stop of the day.

Keppel REIT is headed by CEO Paul Tham, another Cornell alumnus, and is listed on the Singapore Exchange.

The company is the publicly traded real estate owner for Keppel Capital, and its assets are managed by Keppel REIT Management, so much of Mr. Tham’s responsibility it related to acquisitions and strategic growth of the portfolio.

Similar to Mapletree and others in the region, Keppel has taken a favorable view on data centers. This alternative

21

asset class has emerged as a valuable niche for those who understand its quirks, as tech giants continue to expand their global footprint and as the requirements for technology infrastructure continue to increase throughout the world.

For its part, Keppel has established the only pure-play data center REIT in Asia, and Mr. Tham explained some of the challenges facing owners of such assets. Not only do these facilities require an immense amount of energy to operate, but their components are also in need of constant upgrading lest they become obsolete. Perhaps the biggest challenge, however, is the fact that owners have very little pricing power, as their main tenants are constantly pressuring them for lower rents in order to curb their own soaring costs.

All of these factors place owners of data centers in the unenviable position of managing the investors’ demand for such products with the inherent difficulties of their business model.

The second-to-last stop of the day was with Frasers Property, which was directly across the street from Keppel. Wanshi Zheng, Group Chief Strategy & Planning Officer, greeted students with a brief history of the firm and its surprising roots. The company has been in existence for well over a century but was founded initially as a beverage company by the manufacturers of Chang beer. In the 1960s the company began building retail and manufacturing facilities in strategic locations and began to realize the profitability of real estate. In 1983, Frasers developed the CenterPoint Mall and has since grown to become one of the largest

22

commercial property owners and managers in the region, controlling multiple REITS in the retail and office sectors.

Students were given a tour of a formerly maligned office campus that Frasers brought back to life. Alexandra Technopark (ATP) features a group of office towers connected by a series of underground tunnels. It has been marketed towards tech companies, particularly those coming out of Silicon Valley and hoping to establish a foothold in Asia, and has recently secured Google as its major anchor tenant. Ms. Zheng cited the campus-like environment as a major selling point since it is a rarity in Singapore, where land is often too expensive for such an arrangement.

Finally, as the culmination of a whirlwind week, the students moved to the laid-back atmosphere of the Warehouse Hotel. The property was developed within a former 19th century warehouse built a few hundred meters inland of Clarke Quay. As the scarcity of land demands buildings in the CBD go more and more vertical, it is difficult to secure historic properties such as this one in Singapore. The Warehouse Hotel proved to be an able shepherd of this property’s history and charm, paying careful attention to original details and found artifacts and delivering a tasteful collection of just under 40 rooms. The hotel, owned and operated by the Lo and Behold hospitality group, served as a gracious venue where the Baker students capped off the trek with a reception featuring familiar faces from the week’s meetings.

23

Domestic Trek: Miami, Florida

24

OPPENHEIM ARCHITECTURE

By Sam Berry The first stop of the Cornell Baker Program’s Class of 2021 Miami Trek was a visit to the office of Chad Oppenheim, Principal and Lead Designer of Miami-based Oppenheim Architecture. The class gathered in the mezzanine conference room inside Oppenheim’s Miami office located in the famous Design District. The building itself is covered in greenery on the exterior and surrounded by trees, providing perhaps the block’s only cool, shady spot on an otherwise hot South Florida morning. Inside the building, white walls and interior furnishings elicit a modern minimalist feel, a trait synonymous with the projects Oppenheim discussed with the class.

Oppenheim is a 1994 Cornell architecture graduate, and he moved to Miami, Florida, upon graduation to pursue his career. After working in an architecture firm there for five years, he left to prepare for his professional exams, and Oppenheim Architecture was founded shortly thereafter in 1999. Oppenheim’s goal in opening his own practice was to bring high-level architecture to Miami, which sounds commonplace today but was unusual in the late 1990’s and early 2000’s. Uniquely, Oppenheim began his practice as an independent architect by pursuing and completing his own developments, rather than solely working as a feebased architect hired by outside development firms and homeowners. While that strategy has been modified over the last 20 years, Oppenheim Architecture maintains focus on socially- and environmentally-conscious architecture, while incorporating humans and nature in large-scale urban projects, hotels, resorts, luxury homes, and interiors – all of which were put on display during Oppenheim’s presentation to the Class of 2021.

Most of the early projects Oppenheim pursued as a designer/developer were in predominantly opportunistic areas, with the idea of his projects becoming catalysts for their specific neighborhoods. The early projects were primarily smaller residential buildings, such as a 16-unit forsale condominium complex and an eight-home townhouse complex in Miami Beach. Oppenheim was initially focused on “super efficiency,” adopting the economical thought process of a developer and understanding that certain spaces in buildings cannot be sold, such as hallways.

Subsequent larger luxury projects brought Oppenheim, and his growing brand, into the spotlight, such as his 10 Museum Park skyscraper where he sold condominiums for $450 per square foot, despite other condominiums in

the area going for $300 PSF at the time. Oppenheim’s growing reputation for designing luxurious Miami-lifestyle vibes trickled into the speculative home space, where he focused on incorporating this type of lifestyle into the natural environment and region where the building was located.

Oppenheim’s notable residential resume includes projects such as the iconic former Miami Beach home of Carl Fisher, an Arkansas farmhouse retreat for Walmart’s Walton family, the Montclair Miami Beach, and Michael Bay’s Miami and Los Angeles homes.

As the transition into commercial designs commenced, Oppenheim remained committed to his passion: creating environmentally sensitive work in beautiful locations, while letting nature become the star. Hospitality and resort projects followed soon after, including the Toy Story Hotel in Shanghai for Disney, Equinox Hotel in Chicago, and resort work all over the world, including the Bahamas, Brazil, Costa Rica, and Bali. The global spread of Oppenheim’s brand led to the opening of a second office in Basel, Switzerland,

25

which is run by a Cornell classmate. While Oppenheim started his firm doing many projects in the dual role of the designer and developer, the firm has since evolved to a more conventional structure where it designs projects for clients for fees, though in some cases it will invest some of these fees into projects for equity stakes. To demonstrate some recent projects, Oppenheim presented a city he has been tasked to design by the Crown Prince of Saudi Arabia.

Incorporating the reefs of the Red Sea, occupiable sand dunes, and cliffs, Oppenheim is bringing the ecosystem into his design in a once-in-a-lifetime project, despite the cultural and financial differences.

Oppenheim concluded his presentation with a Q&A session, at which point he was asked whether the growth of his reputation globally has resulted in new work being easier to secure now as compared to when he started. Oppenheim admitted that, while the phones may ring more often now than they did in the beginning, it is still important to prove your worth every day, no matter who you are or how long your company has been around. Oppenheim’s presentation surrounding high-end, luxurious, sustainable, and naturecentric design was an ideal foray into the remainder of the Class of 2021’s day in Miami’s Design District.

DACRA

By Samyak Jain Baker Program students visited the office of Dacra, the developer behind the Miami Design District. Craig Robins, the founder and CEO of Dacra and the visionary behind the Miami Design District, led the discussion on his vision and

motivation behind the development. Dacra was established in 1987 with a focus on the preservation of historical districts in Miami and also on building communities of substance.

The first area that Dacra focused on was South Beach.

In the early 90’s, the area was characterized by a sizable elderly population and criminal activities. Dacra began to acquire, renovate, and carefully curate projects in South Beach. This urban renewal attracted restaurants, retail, and entertainment to the area, helping bring the Art Deco District back to life. As the neighborhood became more popular, the area became over-commercialized. Since Dacra did not own all of the land in the neighborhood, it was unable to fully influence change and preserve the intimate nature of the neighborhood.

Its success in rejuvenating South Beach prompted Dacra to venture into the area that would become the Design District.

Learning from the constraints on its development in South Beach, starting in the early 2000’s, Dacra purchased many run-down buildings and vacant lots to control an entire 18 square block area. The area had fallen into disrepair and Robins saw this as an opportunity to reinvigorate the area through exceptional design, architecture, art, and experiences. Robins told the students, “Integrating the community culture with business and focusing on an entire neighborhood instead of just a single building will lead to more returns in the long term.”

The vision behind the Design District was to create a physical place that was filled with art, design, and architecture and that almost functioned as an outdoor museum. As Robins remarked, “Design should be on the streets.” Initially, Dacra focused on luring furniture designers away from enclosed malls to the street-level retail spaces to increase awareness amongst people who may never walk into such stores. Robins convinced Alison Spear, Peter Page, Kartell, Luminaire, and furniture designer Holly Hunt to open studios and showrooms in the area. He also was instrumental

26

in bringing Art Basel to Miami in the early 2000’s, which accelerated both Miami’s and the Design District’s growth as a premier worldwide destination for art. In order to generate revenue and further accelerate the neighborhood’s growth, he also founded Design Miami, a global forum for design.

In 2010, development of the Design District began in earnest, and Dacra and L Real Estate partnered to develop the area as a luxury retail and lifestyle destination. At the time, major luxury retail brands such as Louis Vuitton, Dior, and Hermes had stores in the Bal Harbour Shops north of Miami. Due to restrictive lease terms imposed by their landlord, these and other high-profile tenants whose presence in the Design District was crucial to its growth were prohibited from opening another store in Miami.

Robins saw this as an opportunity and began a dialogue with these prominent brands and ultimately convinced them to vacate their spaces in the Bal Harbour Shops and open showrooms in the Design District. Once brands like Louis

27

Vuitton and Hermes opened stores in the Design District, the proof of concept was established and several brands followed suit and opened their own stores there. Consistent with the artistic concept of the area, each brand attempts to outdo the others when it comes to store design. Almost all of the art in the Design District is curated by Robins, which shows his high degree of expertise and involvement.

Following the discussion at Dacra’s office, the students received an immersive tour of the Design District from Robbins, where he pointed out many of its innovative design elements, architecture, and attractions.

13TH FLOOR INVESTMENTS

By Joshua Lau As a result of superstitious beliefs, many buildings intentionally skip the 13th floor. In fact, this superstition seems to stem from the word “triskaidekaphobia,” which the English dictionary describes as the fear of the number 13.

But just like a charm, Arnaud Karsenti has credited luck, as much as capitalizing on good opportunities, for his success in managing and growing 13th Floor Investments.

13th Floor Investments is a real estate investment firm that focuses on value-add and opportunistic deals primarily in the Florida market. Arnaud recounts the early days of starting the company in 2008 when the market was very different from where it is today. Access to capital was very limited, but assets were also selling at a true bargain. He gave an example of a deal involving a portfolio of properties purchased in Homestead, Florida, for about a fifth of the

28

price it is valued at today. But the day before this deal was about to close, the stock market fell by about 800 points, which imperiled the deal as his primary investor, spooked by the almost ten percent one-day drop, decided it could no longer participate. With just 24 hours to replace this investor’s capital, Arnaud was left to source it from an investor that was originally excluded from this deal. This was an investor not based in Miami, but who just happened to be in the city at the time, and so they held an impromptu meeting that stretched into the early hours of the morning at the 13th Floor office to work out details of their joint venture.

The next day, with the new investor aboard, 13th Floor closed on the deal, and ultimately this partnership worked on multiple other profitable deals together. This just goes to show that sometimes Lady Luck can come through just in the nick of time.

When addressing how the company has performed since these early days, Arnaud was frank in admitting that, while 13th Floor has never lost money on a deal, it began in a down market that has been going up ever since. He advised the audience to remember that no investor is ever invincible.

There will be a time when the market will correct, and it would be disastrous not to be mindful of that. To counter this overconfidence, 13th Floor Investments de-risks by not over-leveraging. Their internal target is to keep debt under 50% on all their deals. Leverage is powerful, and has the ability to increase the IRR by reducing the amount of equity invested in each deal. Therefore, equity returns multiply if the property cash flows meet or exceed the target. But if the actual cash flows fall below the anticipated target, and debt

service cannot be met, leverage can have a devastating negative effect, and investors can lose their properties to foreclosure.

Additionally, the company has a strict policy of never using leverage when acquiring land. Arnaud cautions against levering land because the debt starts a countdown timer, as interest is accruing on an asset that is not generating income. And over a long enough period, that pressure might force an investor to make a rash decision on the idle land.

The visit with Arnaud at 13th Floor Investments concluded with a tour of their recent condo development at 1010 Brickell Ave. At the time, they were able to acquire the underlying land for relatively good value, which meant they were also able to sell their luxury condo units at a very competitive price, hence why the condos are fully sold today. The Baker Program in Real Estate left with renewed insights on real estate investing, a breathtaking view of Miami, and some bespoke 13th Floor Investment Monopoly boards.

TURNBERRY ASSOCIATES

By Ryan Meiser The Baker Program in Real Estate had the privilege of visiting Turnberry Associates during its Miami trek.

Turnberry is one of Florida’s largest and most influential real estate developers operating in the commercial, residential, and hospitality space. Turnberry has developed $10 billion in commercial and residential property including approximately 20 million square feet of retail space, more than 7,000 apartment and condo units, 15 million square

feet of office space, and more than 3,000 hotel and resort rooms. Turnberry developments are typically grand in scale and include multiple master-planned projects such as Aventura and Solé Mia. Developments such as the Aventura Mall, Town Center Aventura, and Destin Commons create destinations in their communities. These projects have catalyzed major economic advances in their neighborhoods “creating community and making the whole greater than the sum of its parts” (About Us: Turnberry, 2020).

The Baker Program’s visit to Turnberry commenced with an introduction from Donald Soffer, the visionary behind the development of Aventura, Florida. In 1967, the site was nothing more than 785 acres of swampland. Soffer, on behalf Oxford Development Company in partnership with Arlen Realty and Development Corporation, purchased this land for $6 million funded by the John Hancock Life Insurance Company. Soffer moved to South Florida from Duquesne, Pennsylvania, where he was raised in a working-class community predominantly driven by strip mining. His father was a shopping mall developer in western Pennsylvania, which gave Soffer his start in the industry.

After graduating from college in Massachusetts, Soffer returned to Pennsylvania and helped his father develop multiple shopping malls including South Hills Village, an indoor family shopping mall with dining, entertainment, and more than 110 stores (Bojnansky, Family & Fortune, 2012).

Soffer’s father envisioned South Florida as the next frontier for speculative development. Soffer envisioned Aventura, the Spanish translation of “adventure,” as a masterplan

29

centered around the Aventura Country Club. Soffer was keen to mention that the golf course was designed by the highly regarded golf course architect, Robert Trent Jones, and this created an attraction for the adjacent development.

Soffer was given the responsibility of executing the development of the 785 acres of Aventura swampland.

The site was drained and ultimately rezoned from singlefamily residential to high-rise development. When visiting the Aventura Mall today, it is almost unfathomable that the area was once swampland. The area is spotless, the roads are well-maintained, and the buildings are all gleaming.

Aventura, aligning with Soffer’s initial vision, is a high-end neighborhood of upper-class residents. The mall, which includes tenants such as Gucci and Burberry, caters to those seeking an upper echelon shopping experience. We met in the Level Three event space attached to the mall, which is connected to the mall by a large patio with games, ping-pong tables and a food court just beyond.

Though we did not visit the golf resort, Soffer described it as the catalyst for the entire community. Once the area was rezoned, the strategy of building vertically to preserve open land was employed and the partnership developed 4,000 condo units. This masterplan essentially created the entire city as it exists today. After developing multiple commercial, residential, and hotel structures on the site, Soffer and his team began to sell the now useable parcels to other developers which contributed to the evolution of the city.

Marina Kazartseva, Director of Asset Management at Turnberry, presented another exciting project to our trek class: the Miami Beach Convention Center Hotel. After other developers were unable to obtain community support, Turnberry stepped in to spearhead the project, a 185-foot-tall, 800-key hotel that was approved by more than the required 60 percent of voters. Turnberry was able to succeed where others failed for a number of reasons, including increasing the vehicle queuing area by nearly six times the previous proposal and reducing the overall height by nearly 100 feet. These efforts eased locals’ concerns and resulted in a general community embrace. The City of Miami Beach also stands to earn an estimated $96 million dollars in rent and percentage of hotel revenue over the next 30 years from the project (Gurney & Dolven, 2018). Kazartseva mentioned that while the project has been approved, there is still much to be done. They are currently finalizing the architectural and interior designs and are preparing to submit the updated plans to the city for review. Turnberry is also in negotiations with hotel brands regarding operations, which will affect the

30

design process to some extent. Once branded, Turnberry will raise the remaining equity investment needed to fund the venture.

Turnberry’s latest mixed-use development, Sole Mia, is currently under construction in partnership with the LeFrak family. This development will consist of 12 residential buildings with 4,390 units and more than 1 million square feet of commercial area. Perhaps most notably, this project will include a 7-acre manmade lagoon.

References About Us: Turnberry. (2020). Retrieved from Turnberry Associates Web Site: https://www.turnberry.com/aboutus Bojnansky, E. (2012, January). Family & Fortune. Retrieved from Biscayne Times Web Site: http://www. biscaynetimes.com/index.php?option=com_content&id=1051:family-a-fortune Gurney, K., & Dolven, T. (2018, November 7). After two failures, Miami Beach is building a convention center hotel. What’s next? Retrieved from Miami Herlad Web Site: https://www.miamiherald.com/news/local/community/miami-dade/miami-beach/article221283950.html

OCEAN TERRACE AND MAGIC CITY

By Parth Patel On the morning of the final day of their domestic trek to Miami, Florida, first-year Baker students visited two developers with ambitions to transform different Miami-area neighborhoods through large, pioneering projects that are each currently in the pre-development stages.

The first visit was to a site owned by Ocean Terrace Holdings, LLC (“Ocean Terrace”) and was led by Sameer Godiwala (MBA/MPSRE ’17). Ocean Terrace is a real estate development firm with a single, significant mixed-use project on an oceanfront site in North Beach. This project is planned on a 2.21-acre oceanfront assemblage and, upon completion, will include hotel, condo, and retail uses. With an estimated cost of $220 million, Ocean Terrace has already spent approximately $100 million thus far to assemble the parcels and fund the lengthy pre-development process.

The vision for the site is to develop a flagship project with a hotel that attracts an upscale clientele (roughly $700

ADR) and condominiums that will have an average sellout of approximately $2,300 PSF. The team behind Ocean Terrace is committed to creating a refined luxury experience that will transform its North Beach neighborhood into what South Beach was at its peak. In fact, Godiwala specifically mentioned that what excited him to take on this role was an opportunity to be a pioneer in a neighborhood that has missed a few real estate cycles. Godiwala believes that North Beach has the potential to become the next “hot” neighborhood in the Miami area – a mantle currently held

by Wynwood – and that the Ocean Terrace project can act as a catalyst for this transformation.

The site currently has an old hotel and a few dilapidated structures that are not structurally sound. To win the approval of the city and the local community, the team at Ocean Terrace agreed to preserve the existing hotel’s façade and completely rehab the structure. In addition, Ocean Terrace also agreed to acquire the street and its associated parking, which currently separates the project from the beach, and invest approximately $15 million to convert this land into an oceanfront public park designed by Raymond Jungles.

While an easement will ensure that this park remains freely accessible by the public, by purchasing and improving this parcel Ocean Terrace was able to convert its holdings into oceanfront property as well as increase its allowable FAR and thus the size of its buildings. Having secured the City of Miami Beach’s agreement with respect to the vacation of the street as well as the support of neighboring property owners, Ocean Terrace will likely break ground on its project in 2020.

Baker Program students next visited a site known as Magic City located in the Little Haiti neighborhood of Miami. Magic City is an innovation district with grand development plans to transform its neighborhood. The project is led by Tony Cho of Metro 1. The innovation district is in its infancy stage and is being planned around four pillars that serve as its guiding principles: technology, health & wellness, sustainability, and art & culture.

As we look to the future, climate change and sustainability are big issues across the globe. Given Miami’s geographical location on the ocean, the impact of climate change is already being felt heavily in the area, and there is a future fear of even greater impacts stemming from rising sea levels. Cho has a strong desire to attract tenants with a focus on research and innovation that fight climate change.

In addition to this desire for research and innovation, the

31

masterplan has been designed to reduce automobile use and preserve the culture of Little Haiti. While Cho wants to redevelop parts of the neighborhood, he does not want to do so at the cost of the area losing its identity.

All of these considerations roll-up into a forward-thinking master development plan that is sure to transform Little Haiti. Cho is committed to building on his track record and the success he had as one of the earliest investors in the Wynwood neighborhood and the Design District, two rapidly-developing and popular neighborhoods in Miami.

RIALTO CAPITAL

By Madhura Kharche As the final stop on their trek, first-year Baker Program in Real Estate students visited Rialto Capital’s new office on Biscayne Boulevard in downtown Miami. This visit was coordinated through the Baker Program’s fortunate connection with Director Michael Mashioff (ILR ‘04). Rialto was founded in 2007 as a subsidiary of Lennar Corporation, the largest home-builder in the U.S. In 2018, Stone Point Capital – a Greenwich-based private equity fund run by Goldman Sachs’ former CEO Steve Friedman – purchased Rialto. The Rialto platform invests in real estate across the capital stack, including floating rate senior loans, mezzanine loans, B-Notes, and direct real estate, with the

most prevalent component of their investment platform being the CMBS B-Pieces.

According to Director Brian Klein, Rialto is unique because it manages all types of commercial real estate assets across all 50 states. These assets include hotels, industrial, offices, retail, self-storage, and multifamily. In addition, Rialto offers an exhaustive list of in-house services, ranging from underwriting initial investments to being the point of contact for borrowers and managing foreclosure activities in the CMBS universe. David Jervasi, Senior Vice President of Finance, emphasized the importance of this diversification, which provides Rialto a competitive advantage. With an integrated investment and asset management structure, Rialto controls each aspect of the investment process, unlike comparable firms in the market.

With a conscious effort to internalize all services, Rialto enjoys some notable benefits as compared to its competitors. Servicing and monitoring deals in-house gives Rialto preemptive insights into potential issues (e.g. retailers filing for bankruptcy in spite of regular payments on loans). This allows Rialto to compile comprehensive data to create an information loop within the company that will allow for informed decisions with respect to other similarly situated properties. Rialto’s clients are often impressed by the attention to detail given to small-scale issues as its team underwrites large-scale deals. This strategy is important to Rialto as it does not have to rely on third party asset managers. Being self-sufficient allows teams to be internally answerable and to avoid charging clients multilayered fees.

