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Tax Reform, Amazon, the MTA and How to Pave a Road to New York City’s Growth

NYC Developers Share 2017 Assessment, What the City Should Work on in 2018
November 20, 2017
The Golden Apple panel, from left to right: William C. Rudin, MaryAnne Gilmartin, Scott Rechler, Stephen M. Ross, Robert S. Blumenthal [Moderator] and Sam Chandan.
Credit: NYU Photo Bureau, Elena Olivo

The packed room quieted quickly as Sam Chandan, associate dean of NYU's Schack Institute of Real Estate, announced the start of The Golden Apple 2017 panel. For years, this panel has discussed the present and future of New York City's commercial real estate market by examining its most paramount issues - and when exploring just how New York City can continue upholding its legacy as a beacon for the world, the past year brought plenty to discuss.

Forest City New York CEO Maryanne Gilmartin, RXR Realty CEO Scott Rechler, Related Companies Chairman Stephen M. Ross and Rudin Management Company CEO William C. Rudin, all development tycoons as-of-right, spoke with moderator Robert S. Blumenthal about the local implications of tax reform, the latest Amazon question, and how to best accommodate the needs of an ever-growing city.

In its current form as passed by the House, the tax reform bill is a mixed bag for New York real estate. Retaining pass-throughs and 1031 exchanges are positives, according to panelists, but a reduced cap on mortgage interest and the elimination of state and local tax (SALT) deductibility are dangerous for both New York investors as well as present and future homeowners.

The cap on real estate taxes for homeowners just doesn't go far enough in New York, according to Rudin, while Gilmartin called the mortgage deduction a huge issue for homeownership.

"The fact is if you want to buy a home in a city like New York, the upper-middle class will be impacted by the SALT measure and mortgage deduction. I am very concerned about it," shared Gilmartin. "I think this has the ability to have a seismic impact on the near-term prosperity of New York."

Ross, meanwhile, said he was unsure tax reform would come through.

"I'm not sure this tax bill is going to get passed, when you have the situation in Washington the way it is today, with the parties not really reaching across the aisle too much," noted Ross. "I understand there are enough Republicans who will not vote for the bill in the Senate if they hear something they don't like."

Rechler quipped plainly, "Last year we had superstorm Trump. And one of the things we've all talked about [this year] was the need for infrastructure investing. As a by-product of this tax plan, the likelihood of an infrastructure plan is slim-to-none."

"One of the most important things we need to do is reinvest in our 20th century infrastructure to sustain 21st century cities," Rechler said, suggesting the $1.5 trillion cost of lowering corporate tax rates could instead go to U.S. infrastructure.

  Related News: Infrastructure Funds Gain Traction with Institutional InvestorsNOVEMBER 21, 2017  |  DIANA BELL

Maintaining Momentum

Infrastructure is a loaded word for its breadth of coverage. Housing, transportation, healthcare, real estate - these facets all fall into the infrastructure bucket. To developers speaking at the panel, the types of infrastructure most needed for New York City to maintain its momentum as a leading global city are housing and transportation.

"New York City right now is a victim of its own success," Rechler said, noting that a population nearing 9 million holds implications for the office market, affordable housing and transportation. But he sees an opportunity for more transit-oriented development (TOD) in the neighborhoods surrounding Manhattan. "We need to be thinking about TOD to expand and target the capacity of New York City as we reinvent suburbs. That is critical to our success. We have room to densify within a 50 mile radius of the City."

Gilmartin disagreed the solution was that simple, adding, "We cannot solve our affordable housing crisis by pushing people to Yonkers and Long Island."

More people want to live in and raise their families in cities, but public policy is not lending itself to address that and neither are land costs, she said, adding that instead, land costs mean developers are going to build condos.

A bureaucratic, regulatory environment makes affordable housing a messy issue for the public sector, according to panelists.

"We do need to solve our issue. We need to find ways to build affordable or workforce housing. I think there are creative ways to expand the region and provide the housing we need to keep our city growing," said Rudin. He cited scaffolding laws as an example of bureaucracy and regulation hurting commercial development. "We need to focus on things like the scaffolding law - it increases our construction costs by 3 to 4 percent," he said, adding that tort reform will further impact commercial real estate costs as well as costs in other sectors, such as medical.

All panelists noted the growing need for private-public partnerships (PPPs) in mixed-use developments, especially as an option in creating affordable housing at those developments.

"PPP is important today to large-scale projects; it has to be a PPP," said Ross, whose firm is developing Hudson Yards, the country's largest such partnership currently in development. But developing through PPP requires a change of mindset. "Your mindset is, what is in the best interest of the public long-term. If you are just looking at how much money you make, it won't work. We look at what the public wants, what the city wants and what is in the best interest of the city, and we develop from that standpoint," said Ross.