The four core departments under Rialto’s Asset Management department are CMBS Performing Loans, CMBS Loan Workout, Real Estate Asset Management (“REO”), and Collateral Surveillance. The CMBS Performing Loans department focuses on various real estate transactions such as leasing matters, property sales, and hotel franchise agreements. The Loan Workout department, on the other hand, explores the investors’ options in the case of a default and analyses the degree to which loan terms may be modified before a foreclosure is imminent. The Asset Management team (REO) adopts a capital improvement strategy, wherein it assesses, manages, and liquidates real estate owned by Rialto or its subsidiaries to then determine the optimal holding period and market value of each asset.

Finally, the Collateral Surveillance team monitors risks associated with Rialto’s CMBS bond investments. The successful performance of this department is essential in

32

making Rialto a market leader as it studies the effect of macro-level issues (e.g. natural disasters) on commercial real estate cash flows.

CMBS loans are an important and growing part of the debt universe. The benefit of CMBS is that these loans are usually non-recourse and allow fixed interest rates at loan origination, which is attractive to borrowers. On the other hand, CMBS loans can be restrictive for borrowers and the tax implications for investors can be complicated. CMBS loans are generally appropriate for built properties with solid past performance, which helps in accurately underwriting the asset and projecting cash flows.

For Rialto, on the fund business and capital raising side, foreign investors play a key role, especially for a company in an international market such as Miami. This part of the business focuses heavily on long-term relationships with players including (but not limited to) pension funds, high net worth individuals, insurance companies, and sovereign wealth funds in countries like Singapore and Japan. Mr. Mashioff explained the concept of “sticky capital,” wherein trust is built with an institutional partner who repeatedly commits capital to the sponsor, causing smaller investors to follow in its footsteps. In repayment of Rialto’s good faith partnership, an investor made a significant investment in its fund after a decade of Rialto’s relationship-building and superior performance.

As parting advice, Mr. Mashioff advised the first-year Baker students to learn and master a specific set of skills, including financial analysis and accounting fundamentals, to stay upto-date with current events, and to focus on communication skills. On this latter point, the ability to read, comprehend, distill, and present information in a digestible manner to senior management is an essential skill.

33

Real Estate Industry

34

35

2019 Industry Leader Award Jonathan Gray, President and COO, Blackstone Written by: Madhura Kharche

Since 2007, the editors of the Cornell Real Estate Review have annually recognized exceptional real estate professionals with the prestigious “Industry Leader Award.”

Recipients of this award are individuals who have made significant contributions to the global real estate industry while serving their community. This year the award was presented to Jonathan Gray, President and Chief Operating Officer of Blackstone Group and Chairman of the Board of Hilton Worldwide.

Gray completed his undergraduate education at the University of Pennsylvania where he studied Economics at the Wharton School of Business and English in the College of Arts and Sciences. Gray joined Blackstone after graduation and, during his remarkable career there, has played an instrumental role in transforming the firm into one of the world’s leading investors in alternative investments.

In particular, he has revolutionized real estate by building the world’s largest investment platform through Blackstone’s buy-fix-sell strategy, frequently making unconventional bets that contradict industry consensus. In addition, together with his wife, Mindy, he has made significant charitable contributions to cancer research and has facilitated increased access to education for low-income children in New York City.

Following the award ceremony, Gray was joined for a one-onone discussion with Kevin Jacobs (SHA ’94), Executive Vice President and Chief Financial Officer of Hilton Worldwide.

Their conversation revealed insights into real estate trends, decision-making, and leadership, and provided invaluable advice to young members of the audience.

An asset’s quality is a more important consideration than the timing of the investment, according to Gray, and he further explained that sticking to the business plan is essential in the long-run as the economy experiences cyclical ups and downs. It is this philosophy that has allowed him to make sound investments with conviction, even under difficult economic conditions. For example, during the

36

From left to right: Jonathan Gray and Kevin Jacobs (SHA ‘94).

global financial crisis, Blackstone’s leadership believed in the company’s assets and strategy and stuck with them, even when other investors wanted to cash out. Blackstone has reaped enormous growth and profits as a result. This important lesson is one to remember, especially in a latecycle economy.

Gray believes in the importance of chasing excellence and striving for greatness through hard work. He remained humble when asked by Jacobs how a young boy from the Chicago suburbs became the President and COO of Blackstone, replying that it was the result of “a good education, hard work, a strong support system, and a little bit of luck – being in the right place at the right time.” While reminiscing about his time at Penn, he recalled meeting a young woman in a romantic poetry class who encouraged him to join Blackstone, then just a 75-person investment firm. Blackstone has now grown into a world-class 2,500-employee company, and that woman is his wife.

While discussing forthcoming trends, Gray predicted that e-commerce will continue to dominate and forecasted a

troubled time for physical retailers, with the exception of those with sufficient space allocated to entertainment, food and beverage, and showrooms. Furthermore, he predicted that large-box format retailers will suffer the most since they fail to provide unique consumer experiences.

Gray also remarked that companies move where knowledge workers are located. He noted that job creation is occurring most strongly on the west coast with innovative technology and creative knowledge workers drawn to cities in states like Washington and California, making these areas attractive for investment. He clarified, however, that there are some exceptions to this rule such as Raleigh-Durham, Brooklyn, and Austin. He also mentioned international regions with similar clustered labor pools of knowledge workers, including Shenzhen, Bangalore, and Scandinavia.

Gray shared with the audience some of the lessons he has learned in the real estate industry during his career. Most recently, he has been reading about energy, media, and pharmaceuticals, and he believes that big trends cut across industries. For example, Blackstone bought office buildings in Burbank, CA, a content creation hub, as he believes in the long-term success of real estate related to media. The distribution methods of media may evolve, but the creation of content in that larger geographical area will remain.

This strong support system, according to Gray, has carried him through crises that can at times seem overwhelming.

In order to keep employee confidence high during tough times, he thinks it is imperative that a leader stay calm and show commitment to the company’s long-term mission. His approach to work-life balance is “all integrated.” He makes it a point to attend his daughters’ games and be present in the moment, and he also occasionally brings them along to view real estate projects.

Gray advised students in the audience to be consumers of information by reading newspapers, analyst reports, company reports, and transcripts of earnings calls. He urged the audience to travel, talk to people, and avoid following the consensus. A willingness to be educated and a conviction in one’s opinions, according to Gray, will allow one to succeed in business. His biggest career advice was to love what you do. He encouraged young members of the audience to find good mentors, be passionate about work, and believe in the mission of the company. He stressed the importance of a good education and commended Cornell for providing students with a competitive advantage through innovation and interdisciplinary skills.

Furthermore, he explained that investing in emerging markets can be difficult as macro trends are just as important to consider as micro factors. Megatrends can present risks that are not apparent at the micro-level. Currently, Gray sees opportunities in India, thanks to its increasing consumer base and strong IT industry, noting that Blackstone is the largest owner of office buildings in India.

When asked about his new role evaluating investment opportunities outside the real estate industry, Gray stated that companies with low capital expenditures grow quickly and make the best investments. Although private organizations can become bureaucratic and employees can get siloed into specialized departments, he explained that the mere scale of the private market allows for high capital, systematic pattern recognition, and the ability to do what public markets cannot. As Blackstone grows, Gray is constantly trying to maintain the small business feel in its daily operations.

He attributes his success as a leader to the support from his wife and his team at work, emphasizing the importance of staying calm under pressure to do the best job for investors.

From left to right: Joseph McFalls (MPSRE ’20), Wilson Blum (MPSRE ’20), Jonathan Gray, Nikita Sarkar (MMH ’06 and MBA ‘21), and Kevin Jacobs (SHA ’94).

From left to right: Jonathan Gray and Kevin Jacobs (SHA ‘94).

37

37th Annual Cornell Real Estate Conference Recap PANEL 1: THE CEO’S CHECK-IN

By Sam Berry The theme of the 37th Annual Cornell Real Estate Conference was “20/20: Hindsight and Foresight” and featured panelists who discussed the unfolding challenges, disruptions, and opportunities in commercial real estate as 2020 approaches. Opening remarks by the Cornell Real Estate Council’s Chairman Paul Rubacha, Co-Founder and Principal of Ashley Capital, and Board Member Lynn Zuckerman Gray, Founder and CEO of Campus Scout, LLC, set the tone, after which Alan Riffkin, Managing Director at Lazard, introduced the first panel: “The CEO’s CheckIn.” The panelists were Owen Thomas, CEO & Director of Boston Properties; Don Wood, President & CEO of Federal Realty Investment Trust; Ben Harris, CEO of Link Industrial Properties; and Doug Yearley, Chairman & CEO of Toll Brothers. The moderator for this panel was the benefactor and Advisory Board member of Cornell’s Baker Program in Real Estate, Richard Baker, Governor of Hudson’s Bay Company and an owner of National Realty & Development Corporation.

Baker initiated the dialogue by asking the panelists to identify the biggest trends that they are currently seeing within their particular asset class. As the CEO & Director of Boston Properties, a Class-A office building owner, manager, and developer, Thomas first identified that the current leading net absorbers of office space include almost exclusively

Figure 1. From left to right: Alan Rifkin (CALS ’88), Doug Weill (SHA ‘88), and Aditya Didolkar (BS ’07 and MBA/MPSRE ‘16).

38

tech companies, life sciences companies, and co-working operators. This has shifted Boston Properties’ focus towards identifying office spaces where these companies want to locate. Thomas expanded on shared office space and co-working’s radical impact within the asset class and wrapped up his response by identifying the recent trend of capital flows into the office industry from private, not public, companies.

Wood, as President & CEO of Federal Realty Investment Trust, began with the observation that retail in this country is over-supplied. It is either over-developed or underdemolished, however one chooses to view it. Wood believes that the over-supply has provided a unique opportunity in the stronger U.S. markets. He identified these markets as locations where the currently booming industries are located.

Northern California with its tech industry and Boston with its medical tech industry are two of Federal Realty Investment Trust’s current favorite markets, preferred over other areas in locations such as Philadelphia and Washington, D.C. While Wood did not initially speak about e-commerce’s effect on retail, Harris of Blackstone’s U.S. industrial real estate platform, Link Properties, identified this as the number one trend within the industrial asset class. Harris’s focus is to truly understand how companies are moving products around the country and how that may change or adapt in the future. This means that while other asset classes may focus on rent differentials over location, he wants properties

Figure 2. Richard Baker (SHA ‘88) moderates the CEO’s Check-In.

where location is the most important factor so that Link is well-positioned in the “last mile” delivery competition.

Additionally, Harris cited how his industry has really set out on a path of its own, having disconnected its correlation to the overall economy around 10 years ago, mainly due to the massive growth in e-commerce.

Yearley, Chairman & CEO of Toll Brothers, provided perspective from the residential industry’s point of view.

Demographic trends, whether that is the growth of activeadult baby boomers or first-time home-buying millennials, affect what and where the company is building. The “smile states,” from California to the Carolinas, are where Yearley sees most of the residential growth taking place over the next several years. Toll Brothers is striving to create homes and spaces in these states, citing connectivity as the number one desire for their home buyers.

Figure 3. From left to right: Owen Thomas, Don Wood, Ben Harris, and Doug Yearley (A&S ’82).

Baker then steered the conversation towards innovation and asked each panelist to identify the biggest innovations their companies are currently undertaking. In addition to placemaking and property technology, Thomas first noted the downtown evolution and its effect on office space as having transformed Boston Properties’ development locations. Boston Properties has seen premiums in selling or renting office space in buildings it has elected to “freshen up.” Some of these decisions have been influenced by the growth of PropTech and its ability to identify densities, traffic counts, and what is going on inside the building in real time. Wood wholeheartedly agreed that placemaking could exponentially impact the attractiveness of a retail center as well, citing a 15-25% rent premium in desirable centers with high-level amenities. Although similar amenities may not matter as much in the industrial sector, design innovations are taking place. The movement towards multi-story warehouses is an effort to capture increasing demand and rents, as well as truck movement efficiency. These are the leading innovative trends that Link Industrial is seeing, according to Harris. Meanwhile, according to Yearley, Toll Brothers’ design innovations are influenced by consumers’ desires for modern, casual, open floor plans that complement their connected locations, which is a completely different home model than what was desired 15 or 20 years ago.

Following Yearley’s comments, Baker turned the discussion to a new term that seems to have attracted attention within the industry: “Hipsturbia.” With everyone talking about the

Figure 4. From left to right: Ben Harris and Doug Yearley (A&S ’82).

39

evolution, revitalization, and movement back into America’s

downtowns, are we on the verge of a movement back to the suburbs at some point in the future? All four panelists

agreed that suburbs are not dead, the “American Dream” is still alive and well, and suburbs are actually thriving in cities

like Nashville, Dallas, and Phoenix. While connectivity is still key, Yearley remarked that many people are still leaving

cities when their kids reach kindergarten age – as they want the big house, the big yard, the good schools, and the prime zip code – all of which are found in the suburbs. To support

this fact, Yearley cited data that confirms that premiums for

new homes are higher than they have ever been versus existing homes, meaning that companies like Toll Brothers are still building, and consumers are still buying, in the suburbs at a high rate.

Baker concluded the panel with a synopsis of the discussion, identifying his key takeaways. The concentrated location of new jobs and new job growth, the demographic movements, and placemaking maintained a constant theme in the hourlong conversation amongst the CEOs. What was most evident to Baker, and likely members of the audience as well, was the fact that commercial real estate continues to be a fantastic, creative, and thriving industry in which to work.

PANEL 2: PROPTECH - THE NEW BUZZWORD

By Samyak Jain The Cornell Real Estate Council was pleased to welcome leading investors in real estate technology (“PropTech”) to the Cornell Real Estate Conference. The esteemed panel gave valuable insights into the exciting world of PropTech and the changing real estate environment in light of the ever-growing pervasiveness of technology in business. The panel, which was moderated by Zak Schwarzman, Partner, MetaProp, included Brad Greiwe, Co-Founder & Managing Partner, Fifth Wall; Andrea Jang (MMH ‘09), COO, AckmanZiff; and Judah Siegal, Vice President, Brookfield Ventures.

The panel began with a discussion on the panelists’ interpretation of PropTech and what the word has meant for their investment firms. While the interpretation varied for

Figure 6. From left to right: Zac Schwarzman and Judah Siegel.

Figure 5. From left to right: Zac Schwarzman, Judah Siegel, Andrea Jang (MMH ‘09), and Brad Greiwe.

40

each panelist, all of them had the same broad understanding – adoption of technology in the built world. One panelist noted that though real estate is one of the largest asset classes, its adoption of technology has historically been very slow. However, this panelist is now seeing an active effort by some real estate leaders to adopt and implement technology in their businesses. Another panelist remarked that since PropTech is still in its nascent stages, real estate industry leaders should utilize this opportunity to back innovators in the space and treat that as research and development.

When posed the question about the response and mindset of traditional real estate companies to technology adoption and innovation, the panelists believed that in the last five years, there definitely has been a positive change and increasing willingness to adopt technology by the players in the industry. Industry leaders have taken the initiative to introduce verticals dedicated to PropTech and hire executives with a tech background to lead these verticals. Technology is becoming an increasingly important part of people’s lives and property managers are viewing technology from a more holistic perspective. One panelist noted that while things are changing for the positive, it is still a long road ahead.

Change will take time and will be a slow process as most companies are still not willing to allocate capital to, or do not have the organizational capability to adopt and invest

in, technology. Investors who are investing in the PropTech space should also look for quick wins that will provide returns in the short-term. This will help in establishing a proof of concept for the sector and will help drive the capital and support essential to the growth of the sector.

Discussion of a few case studies from the panelists’ investments gave valuable insights on the possibilities of the confluence of tech and real estate. The case studies discussed were VTS – a leasing and asset management platform that gives real time updates to the users of the platform, Opendoor – a platform offering an instant quote on a home value, Jones – a platform automating the certificates of insurance for vendors, and Dealpath – a collaborative platform for real estate acquisitions. Driving synergies between portfolio companies also helps in promoting cross business and overall optimization.

The panel finished by remarking that it is an interesting time for real estate as it is on the cusp of innovation. For young people looking to begin their careers in real estate, they should focus on developing skills in data science/tech as well as real estate. An intersection of these skills would be in great demand in the near future and will be beneficial to job seekers. The panel also sought the collective participation of owners, operators and managers of real estate to further tech innovation and adoption in the industry.

Figure 7. From left to right: Guy Geller (A&S ‘98), Billy Butcher, Adam Kaplan (SHA ‘04), Mark Alexander, and Seth Singerman (SHA ‘99).

41

PANEL 3: THE SILVER TSUNAMI

By Ryan Meiser An afternoon panel at the Cornell Real Estate Conference moderated by Seth Singerman (Singerman Real Estate) offered an insightful discussion about the senior housing market and the prospect of new developments in the space. Singerman was joined by Mark Alexander (Atria Senior Living), Billy Butcher (KKR), Guy Geller (Grace Management), and Adam Kaplan (Solera Senior Living).

“The Silver Tsunami” refers to the soon-expected wave of seniors maturing from the Baby Boomer generation.

This demographic group makes up about a quarter of the population in the United States now with nearly 79 million people. As these people prepare for retirement, the commercial real estate industry seeks to capitalize on the unique demographic shift by preparing to supply the inevitable need for senior housing. But in what form is this housing going to take shape, and how will real estate professionals differentiate their properties? The panelists shared some ideas, but one theme seemed to prevail: For senior housing, lessons must be taken from the hospitality industry.

First, Singerman asked the panel about why now is the time to focus on senior housing. The more recent market conditions in this asset class have shown that there was, in fact, a supply glut and related decline in senior occupancy.

Singerman hinted that this information may counter the notion that additional senior living facilities are even necessary. Butcher responded first, stating that KKR’s bet on the demand for senior housing is expected to crop up about eight to ten years out. The others on the panel certainly agreed that, while a recent oversupply has made the asset class less appealing, the demographics of an aging population are unavoidable. The Baby Boomers will need

Figure 8. From left to right: Guy Geller (A&S ‘98) and Billy Butcher.

42

senior living facilities. It must be noted here that this is a bet on time and that time is arguably the only constant in any market. So then, where is the variability? Butcher specified three variables: (1) The operator – referring to the standards of quality implemented by the property managers, (2) the future supply – when and how new senior housing will be delivered, and (3) the value – the culture of the community including residents and staff. Alexander, Geller, and Kaplan were affirmative regarding these notions, particularly given the aging demographics. The U.S. Census report projects that an average of 404,000 people will be aging between 80 and 84 on a yearly basis from 2020 to 2030.

Kaplan highlighted the necessity for high quality design and hospitality services that continued to arise throughout the discussion. Think for a minute about the unique housing demands for a senior citizen. This demographic has a high rate of medical needs, accessibility is mandatory, and retirement has increased its reliance on a sense of community. All of these needs lead to an operationsintensive property business model. When Singerman asked the panel about trends in the senior housing industry, the discussion began to closely resemble what one might expect from the hospitality industry. Both Geller and Kaplan expressed an increasing need for strong operations teams at the property management level. That, however, brings some difficulty because attracting and retaining good talent often means paying higher salaries. While these higher salaries are certainly warranted, they must be funded by increases in rental prices. Increases in rental prices are difficult in senior housing facilities for two primary reasons: (1) many of the tenants are living on fixed incomes, and (2) these tenants tend to hold their leases by staying put for long periods of time.

The senior housing industry is going to face a unique increase in demand that heralds an abundance of market opportunities for developers, investors, and managers.

However, it is not without hurdles. It seems that the most successful businesses in this space will be able to differential themselves by various means. The best senior living properties will need to be managed like hotels with considerable resources allocated to care for the resident community. This includes access to medical assistance as well as to amenities that encourage gathering, health, and general wellbeing. These tenants are elderly people who will likely be moving into these properties from local neighborhoods. They may also have families with grandchildren nearby that will come to visit

so accommodation for these guests would probably be a benefit that sets one property apart from the others. In fact, the panel discussion highlighted that many tenants lived approximately 30 minutes away from their senior housing facilities before moving in.

There is a unique opportunity in providing housing to folks who are, actuarially speaking, at the final stages of their lives. Proper care and spatial synergy must be considered when creating and managing a property for these individuals. These trends in experience-based design are emerging across all types of real estate assets.

In the senior living space, it has become clear that the demand it set to increase, and the operational strategies will be challenging but will create significant opportunity for developers and property managers to deliver unique senior housing facilities to the market.

PANEL 4: PLACEMAKING

By Parth Patel Placemaking was part of many conversations throughout the conference. In fact, there was a panel specifically dedicated to placemaking helmed by esteemed industry

guests Ben Bernstein, Co-founder and Principal of Redsky Capital; Adam Flatto, President and CEO of The Georgetown Company; MaryAnne Gilmartin, Co-founder and CEO of L&L MAG; and Saul Scherl, New York Tri-State Region President of Howard Hughes Corporation. The panel was moderated by Alan Tantleff, Senior Managing Director of FTI. As the group kicked off its discussion, each panelist revealed their visions for the future in the context of their past experiences with placemaking.

Gilmartin launched L&L MAG two years ago to develop ground-up projects of scale in New York City that not only deliver value to investors but also add value for the surrounding community. Gilmartin wants to do that with a diverse team that resembles the city and neighborhoods where her projects are located. Prior to Gilmartin’s founding of L&L MAG, she played a pivotal role in many of the significant projects at Forest City Ratner Companies during her 15-year tenure at the firm, including The New York Times Building, the venue for this conference. Gilmartin specifically highlighted the development of The New York Times Building to showcase how a successful project can act as a catalyst that transforms a neighborhood in a positive way. Gilmartin also touted the fact that most people would

Figure 9. From left to right: Ben Bernstein (A&S ‘06), Saul Scherl, Adam Flatto, MaryAnne Gilmartin, and Alan Tantleff (SHA ‘87).

43

not have believed that a building in that location would have commanded $100 per SF at the time it was being proposed but that it is possible to create a marketplace when you take the time to understand your tenants’ needs.

Flatto’s focus remains on creating neighborhoods from scratch around the country in line with The Georgetown Company’s track record. Over the span of more than a decade, The Georgetown Company has created a very successful “mixed-use town center” called Easton in the northwest corridor of the Columbus, Ohio, metropolis. This large-scale development attracts businesses from across central Ohio and largely functions as an independent town.

A total of more than 9.5 million square feet of mixed-use development has been completed to date at the Easton project, including retail, office, hotel and residential properties. Earlier in the year, The Georgetown Company announced that it wants to add an additional 350,000 square feet of Class-A office space to couple with its successful retail and residential development so that it can create a “Live, Work, Play” neighborhood.

Scherl of Howard Hughes Corporation has an individualized strategy that is specific to each of the assets that his firm inherited from the bankruptcy workout of GGP, owner and operator of shopping malls, during the Great Recession.

During the restructuring of GGP, all non-core assets on GGP’s balance sheet were spun off as a new company that became known as the Howard Hughes Corporation. Due to the nature of Howard Hughes’ founding, the company is comprised of a mixed pool of assets that each require a different strategy to unlock the true potential of the portfolio.

For example, its Downtown Columbia project in Maryland is a master planned development of an “entire town” comprising 2,300 residences, a 250-room hotel, 1.5 million square feet of Class-A office space, and 314,000 square feet of streetlevel retail. By contrast, the primary focus of its New York Seaport project is an experiential and destination retail experience. To attract shoppers to the Seaport’s 450,000 square feet of retail space, Scherl’s team has gone to great lengths, including attracting top restaurants and installing a new concert venue.

Finally, Bernstein of Redsky Capital remains committed to his first love, street-level retail. As Bernstein put it, he started his company in 2006 right as he graduated (from Cornell) because he believed that residents of Brooklyn who were paying ultra-high prices for apartments should have more than just a “liquor shop, nail salon, and photo

44

Figure 10. From left to right: Ben Bernstein (A&S ‘06) and Saul Scherl.

shops.” Redsky now owns and operates more than two billion dollars’ worth of real estate and Bernstein remains committed to his qualitative in lieu of quantitative approach.

Bernstein emphasized that his investments in both Brooklyn and Williamsburg have benefited by looking beyond an immediate opportunity to maximize proformas. According to Bernstein when you treat retail space as an amenity, you can elevate the surrounding buildings and neighborhood.

Tantleff later asked the group to define the word “placemaking,” which quickly revealed that each panelist had a slightly different notion of what constituted placemaking.

The discussion reveled that placemaking does not have to be uniform, but that it should be a specific and individualized effort that is designed for the neighborhood where the project is located. One panelist also shared that you will just know that the development was truly special and worthy of being labeled as a “placemaking development” once the project is done and its impact is palpable.

Despite all the complexities and wide range of perspectives, the panelists shared two key lessons that all developers can employ as they think about good development. The first is that it is not only important but also beneficial to involve the community during the development process, and the second is that it is best to consider the entire project or neighborhood cohesively instead of compartmentalizing spaces by use.

When it comes to community involvement Gilmartin shared that each community and neighborhood will be different.

Gilmartin continued that when you involve the community early in the process, you gain deeper understanding of the neighborhood where the project is located. Furthermore, you can parse out the true opinions and concerns relating to the project from the ones that are simply the loudest.

Gilmartin specifically cited her projects in Brooklyn that

seemed controversial even though she had overwhelmingly large support of the community because a small group had utilized social media to amplify its criticisms. Scherl also cited an interesting example that by engaging with the community surrounding the Seaport project he realized that the community was irked by the simple omission of the word “historic” from “Seaport Historic District.” This simple change would go a long way in winning over the community.

The second lesson evident throughout the conversation was that developers often make the mistake of compartmentalizing or neglecting the first floor of the building. Gilmartin citied how much thought they put into creating a lobby in The New York Times Building and that it is often an overlooked amenity that can kill the commercial space above. Gilmartin then generalized this notion by concluding that retail space is not meant for maximizing the proforma, but that it is an amenity that, if used correctly, would create higher rents throughout the building. Bernstein echoed Gilmartin’s sentiment and stated that the same

idea can be applied at the neighborhood level. Bernstein emphasized that if you are willing to acquire the best retail tenants to meet the needs of the neighborhood, and not just the ones willing to pay the highest rents, then you can create even more value in all of the surrounding assets than previously possible. Bernstein shared that it is important to find equity partners who would support this process of creating value at the neighborhood level and not just ones who are focused on immediately monetizing the assets by acquiring tenants willing to pay the highest rents. Too often the focus is on highest and best use for the specific retail location or space in the building.

During the concluding remarks, each of the panelists echoed that they approach their role of placemaker with a great deal of responsibility as they toe the line between bringing new development to a neighborhood and preserving the authenticity of the neighborhood and of the surrounding community.

S A V E T H E D AT E

38th Annual

Cornell Real Estate Conference Friday, October 23, 2020 The Times Center, New York City

An evening reception will be held on

Thursday, October 22, 2020 Cedric’s at the Shed, Hudson Yards Encourage your colleagues to stay informed by registering for CREC membership here:

➤

www.cornellrec.org/register/ Early Bird ticket discounts, detailed agenda & sponsorship opportunities coming soon!

45

NEW YORK 850 Third Avenue, 16th Floor New York, NY 10022 United States of America +1 (212) 867-0888 info@hodesweill.com

46

DENVER 1401 Seventeenth Street, 12th Floor Denver, CO 80202 United States of America +1 (720) 443-9550

LONDON 18 Pall Mall London SW1Y 5LU United Kingdom +44 (0)20 3427 3624

HONG KONG 2102 Two Exchange Square 8 Connaught Place, Central Hong Kong +852 3589 6940

Survey Highlights

2019 INTRODUCTION Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates are pleased to present the findings of Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates are pleased to present the findings of the seventh annual Institutional Real Estate Allocations Monitor (the “2019 Allocations the seventh annual Institutional Real Estate Allocations Monitor (the “2019 Allocations Monitor”). The 2019 Allocations Monitor”). The 2019 Allocations Monitor focuses on the role of real estate in institutional portfolios, Monitor focuses on the role of real estate in institutional portfolios, and the impact of institutional allocation trends on the and the impact of institutional allocation trends on the investment management industry. Launched in 2013, the Allocations Monitor is a comprehensive annual assessment of institutions’ allocations to, and investment management industry. Launched in 2013, the Allocations Monitor is a comprehensive annual assessment of objectives in, real estate investments. This report analyzes trends in institutional portfolios and institutions’ allocations to, and objectives in, real estate investments. This report analyzes trends in institutional portfolios allocations by region, type and size of institution. and allocations by region, type and size of institution.

The 2019 Allocations Monitor includes research collected on a blind basis from 212 institutional

investors in 24 countries. The 2019 participants hold total assets under management (“AUM”) exceeding US$12.3 trillion and have portfolio investments in real estate totaling approximately US$1.1 The 2019 Allocations Monitor includes research collected on a blind basis from 212 institutional investors in 24 countries. The trillion. Our survey consisted of 24 questions concerning portfolio allocations to the asset class, current 2019 participants hold total assets under management (“AUM”) exceeding US$12.3 trillion and have portfolio investments in and future investments in real estate, investor conviction, investment management trends and the role real estate totaling approximately US$1.1 trillion. of various investment strategies and vehicles within the context of the real estate allocation (e.g., direct Our survey consisted of 24 questions concerning portfolio allocations to investments, joint ventures, private funds). We also included questions regarding historical and target returns as well as environmental, social and governance (“ESG”) policies. the asset class, current and future investments in real estate, investor conviction, investment management trends and the role of various investment strategies and vehicles within the context of the real estate allocation (e.g., direct investments, 2019 Global Institutional Participants joint ventures, private funds). We also included questions regarding historical and target returns as well as environmental, 212 participants in 24 countries representing US$12.3 trillion in AUM social and governance (“ESG”) policies.

2019 GLOBAL INSTITUTIONAL PARTICIPANTS 212 participants in 24 countries representing US$12.3 trillion in AUM KEY FINDINGS OF THE 2019 ALLOCATIONS MONITOR

1. Target allocations to real estate continue to rise globally, although the pace of year-over- year growth is moderating.

Average target allocations to real estate increased 10 bps to 10.5% in 2019, up approximately 160 bps since 2013.

However, the annual pace of increase appears to be moderating, with 10 bps representing the lowest annual change in six years, during which time the annual change ranged from 20 bps to 40 bps.

47

Breakdown of Participants

By Type of Institution

Breakdown of Participants

By Location of Institution

APAC 10%

Public Pensions

Private Pensions 23%

Breakdown of Participants

By Size of Institution

EMEA 24%

35%

Greater than US $50B 20%

The Americas 66%

Endowments & Founda6ons 29%

Less than US $50B 80%

Figure 1. Key Findings of the 2019 Allocations Monitor

Figure 2. Weighted Average Target Allocation to Real Estate, All Institutions

2. Led by institutions in the Americas and Asia Pacific, growth in target allocations is forecasted to continue in 2020. On average, institutions are expecting to increase target allocations by an additional 10 bps over the next twelve months.

This expected increase is being driven by institutions based in the Americas and Asia Pacific, with each region forecasting increases of 20 bps, while target allocations for EMEA-based investors are expected to remain flat.

48

Figure 3. Weighted Average Target Allocation, By Location of Institution

Figure 4. Actual vs. Target Allocation, By Location of Institution

3. While institutions have been actively investing in real estate, the “denominator effect” continues to contribute to portfolios lagging target allocations. Actual allocations remained flat year-over-year, with institutional portfolios 9.4% invested in real estate on average. Overall, institutions are 110 bps under-invested relative to target allocations. Institutions in EMEA and APAC remain significantly under-invested, at margins of 150 bps and 170 bps, respectively. Approximately 50% of institutions overall are under-invested relative to target allocations by an average of 190 bps.

(4) While actual investment returns declined moderately in 2018, to results continue to outpace 4. While actual investment returns declined moderately in 2018, results continue outpace target returns.

As capital target returns. As capital appreciation has slowed in recent years, returns have moderated to appreciation has slowed in recent years, returns have moderated to high single digits. Institutions reported an average return of 8.8% in 2018, 30 Institutions bps from 9.1% in 2017.an While institutions continue to2018, express concerns regarding high single down digits. reported average return of 8.8% in down 30 bps from asset valuations and weakening economic growth, operating fundamentals broadly favorable which is contributing 9.1% in 2017.

While institutions continue to express remain concerns regarding asset valuations and to a continuation weakening of strong returns for the growth, asset class. economic operating fundamentals remain broadly favorable which is contributing to a continuation of strong returns for the asset class.

All Institutions

By Type Public Pension Endowment & Foundation Private Pension Insurance Company SWFs & GEs

By Location The Americas EMEA Asia Pacific

By Size Greater than US$50 billion Less than US$50 billion

2018 Target Return 8.2%

7.6% 8.8% 8.4% 8.2% 7.2%

8.5% 7.3% 8.1%

7.5% 8.3%

2019 Target Return 8.3%

7.5% 9.7% 8.3% 8.4% 7.2%

9.0% 6.9% 7.6%

7.9% 8.5%

Actual 2014 11.8%

11.7% 13.0% 12.6% 8.3% 11.4%

12.6% 10.4% 9.5%

11.1% 12.0%

Actual 2015 10.9%

11.4% 11.0% 11.1% 9.3% 9.7%

11.7% 9.3% 10.1%

11.0% 10.9%

Actual 2016 8.7%

8.8% 9.1% 8.2% 9.1% 8.1%

8.7% 8.4% 9.2%

9.4% 8.6%

Actual 2017 9.1%

9.2% 8.9% 8.9% 9.9% 8.9%

9.3% 8.5% 9.1%

9.6% 9.0%

Actual Actual Actual 3-Year 5-Year 2018 Average Average 8.8% 8.9% 9.9%

8.4% 8.8% 9.9% 9.1% 9.0% 10.2% 9.0% 8.7% 10.0% 8.7% 9.2% 9.1% 9.3% 8.8% 9.5%

9.2% 9.1% 10.3% 7.5% 8.1% 8.8% 9.1% 9.1% 9.4%

9.2% 9.4% 10.0% 8.7% 8.8% 9.8%

(5) Investor sentiment increased for the second straight year, reaching a 5-year high. Between Figure 5. Historical and Target Returns 2018 and 2019, our “Conviction Index”, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, increased from 5.1 to 5.7, the highest reported since 2014. Despite rising investor sentiment, institutions report an increase in focus on positioning portfolios more defensively for a potential market downturn.

49

(5) Investor sentiment increased for the second straight year, reaching a 5-year high. Between 2018 and 2019, our “Conviction Index”, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, increased from 5.1 to 5.7, the highest 5. Investor sentiment increased for the second straight year, reaching a 5-year high. Between 2018 and 2019, our “Conviction reported since 2014. Despite rising investor sentiment, institutions report an increase in focus Index”, which measures institutions’ view of real estate as an investment opportunity from a risk-return standpoint, on positioning portfolios more defensively for a potential market downturn. increased from 5.1 to 5.7, the highest reported since 2014. Despite rising investor sentiment, institutions report an increase in focus on positioning portfolios more defensively for a potential market downturn.

Conviction Index, All Institutions

10.0 8.0

6.4

6.0 4.0 2.0 0.0

5.7

5.7 5.6 5.4 5.1 4.9 majority of their new investment allocations to third-party managers. Rising target all and an increase in cross-border investing continue to drive the outsourcing of management.

(7) Value add strategies remain the strongest preference for institutions globally, while in 2014 2015 2016 2017 2018 2019 opportunistic strategies declined for the first time in five years. Approximately Figure 6. Conviction Index, All Institutions (6) Allocations to third-party managers reported continued to they trend are upward in 2019, driving double-digit institutions that actively allocating to value add strategies, while growth in global AUM allocating to core strategies and 69% to opportunistic strategies. Opportunistic strateg for fund managers. Institutions continue to allocate a substantial 6. Allocations to third-party managers continued to trend upward in 2019, driving double-digit growth in global AUM for the only type of strategy that garnered a decline in interest in 2019, as compared to 201 fund managers. Institutions continue to allocate a substantial majority of their new investment allocations to third-party Risk Preference, All Institutions managers. Rising target allocations and an increase in cross-border investing continue to drive the outsourcing of portfolio management.

2013

2015

2016

2017

2018

2019

7. Value add strategies remain the strongest preference 90% 91% for institutions globally, while interest in opportunistic 100% 86% 86% 76% 72% 75% 69% strategies declined for the first time in five years.

70% 66% 69% 63% 66% 75% 57% Approximately 91% of institutions reported that they 56% are actively allocating to value add strategies, while 50% majority of their new investment allocations to third-party managers. Rising target all 66% are allocating to core strategies and 69% to and an increase in cross-border investing continue to drive the outsourcing of opportunistic strategies. Opportunistic strategies 25% management. were the only type of strategy that garnered a 0% decline in interest in 2019, as compared to 2018.

(7) Value add strategies remain the strongest preference for institutions globally, while in

Core Value add Opportunisac

opportunistic strategies declined for the first time in five years. Approximately Figure 7.remain Risk Preference, Institutions 8. While cross-border capital flows(8)remain the While strong, cross-border capital flows strong, Allthe percentage of institutions i institutions reported that they are actively allocating to value add strategies, while percentage of institutions investing outside outside of their of their domestic region has decreased, led by EMEA-based institutions allocating to core strategies and 69% to opportunistic strategies. Opportunistic strateg domestic region has decreased, led by EMEA-based institutions that are increasingly favoring intra-regional allocations. increasingly favoring intra-regional allocations. North America continues to be the the only type of strategy that garnered a decline in interest in 2019, as compared to 201 North America continues to be the largest recipient of capital allocations, followed by Continental Europe. Investor demand recipient of capital allocations, followed by Continental Europe. Investor demand r remained largely consistent year-over-year with the exception of the UK and Asia. Investors are citing currency exchange Risk Preference, All Institutions largely consistent year-over-year with the exception of the UK and Asia. Investors a rates, uncertainty regarding BREXIT, Hong Kong protests and the impact of global trade wars as significant risks. currency exchange rates, uncertainty regarding BREXIT, Hong Kong protests and the im 2015 2016 2017 2018 2019 global trade wars as significant risks.

9. Closed- and open-end private funds remain the

preferred investment products for institutions, but 90% 91% 100% 86% 86% Institutions Investing Outside of their Domestic Region, By (9) Closed- and o popularity has declined slightly after several years of 76% 72% 75% 69% 70% Location of Institution 66% 69% 66% funds rem growth. Closed-end funds continue private to be the most 75% 63% 57% 56% favored investment product for institutions, although p 88% 95% 95% 90% 81% the percentage of investors allocating capital 100% to 50% inv 74% 71% 66% 66% closed-end funds decreased 13 percentage points 75% 25% products in 2019. Appetite for direct investments and 50% institutio separate accounts increased in 2019, led by larger 0% popularit 25% Core Value add Opportunisac institutions with an objective to maintain greater

declined slightly discretion over their capital (and to lower portfolio0% Figure 8. Institutions Investing (8) While cross-border capital flows remain strong, the Outside percentage The Americas EMEA APAC of institutions several years of i management costs). of their Domestic Region, By Location of Institution 2017 2018 2019 outside Closed- of their domestic region has decreased, led by EMEA-based institutions end

50

increasingly favoring intra-regional allocations. North America continues to be the continue

recipient of capital allocations, followed by Continental Europe. Investor demand the most r largely consistent year-over-year with the exception of the UK and Asia.

Investors investment product for institutions, although the percentage of investors allocating ca currency exchange rates, uncertainty regarding BREXIT, Hong Kong protests and the im

greater discretion over their capital (and to lower portfolio management costs).

Investment Product Preferences, All Institutions 2016

2017

2018

2019

100%

79%

87%

93% 80%

75% 50%

39% 38%

33%

38%

40% 37%

42% 41%

52% 55% 56% 51% 36% 33%

31% 34%

25% 0%

Direct

Joint Venture

Separate Account

Closed-End Private Fund

Open-End Private Fund

Figure 9. Investment Product All Institutions (10) ESG policies are increasingly important for Preferences, institutions, and investment managers are positioning their organizations and product offerings to accommodate their clients’ objectives. The focus on ESG policies has continued its trend upwards in 2019. Institutions are 10. ESG policies are increasingly important for institutions, and investment managers are positioning their organizations showing an increasing preference for investments that not only meet their return expectations and product offerings to accommodate their clients’ objectives. The focus on ESG policies has continued its trend but also satisfy their objectives for environmental sustainability, social responsibility, and upwardsgovernance. in 2019. Institutions are showing an increasing preference investments that not only ESG meet their EMEA-based institutions continue to lead the forindustry in implementing return expectations but also satisfy their objectives for environmental sustainability, social responsibility, and policies.

governance. EMEA-based institutions continue to lead the industry in implementing ESG policies.

The 2019 Allocations Monitor leverages the academic resources of Cornell University and the global institutional relationships and real estate expertise of Hodes Weill University & Associates.

We hope this report The 2019 Allocations Monitor leverages the academic resources of Cornell and the global institutional relationships provides unique insight into the institutional investment industry, serving as a valuable tool for and real estate expertise of Hodes Weill & Associates. We hope this report provides unique insight into the institutional institutional investors development portfolio investors allocation instrategies and peer of strategies investment industry, serving in asthe a valuable tool for of institutional the development of benchmarking portfolio allocation returns, and for investment managers in business planning and product development. With this goal in and peer benchmarking of returns, and for investment managers in business planning and product development. With this mind, please feel free to contact us with any comments, questions or suggestions. goal in mind, please feel free to contact us with any comments, questions or suggestions.

a of copy full 2019 Allocations please Kathy contact Kathy Terry, Program for Assistant for the For aFor copy theof fullthe 2019 Allocations Monitor,Monitor, please contact Terry, Program Assistant the Baker Program in Real Baker Program in Real Estate, at kcr2@cornell.edu or (607)255-7110.

Estate, at kcr2@cornell.edu or (607)255-7110.

51

Hahne & Co. Case Study We are pleased to present a ULI case study of the redevelopment of the historic Hahne & Co. building in Newark, New Jersey. This is the first in a series of case studies and briefs jointly created by ULI and Cornell University’s Baker Program in Real Estate. The Baker Program is honored to collaborate with ULI and looks forward to contributing to the continued success of these case studies and briefs, which are important resources for professionals throughout the real estate industry. All ULI case studies and briefs can be found on ULI’s website at https://casestudies.uli.org/.

Hahne & Co. Captions:

PROJECT SUMMARY The historic Hahne & Co. building was redeveloped by a joint venture among affiliates of L+M Development Partners Inc. (L+M), Prudential, and Goldman Sachs from a once grand but vacant department store into a lively mixeduse development in the heart of downtown Newark, New Jersey. Built in 1901 at 609 Broad Street, the Hahne & Co. Department Store stood empty since its namesake brand closed in 1987. The building rises four stories and is now linked to a nine-story tower constructed on an adjacent parcel for a total of 528,500 square feet. This adaptive reuse includes 160 apartments–both market-rate and affordable–as well as 75,000 square feet of retail.

Rutgers leases nearly 60,000 square feet for a community arts collaboration space and campus bookstore, while other tenants occupy over 40,000 square feet of office space.

The Grand Court located under the building’s historic skylight provides access to many commercial spaces and serves as a community gathering area. The project also includes over 200 underground parking spaces. The redevelopment opened in phases, first in January 2017, and it was completed in late 2018, after five years of planning and construction.

THE SITE AND THE IDEA The City of Newark, New Jersey, is a major employment center and commercial hub of the northeastern United States. Having suffered serious decline in the latter half of the 20th century, at the time of the rehabilitation of Hahne & Co., the downtown area was characterized by a population of mainly office workers who vacated the area in the evening. While there was still some nearby street activity due to the New Jersey Performing Arts Center and Rutgers University, the area lacked vibrancy. The site itself had been long recognized for its redevelopment potential in bringing life back to the area, but several attempts to redevelop the

52

LOADING DOCK

RESIDENTIAL LOBBY

ARCADE ENTRANCE

10

Site plan. (L+M Development Partners)

Site plan. (L+M Development Partners)

building had floundered and it remained abandoned for 30 years until L+M broke ground in 2015. Due to the many challenges presented by this redevelopment, Tim Lizura, the former Executive Director of the NJEDA, once referred to it as “a site where developers came to die.”