"Not to promote Dock 72," Rudin said of his Brooklyn Navy Yard project, "but it is a PPP. The City puts up the land and we put up the capital to build. That's one small example. The public sector does what they can do with the land and the private sector needs to put up the capital." The commercial real estate industry must be more creative in getting PPP deals done, according to Rudin. "We have to figure it ourselves. It is obvious the federal government is not helping us."

Redefining the social contract between business people, government and the public is crucial to success in projects with such a massive development scope as PPP or infrastructure, according to panelists. After all, isn't infrastructure what Amazon is banking on?

The HQ2 Q

Amazon recently closed its request for proposal (RFP) bidding process for its second headquarters, called HQ2, and the e-commerce giant said it has received 238 bids from cities around the country. HQ2 will equal its first Seattle-based headquarters in size, meaning it would require approximately 8 million square feet. New York City submitted four of those bids - including one downtown, one in Midtown West, one in Brooklyn Navy Yards and one in Long Island City. But panelists were divided on whether any of the bids would be successful.

Gilmartin would be happy no matter which site Amazon chose, saying that rising tide rises all boats. However, she doesn't see it happening, noting that, "I think it is very difficult to imagine based on cost structure."

"Amazon is leaving Seattle because they don't want to be competing so heavily against jobs they are looking for," said Ross, citing that competition as one cost of doing business. "In New York the cost of doing business is so great. Other cities are giving [Amazon] significant incentives. I don't see New York has a chance because they don't offer the incentives other cities have offered."

"The state has been clear, it is not going to put out offers on four choices. But if Amazon narrows it two sites, the State will give an incentive package," explained Rechler, who works on the Governor's Fix NYC panel alongside Rudin.

"The mayor has been firm on his position, the state has been firm on its position. There are significant as-of-right tax incentives in place that have already attracted companies like United Technologies or Aetna. Those deals were very significant. Those companies could have gotten to a lower cost location but they weighed that against the talent," said Rudin. "I would think if they come to NY, it would be Brooklyn or Queens because of the as-of-right tax structure. The Brooklyn factor is positive for attracting employees."

Concluded Rechler, "If you read their RFP, that is what we need our city to be like going forward, and what we need to plan around for our city's future. It is a war for talent - that's what drives the 21st century economy. Being a leader in that economy, that is what New York City should focus on."

Gone West

The push to recruit talent is one of the reasons employers are moving to the West Side to new office product at Hudson Yards, according to Ross.

"Is the epicenter going west? Look at the success we've had. We've leased over 7 million square feet of space. We are 75 percent leased on 1 million square feet of retail. Residential is selling well. I don't think New Yorkers will understand the impact until it opens up," Ross said.

Companies who are attracting the best talent will succeed, Ross noted, adding, "You can see New York grow if you follow where the young people are. Corporations came to Hudson Yards because of obsolescence in office buildings in other areas and because young people wanted to be there." Answering obsolescence through east side rezoning will take a long time, and, he added, "With the way cap rates are today, you can't afford the land cost in tearing down those buildings."

Blackrock is one such tenant leaving Midtown East for Hudson Yards.

"We are sad to see [BlackRock] leave 40 E. 52nd St., but we will reposition our building," said Rudin, saying his company remains bullish about the midtown east submarket in the long term.

Although there are deals going west, companies are staying east as well, Rudin argued, citing Estee Lauder signing for 220,000 square feet at GM Building and Twenty-First Century Fox and News Corp. expanding to 1.2 million square feet at 1211 Sixth Ave. HSBC also renewed its 548,000-square-foot lease at 452 Fifth Ave. this year.

Mayday MTA

"Deteriorating infrastructure is a tarnish on the city. Without access the city will wither," Blumenthal said solemnly.

There is no easy solution to the MTA, responded Rechler, who sits on the board of the MTA after his nomination by Governor Cuomo was passed by the NY State Senate.

"There have been generations not investing; 100 years ago we made an incredible investment and we've been resting on our laurels. We stopped having maintenance people. The CFO told us he thinks we need $1 billion more per year just to continue in its existing state, not to improve."

Fixing MTA infrastructure won't come without some pain, Rechler contends.

"You need to have pain of having lines shut down. Now, it is done at night and half the work is moving equipment in and out of the tunnels and setting up," said Rechler, pointing to Amtrak's work over the summer, which involved closing some tracks in tunnels running under the Hudson River.

Gilmartin, whose company is currently involved in developing the Cornell Tech campus at Roosevelt Island, shared a jewel of an anecdote about the MTA from her time spent developing Barclays Center. Part of the agreement involved Forest City renovating the subway entrance, which it expected would cost $15 million.

"We found out there was major structural damage," she said. "And the MTA says, 'You touch it, you own it.' At the end of the day the subway entrance cost $72 million. It was easier to build an arena than it was to build a subway entrance."

Diana Bell, New York City Market Reporter  CoStar Group   
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