This landmark department store building is located on

a 2.39-acre site that occupies half of a city block on the north end of downtown Newark and 0.3 miles north of the intersection of Broad and Market Streets, the center of the city’s street grid, and 0.45 miles northwest of Newark Penn Station. Hahne & Co. is in the historic Central Ward (earlier known as the Third Ward) that includes many of Newark’s historic public spaces, one of which is Military Park, downtown’s largest green space. The Hahne & Co. building fronts directly on Military Park. At the time of the conceptualization of the project, this park was in the process of a long-awaited revival by local stakeholders, thanks in large part to a substantial grant from Prudential. To the west of the site is Halsey Street, a local commercial corridor, the Rutgers University campus, which enrolls 12,000 students, and the New Jersey Institute of Technology, which enrolls more than 11,000 students. The area to the south of the site was redeveloped simultaneously with this adaptive reuse project. The new 20-story Prudential Tower situated across New Street brought 6,000 workers to the downtown though the area still lacked any significant mix of uses or vibrancy.

All of these factors served as the context for the concept of the multi-use combination of functions that were fused into the proposed program for the building. Lying at the nexus of important corridors of downtown Newark, the project was envisioned as a node around which the downtown could gather and grow. The dearth of residential options in the area was also an important piece of the development— addressing the need for market rate and affordable housing—while taking advantage of tax credit funding. As the project developed, it was also tied into the institutional surroundings with the relocation of the Rutgers University Department of Arts, Culture and Media. This community arts and education program facility, “Express Newark,” encourages the creation of a more mixed-use downtown, one with daytime and evening activity seven days a week.

Because of the size and location of the Hahne & Co. department store, the redevelopment project originated with the idea of a mixed-use redevelopment, including a combination of apartments, retail, and office space. These uses were brought together under a four-story Grand Court running lengthwise through the building. This atrium was capped by a steel and glass skylight, which served as the focal point for the redevelopment.

The historic restoration and conversion of the property centered on the removal, offsite restoration, and reinstallation of this glass skylight. The newly rebuilt skylight, together with a reimagining of the original atrium space with the skylight relocated from the fourth to the second floor, proved to be challenging but ultimately paid great dividends.

The Grand Court at Hahne & Co. and its skylight serve as the focal point of the historic redevelopment. The Grand Court The Grand Court at Hahne & Co. and its skylight serve as the focal point of the historic offers access to Court many of access the commercial spaces spaces in thein building redevelopment.

The Grand offers to many of the commercial the building andand servesserves as a community area. (L+M Development Partners) as a gathering community gathering area.

(L+M Development Partners)

DEVELOPMENT BACKGROUND AND PROCESS The Hahne & Co. redevelopment project was spearheaded by a partnership between L+M, a New York-based developer with a record of success undertaking real estate developments in the five Boroughs, and Prudential. The developer had been looking to New Jersey, particularly Newark, as it believed these markets had strong growth potential. The firm recognized that Newark had excellent infrastructure, beautiful historic buildings, and a motivated group of local stakeholders.

A critical component of the redevelopment project, the Whole Foods Market at the corner of Broad Street and New Street addressed A critical component the redevelopment project, the Whole Foods Market at the corner of the pre-existing food desert in the surrounding downtown Newark area. of(L+M Development Partners)

Broad Street and New Street addressed the pre-existing food desert in the surrounding downtown Newark area. (L+M Development Partners) 53

Indeed, L+M initially had not anticipated how complicated it would be, or whether it was even feasible, to undertake this work with respect to the skylight. The skylight had not been touched since World War II and had since been capped with asphalt causing the glass to be badly damaged. “We substantially evaluated its replacement and surprisingly found that the restoration was cost effective when compared against the replacement,” remarked Jonathan Cortell, a Managing Director of L+M. Choosing to restore rather than replace the skylight also allowed the building to retain more of the original characteristic of the building. Cortell explained, “we note here that preservation would enable an accurate representation of the building’s history as modern skylight systems use lightweight aluminum framing members while the original steel includes exposed rivets and connections.”

space in the Grand Court as being a pivotal component of the structure as it facilitated layouts with interior-facing apartment arrangements.

Throughout the development process, and especially during the approvals phase, L+M juggled the varied requirements of several different agencies. While local historic approval was reviewed by the Newark Landmarks and Historic Preservation Commission, NJSHPO, and the NPS, the site plan approval fell under the purview of the Newark Central Planning Board. Further, the Newark Building Department oversaw building code and construction details, and the hiring and contracting aspect of the project was reviewed by the City of Newark.

The Developers faced significant challenges during the project mostly stemming from the building’s years of neglect. Due to their lack of maintenance, the building Opting for a restoration of the skylight also fostered a positive elements required close evaluation, beginning with the relationship with the New Jersey State Historic Preservation cast iron columns and steel beams. The columns were Office (NJSHPO) and the National Park Service (NPS). cracked in places and were thus reinforced and incased The restoration of the Grand Court was a requirement of the in concrete to the roof. As a result of the increased dead development, though electing to restore the skylight over loads and structural changes to the building, and to ensure replacing it was not compulsory. In addition to the Grand the structural integrity of the floors, an additional three-inch Court restoration, other historic aspects incorporated into lightweight concrete slab was added to the original concrete the development include renovating historic railings, exterior floors and a new concrete perimeter wall was built on the windows, the grand staircase, exterior facades, and the inside of the façades to meet expected wind loads and terra cotta cornice. At the core of the development strategy moisture penetration. Much of this work became change was the synergy created by the varied mix of uses, and A moving criticalthecomponent of the redevelopment project, the Wholealtering FoodstheMarket the of corner orders, originalat scope work. of skylight to the second floor from the fourth floor

Broad Street and New Street pre-existing food desert in the surrounding downtown allowed for the conversion of theaddressed 3rd and 4ththe floors into 83 The new tower constructed at the corner of Halsey Newark area.

(L+M Development Partners) rental apartments. The developers saw the central vacant

and New Streets included ground floor retail and nine stories of residential units (including an additional 77 rental apartments).

Further, the partnership converted approximately 60,000 square feet into educational and community space, which was leased to Rutgers University for Express Newark, its arts, culture, and media collaborative. Originally this space was designed to house a movie theater, but ultimately L+M changed course, as the public assembly designation that would come with such use required certain building structures that were not appropriate or financially feasible.

Some of the most challenging components of the development process were issues surrounding the rollout of the tenant mix. Staggering the residential lease-up and construction of different components, as well as the ownership structure of common areas, was an important The flagship Hahne & Co. Department Store was built in 1901 and of and the financial While L+M pushed for a The flagship & Co. Department Storedowntown was built aspect in 1901 served structure. as the retail anchor at served as the Hahne retail anchor at Broad Street in historic Newark, New Jersey.

(L+M Development Partners) phased execution of the newPartners) residential tower, staff for then Broad Street in historic downtown Newark, New Jersey.

(L+M Development

54

Mayor Cory Booker were steadfast in requiring the entire project be completed in one phase.

FINANCING The successful completion of a project of this scale and complexity required the financial backing of many stakeholders. Redevelopment costs for the Hahne & Co. project totaled $178.9 million. About $29.5 million of this cost was covered by sponsor equity from 609 Holdco, Inc., a partnership between an affiliate of L+M, Prudential’s Impact Investments Group, and Goldman Sachs Urban Investment Group. As the developer member, L+M contributed 27 percent of the equity and received a development fee at project completion. Consistent with its longstanding commitment to the downtown Newark community, Prudential contributed 70 percent of the sponsor equity while Goldman Sachs contributed the remaining three percent.

In addition to the $8.7 million acquisition price, sponsor equity was also used to fund investigative demolition on the site prior to construction financing. This gave the development team crucial insight into the building’s condition and facilitated a more accurate estimate for the

private financing and public subsidy needs. This preliminary step had the added benefit of providing lenders with more comfort around the proposed redevelopment’s risks.

The remaining project financing was a mosaic of public and private sources. “It took a village to get this done,” noted Cortell. Public subsidies included nontaxable bonds through the New Jersey Housing and Mortgage Finance Agency’s (NJHMFA) Multifamily Conduit Bond Program,1 New Market Tax Credit (NMTC) Qualified Low-Income Community Investment lending, federal Historic Tax Credits (HTCs), and four percent Federal Low-Income Tax Credits.

The project also received an Economic Redevelopment & Growth (ERG) grant from the New Jersey Economic Development Agency (EDA).2 Construction lending was provided by Citibank, Prudential, The Reinvestment Fund (TRF), and Low Income Investment Fund. Permanent financing was also provided by Prudential. New Jersey 1

NJHMFA’s Multifamily Conduit Bond Program was created in 2011.

This program allows well-capitalized developers to issue bonds through the agency on a pass-through basis at the most competitive interest rates available in the marketplace.

2

The Economic Redevelopment & Growth program was created as part of the New Jersey Economic Stimulus Act of 2009.

Designed by architecture firm Goldwin Starrett, the original space at the Hahne & Co. Department Store hosted over 400,000 square feet of selling space, several restaurants, and a grand skylight atrium. (L+M Development Partners)

Designed by architecture firm Goldwin Starrett, the original space at the Hahne & Co. Department Store hosted over 400,000 square feet of selling space, several restaurants, and a

55

Community Capital and Goldman Sachs served as the NMTC Community Development Enterprises for the project.

In order to obtain National Park Service approval and receive HTCs, the complete restoration of the Grand Court was a required component of the redevelopment.

project’s various public funding sources going forward. “I’m not sure we could simplify this structure,” remarked Cortell, “[but] I would have loved to because of the headache from assembling, from a reporting and ongoing operations standpoint.”

Stitching together such a diverse array of funding sources required ingenuity on the part of the development team. For example, NJHMFA could not provide financing if less than 60 percent of building square footage was nonresidential.

To meet this requirement, a condominium structure was created to separate the property into the following units: (a) the NJHMFA Condo comprised of all residential units, 40,000 square feet of first floor retail, and 10,000 square feet of second floor commercial space; (b) the NMTC Condo comprised the 30,000 square foot Whole Foods Market and 30,000 square feet of second floor commercial space; and (c) the Rutgers Condo comprised solely of 55,000 square feet of Rutgers University space. Each condo was subsequently master leased to an investor entity. This condo structure not only maximized the size of the space eligible for NJHMFA financing and related tax abatement, but it also helped L+M satisfy the unique rent restrictions and compliance periods associated with the

The Hahne & Co. redevelopment project was not without its share of financing obstacles. Most notably, the closing for the project financing was delayed approximately six months as the result of a lengthy legislative extension process for ERG grant monies. As this was a critical component of the funding structure, the project could not proceed until this process was completed. This postponement resulted in construction cost creep that led to a funding gap. Although the team was able to find additional funding sources to alleviate some of this gap, design modifications, such as scrapping plans for penthouse units on the top of the development, were also required to reduce the construction costs.

The Grand Court with its iconic skylight, once the highlight of the Hahne & Co. Department Store, was filled in over time to create additional selling area. During World War II, the skylight was concealed to camouflage the building and protect it from potential enemy air strikes.

(L+M Development Partners)

PLANNING AND DESIGN The original building of Hahne & Co., although in a decrepit condition, still had a considerable volume and appealing aesthetics. The ultimate success of this project was due to the forethought needed to combine the historic elements of the structure and site with forward-thinking and understanding of future market conditions. Public-private partnerships were also essential to effectuate this successful adaptive reuse project. While earlier proposals for the site were structured with inadequate financial proposals and cut up the building such that it failed to get state and NPS approvals, L+M followed the guidance provided by the NPS and visualized a concept that retained more of the original layout. “We succeeded because we tried to imagine the building as an art piece, trying to restore something once fabulous. We were respectful of [NJ]SHPO’s guidelines and developed a project that was true to NPS goals while also solving several design and logistical problems,” observed Richard Weinstock, Vice Chairman and Senior Partner of L+M. “Prior developers had focused entirely on financials, cutting up the building differently and couldn’t put together a project that worked and was true to NPS goals.”

Although initially conceptualized with a modernist interior, later designs abandoned this concept to instead honor the imagery of the old department store. The original twostory staircase was reconstructed, along with the windows, railing, and millwork, to comply with the current code.

The original building, constructed as a department store,

The Grand Court with its iconic skylight, once the highlight of the Hahne & Co. Department Store, was filled in over time to create additional selling area. During World War II, the skylight was concealed to camouflage the building and protect it from potential enemy air strikes. (L+M 56 Development Partners)

contained expansive floor plates. It was the reopening of the atrium that structurally allowed the possibility of interiorfacing apartments to be incorporated into the project.

The repurposing for multiple new uses required continual iterations to have the Grand Court function as the spine.

With Whole Foods Market becoming an anchor tenant early in the planning of the project, other uses were swapped around in the planning process to satisfy various project requirements. The community benefited by retaining the lower floors of the original structure and using them for retail, community, and commercial uses. The presence of Rutgers also helped to solidify the project as Rutgers would occupy challenging space with deep floor plates. Noted Alex Merlucci, Associate Partner of Inglese Architecture + Engineering, “when we realized Rutgers was serious and wanted to take it, this was real.”

In anticipation of an earlier attempt to renovate this property, the interior had been gutted and the interior corner of New & Halsey Streets had been cleared to get into the basement.

This portion was utilized to create the nine-story tower that includes parking, ground floor retail, and eight stories containing 77 residential units. Another 83 apartments were housed in the upper floors of the older structure. The proportions of the building were not completely conducive for new apartment layouts but only a section of the third and fourth floors were demolished to move the rear walls back and create terraces on the back of the units.

MARKETING, MANAGEMENT, TENANTS, AND PERFORMANCE Since its completion, Hahne & Co. has been successful in achieving high occupancy rates and rental rates that exceed the proforma estimates. The pre-existing lack of grocery options and community spaces in downtown Newark coupled with strong community support for this project are key factors contributing to the positive performance of this large redevelopment effort.

This project was positioned to appeal to a large demographic of downtown Newark due to its mix of affordable and market-rate apartments as well as the inclusion of a coworking concept and Rutgers space. The affordable apartments appeal to those seeking the convenience of walkable amenities, including food shopping, in close proximity to their work. The market-rate apartments target those who seek the highest quality residential units on the market, with washer/dryer units, cut wood floors, and double height mirrors that also function as vanities.

“We tried to bring a New York experience to bear without certainty [the market would] lap it up, but it was a necessary, conservative strategy,” remarked Cortell. Those looking for a shorter commute without sacrificing quality are a target market of the residential portions of the Hahne & Co. project. In particular, potential tenants include employees of Prudential, Audible, and Panasonic as well as law and medical students and faculty of New Jersey Institute of Technology and Rutgers University. With a location near the Newark Airport, the Amtrak Northeast Corridor, PATH, NJ Transit, and many other means of public transportation, Hahne & Co. is about 30 minutes from Midtown Manhattan and provides convenience while remaining less expensive than other options in Hoboken, Jersey City, and New York.

Marketing programs for Hahne & Co. have included the use of social media and on-site events. Formal marketing efforts for the project were aimed at its target markets, but the success of the project largely relied on providing the community with what it urgently needed. “We created a larger pool for affordable housing to market to appeal to the public’s needs,” explained Cortell. “We were very cognizant of integrating into the product a range of product types. We utilized both new construction and adaptive reuse to provide aesthetic appeal. There were limited excuses regarding the food desert considering the transitional nature of the neighborhood.”

The residential leasing strategy is broken down into two categories: market-rate apartments and affordable apartments. By design, 60 percent of Hahne & Co.’s units are market-rate, while the remaining 40 percent are reserved for tenants whose incomes qualify at or below 60 percent of Area Mean Income for 54 of the units and at or below 40 percent of Area Mean Income for 10 of the units. The occupants of the 64 affordable housing units are decided by lottery, and an overwhelming 700 applicants applied for these units prior to their opening. The market-rate and affordable housing both consist of a mix of studios, onebedroom apartments, two-bedroom apartments, and threebedroom apartments. Market-rate unit average rents per square foot are $3.24, $2.79, $2.75, and $2.33 for studios, one-bedroom apartments, two-bedroom apartments, and three-bedroom apartments, respectively. Affordable unit average rents per square foot are $1.35, $1.22, $1.02, and $0.86 for studios, one-bedroom apartments, two-bedroom apartments, and three-bedroom apartments, respectively.

Affordable units are 100 percent occupied, and the residential units overall are 97 percent occupied.

57

The commercial leases also vary. Rutgers University’s 58,723 square foot space contains a Barnes & Noble bookstore and Express Newark. This includes an arts incubator, communications media center, portrait studio, lecture hall, print shop, and gallery. This space involves a collaboration with many other arts partners, including the Newark Museum, the New Jersey Performing Arts Center, Newark Print Shop, WBGO, Gallery Aferro, and GlassRoots.

It also hosts Rutgers’ Institute of Jazz Studies.

To address the existing food desert, Whole Foods Market occupies almost 30,000 square feet at the corner of Broad and New Streets. Even before its opening, Whole Foods Market demonstrated its support for the community by creating a grants program to support local nonprofits, including local vendors for the new store, and by hiring around 110 area residents for jobs. Other tenants of the project currently include celebrity chef Marcus Samuelsson’s Marcus B&P, City MD Urgent Care, Kite and Key, Industrial Bank, New Jersey Citizen Action, and Credibility Capital.

This project also includes almost 15,000 square feet of coworking space with Launch Pad. Currently, Hahne & Co.’s office portion is 100% occupied and its retail portion is 86 percent occupied.

Newer tenants in the building include CoolVines, an artisanal wine store across from Whole Foods Market on the grand atrium and Sweetwaters, a coffee shop across from Marcus B&P on the Halsey Street end of the property.

Just down the street, leasing has begun for L+M’s newest historical redevelopment and mixed-use concept, Walker House, formerly known as 540 Broad Street.

Hahne & Co. has been managed by Bozzuto since its opening. The project includes 220 on-site parking spaces.

103 of these spaces are dedicated to the Whole Foods Market and the remainder of these spaces are offered to residents of the building for $225 per month and are managed by SP Plus Corporation. Due to the building’s proximity to several different types of public transportation, however, many residents do not own cars. Limited parking is provided to the public for an hourly fee for visitors of the building. There is also limited metered street parking and private parking garages and parking lots on bordering streets.

With over 60,000 square feet of common areas, Hahne & Co. has hosted many different events since its opening. Some of its notable events include a St. Patrick’s Day parade, trick-

58

The historic rehabilitation for theCourt iconic Grand Court and itsskylight skylight involv The historic rehabilitation for the iconic Court and The historic rehabilitation for the iconic Grand and Grand its skylight involved theits removal, offsite restoration, re-instillation of restoration, the historic skylight.

The recreationskylight. ofof thethe original involved the and removal, offsite and historic offsite restoration, and re-instillation of there-instillation historic The recreation atrium space required locating the skylight the second floor instead of the fourth floor, where skylight.

Therequired recreation of theonoriginal atrium space required locating atrium space locating the skylight on the second floor instead of th it sat previously. (L+M Development Partners) on the second floor instead of the fourth floor, where it sat it the sat skylight previously.

(L+M Development Partners) previously. (L+M Development Partners)

The redevelopment of the Hahne & Co. Department Store included the conversion of the third and fourth floors into 83 apartment units. Approximately 50,000 square feet of the historic

The redevelopment of the Hahne & Co. Department Store included

theredevelopment conversion of the and fourth floors into 83 apartment units. the conv The of third the Hahne & Co. Department Store included Approximately square feet ofunits. the historic building conversion and fourth floors50,000 into 83 apartment Approximately 50,000 square fee was earmarked for educational and community space for Rutgers University for Express Newark, its arts, culture, and media collaborative.

(L+M Development Partners)

or-treating for children on Halloween, and events for local nonprofits. Express Newark has included exhibits such as portraits of 100 influential people in Newark’s history and participated in events such as Newark Arts Festival and Newark First Fridays. Hahne & Co. has had an ongoing annual economic impact of $31 million. Notes Cortell, “the building had and hopefully will have an enormous amount of importance to folks in New Jersey.”

OBSERVATIONS AND LESSONS LEARNED Perseverance, creativity, and vision were required of L+M to successfully complete this complex mixed-income, mixeduse redevelopment. There were very few comparable

projects in Newark and this understandably caused many to express doubt that the development team would be able to succeed with its plans. The firm was confident that that the time was finally right to bring this project to fruition.

As is often the case with complex redevelopment projects in urban areas, L+M was not able to do it all alone. Indeed, L+M credits strong, active, and committed leadership from the City government, community political support, and local institutions, particularly Prudential and Rutgers, who were all focused on seeing this project succeed. With their support, L+M was able to creatively fit the puzzle together piece by piece, including the project’s complex financing structure.

L+M’s rehabilitation of the historic skylight and its relocation to the second floor, creating a smaller version of the former department store’s atrium, exemplifies a creative solution by the firm that featured significant architectural elements while providing the opportunity to locate additional apartments on the upper floors. L+M was initially drawn to the building by its aesthetics and sought to preserve as much of the building’s history as possible.

revitalizing the surrounding area. In addition to providing additional population density and much-needed retail

options–with a Whole Foods Market to fill a substantial

void in a food desert–the project has also brought together

members of the community. Neighborhood groups and local companies now regularly use the Grand Court for exhibits

and parties. The project serves as a nexus among social groups at Rutgers, NJPAC, and Prudential.

Residents

of the area, some of whom remember the Hahne & Co. department store, can take pride in the building’s rebirth and its contribution to their city and neighborhood.

Finally, Hahne & Co. has served as a catalyst for additional

development in the area, including nearly 750 new

apartments that have or will come online since Hahne & Co. opened. This includes One Theater Square, 50 Rector Park, Kislak, and Walker House, which has been redeveloped

by L+M into 265 mixed-income apartments, offices, and ground floor retail space. Cortell stated that Walker House

“would have been impossible without Hahne & Co.” Indeed,

based on its experience and success with the Hahne & Co. As L+M and its partners hoped, this project has been project, L+M is investing further in Newark’s renaissance ng conversion was earmarked for educational and community space for Rutgers University embraced by the City and has had a significant role in the press Newark, its arts, culture, and media collaborative. (L+M Development Partners) with the redevelopment of the 440,000-square foot former headquarters of NJ Bell (subsequently Verizon). “I think this [new development] is just great for Newark,” remarked

Alan Kane, former President and CEO of the Hahne & Co. Department Store. “I’m so glad that it’s happening there.”

CORNELL REAL ESTATE REVIEW STAFF Jennifer Spritzer Executive Editor/Lead Case Study Author Lera Covington Senior Editor/Case Study Author Joe McFalls Editor/Case Study Author Ryan Sequeira Editor/Case Study Author John Thompson Editor/Case Study Author Michael Tomlan

The Grand Court at Hahne & Co. serves as a meeting hub for the Academic Advisor/Case downtown Newark community, with local residents and workers rand Courtfrequently at Hahneoccupying & Co. serves as a meeting hub for the downtown Newark community, the space. Neighborhood groups and local Dustin Jones ocal residents and workers frequently occupying space. and Neighborhood groups and companies regularly utilize the space forthe exhibits events. (L+M Partners) ompaniesDevelopment regularly utilize the space for exhibits and events. (L+M DevelopmentAcademic Partners) Advisor

Study Editor

59

Research Articles

60

61

The Rise of Co-living in New York City

Author: Parth Patel Parth Patel is a Master’s candidate in the Baker Program in Real Estate at Cornell University’s SC Johnson College of Business. Prior to attending Cornell, Parth completed an internship at The Habitat Company in which he assisted in a distressed workout of a 950+ unit multifamily portfolio.

Parth has also helped assemble single family home REITs for institutional clients—including Blackstone’s Invitation Homes, and developed luxury residential real estate on his own account. Parth is a graduate of Hope College in Holland, Michigan, where he studied Economics and Mathematics.

62

EXECUTIVE SUMMARY

Co-living has taken off in the last year as a brand-new phenomenon within the multifamily real estate sector. Not only is it a new asset type for the general public but it is also the new niche asset type receiving a considerable amount of attention from institutional investors. So, what exactly is co-living?

Is it something completely new as it is often talked about in many conversations in the real estate industry or is it rather a simple, modified version of a real estate asset type that we have grown to know incredibly well?

In this article I will begin with introductory remarks on what the co-living asset type actually is, and what it is not. I will then (1) briefly discuss the demographic that co-living operators are hoping to serve and whether or not the demand is sustainable, (2) illustrate a geographical overview of the current state of co-living in New York City, (3) provide insight into the link between affordability and the rise of co-living in those neighborhoods, (4) discuss the regulatory hurdles that co-living faces and the efforts that are being made by the real estate industry to overcome those hurdles, and (5) discuss how the institutional world views the rise of this niche asset type and what trends investors may look for as they seek to confirm the viability of their investment. Finally, summary remarks are at the end.

INTRODUCTION In a traditional multifamily business model, a group of nonfamilial individuals will form a household to rent a multifamily unit of two bedrooms or more to save money. This is a fairly common phenomenon in America. When this occurs each member of the group is liable for the whole lease if any of their counterparts fails to uphold their contractual obligations. This group will generally have a loose verbal agreement for how they will divide monthly rent, utilities, and upkeep of the common area. Furthermore, each member of the group will be subject to the same start and end date of the lease as well as high start-up costs that come from the time and resources spent on furnishing the common areas and setting up utilities.

their portfolios to a different lease structure that has now widely come to be recognized as co-living.

Under the co-living lease structure each tenant signs a lease directly with the building owner to rent one of the bedrooms in a unit that otherwise feels similar to a traditional apartment or luxury student housing, removing the financial liability that would result if their roommates did not uphold their lease obligations. Each person will also have an individual start

Some industry leaders have come to recognize that not only do each of these issues represent a major source of potential conflict among roommates, but also that the high start-up costs represent a significant burden on the tenants. In order to overcome these hurdles and improve the experience for their tenant base, some multifamily operators are Figure 1: An example floor plan of a co-living unit from WeLive property located in the financial district increasingly allocating a portion of at the southern tip of Manhattan.

63

and end date, providing greater flexibility. Furthermore, these co-living operators are furnishing common areas, billing utilities directly to each tenant, and offering general cleaning and maintenance, creating a turn-key solution that makes it simple and easy for anyone to move into an apartment without having to invest significant time and resources. In fact, this ease and convenience cause some to opt for a co-living solution who would have otherwise opted for a studio, and do so at net savings compared to what a studio may have cost them. (Lee, Levine, Koles, & Dominguez, 2019) The result is a living arrangement that looks and feels very similar to luxury student housing for adults. In fact, a typical floor plan of a co-living unit is very similar to a luxury student housing floor plan and includes a kitchen and a family room.

Generally, there are two to four bedrooms that are private for each tenant with a private or shared bathroom. While slight variations exist, this is generally how co-living is organized across the industry.

There is also a misconception of what co-living is as a result of the narrative being used by industry leaders to describe it. While describing co-living, there is an emphasis on “experience” rather than the fundamental problem that the co-living operators are solving for their tenants: lack of flexibility, high start-up costs, and ongoing common area maintenance synonymous with traditional leases. For example, Rebekah Neumann, a former executive of WeLive, a co-living operator that is an offshoot of its better-known shared office platform, WeWork, remarked while introducing WeLive’s flagship property in New York City’s financial district that co-living “[i]s a new way of living, centered on community, and the belief that we are basically as good as the people we surround ourselves with” (Neumann, 2016).

While WeLive could have created a multifamily building anywhere, it chose to do so in one of the least affordable neighborhoods in the country, which is not accidental as will be shown later in this article.

In another example, Brian Koles, Brand & Marketing Director of PMG, a Chicago-based operator with a nationwide real estate portfolio, said the following in his opening remarks at a millennial housing and co-living panel hosted by The Real Deal: “I think what we are seeing is a shift from just trying to find the biggest space for my budget to finding the best lifestyle, the best experience for my budget and that’s a lot of what we have built our platform around; don’t just build a regular boring apartment building, instead tell a

64

story that makes them feel like they are going to live their best life in that building, which has been very different from [the] institutional multifamily world” (Lee, Levine, Koles, & Dominguez, 2019).

Andy Levine, Director of Real Estate Partnership at Ollie, a co-living platform that proclaims to provide fully furnished units with hotel style amenities, immediately followed Koles’ comment by suggesting that while experience is important, the number one pain point is affordability for their cash strapped consumers (Lee, Levine, Koles, & Dominguez, 2019). Brian Lee, Senior Director of Real Estate at Common, a leading co-living operator, continued that millennials want the convenience and flexibility that they have become accustomed to with other shared economy solutions such as Uber (Lee, Levine, Koles, & Dominguez, 2019).

DESCRIPTION OF CO-LIVING’S TARGET DEMOGRAPHIC AND IS IT SUSTAINABLE? In 2019, Cushman & Wakefield completed a research assignment on behalf of Common that identified the underlying demand drivers for co-living. This study found that millennials are burdened by high student debt, have delayed family formation, and prefer to live in urban cores that are associated with a higher cost of living (Cushman & Wakefield, 2019). This report does an excellent job at providing insight into the current demand for co-living.

But what about the future of co-living? Is there sustained demand for this product type? In short, the answer is likely to be “yes” even if millennials’ lifestyle preferences change over time. As millennials age, a large portion of them may delay family formation as there is evidence of a link between feeling ready for marriage and feeling secure financially, including an ability to buy and own a home (Gurrentz, 2018). This, coupled with the fact that a larger share of young adults graduating from college is riddled with student debt, suggests many millennials will likely not be ready to become homeowners any time soon (Noguchi, 2019).

Further, there is little evidence to suggest a reversal of the current urbanization trends. One authority on cities, Edward Glaeser, Professor of Economics at Harvard University, stated that, “The rise and fall and rise of New York introduces us to the central paradox of the modern metropolis – proximity has become ever more valuable as the cost of connecting across long distance has fallen” (Glaeser, 2011). As new college graduates continue to enter the workforce with increasingly high student debt,

there are higher and higher economic incentives for them to purse the best opportunities in gateway cities and continue to work and live there for longer periods of time. As long as these relationships continue to hold true, a large proportion of millennials may likely delay their plans for settling down for the foreseeable future, creating a sustained demand for co-living.

include those buildings that offered true turnkey solutions by including three important services: furnishings for common areas, direct billing of utilities without any burden on tenant for set-up, and general cleaning and upkeep for common areas. In total, there were 32 properties included in the study.

In addition, there may be additional demand from other groups on the horizon. The share of young adults (ages 2337) who have been living with their parents has increased considerably in the last decade (Rental Housing Journal, 2019). In 2005, only 13.0% of young adults in the United States lived with their parents, but by 2017 that number had increased to 21.9% (Rental Housing Journal, 2019). Many young adults chose to reside at home as they struggled to find meaningful employment during the Great Recession.

Meanwhile, the unemployment rate of those living with their parents is now only 10.3%, down from 19.5% in 2010 (Rental Housing Journal, 2019). As the number of unemployed young adults from the cohort that is currently living with their parents continues to shrink, a large number of them will become fiscally stable and likely provide fresh demand for multifamily markets, including co-living. It is reasonable to assume that many young adults searching for apartments with roommates for the first time in their early 30’s would rather opt for co-living solution instead of, for example, an apartment they would find on Craigslist.

GEOGRAPHICAL OVERVIEW OF THE CURRENT STATE OF CO-LIVING IN NEW YORK CITY This article relies on an examination of every co-living multifamily property in New York City that allowed its tenants to directly rent a bedroom from the landlord as of January 15, 2020. This list was then further refined to only

Figure 2: An illustration of co-living locations across the New York City.

Table 1: Zip Code Level Analysis (Census Reporter, n.d.)

Table 2: Census Tract Level Analysis (Census Reporter, n.d.)

65

AFFORDABILITY AND THE RISE OF CO-LIVING PROPERTIES IN NEW YORK CITY It is not a coincidence that co-living is focused in two boroughs of New York City – Manhattan and Brooklyn.

As discussed in the introductory section of this article, it is certainly possible to create co-living properties with the primary focus on offering a “unique experience” to tenants anywhere in the country. In fact, it would be more cost effective to do that elsewhere if that was indeed the primary reason for co-living’s appeal among its tenant base as land prices are generally cheaper as you move away from the city core. Instead, co-living projects are heavily concentrated in the most cost-burdened neighborhoods in gateway cities across the country.

In order to assess how co-living’s affordability compares to its relative neighborhood, the ratio of gross income allocated to the housing costs for co-living was compared to the larger general neighborhood level data gathered from the U.S. Census Bureau. For co-living, the official monthly rates offered from owner-operators when the tenant chose to sign a twelve-month term were adopted – a length comparable to traditional multifamily leases and housing costs that a large majority of residents would be subject to during the census data collection.

In order to mitigate any bias, co-living’s affordability was compared to its respective neighborhood at both census tract level (a microscopic view) and zip code level (a macroscopic view). For co-living, a $75,000 median income was used, based on comments made by Lee, the Senior Director of Common, in an interview (Lee B., 2019).

A 30% cost savings from traditional (studio) housing was found based on an average calculated from the Cushman & Wakefield report and Levine’s comments during the previously referenced co-living panel.

As illustrated, both analyses show that co-living properties are located in neighborhoods that are significantly more cost-burdened and above the 30% threshold for the percent of gross income allocated to housing costs that is widely quoted in housing research. Furthermore, co-living properties are offering a reasonable entry point to tenants that would be priced out of a neighborhood otherwise.

REGULATORY HURDLES FOR CO-LIVING OPERATORS AND OPPORTUNITY FOR ZONING CODE REVISIONS When co-living first emerged a few years ago, it largely fell 66

in the regulatory gray zone. New York City did not officially offer a broad enough definition of multifamily buildings to classify co-living as a multifamily building. Most developers used provisions in the zoning code reserved for the hospitality industry to develop co-living properties, though they were subject to less favorable tax treatment as a result.

While this was the case when co-living first emerged, it is fast changing with New York City’s Department of Housing Preservation and Development introducing a program called ShareNYC – a pilot program for affordable co-living developments.

An active effort is being made by more established co-living operators such as Common to work with New York City to broaden the definition of multifamily properties (Lee B., 2019). Even more surprising is that New York City has been receptive and views co-living as an opportunity to meet its Affordable Housing 2.0 agenda of creating and preserving 300,000 affordable housing units by 2026 (Warerkar, 2018). While it is clear from earlier analysis in Section 3 of this article that co-living does indeed bring more people into a neighborhood who would have otherwise found it unaffordable, co-living now attracts a different demographic than does typical affordable housing. One striking number is that, in the study area, the median income per capita for a co-living resident is higher than the overall median income per capita of the co-living resident’s neighborhood’s traditional makeup at both the zip code and census tract level.

INSTITUTIONAL VIEW ON CO-LIVING AS AN INVESTABLE ASSET TYPE No official known survey exists summarizing the institutional viewpoint of co-living at this time. Most of the interviews held during the research process displayed a healthy level of skepticism that is reminiscent of the attitudes toward luxury student housing a little more than a decade ago. Some companies, however, are beginning to take positions on co-living. For example, Invesco has published a favorable viewpoint in its white paper for co-living investments (Unger & Tan, 2019). Cushman and Wakefield has also been actively raising a $1.5 billion fund for Six Peak, a New York-based firm with the exclusive goal of investing in the debt and equity of co-living properties (Real Estate Weekly, 2019). These examples represent early enthusiasm for coliving from institutional firms.

Co-living’s fate as an investable asset type will largely depend on the risk premium that the institutional world assigns to it compared to traditional multifamily property.

According to some in the industry, student housing is a great case study from which we can see that cap rates have followed traditional multifamily cap rates and that the spread between the two has narrowed over the years as more institutional capital continues to flow into the space. While no official data set of nationwide trends on co-living cap rates yet exists, reputable developers interviewed as part of the background research for this essay stated that they are underwriting potential investments at 40-60 basis point discount compared to traditional market rate multifamily development. This spread is very similar to luxury student housing even without an established track record, and there are number of explanations for this according to those in the industry:  1. The institutional world has deemed co-living investments as having a similar risk profile to student housing and therefore feels comfortable with a similar discount to multifamily cap rates.

2. There is an overenthusiasm for co-living and the institutional world is willing to deploy capital quickly though over time the spread may increase.

3. While the institutional world recognizes that there is significant risk associated with operating a new type of multifamily property, it is motivated to deploy capital in niche asset types due to excess dry powder.

CONCLUSION With strong demographic trends and a clear affordability crisis in gateway cities, co-living may serve as a solution if it is integrated thoughtfully. While it is helpful to continue to innovate and find solutions to underlying problems, developers must not lose sight of what it is that they are actually solving. Although it is helpful for co-living operators to improve the living experience of their residents, it should not come without a solution to the fundamental problems of affordability, flexibility, and convenience.

It is also important to acknowledge that this essay only serves as a starting point while empirically confirming the widely held belief that affordability is one of the principal driving forces behind the rise of co-living. Our research demonstrates that, while New York City’s integration of coliving in its affordability initiative improves affordability for some, it does so at the expense of affordability for others.

Further, some of the experts interviewed for this essay

widely cited that it is New York City’s zoning regulations that have played a significant role in creating the affordability crisis in the first place.

Finally, in light of the COVID-19 outbreak, it is important to keep in mind that co-living operators face significantly higher operational challenges because their responsibility extends beyond the corridors of the building and into the shared family room and kitchen area of each apartment. With that, at least some of the properties that were previously financially feasible may face an uncertain future as they seek to provide safe living conditions for their residents.

WORKS CITED Cushman & Wakefield. (2019). Survey of Coliving Landscape. Chicago.

Glaeser, E. (2011). Triumph of the City. Penguin Press.

Gurrentz, B. (2018). Millennial Marriage: How Much Does Economic Security Matter to Marriage Rates for Young Adults? U.S. Census Bureau.

Lee, B. (2019, March 8). How will New York City zoning and housing regulations change to accommodate co-living? (L. Bujarski, Interviewer) Lee, B., Levine, A., Koles, B., & Dominguez, M. (2019, October 10). Millennial Housing & Co-Living. (D. W. Katherine Kallergis, Interviewer) Neumann, R. (2016, May 25). Office-sharing company WeWork expands to WeLive. (V. Duthiers, Interviewer) Noguchi, Y. (2019, February 1). Heavy Student Loan Debt Forces Many Millennials To Delay Buying Homes.

NPR. Real Estate Weekly. (2019). Cushman & Wakefield tapped to raise $1B for co-living investor. Real Estate Weekly.

Rental Housing Journal. (2019, May 7). More Than One in Five Millennials Still Live With Parents. Rental Housing Journal.

Unger, S., & Tan, J. (2019). A case for co-living.

Warerkar, T. (2018, November 1). NYC launches pilot for affordable co-living developments. Curbed New York.

WeLive. (n.d.). WeLive 3-bedroom Floor Plan. Retrieved from WeLive.com: https://www.welive.com/new-yorkcity/

67

Suburban Slum Redevelopment in Mumbai, India

Author: Madhura Kharche Madhura Kharche is a Master’s candidate in the Baker Program in Real Estate at Cornell University’s SC Johnson College of Business. At Cornell, Madhura is an Editor of the Cornell Real Estate Review and a member of the Executive Board of the Association of Cornell Women in Real Estate (ACWIRE), serving as President (formerly VP of Marketing and Communications). Before Cornell, Madhura worked as an architect at AE7, a multinational architecture and engineering firm focused on a wide range of development projects in the U.S. and U.A.E. She has a B.Arch degree from the School of Architecture at Carnegie Mellon University and a minor in Business Administration from the Tepper School of Business.

68

INTRODUCTION

Slum redevelopment has recently emerged as a popular and successful model in Mumbai’s chaotic commercial real estate market. With slums occupying a significant portion of the city’s land, the government of Maharashtra’s Slum Rehabilitation Scheme presents a great opportunity for private developers. As the market experiences political cycles, policy makers update schemes to gain favor with voters, and slum redevelopers find it increasingly difficult to feasibly meet the stringent requirements of rehabilitated housing. This paper discusses the implications of such policy updates on Shivangan SRA CHS, an ongoing redevelopment in Mulund East, Mumbai.

GEOGRAPHICAL CONTEXT

THE SLUM REDEVELOPMENT MODEL

In the northeast suburbs of Mumbai lies Mulund, a wellconnected neighborhood with access to the Central Railway line as well as the Eastern Express Highway. Situated at the starting point of the city’s railway network, Mulund has recently witnessed a growth in real estate development.

It is geographically split into two parts – Mulund (East) and Mulund (West), which are abbreviated Mulund (E) and Mulund (W) – with each of the two areas having its own unique demographic and real estate development opportunity.

In 1995, the government of Maharashtra, led by Shiv Sena,3 formulated a Slum Rehabilitation Scheme (SRS), which relaxed the eligibility criteria for slum dwellers in Mumbai.4 In order to attract private developers to underutilized public land, the scheme granted Transferable Development Rights (TDR) and provided Floor Space Index (FSI)5 incentives for developers to build for-sale condominiums. The salient features of this scheme included the following: 1. In-situ rehabilitation of eligible slum dwellers with one tenement per family.

While the western side of Mulund is livelier, with full-fledged development including large-scale residential complexes, shopping malls, entertainment halls, and offices, the eastern side is more conservative and quieter, and is primarily occupied by residential areas with some retail, schools, and temples to support the demographic there. The west is wealthier, and families here tend to have higher disposable incomes, which is reflected in the real estate prices in the area. However, property values on both sides are almost at par.

Mulund is the perfect spot for residents of Navi Mumbai or Thane,1 who commute to downtown Mumbai for work and are looking to relocate to an address within Mumbai city.2 In the early 2000s, established developers such as Oberoi Realty, Shapoorji Pallonji Real Estate, and Rustomjee Builders were continually constructing large-scale residential complexes in Mulund (W), while Mulund (E) typically had stand-alone apartment buildings with limited amenities. Increasing migration into Mumbai suburbs led to rising property prices in gateway neighborhoods such as Mulund. With a large portion of land being underutilized by slums, Mulund presented a great opportunity for developers to undertake profitable projects in the neighborhood.

2. Residential tenement size was fixed at 225 square feet, and the square footage of nonresidential tenements was to be provided as per actual area subject to a maximum of 225 square feet.

3. Self-financing by way of compensating the developer with salable components proportionate to the rehab component for sale on the open market (i.e. for-sale condos).6 Thus, the scheme allowed for a development model wherein: 1. At least 70% of the eligible slum dwellers7 of a viable slum area form a cooperative housing society (CHS) as per the provisions of the Maharashtra Co-operative Societies Act, 1960 3

Mumbai is the capital of the state of Maharashtra. Shiv Sena was the elected political party in 1995.

4

For Shivangan SRA CHS, eligibility was granted for families residing in slums since before 2000.

5

FSI is the same as FAR. FSI is the term used in Mumbai and in the Slum Rehabilitation Scheme.

1

Thane and Navi Mumbai are neighboring cities to the north and east of Mumbai, respectively.

6

Slum Rehabilitation Scheme (1995), Urban Development Department (15/10/95), Govt. of Maharashtra.

2

Mulund is the first stop on the railway line for trains entering Mumbai from Thane or Navi Mumbai.

7

In 2018 , the 70% participation requirement was changed to 51% in an amendment.

69

(MCS Act), with its Chief Promoter elected to represent the interests of its members (i.e. the eligible families on site).

4. After approval of the scheme by the Authority, the site is vacated and slum dwellers are relocated into temporary on-site camps or off-site rental housing, paid for by the developer.

2. By passing a resolution in a general meeting of its members, the CHS appoints a private developer to implement the redevelopment project. Projects are initiated only after documenting the consent of at least 70% of the slum dwellers. Developers can be removed at any point by reason of nonperformance and/or violation of the terms and conditions for approval of the project imposed by the government authority.

3. The slum-occupied land is considered a “resource� for implementation of the redevelopment scheme. For redevelopment of slums located on public land, the land-owning governmental authority provides the land to the developer at a percentage of the market price. In the case of privately-owned land, the landowner receives a preferential right to undertake the redevelopment directly or through a nominee. In a case where the owner fails to redevelop the land in a timely manner, and upon the request of the CHS, a compulsory acquisition is carried out by the Slum Rehabilitation Authority (SRA or Authority), with payment of meager compensation to the landowner. Following such an acquisition, a new developer appointed by the CHS undertakes said development.

Figure 1. Final rendering of the lobby for the Baya Upper Nest towers.

70

5. Based on the criteria set by the SRS, the developer builds rehab tenements on the site to provide permanent housing for the eligible slum dwellers.

6. In return for providing free housing, the developer receives floor space index incentives to build forsale market-rate condominiums on the site.

7. The developer pays SRA INR 40,000.008 per tenement as a maintenance deposit, which remains in a special CHS account for 10 years.

The interest earned on this principal amount is used for recurring expenses such as common area maintenance, electrical costs to operate elevators and motor pumps, property taxes, and water charges payable to the municipal authority.

After 10 years, the CHS can withdraw the principal amount as needed. Tenement allottees are not permitted to sell or lease their tenements for 10 years from their date of occupancy. It is assumed that tenement allottees will eventually have improved incomes, which they may use to buy a new property.

8

This was 20,000 INR prior to the 2018 amendment to the SRS.

Figure 2. Rendering showing street view of the Baya Upper Nest towers.

Figure 3. Daytime rendering of the Baya Upper Nest towers.

Figure 4 & 5. Podium level amenities including a swimming pool, terrace lounge, and gym for residents of the Upper Nest.

Arihant Construction’s Shivangan project in Mulund (E) followed this model. Original plans for the redevelopment involved two components. In this case, the co-operative housing society is referred to as Shivangan SRA CHS,9 while the for-sale condominiums are marketed as Baya Upper Nest by The Baya Company.10 ORIGINAL PLANS FOR SHIVANGAN CHS A leading developer in Mumbai’s real estate industry, Arihant Construction Company owned a prime site in Hanuman Chowk.11 Measuring a total area of 6732.10 square meters (72,463.72 square feet), and located within a 3-minute walking distance from the Mulund (E) railway station, this site presented a great opportunity for redevelopment. In addition to its proximity to major transportation hubs, it is also close to schools, parks, restaurants, shopping, healthcare 9

Figure 8. Jogging track for the residents of the Baya Upper Nest.

Co-operative Housing Society listed under the Slum Rehabilitation Authority, Govt. of Maharashtra.

10 As discussed later in the case study, The Baya Company took over Arihant Construction Co. in 2017.

11 A prime location within Mulund (E), named after the Hanuman Temple located there.

Figure 9. Terrace lounge at the podium level of the Upper Nest towers.

71

facilities, and other family-oriented infrastructure.

Original plans for the redevelopment involved three rehab buildings and one for-sale apartment tower. Based on the minimum density requirement of 500 housing units per hectare (~202 units per acre), this site was required to accommodate 306 rehab tenements. This included 224 tenements for the dislocated slum dwellers and 82 additional tenements as “surplus rehabilitation tenements” that are provided to the government for use as rehabilitation of slum dwellers/occupants of other structures that are affected by infrastructure or other government projects such as road widening, laying of railway tracks, and the like.

Such surplus tenements are referred to as Project Affected Persons (PAP)12 tenements. The project was originally approved in 2006, as seen in the SRA’s approved Letter of Intent dated April 29, 2006.

Construction started soon after the premises were vacated, and slum dwellers were put up in temporary housing. By 2008, Arihant Construction Co. completed part of an 8-story rehab building for Shivangan SRA CHS, with housing units of 20.9 square meters (225 square feet) each. This part of the rehabilitation building accommodated only 40 of the 224 slum dwellers that were eligible for free housing under the Slum Rehabilitation Scheme of 1995. Meanwhile, another rehab building, planned to be 8 stories, was constructed up to the plinth level (i.e., ground level).

CHANGE IN POLICY In 2007, the central government of India approved a national housing policy, which stipulated that the minimum size of a dwelling should be no less than 25 square meters (269 square feet). In order to align the state’s slum rehabilitation scheme with this federal policy, the Government of Maharashtra issued a notification dated April 16, 2008, changing its minimum tenement size requirement to conform to these requirements. Passed under political pressure to appease citizens, this policy left private developers in a bind to re-evaluate their proposed schemes.

This change in the regulations failed to clarify how the updated requirement affected ongoing schemes where construction was completed up to different stages. To address this issue, on June 11, 2008, the government issued a clarification stating that that new regulation applied 12 PAPs are commercial tenants and businesses affected by the redevelopment scheme.

72

Figure 6. An isometric rendering of a typical floor plan layout for the condominiums.

to ongoing projects, provided that the occupancy certificate has not yet been issued. The problem with this clarification was that occupancy is typically granted for buildings that are complete. But at earlier points in construction before the certificate of occupancy is issued, the entire reinforced cement concrete (RCC) structure may have been built and thereafter it is almost impossible to alter the structure of the building. As Arihant Construction Co. evaluated its strategy to solve this dilemma, the CHS demanded bigger tenements and pushed for updated plans. Under pressure from the CHS, an alliance of private developers urged the government to further clarify the policy.

In December 2008, another clarification was issued, superseding the earlier order. It stated that converting units from 225 to 269 square feet is not required if the building is constructed up to the plinth level. Although this notice initially seemed promising, Arihant struggled to proceed with the project since the CHS was unwilling to accept the 40 tenements of 225 square feet and continued to demand larger units of 269 square feet. Arihant sent over revised drawings as a proposal to convert the second rehab building to the larger tenement sizing. As the developer dealt with this conflict, the confusion regarding the applicability of this policy continued.

During this period of confusion, Arihant was still waiting for the revised plans to be approved. As the CHS pressured the developer to deliver larger houses quicker, Arihant continued construction of the second rehab building with unapproved plans showing 65 tenements of 269 square feet

Adj. CTS NO-606

Adj. CTS NO-607

Adj. CTS NO-608

Adj. CTS NO-671

W AY IVE E

W ID M.

M 2N D TO UP

WA Y

TOWER - B (2-BASEMENT+ STILT+1st TO 7th LEVEL PODIUM+8th LEVEL OPEN TO SKY PODIUM FOR AMENITIES +9th TO 12th UPPER FLOORS) (HT=43.60 M)

DRIVE Y WA

0

10.9

BLDG NO-3 (SALE)

9.84

VENTILATION FOR STP

VENTILATION FOR STP

Mt

9.00 M. WIDE DRIVE WAY

3.00

16.20

12.40

9

9

17.1

14.2

W

BELO

26.36

13.9

STP LINE

9.00 M. WIDE DRIVE WAY

21.01

2

PODIUM LINE ABOVE

AY

0 24.6

26 SN O-5 CT

ABOVE

6

20.74

-67

3.0 3.0 0

BLDG NO-2 (COMPOSITE) (GR+23 FLOORS) (HT=70.00 M)

PODIU

M LINE

NO

8

4.3

STP BELOW

27.87

12.70

Adj.

Y

DRIVEWA

0

24.62

6.49

3.00 Mt WIDE

3.09

18.53

TS j. C Ad

19.55

3.00

PODIUM LINE

ABOVE

21.48

PODIUM LINE ABOVE

28

WID ED RIV EW

M. WID E DR

TOWER - A (2-BASEMENT+ STILT+1st TO 7th LEVEL PODIUM+8th LEVEL OPEN TO SKY PODIUM FOR AMENITIES +9th TO 49th UPPER FLOORS) (HT=169.20 M)

WIDE

9.00

0 M.

IVE

9.0

NO -60 9

0

14.7

NO-672

E BE LOW

E

BASE MENT LIN

OV E AB

Ad j. C TS

LIN

AY W

M DIU

6.00

PO

IVE

D

2N

DIU

TO

E DR

9.50

NO-5

Adj. CTS

UP

ID W

E DR

M.

CTS

LIN E AB OV

6.00

Adj.

0

16

32

EXISTING TEMPLE

LAYOUT R.G

.20

.03

.75

0

11.0

6.00 M. WIDE DRIVE WAY

PO

14.2 0

31

10.0

.24

BELOW BASEMENT LINE

24

PODIUM LINE ABOVE

FROM 3RD PODIUM LINE ABOVE

24

0 14.4

.70

.53

10.65

7.95

0 .4 14

10.41

14

.70

14

PODIUM LINE ABOVE

8.12

LAYOUT R.G

6.00 M. WIDE DRIVE WAY

14 .75

BASEMENT LINE BELOW

BASEMENT LINE BELOW

BASEMENT LINE BELOW

3.0

Ad

NO TS

0M

6

j. C

Reloc ated Te Anne mple sr. no x.II . 162

1.2

Ad >

AL

AC

74

CE

SS

BLDG NO-1

3.4

RO AD

Tan

k

(REHAB) (GR+7 FLOORS) (HT=23.80 M)

UG

7.

5.7375

10.37

5 12.7

6.00

RN

5.53

Y --> IVEWA

4.5

.G

4.5

6.21

.K G TIN

4.8

LAYOUT R.G

EX

IS

5

ID E

9 5.9

M

W

Adj. CTS NO-657 Adj. CTS NO-668

0

LAYOUT PLAN

8.1 0

G

O-6 6 CT SN Adj.

3.85

4

.3

23

VENTILATION FOR STP

4

5K

/1

6

4.6

18

25

DE DR Mt WI

SN O-5 CT Adj.

<<--

3.63

BLDG NO- 4

CT SN

1.1 1.15 5

NO

-6

TE

8

(COMPOSITE) (GR+23 FLOORS) (HT=69.95 M)

O-5

3.54 3.8 3

4.71

CT

S

WID

E IN

Adj. CTS NO-667

4.28

BELOW

j.

9.0

O KH AL E

-66

LAYOUT R.G

3.19

BASEMENT LINE

6.41

E

N

S

6.29

Adj.

2

9.0 0 5A

BELOW BASEME NT LINE

3.57

<<--

Adj.

CTS

6.00

Mt WI

NO-6

W

DE DR

IVEWA

3.78

Y -->

>

6.16

11

EXST TEMP .

LE

Adj. EXST ROAD .

CTS

Secretary of the Urban Development Department (UDD) on April 29, 2011. In his letter, he urged the UDD to allow him to approve the revised Shivangan scheme under special provisions, wherein the 65 tenements at 269 square feet may be regularized and the building may receive an occupancy certificate, following the payment of a penalty. Mr. Zende also proposed that the originally built 40-tenement building be converted into a for-sale component and sold in the market.13

NO-6

12

This proposal, if approved, would regularize 65 of Figure 7. Project scheme layout showing rehab and for-sale condominium buildings as of February 27, 2020. the 224 rehab tenements each. The developer was aware that post-facto permission required for the project, while also leaving an additional would allow for regularizing this building even though it was 82 PAP tenements to be accommodated separately.14 Mr. constructed without approval. This is possible through a Zende acknowledged that the remaining unbuilt tenements penalty payment, provided that the building is approvable will be constructed at 269 square feet, according to the by the Slum Rehabilitation Authority from the viewpoint of updated policy. building regulations. However, since the building had been constructed up to the plinth level at the time of the policy SPECIAL COMMITTEE OF THE UDD change, they could not receive a post-facto permission, as the building was not approvable under the terms of the From 2011 to 2015, this case file kept circulating within policy. the Housing and Urban Development departments, with LOBBYING THE STATE GOVERNMENT Seven years after the approved letter of intent, none of the eligible slum dwellers had yet been relocated into permanent tenements. Around 50 were in temporary transit camps on site while others were living in rental housing, costing Arihant Construction Co. approximately â&#x201A;¹10,000 ($141) per month per family. For almost a decade, the CHS and the developer wrote letters to the SRA to consider their case since the building was code-compliant and approvable, except for the term regarding plinth completion. However, with no substantive power to regularize this building, the SRA was unable to decide on the case.

To raise this matter to a higher authority level, SRA CEO S.S. Zende, a senior bureaucrat, wrote a letter to the Principal

no ruling on the matter. Meanwhile, Arihant kept pursuing other projects, while regularly making payments to keep its slum dwellers in temporary rental housing.

Eventually, the UDD formed a special committee of three Indian Administrative Services (IAS) officers to decide on special cases such as Shivangan SRA CHS. The three senior bureaucrats on the committee ruled that the conversion requirement of tenements up to the larger size of 269 square feet was entirely dependent on the structural feasibility of such an architectural update, and that each case will be adjudicated separately. However, following this 13 This would be accomplished by demolishing non-load bearing walls to create larger apartment units for sale.

14 This would result in a total 306 units (224 for slum dwellers + 82 for PAPs), based on the minimum density requirement.

73

new clarification, the Government failed to provide a final decision on the Shivangan case.

As the developer awaited a final decision, the government issued a new notification on May 19, 2015, stating that any such special cases for ongoing projects affected by the increase in required tenement sizing will be adjudicated by the Chief Executive Officer of the Slum Rehabilitation Authority. The SRA CEO had the authority to approve special case projects, provided that converting tenements from 225 to 269 square feet did not require demolition of already constructed structures within the building.

With approval in place, the first constructed building with 40 of the 225 square foot tenements was demolished.

Construction of the new buildings started according to updated approved plans.

The 65-tenement building continued to remain occupied, while shore piling for the for-sale building construction began on site. Things were finally looking promising for the redevelopment scheme.

REVISITING THE ENTIRE PROJECT SCHEME

ANOTHER CHANGE IN POLICY

Following the UDD notification in 2015, the project faced some unforeseen challenges. Due to delays in construction arising from changes in policies and increased costs, the partners in Arihant Const. Co. experienced financial difficulties. The partnership firm did not have the financial capability to implement this project and to obtain approval for the revised proposal. As a result, in 2017, a leading real estate developer, The Baya Company, took over Arihant Const. Co. and bought out the stake of each of the eight partners in this project.15 With a strong reputation in the industry and unparalleled expertise in slum redevelopment, The Baya Company presented a promising future for the project.

As construction on site proceeded, the government sanctioned yet another Development Control and Promotion Regulation (DCPR) on September 21, 2018, which increased the required tenement size to 300 square feet.

Once again, the CHS started demanding larger tenements from the developer. At the same time, The Baya Company, although not as keen to use the additional FSI incentives, was interested in working with the CHS to provide larger units for the slum dwellers.

With his newly acquired authority, the new SRA CEO, Vishwas Patil, approved the 65-tenement building, years after its construction was completed. 65 families were moved into these permanent tenements. Despite this success, one problem remained: none of the slum dwellers within the CHS wanted units in the 40-tenement building since it had smaller units of 225 square feet and retention of this building was also not feasible from a planning point of view.

To appease the CHS, The Baya Company submitted revised plans to SRA proposing that it will demolish the 40-tenement rehab building and in its place, build a new building with larger units. The entire project scheme was revisited, and Mr. Patil approved this new plan on July 1, 2017. This new scheme included 3 buildings in total – one rehab building with 65 occupied tenements, another one that will accommodate the remaining rehabilitation and PAP 15 The commercial deal was reached in 2016, while the takeover was completed in 2017.

74

tenements at 269 square feet per tenement, and finally, a for-sale apartment tower. The revised layout and building plans showing this new scheme were also approved in 2017.

Known for its attention to detail, The Baya Company recognized that it is possible to convert the occupied 65 tenements from 269 square feet to 300 square feet in a structurally feasible manner.16 As an elevation feature, the RCC structure of this building had provisions for exterior niches of 0.75 m (2.5 ft.) in depth. These niches were present in front of each rehab tenement and had the structural strength to safely carry live loads. The developer identified that this additional area can be incorporated into each tenement by moving the curtain wall to the outer edge of this elevation feature.

Including this space into the tenement’s floor area and merging the exterior elevation feature into the interiors of the unit would make it possible to increase the tenement size to 300 square feet. The CHS appreciated The Baya Company’s efforts in meeting its demands. The company is currently awaiting approval for the revised plans proposing this layout change.

Also in the new DCPR was an update requiring redevelopment schemes to have a minimum housing density of 650 tenants 16 Structural feasibility was a condition for approval, as stated by the policy update discussed earlier.

per hectare (~263 tenants per acre), in contrast to the 500 required when this project was approved in 2006. The scheme now required 405 tenements in total, which is an additional 99 over the 306 that were planned for this site.

With one rehab building already constructed and the other in the process of being built, along with the foundation for the condominium tower in place, it was impossible to fulfil this additional requirement for PAP tenements. If The Baya Company had to provide these additional tenements at the increased 300 square foot size, the second rehab building would have to be over 30 floors, while the for-sale tower would end up being over 70 floors tall. The project would not be viable due to elevated construction costs.

To solve this issue, The Baya Company will make use of clubbing, a provision allowed by clause 10 of the Regulation 33(10) of the DCP Regulations as part of the Slum Rehabilitation Scheme. This provision allows the developer to interchangeably use two plots and shift tenement requirements as well as FSI incentives from one to the other.

The Baya Company’s director disclosed that 65 of the originally planned 224 tenements will stay on the Shivangan site, while the remaining tenements will be shifted to an adjacent plot, which Baya acquired recently. Thus, the remaining 159 rehab tenements will be constructed on this new site. The additional FSI from the increased tenement area is still applicable on the original site, which allows The Baya Company to maximize its profit from sales as condominiums will sell for higher prices in a prime location.17 The new site had a small apartment building, and apartment owners here have consented to such a clubbed redevelopment scheme, in return for free condominiums.

Finally, the remaining 181 PAP tenements are now moved to a Baya scheme in Mankhurd, another suburb of Mumbai.18

for a 180-meter (590.5 foot) apartment tower, with 7 condominiums already sold.

As it proceeds with the project, The Baya Company needs to raise ₹150 crores ($21.1 million) to support construction costs. Although the company anticipates delays in funding due to the Non-Banking Financial Corporation crisis, it is hopeful of receiving financial assistance from local banks, which are aware of The Baya Company’s good reputation regarding timely delivery of high-quality projects.

After recent elections, the Congress party came to power in Maharashtra through an alliance. Prior to the elections, it had promised slum dwellers an update in SRS DCPR increasing minimum tenement requirement to 500 square feet. With the stress of a potential policy update, developers such as The Baya Company are understandably wary of the future of ongoing slum redevelopment schemes across Mumbai.

WORKS CITED Semwal, Arvind.Sr. Project Manager, The Baya Company (2019, December 16th). Email, personal interview.

Mukhija, Vinit. “Rehousing Mumbai: Formalizing Slum Land Markets Through Redevelopment.” PennIUR, 13 Apr. 2016, penniur.upenn.edu/publications/rehousing-mumbai-formalizing-slum-land-markets-through-redevelopment.

The Baya Company. Archived architectural drawings.

Shivangan SRA CHS (2006-2017).

The Baya Company. Baya Upper Nest sales brochure (2017).

FUTURE CLIMATE OF SLUM REDEVELOPMENT Today, the project site has one 8-story rehab building completed and occupied by 65 families. Another rehab building, now modified to be 24 stories, is ready for construction but is still awaiting approval. In the remaining part of the original site, the foundation is completed 17 The original site is better suited for higher sale prices of condominiums.

18 Clubbing with yet another project. Details regarding the Mankhurd site are unknown.

75

Diverse Industries Power a Burgeoning Innovation Hub in South Philadelphia

Author: Joseph A. McFalls Joe McFalls is a Masterâ&#x20AC;&#x2122;s candidate in the Baker Program in Real Estate at Cornell Universityâ&#x20AC;&#x2122;s SC Johnson College of Business. Prior to attending Cornell, Joe served as real estate counsel at Toll Brothers, Inc. and as an associate in the real estate department at Blank Rome LLP. A native of suburban Philadelphia, Joe is a graduate of the University of Pennsylvania and the Villanova University Charles Widger School of Law.

76

INTRODUCTION

As the pace of change has accelerated, there is wide recognition that the future will belong to innovative and advanced technologies and industries. Competition among cities and, indeed, within cities, has intensified to attract and retain the individuals and companies that are leading this change. While areas like Boston’s Kendall Square and Silicon Valley are at the forefront of this movement, other areas are significant but under-reported contributors. Philadelphia, with its “eds and meds” economy, is wellpositioned to excel in, and indeed has been capitalizing on, this innovation economy. While Philadelphia has received significant attention as an innovation center, much of this focus has been on University City, a portion of West Philadelphia with high-profile universities, spin-offs, and real estate developments.

Meanwhile, South Philadelphia has quietly been creating a diverse innovation ecosystem, fueled by start-ups, Fortune 500 and publicly-traded companies, and professional sports teams. Anchored by the Philadelphia Navy Yard, which is rapidly expanding to become a research and development hub, the diversity and depth of South Philadelphia’s innovation ecosystem may well elevate this neighborhood – and Philadelphia – into the national consciousness as a leading center of innovation.

BACKGROUND Philadelphia is the sixth-largest city in the United States with a population exceeding one and a half million people (Fastest-Growing Cities Primarily in the South and West, 2019). The City’s economy is driven primarily by education and medicine with leisure and hospitality and professional and business services also serving as significant drivers (Philadelphia 2019: The State of the City, 2019). In addition, the continued growth and success of Comcast, the multinational media and entertainment company headquartered in Philadelphia, is also a significant catalyst for the City. As a result of these drivers, in the last decade, Philadelphia has experienced increasing population, home sale prices, job creation, educational attainment, and diversity (Philadelphia 2019: The State of the City, 2019).

The City has a number of key assets to enable its growth into a leading innovation center. Its growing economy and respected institutions are among the most important of these assets. The region features “over 2.8 million jobs” as well as “four major research universities, several highly ranked liberal arts colleges, and a cluster of powerhouse medical centers [with] the region’s ‘eds and meds’ sector [being] arguably one of the strongest in the country” (Vey, Hachadorian, & Katz, 2017). Moreover, “outside of medicine, the city is also home to growing clusters of digital health, financial services, advanced manufacturing, and media firms . . . and [i]ts research capacity in engineering, automation technology, and computer science is expanding rapidly” (Vey, Hachadorian, & Katz, 2017). In addition, Philadelphia ranks among the top 10 metropolitan regions based on total annual public and academic research expenditures (Vey, Hachadorian, & Katz, 2017).

Philadelphia’s location on the eastern seaboard of the United States and its accessibility, a short train ride from New York City, Washington, D.C., and Boston, is another key asset, as is the region’s diverse and skilled population of 6.1 million residents (Philadelphia Navy Yard Request for Qualifications, 2018). Millennials, who are highly sought by innovative companies, are drawn to Philadelphia’s cosmopolitan, urban – but comparatively affordable – environment, with increasing in-migration as well as retention of these individuals graduating from the many colleges and universities in the region (Philadelphia Navy Yard Request for Qualifications, 2018).

The City’s innovation ecosystem has already enjoyed several high-profile successes. In 2019, Philadelphia was ranked among the top cities worldwide for innovation by Jones Lang LaSalle, the international real estate brokerage firm (Why Philadelphia is Emerging as a Global City, 2019). Due to its successes, Philadelphia is attracting more researchers, engineers, and scientists and, in turn, additional attention from venture capitalists (Vey, Hachadorian, & Katz, 2017).

University City – an area comprising the portion of West Philadelphia closest to Center City and home to venerable institutions such as the University of Pennsylvania, Hospital of the University of Pennsylvania, Children’s’ Hospital of Philadelphia (CHOP), Drexel University, Wistar Institute, and University of the Sciences – is already on the radar of many as a notable innovation district. And its stature should only continue to rise with the development by Brandywine Realty Trust, one of the largest, publicly-traded, full-service, integrated real estate companies in the U.S., of Schuylkill Yards, a $3.5 billion, 14-acre development that, upon completion, will contain almost seven million square feet of space, including five million square feet of workspace, much

77

of it dedicated to office/life science use (Hurdle, 2018).

Notably, Schuylkill Yards will serve as the headquarters of Spark Therapeutics, a CHOP/UPenn spin-off that was purchased by Roche for over $4 billion in early 2020.

At first glance, South Philadelphia may not appear to be a likely innovation hub in the City. It is a primarily residential neighborhood extending from South Street to the I-76 expressway and from the Delaware to the Schuylkill Rivers.

While many may remember South Philadelphia from Sylvester Stallone’s 1976 film “Rocky,” the neighborhood is a much different place today. While large numbers of families of Italian descent remain in middle-class rowhouse communities, the area has become much more ethnically and socioeconomically diverse. The residential neighborhoods contain entry-level housing that attracts new immigrants (often of Mexican or Southeast Asian descent), middleincome housing, and upper-income housing that is among the most desirable in the city. While the neighborhood is predominantly residential, it does contain the Navy Yard and sports complex, which are the heart of the area’s innovation ecosystem.

ANALYSIS OF SOUTH PHILADELPHIA’S INNOVATION ASSETS AND OPPORTUNITIES South Philadelphia features a wide array of innovative companies across many different industries. The breadth and depth of its innovation economy, which continues to grow both in the Navy Yard and elsewhere in the neighborhood, provide South Philadelphia with the necessary assets to continue to grow into a preeminent hub for innovation.

At the southern tip of South Philadelphia is the Navy Yard, a large shipyard and naval base that was established in 1801 and served the Navy until its closure in 1996 (Saksa, 2017).

The Navy Yard had a tumultuous history until the World Wars and the Great Depression, during which time government investment fueled its expansion and the construction of the many brick industrial and loft buildings that remain today and give the area its historic character (Saksa, 2017). The Navy Yard languished in the postwar years until another short-lived boom during the Vietnam War (Saksa, 2017).

Following Vietnam, the Navy Yard began its slow decline that eventually led to its closure and the subsequent transfer in 2000 of its remaining 1,200 acres to the Philadelphia Industrial Development Corporation (“PIDC”), a publicprivate economic development corporation founded by the City of Philadelphia and the Chamber of Commerce of Greater Philadelphia (Saksa, 2017).

78

The Navy Yard is the site of many firsts and other significant events: it is “the outfitter of the first American fleet, builder of the first warship under the Constitution, launcher of the largest U.S. battleships, and a frontrunner in aviation experimentation” as well as the location of “experiments instrumental to the construction of the atomic bomb” (Saksa, 2017). Today, under PIDC’s guidance as master developer and site operator, the Navy Yard has become the “coolest shipyard in America” (Philadelphia Navy Yard Request for Qualifications, 2018). Indeed, “the Navy Yard is a growing community of nearly 15,000 employees and 170 employers who occupy 7.5 million square feet across a mix of property types, including office, retail, industrial, hospitality, R&D, and institutional” (Philadelphia Navy Yard Request for Qualifications, 2018). These companies have been drawn, and continue to be drawn, to the Navy Yard due to its “strong talent base; a central location in the region (it is less than three miles south of Philadelphia’s central business district) with great highway, transit, and airport access; a historic, walkable riverfront community; and customizable buildings that can support office, research, laboratories, and production” (Philadelphia Navy Yard Request for Qualifications, 2018).

The Navy Yard is home to a number of leading innovative companies, including: •

Urban Outfitters, a progressive lifestyle retailer with stores throughout the world, has its awardwinning world headquarters campus spread throughout multiple historic buildings, which have been sensitively restored to keep their historic aspects intact. Urban Outfitters has been recognized among the world’s most innovative companies “for nurturing very distinct, successful, and quirky retail brands” (Most Innovative Companies, 2011). Creativity and thinking “outside the box” are a priority for the company and its employees (Urban Outfitters, 2020).

•

GSK, the global pharmaceutical giant, has its U.S. corporate headquarters in a Robert A.M. Stern designed LEED platinum building that was envisioned as a “workplace for the future” (GlaxoSmithKline Moving to New Building at Philadelphia Navy Yard, 2011). This building sold for a record price for Philadelphia in 2018 (Kostelni, 2018).

•

Axalta, a DuPont spinoff that is a leading global

supplier of liquid and powder coatings, operates

its “Global Innovation Center, the largest coatings research and development center in the world,”

in the Navy Yard (Axalta Opens World’s Largest Research Development Center Dedicated to Coatings and Color Development at the Navy Yard in Philadelphia, 2018).

•

Iovance Biotherapuetics, immuno-oncology

a

company

publicly-traded

headquartered

in Silicon Valley, recently began construction

of its $125 million, 136,000 square foot office and cell therapy production facility, choosing

the Navy Yard after conducting an extensive national search due to its “access to talent,

[] ability to build a customized space, and

Philadelphia’s unmatched immunotherapy R&D ecosystem” (Philadelphia Navy Yard Request for

Numerous other innovative companies across many different industries are located in the Navy Yard, including WuXi AppTec, Jefferson Health, Vincera Institute, Adaptimmune, Tastykake, Revzilla, and Navsea. Penn State University and the U.S. Navy also have a significant presence there.

At the Navy Yard, Penn State offers master’s degrees, graduate certificates, and professional development programs with a focus “on building energy efficiency and efficient energy management, with significant support from the U.S. Department of Energy and the Commonwealth of Pennsylvania” (This is Penn State at the Navy Yard, 2020). Elsewhere at the Navy Yard, the U.S. Navy has 1,800 civilian employees and a $1.2 billion annual budget to conduct “sustainable power and energy research that impacts [the] nation’s entire naval fleet for the future” (U.S. Navy - NAVSSES, n.d.). Penn State’s and the Navy’s focus on energy dovetails well with the Navy Yard’s leadership in energy innovation as “it offers the region’s most densely populated collections of privately-owned LEED-certified

Qualifications, 2018).

•

FS Investments, a fast-growing leader in alternative investments, is headquartered in a

LEED-Gold certified building in the Navy Yard.

In its 13-year history, FS has grown to almost $25 billion in assets under management as a pioneer in the burgeoning business development company industry (Blumenthal, 2019).

Figure 1. A typical residential street in South Philadelphia.

Figure 2. University City, with the University of Pennsylvania’s Huntsman Hall in the foreground, looking toward Center City.

79

buildings, a 35-megawatt unregulated electric grid that is host to some of the nation’s leading smart grid research, and an innovative network of stormwater technologies built into the street grid” (Energy Innovations, n.d.).

To lead the next evolution of the Navy Yard, PIDC is seeking developers to assist in the planning and development of almost 110 acres of undeveloped land in the Navy Yard.

PIDC’s vision for this land is a mixed-use district with R&D and life science facilities, dense multifamily development, and commercial amenities, including restaurants and retail.

The innovative nature of South Philadelphia is not concentrated solely in the Navy Yard, however. Immediately north of and adjacent to the Navy Yard is Philadelphia’s sports complex that includes the Wells Fargo Center, home to the NBA’s Philadelphia 76ers and NHL’s Philadelphia Flyers; Citizens Bank Park, home to the Philadelphia Phillies; and Lincoln Financial Field, home to the Philadelphia Eagles.

While professional sports, which are anchored in history and generally only evolve incrementally, and innovation are not typically linked, Philadelphia’s sports complex is home to significant innovation, which further adds to South Philadelphia’s status and growth as an innovation district.

The Eagles have proven to be leaders in innovation both on and off the field. On the field, the Eagles’ innovative approach extends to its team-building and in-game decision-making. The team was one of the first to invest in and prioritize advanced analytics, which has contributed to the team’s success, including its 2018 Super Bowl victory (McManus, 2019). Off the field, the team has been recognized as one of the world’s most innovative companies for its early embrace of clean energy in its operations (Most Innovative Companies, 2011). The team’s “on-site renewable energy (produced by more than 11,000 solar panels and 14 wind turbines) supplies more than four times the power used during a season of home games,” which has allowed the team to significantly reduce its energy costs and environmental impact (5 NFL Football Stadiums Score Big of Efficiency, 2017). The Eagles sustainability efforts extend to water conservation, tree-planting, food waste decomposition program, carbon emissions offsets, bike share program, and closed-loop recycling, which resulted in the team becoming the first professional sports team to receive ISO 20121 certification, “an international standard designed to help organizations integrate sustainability into management practices and processes” (2018 Annual Report, n.d.). As a result, the Eagles’ stadium is recognized

80

as one of the “greenest” stadiums in the world (5 NFL Football Stadiums Score Big of Efficiency, 2017) and is LEED Gold certified (2018 Annual Report, n.d.).

As with the Eagles, the 76ers have been among the most innovative teams in their sport. More than any other American sport, analytics have redefined basketball over the last decade. The 76ers were at the forefront of this movement beginning in 2013, with the team’s hiring of Sam Hinkie, one of the original adopters of advanced statistics in the NBA, as its general manager. This focus on innovation continues today with an analytics department staffed by “10 math whizzes and computer programmers, most of them with PhDs” (Hayes, 2018). The Sixers also started and fund an innovation lab located in Camden, New Jersey, just across the Delaware River from South Philadelphia. This incubator “supports rapidly growing, early-stage companies in the consumer product space and provides speed and flexibility, individualized, industry-leading consulting and investment opportunities to startups with potential” (Sixers Innovation Lab Crafted by Kimball Opens Doors, 2017). Selected companies receive “access to industry experts, executives, and financiers; third-party branding, marketing, and legal services; free meals and housing in the Philadelphia-area; and the opportunity to pitch industry-leading investors and

Figure 3: The historic core of the Navy Yard.

Figure 4: New development in the Navy Yard.

venture capital firms” (Sixers Innovation Lab Crafted by Kimball Opens Doors, 2017). In the few years since its formation, the innovation lab has already had companies graduate, sign product distribution deals, complete sevenfigure equity financings, and reach agreements to sell their products in major sports apparel chains (George, 2019).

The sports complex is home to more than just traditional sports. Innovative entertainment options are also coming to the area. A joint venture between Comcast Spectacor, a sports and entertainment company that is part of the Comcast family, and The Cordish Companies, a developer of large-scale, urban revitalization projects throughout the U.S., is constructing a $50 million “next-generation esports and entertainment venue,” which will be a “first-of-its-kind venue . . . as the largest new-construction, purpose-built esports area in the Western Hemisphere” (Fusion Arena, n.d.). Esports, which is “a form of competitive video gaming with multiple players battling against each other usually in teams, often in matches that are streamed live to throngs of young fans,” is quickly growing, with revenues expected to top $1 billion in 2019 and significant additional growth expected in coming years (Russ, 2019). Some believe that in the future esports could become as popular or even more popular than traditional sports, a development that South Philadelphia will be well-positioned to capitalize on given the location of this ground-breaking arena.

As a result of a deed restriction recorded when the land was transferred by the Navy to PIDC, residential development has been prohibited at the Navy Yard (Philadelphia Navy Yard Request for Qualifications, 2018). However, this should soon change as PIDC has succeeded in removing this deed restriction for large portions of the Navy Yard and is seeking developers to construct high-density residential in the area (Philadelphia Navy Yard Request for Qualifications, 2018). Upon the completion of these residential projects, the addition of residents who are around on nights and weekends to the many companies and employees in the area should spur the Navy Yard to become a more vibrant and active neighborhood and lead to the development of retail and entertainment venues in the area, which should further enhance this virtuous cycle. Once this occurs, the area will only become more desirable for companies, employees, residents, and retailers, further elevating the

CHALLENGES TO SOUTH PHILADELPHIA’S CONTINUED ASCENSION AS AN INNOVATION HUB Three specific challenges affect the Navy Yard, South Philadelphia’s primary innovation hub: lack of transit connectivity, lack of housing and entertainment, and sealevel rise. Philadelphia’s Broad Street subway line currently terminates at the sports complex, which is less than a mile from the Navy Yard. PIDC continually explores and implements transportation improvements for the Navy Yard, including offering private shuttle services to the Broad Street line stop at the sports complex as well as to downtown Philadelphia. There is broad recognition, however, that, until autonomous or other transportation improvements become more ubiquitous, extending the subway is the only way to truly connect the Navy Yard to the rest of the City, a project that is estimated to cost upwards of a billion dollars (Laughlin, 2019). Without this connection, the Navy Yard’s growth may be inhibited, though there is ample evidence to suggest that these transit challenges are not insurmountable.

Figure 5: The Philadelphia sports complex.

Figure 6: Solar panels and wind turbines on Lincoln Financial Field, the home of the NFL’s Philadelphia Eagles.

81

pharmaceuticals, chemicals, and finance. The diverse array of talented innovators working at these companies comprise an agglomeration of intellectual capital that is almost unmatched. Provided that the challenges specific to South Philadelphia as well as those affecting the City more broadly can be overcome, and the potential of these innovative companies and their employees is fully harnessed, South Philadelphia, and Philadelphia generally, will be poised to become a leading center of innovation.

WORK CITED

Figure 7: Entrance to the Navy Yard.

Navy Yard’s status as a preeminent location to live, work, and play.

Another challenge is the Navy Yard’s low-lying location along the Delaware River. As with many other properties located in coastal areas, the Navy Yard is projected to experience future flooding as a result of climate change (What Can a City Do About Climate Change? 2019). If the worst-case scenarios are realized, this flooding would have a devastating impact on the Navy Yard and other parts of South Philadelphia (What Can a City Do About Climate Change?, 2019). While there is still time to address this challenge and mitigate much of its effects, solutions will require bold and significant action across the public and private sectors, both domestically and abroad.

Finally, on a boader scale, South Philadelphia is not immune from the overall challenges faced by Philadelphia (and many other big cities), including persistent poverty, significant tax burdens, educational challenges, elevated homicide rates, and increased drug addiction and drug-related deaths (Philadelphia 2019: The State of the City, 2019).

Unfortunately, these are not easily solvable problems and have indeed plagued Philadelphia for some time. However, the success of South Philadelphia as an innovation hub could aid greatly in addressing many of these challenges as the growth of the companies located in this area should have positive spillover effects for the remainder of the City and its residents.

CONCLUSION South Philadelphia features companies at the forefront of innovation and advancement across myriad industries, including retail, energy, entertainment, sports,

82

2018 Annual Report. (n.d.). Retrieved from Philadelphia Eagles: https://www.philadelphiaeagles.com/community/ go-green (2020). Retrieved from Urban Outfitters: https://www.urbn. com/who-we-are 5 NFL Football Stadiums Score Big of Efficiency. (2017, September 11). Retrieved from United States Department of Energy, Office of Energy Efficiency & Renewable Energy: https://www.energy.gov/eere/articles/5-nfl-football-stadiums-score-big-efficiency Axalta Opens World’s Largest Research Development Center Dedicated to Coatings and Color Development at the Navy Yard in Philadelphia. (2018, November 7). Retrieved from Navy Yard Philadelphia: https://www.navyyard.org/theyardblog/2018/11/07/ axalta-opens-worlds-largest-research-development-center-dedicated-to-coatings-and-color-at-the-navy-yard-in-philadelphia/ Fastest-Growing Cities Primarily in the South and West.

(2019, May 23). Retrieved from United States Census Bureau: https://www.census.gov/newsroom/press-releases/2019/subcounty-population-estimates.html Fusion Arena. (n.d.). Retrieved from Fusion Arena: https:// fusionarenaphilly.com/ George, J. (2019, June 6). 76ers Next Process. Retrieved from The Philadelphia Business Journal: https://www. bizjournals.com/philadelphia/news/2019/06/06/assistmachine-the-76ers-innovation-lab-gives.html GlaxoSmithKline Moving to New Building at Philadelphia Navy Yard. (2011, February 11). Retrieved from GSK: https://www.gsk.com/en-gb/media/press-releases/ glaxosmithkline-moving-to-new-building-at-philadelphianavy-yard/ Hayes, M. (2018, April 18). Analytics-Driven Sixers Ride

the Numbers to the NBA Playoffs. Retrieved from The Philadelphia Inquirer: https://www.inquirer.com/philly/ sports/sixers/sixers-76ers-philadelphia-analytics-process-numbers-nba-playoffs-miami-heat-brett-brown-bryan-colangelo-20180418.html#loaded Hurdle, J. (2018, February 20). Philadelphia’s First Step to a Platform of Innovation. Retrieved from The New York Times: https://www.nytimes.com/2018/02/20/business/ philadelphia-commercial-real-estate.html Kostelni, N. (2018, May 8). Liberty Property Sells GSK’s Navy Yard HQ. Retrieved from Philadelphia Business Journal: https://www.bizjournals.com/philadelphia/ news/2018/05/08/lpt-liberty-property-sells-gsk-hq-navyyard-philly.html Laughlin, J. (2019, February 1). Here’s What a Broad Street Line Extension to the Navy Yard Could Look Like.

Retrieved from The Philadelphia Inquirer: https://www. inquirer.com/transportation/broad-street-line-extensionrail-navy-yard-septa-subway-20190201.html McManus, T. (2019, September 11). Eagles Provide Roadmap to Analytis-Driven Future of NFL. Retrieved from ESPN: https://www.espn.com/blog/philadelphia-eagles/ post/_/id/27697/eagles-provide-roadmap-to-analytics-driven-future-of-nfl Most Innovative Companies. (2011). Retrieved from Fast Company: https://www.fastcompany.com/most-innovative-companies/2011/sectors/sports Most Innovative Companies. (2011). Retrieved from Fast Company: https://www.fastcompany.com/company/urban-outfitters

Saksa, J. (2017). Philadelphia Navy Yard. Retrieved from The Encyclopedia of Greater Philadelphia: https:// philadelphiaencyclopedia.org/archive/philadelphia-navy-yard/ Sixers Innovation Lab Crafted by Kimball Opens Doors.

(2017, July 18). Retrieved from Philadelphia 76ers: https://www.nba.com/sixers/sixers-innovation-lab-crafted-kimball-opens-doors This is Penn State at the Navy Yard. (2020). Retrieved from Penn State at the Navy Yard: https://navyyard.psu. edu/this-is-penn-state-navy-yard U.S. Navy - NAVSSES. (n.d.). Retrieved from Navy Yard Philadelphia: https://navyyard.org/impact/tenant-profiles/ tenant-profiles-detail/u.s.-navy-navsses Vey, J. S., Hachadorian, J., & Katz, B. (2017, May 18).

Connect to Compete: How the University City-Center City Innovation District Can Help Philadelphia Excel Globally and Serve Locally. Retrieved from Brookings: https://www.brookings.edu/research/connect-to-compete-philadelphia/ What Can a City Do About Climate Change? (2019, November). Retrieved from Philadelphia Magazine: https://www.phillymag.com/news/philadelphia-climate-change/ Why Philadelphia is Emerging as a Global City. (2019, November 12). Retrieved from Jones Lang LaSalle: https:// www.us.jll.com/en/trends-and-insights/cities/why-philadelphia-is-emerging-as-a-global-city

Philadelphia 2019: The State of the City. (2019, April 11).

Retrieved from The Pew Charitable Trusts: https:// www.pewtrusts.org/en/research-and-analysis/reports/2019/04/11/philadelphia-2019 (2018). Philadelphia Navy Yard Request for Qualifications.

Philadelphia: Philadelphia Industrial Development Corporation.

Rizzo, M. (2013). South Philadelphia. Retrieved from Encyclopedia of Greater Philadelphia: https://philadelphiaencyclopedia.org/archive/south-philadelphia-essay/ Russ, H. (2019, February 12). Global Esports Revenues to Top $1 Billion in 2019: Report. Retrieved from Reuters: https://www.reuters.com/article/us-videogames-outlook/ global-esports-revenues-to-top-1-billion-in-2019-reportidUSKCN1Q11XY

83

PACE Financing Emerges as a Valuable Resource for Property Owners Rushing to Comply with NYC’s New Climate Mobilization Act

Author: David Lee David Lee is a Master’s student in the Baker Program in Real Estate at Cornell University’s SC Johnson College of Business. David received his bachelor’s degree in architecture with a minor in business from the University of Florida.

His professional experience involves a variety of commercial architecture projects in the New York and New Jersey areas. Upon graduation he intends to use his experience and business mindset to focus on opportunistic investments in real estate.

84

INTRODUCTION

In May 2019, the City of New York passed the Climate Mobilization Act (CMA), the most ambitious climate legislation ever enacted by any city or county in the State of New York. The CMA mandates the reduction of the City’s overall carbon emissions by 80 percent within 20 years. Generally, buildings are responsible for 70 percent of the City’s emissions – by far the highest percentage of any sector (Climate Mobilization Act: Mayor’s Office of Sustainability, 2019). Building emissions are likely only to increase compared to other sectors, such as transportation, which have had a head start in reducing their carbon emissions. Given buildings’ contributions to carbon emissions and the lack of significant progress to date, this legislation is seen by many as overdue. With numerous large developments occurring throughout the City, this legislation could yield major long-term improvements to the environment. In fact, “the Climate Mobilization Act is a down payment on the future of New York City – one that ensures we lead the way in the ever-growing fight against climate change,” Council Member Costa Constantinides said in a statement before the bill was passed (New York City Council [NYCC], 2019). With the help of Constantinides, the CMA also included Property Assessed Clean Energy (PACE) financing – a voluntary financing mechanism that enables energy efficiency and renewable energy projects to receive long-term financing for little or no money down – to assist building owners in complying with the CMA (NYCC, 2019).

The CMA, which will go into effect by 2024, impacts buildings that are “25,000 gross square feet or larger and 2 or more buildings on the same tax lot that together exceed 50,000 gross square feet (including condominiums)” (D&S Real Estate Finance Group [D&S], 2019). Despite the many exceptions to the law – buildings owned by the government or government-related entities, houses of worship, rentregulated dwelling units, and low-income housing – the impact to owners and even possibly to lenders will be enormous. Complying with the CMA could be expensive for many building owners, which explains the inclusion of PACE financing as part of the CMA. CONCERNS FROM THE COMMUNITY While acknowledging that cutting emissions is a laudable goal, the real estate community is concerned with the potential compliance costs as it is predicted that the cost of upgrades to bring buildings into compliance with the CMA could exceed $14 billion (City of New York, 2019). The Real Estate Board of New York (REBNY) argues that the CMA would effectively discourage landlords from leasing space to industries with higher energy consumption such as technology, media, and life sciences, for fear of paying fines when the energy usage of their buildings exceeds the caps. The overall effect is that owners will have to carefully consider the ramifications of prospective tenants’ energy usage before renting out space. “Is the next tenant I’m renting to going to be an energy hog or not?” mused Carl Hum, general counsel for REBNY, to the New York Times (Neuman, 2019). “There’s a clear business case to be

Figure 1: Lower Manhattan as viewed from New Jersey.

made that having a storage facility is a lot better than having a building that’s bustling with businesses and workers and economic activity,” Hum concluded (Neuman, 2019).

However, according to Nomura’s Global Market Research, commercial real estate owners have an opportunity to benefit from this legislation, with the most prominent advantage being the potential positive impacts to cash flow (Nomura, 2018). “Traditional financing for infrastructure projects typically requires large upfront expenditures and has long cost recovery timelines,” according to the Nomura report, “with faster returns on other investments” (Nomura, 2018). This report further expounded on the inefficiency of using internal capital for infrastructure upgrades in situations subject to split incentive due to accretion in expenses for landlords to lower energy costs for tenants.

Given the inefficiency of either using internal capital or traditional financing, it comes as no surprise that important infrastructure projects are often deferred or ignored by

85

property owners. PACE financing offers one solution to overcome this reluctance.

ACHIEVING COMPLIANCE WITH PACE

86

conventional financing, soft costs such as development fees can be financed through the program. Lastly, the financing can be used both for newly built construction as well as to retrofit existing buildings.

City legislators anticipated pushback against the law due to concern about the high costs of installing new clean energy measures (Hosfelt, 2019). In conjunction with the CMA, the City allowed the use of PACE financing to provide an efficient capital source to support the mandated upgrades to commercial buildings. As explained by Patka and Miller, representatives from Duval & Stachenfeld LLP (D&S, 2019), a law firm based in New York City focusing on real estate transactions, “PACE financing is a way for owners to obtain fixed, competitive rates to finance up to 100% of the cost of the improvements that will be needed to meet the requisite carbon reduction targets. The financing is paid back through real estate tax assessments on the property which fully amortize over the expected useful life of the improvements that were financed” (D&S, 2019). Moreover, because it is a voluntary tax lien, “PACE is senior to mortgage debt” (D&S, 2019). In other words, in the case of bankruptcy, PACE and other tax liens will get satisfied first before any mortgages are repaid.

There has also already been a large nationwide movement toward accepting PACE financing among lenders despite the seniority of the PACE lien. This is because it is only the PACE payments, not the assessment itself, that are senior to mortgage debt. “[It] is non-recourse financing… [it] does not accelerate in the event of an assessment payment delinquency or default and it runs with the property in the event of an ownership transfer,” according to PACE Nation, the leading non-profit advocate for PACE financing (PACE Nation, 2018).

There are several reasons that PACE financing is a compelling option for building owners seeking to perform energy upgrades as compared to self-financing or traditional financing. First, the cost of PACE financing and the benefits generated can be shared with tenants under most lease forms. In other words, owners of properties with triple net or gross modified leases can pass through utility costs to tenants. For tenants, their cash flow can actually be increased by having annual energy savings over the lease term. Second, with PACE financing, the positive cash flow from comprehensive energy projects could translate into higher property values for building owners. With higher cash flow being realized for a building through utility cost savings, the collateral value rises. Indeed, through PACE financing, building owners can increase collateral value with no upfront capital outlay out of their own pockets and can bring their buildings into compliance despite the magnitude of the upgrades required by the new law. Third, since PACE financing is strictly property-based financing secured by a lien on the property, the owner is not personally obligated to repay the tax assessment (i.e., it is non-recourse financing).

Fourth, compared to a typical loan that has to be repaid in full upon the sale of the secured property, PACE financing may automatically transfer to a new owner. Fifth, unlike with most

The efficiency of PACE financing for commercial real estate can be found in many cases throughout the country. For example, a 35-year old 200,481 sq. ft. Class-A office highrise in Houston, Texas – better known as 1225 North Loop

Although it only recently started to gain more attention from industry professionals and related media and reporters, PACE financing is not as new as many may think. It was first conceived and proposed in 2005 by the Monterey Bay Regional Energy Plan and was subsequently approved by California legislation in 2008. Since then, PACE-enabling legislation has been passed in 36 states and the District of Columbia (CleanFund, 2018).1

1

For quite some time, PACE financing for residential housing also existed, only to be discontinued in most states following the meltdown in the residential PACE sector. Unlike the owners of most commercial real estate properties, many homeowners’ ability to pay or credit scores were not taken into account during the loan approval process (Cox, 2011). Because the financing was designed to run with the property, there was more reason to approve eligibility based primarily on property information rather than income or credit scores, which resulted in many homeowners who were unable to make their PACE payments. Fannie Mae and Freddie Mac, soon after realizing the potential problem, refused to back mortgages with PACE liens on them starting in 2010 (Hsu, 2010). Similarly, the Federal Housing Administration (FHA) announced and clarified in 2017 that residential properties with PACE obligations were not eligible for FHA financing (U.S. Department of Housing and Urban Development, 2017). That meant that homeowners were no longer eligible to take out PACE financing if any of those three agencies held securities based on their mortgages, which represented the bulk of the U.S. residential mortgage market (The Urban Institute, 2018). As a result, states as well as local legislators quickly disallowed PACE programs in the residential sector. Currently, only three municipalities remain in the United States that still enable a residential PACE program, with approximately $0.8 billion in overall securitization market size – a huge reduction from its 2016 peak of $1.7 billion (National Association of State Energy Officials, 2018; PACE Market Data, n.d.). The commercial real estate market, on the other hand, has not proven as troublesome as the residential market as the primary purpose of commercial properties is already to generate profit through rental income, rather than just through capital gains.

West, Houston, TX – had an old chiller that had never been replaced since the building’s original construction (TexasPACE Authority [Texas], n.d.). The owner, 1225 North Loop Investments, Inc., concluded that the building was consuming above-average energy loads (Texas, n.d.). About this time the General Manager of the property connected with the Texas PACE financial provider and learned about the program. The project included the replacement of the old chiller with two new ones, installation of a new building automation system, and a complete LED fixture upgrade.

It has been projected that the building’s utility consumption will be reduced by as much as 38.0% and provide $3.66 million in savings over the 20-year projection (Texas, n.d.).

Figure 2: New York City Skyline.

OTHER ALTERNATIVES

Aside from PACE financing, building owners have other Of course, just because PACE financing has worked options – adjustments, deductions and carbon trading – to elsewhere is no guarantee that this financing will succeed fund energy improvements and achieve compliance with with New York City projects to the same degree. The the new law. biggest immediate problem likely lies in the fact that almost half of the existing square footage in Manhattan alone was Adjustments built more than 90 years ago, according to an analysis done

by Kohn Pedersen Fox, an architecture firm based in New If the condition of the building is difficult to retrofit, an owner York (Bui, et al., 2016). The existence of so many outdated is facing high-energy-consuming tenants, or if a carbonbuildings can increase the difficulty of future renovations, reducing building improvement is hurting the building’s which can then lead to increased design and construction cash flow, then the owner may be eligible to apply for a costs for building owners. New York City’s zoning laws have temporary adjustment (increase) to the building emission become more restrictive over time, benefiting properties limits to achieve compliance with the law. Although this built in the eras where the zoning was much less restrictive. might seem like an owner’s first choice, these adjustments Now, what was once an advantage is becoming a drawback the property connected with Texas PACE financial provider and learnedwill about program. are the likely to be difficult to obtain as buildings firstthe have to for the building owners (Bui, et al., 2016). The project included the replacement of the old chiller with two new ones, installation of a new qualify as part of “special categories of buildings” according building automation system, and a complete LED fixture upgrade. It has been projected that the to thewill New York City (the law and is currently still under Further, New York City differs from the restbuilding’s of the country in utility consumption be reduced

by Statute as much as 38.0% provide $3.66 million in development) Mobilization Act, 2019). Building savings overnation’s the 20-year projection (Texas,(Climate n.d.). many aspects. It is not only home to much of the owners must also be aware that the City has the goal to most valuable commercial real estate but also is the nation’s largest commercial real estate market with a near one percent vacancy rate (Alvarez, 2013).

Moreover, New York is the most densely populated major city in the nation (by a high margin), making public transport and pedestrian access essential to New York City commuters (Weinberger, 2011). This contrasts with the rest of the country, where 91% of commuters travel in automobiles to their workplaces (Census Bureau, 2012).

How these differences will play out in the PACE financing world is yet to be tested.

Financial Scenario Summary of 1225 North Loop West, Houston TX (Texas, n.d.)

SelfConventional PACE Funded Loan Financing ($1,300,000) ($260,000) $0 Out-of-Pocket Investment $200,000 $200,000 $200,000 Savings (First Year) $0 ($282,803) ($118,437) Annual Payment ($1,100,000) ($342,803) $81,563 Cash Flow Impact Year 1 Net Project Cash Flow Year 2 Years to Positive Project Cashflow Debt Service Over Finance Term

($900,000)

($425,607)

$163,126

6.5

8.4

(Immediate)

$0

($1,414,017)

($2,368,742)

$172,017 $20,747 $600,310 10-Year Project NPV Property Value Increase (20-Year $993,984 $842,714 $935,520 NPV) The study presumes three different scenarios for the same project – one, “Self-Funded”, which Table 1: Financial Scenario Summary of 1225 North Loop West, Houston TX (Texas, n.d.) — The assumes that all thedifferent projectsscenarios costs arefor paid by the– one, owner; two, using the “Conventional study presumes three the directly same project “Self-Funded”, which assumes Loan”, such as a bank loan; and three, using PACE that all the projects costsor areprivate paid directly by the owner; two, usingfinancing. the “Conventional Loan”, such as a bank or private loan; and three, using PACE financing.

Of course, just because PACE financing has worked elsewhere is no guarantee that this financing will succeed with New York City projects to the same degree. The biggest immediate problem likely lies in the fact that almost half of the existing square footage in Manhattan alone was built more than 90 years ago, as reported according to an analysis done by Kohn Pedersen87 Fox, an architecture firm based in New York (Bui, et al., 2016). The existence of so many outdated buildings can increase the difficulty of future renovations, which can then lead to

Figure 3: Central Park.

Figure 4 Central Park in the Fall.

progressively reduce the overall carbon emission, which makes it even more unlikely for landlords to obtain such adjustments.

as possible, despite the deadline and risk of being labeled as “delinquent” from the city (Coté, 2014). Five years later, the city promptly started to issue a “Notice of Violation” to each non-compliant property (Coté, 2014). The demand for, and therefore the cost of, the retrofitting construction skyrocketed immediately (Dineen, 2017). A similar trend is currently being observed in Los Angeles as it passed a law in 2016 called the “Los Angeles Soft-Story Retrofit Program” (Veklerov, 2018). Thus, New York City building owners that delay installation of retrofits risk paying significantly more for this work as demand increases shortly before the law goes into effect.

Deductions Deductions provide an alternate incentive compliance method by allowing the purchase of renewable energy credits and/or greenhouse gas offsets. However, the related regulations and timing of implementation are still to be determined by the New York Department of Buildings, making it uncertain whether or when this will be a solution for most buildings.

Carbon Trading If the reduction in carbon for a property exceeds mandates, then the owner is eligible to apply these carbon credits (a tradable certificate representing the right to emit one ton of carbon dioxide) toward another building. This is another way of incentivizing building owners to reduce carbon emissions through monetary enticements. The details of the rules and thresholds are being developed and are anticipated to be announced before 2021.

GOING FORWARD Owners of buildings that qualify under the CMA are being urged to begin taking steps as early as possible – even though compliance is not mandated soon – because once the mandate takes effect in 2024, it is likely that the construction costs could skyrocket due to limited numbers of contractors able to perform the work (Riverra, 2019).

This high volume of demand has already occurred in other cities with mandatory retrofit programs (Veklerov, 2018).

In the case of San Francisco, when it passed a series of retrofit ordinances for soft-story wooden structures and non-ductile cement structures in 2013, most property owners responded by postponing the retrofit project as long 88

CONCLUSION The Climate Mobilization Act is an ambitious attempt to reduce carbon emissions in New York City. As the City’s building owners approach compliance enforcement deadlines, construction costs may increase and the values of noncompliant buildings may decrease. Owners will have a more difficult time selling properties that require extensive renovation to achieve energy efficiency in compliance with the law. Though there is pushback against the legislation from property owners and interest groups, the City has provided a means to address the cost concerns through PACE financing, a capital source that makes retrofitting buildings cost-effective and beneficial for New York City.

WORK CITED Alvarez and Marsal Real Estate Advisory Services, & JRT Realty Group. (2013). Commercial Real Estate Competitiveness Study. Retrieved from https://edc.nyc/sites/ default/files/filemanager/Resources/Studies/Commercial_Real_Estate_Competitiveness_Study.pdf Bui, Q., Chaban, M. A. V., & White, J. (2016, May 20).

40 Percent of the Buildings in Manhattan Could Not Be Built Today. The New York Times. Retrieved from https://www.nytimes.com/interactive/2016/05/19/

upshot/forty-percent-of-manhattans-buildingscould-not-be-built-today.html?mtrref=www.google. com&gwh=74DA35E11375F4DBF8B3CFB96C92723 6&gwt=pay&assetType=REGIWALL Census Bureau. (2012). Population and Housing Unit Counts: 2010 (September 2012). Retrieved from https:// www.census.gov/prod/cen2010/cph-2-1.pdf City of New York. (2019, April 22). Action on Global Warming: NYC’s Green New Deal. Retrieved January 2, 2020, from https://www1.nyc.gov/office-of-the-mayor/ news/209-19/action-global-warming-nyc-s-green-newdeal#/0 CleanFund. “CleanFund Announces Major Financial Commitment from Starwood Sustainable Credit, Follow-on Investment from Vulcan, and Names Industry Vet Lain Gutierrez as CEO.” PR Newswire. PR Newswire Association, June 4, 2019.

Climate Mobilization Act, 26 New York City Charter § 651 (2019).

Climate Mobilization Act. (2019). New York City: New York City Mayor’s Office of Sustainability. Available at: https:// retrofitaccelerator.cityofnewyork.us/sites/default/files/ public/MOS%20CMA%20General%20Factsheet.pdf Coté, J. (2014, October 8). S.F. buildings getting slapped with quake-safety warnings. SFGate. Retrieved from https://www.sfgate.com/news/article/SF-soft-story-buildings-not-in-retrofit-program-5807153.php Dineen, J. K. (2017, September 2). Owners of S.F. ‘soft-story’ buildings slow to file for required retrofits.

San Francisco Chronicle. Retrieved from https://www. sfchronicle.com/politics/article/Owners-of-S-F-soft-storybuildings-slow-to-12168181.php D&S Real Estate Finance Group. (2019). Picking up the “PACE.” Retrieved from https://www.dsllp.com/content/ Duval%20%20Stachenfeld%20LLP.%20Picking%20 Up%20the%20PACE.%20July%202019.pdf Hosfelt, B. (2019, October 7). Big Decisions Loom on How NYC Will Implement Historic Carbon-Reduction Law. City Limits. Retrieved from https://citylimits. org/2019/10/07/big-decisions-loom-on-how-nyc-will-implement-historic-carbon-reduction-law/ Kammerer, Kurt (April 6, 2006). Monterey Bay Regional Energy Plan (PDF) (Report).

Neuman, W. (2019, April 22). Big Buildings Hurt the Climate. New York City Hopes to Change That. The New York Times. Retrieved from https://www.nytimes. com/2019/04/17/nyregion/nyc-energy-laws.html

New York City Council. (2019, April 18). Council to Vote on Climate Mobilization Act ahead of Earth Day. Retrieved January 2, 2020, from https://council.nyc.gov/ press/2019/04/18/1730/ Nomura International plc. (2018). Global Market Research.

London, United Kingdom: Nomura International plc.

PACENation. (2018). C-PACE – a Primer for Mortgage Lenders. Retrieved from https://www.pacenation.org/ wp-content/uploads/2018/04/Mortgage_Holder_Primer_Final_for_publication.pdf Patka, Y. T., & Miller, D. (Eds.). (2019, June 11). How To Comply With NYC’s New Climate Mobilization Act. Law360. Retrieved from https://www.law360.com/articles/1167235/how-to-comply-with-nyc-s-new-climatemobilization-act Riverra, E. (2019, February 27). Some Local Landlords Face Expensive Retrofit Costs, Their Tenants the Prospect of Temporary Displacement. Pasadena Now. Retrieved from http://www.pasadenanow.com/ main/some-local-landlords-face-expensive-retrofit-costs-their-tenants-the-prospect-of-temporary-displacement/#.Xg3YsUczY2x Schleuss, J., & Lin, R. (2019, November 12). Dangerous L.A. apartment buildings most at risk in an earthquake are quickly being fixed. Los Angeles Times.

Retrieved from https://www.latimes.com/california/story/2019-11-22/los-angeles-soft-story-earthquake-building Texas-PACE Authority. “CASE STUDY 1225 North Loop West Houston, Texas.” Texas PACE Authority. Texas PACE Authority. Accessed November 11, 2019. https:// www.texaspaceauthority.org/wp-content/uploads/ CS_1225-North-Loop_Houston_Final.pdf Veklerov, K. (2018, December 10). Oakland may require landlords to retrofit seismically unsafe apartments. San Francisco Chronicle. Retrieved from https://www. sfchronicle.com/bayarea/article/Oakland-may-require-landlords-to-retrofit-13452049.php Weinberger, R., Kaehny, J., & Rufo, M. (2011). U.S. Parking Policies: An Overview of Management Strategies.

Retrieved from http://www.infrastructureusa.org/wp-content/uploads/2010/03/itdp_parking_fullreport.pdf 89

Page

Description

Credit

Date

Page

Description

Credit

Date

Cover

Singapore Skyline

William Cho

2009

62

New York City Skyline

Parth Patel

2018

2

Miami Skyline

Cglas

2013

63

WeLive Floor Plan

WeLive Company

n.d.

Singapore Group Photo Miami Group Photo Industry Leader Award Hahne & Co. ULI Case Study New York City Skyline

Martin Tan Image 1st Miami Jasmina Tomic L+M Development Partners UIHere

2020 2020 2019 2019 n.d.

65 Top Bottom

Map of New York Co-Living Locations Zip Code Level Analysis

Parth Patel Census Report

2020 2020

68 - 75

The Baya Company

2019

5

Singapore Skyline

Martin Tan

2020

Various Baya Upper Nest Towers Renderings/ Scheme

76

Cornell University

Kenneth Zirkel

2018

King of Hearts

2016

6-7

Philadelphia Skyline

8

1225 North Loop West, Houston, TX

1225 North Loop Investments, Inc.

2017

South Philadelphia Street University City

Paul Sableman WestCoastvieS

2010 2010

9

Baker Program Distinguished Speaker Series

Cornell University

2020

Cornell Colvin Case Study Challenge Team

Dustin Jones

2019

Google Maps Google Maps

2020 2020

10

Navy Yard Historic Core Navy Yard

Cornell Impact Investing in Commercial Real Estate Team

Shang-Chi Liu

Philadelphia Sports Complex Lincoln Financial Field

NASA Green Energy Futures

2008 2013

82

Singapore Trek

Martin Tan

2020

Bestbudbrian

2016

12 - 23

Navy Yard Entrance

24 - 33

Miami Trek

Image 1st Miami

2020

84

New York City Skyline

UIHere

n.d.

34 - 35

Singapore Skyline

xPhantomhive

2019

85

New York City Skyline

Public Domain

2017

87

New York City Skyline

UIHere

n.d.

36 - 45

Cornell Real Estate Conference

Jasmina Tomic

2019

Anthony Quintano Ed Yourdon

2014 2009

52 - 59

Various Hahne & Co. Project Images

L+M Development Partners

2019

New York City Skyline New York City Skyline

91

Miami Skyline

Adam Mizrahi

2011

60 - 61

New York City Skyline

JaxsonD

2018

92

Singapore Skyline

Martin Tan

2020

3 Top Top Middle Middle Bottom Middle Bottom

11

2020

79 Top Bottom

80 Top Bottom

81 Top Bottom

88 Left Right

Images used in this publication are sourced from the public domain or, to the best of our knowledge, have been used in accordance with any applicable reuse restrictions thereon, if any. This publication is for academic purposes and is not sold or distributed commercially.

90

91

Cornell Real Estate Review Email: crer@cornell.edu Online at: blog.realestate.cornell.edu 489 Statler Hall | Cornell University | Ithaca, NY 14853 92