EXCLUSIVE: Gaw Capital's Chairman On Hollywood Plans, Hong Kong Protests, Brexit And Why He's Not Buying Opportunity Zones
In the past 25 years, Gaw has built a global portfolio with $23B of assets under management, 14 offices and more than 1,100 employees spread around the world.
His portfolio includes trophy assets such as the Bradbury Building in downtown Los Angeles, the Standard Hotel in Manhattan, the Soho House in Chicago, the Allen House in London, Ocean Towers in Shanghai and the Columbia Center in Seattle.
But it was the Hollywood Roosevelt that started it all. It was his first property acquisition out of Stanford graduate school and the foundational piece of what would become a massive worldwide real estate empire.
Named after former President Theodore Roosevelt, the Hollywood Roosevelt is a 335-key hotel that opened in 1927 on 3 acres in the middle of Hollywood.
The hotel is known for its architecturally distinct Spanish Colonial-style lobby. The very first Academy Awards were held there in 1929. Marilyn Monroe lived at the hotel before her career took off. And the Roosevelt is a place where A-listers and Hollywood celebrities past and present socialized.
The city declared the hotel a Los Angeles Historic-Cultural Monument in 1991. But in the mid-1980s and early 1990s, the once famed and illustrious Roosevelt lost its luster. The owners of the Roosevelt at that time had filed for bankruptcy protection in 1989 and despite some renovations and improvements, the hotel fell further into disrepair.
“At that time, Hollywood isn’t what you see today,” Gaw said at a Filipinos In Institutional Real Estate event in Dana Point. “There was a lot of prostitution, drugs. You name it, it was there.”
Hollywood was a hollow shell of its name, Gaw said, but the millions of tourists who frequent Hollywood Boulevard every year, walking along the Hollywood Walk of Fame, either didn’t know the problems the area faced or didn’t care.
But the Hollywood brand is still very powerful, Gaw said.
After securing a loan from East West Bank, and capital from a pair of investors including his late father, Anthony Gaw, the founder of Pioneer Global Group, Gaw purchased the hotel out of a bankruptcy auction for $9.5M, he said. Though his father was against the project, Gaw immediately moved inside a 450 SF room at the hotel.
For three years, Gaw ate in the basement of the hotel with the staff — the janitors and maids and cooks and other employees, many of whom would be considered low level.
“Breakfast, lunch, dinner, every day I ate at the basement of that hotel,” Gaw said. “Most of the time, I ate with the housekeeping staff because at that level, they will tell you which managers are not performing, [and] why the hotel went bankrupt.”
Gaw picked up some Spanish during his interactions, and his translator, who served as the go-between he and his staff, is still working with him to this day.
The experience of breaking bread with his staff taught Gaw one of the most important lessons in his career and one that he carries with all of his employees worldwide today: treat everyone equally.
During all that time he spent with his staff, he said, they began to look up to him and respect him. None of the other managers or executives had ever cared enough to sit down and eat with them, Gaw recalled them saying to him.
“By treating people with respect and treating them nicely no matter what level they are, they will embrace you,” Gaw said to Bisnow. “They want to help you.”
He learned the hotel business from the ground up — literally.
“I learned Business 101 at the basement of that hotel,” he said. “This is a people business.”
In a wide-ranging interview with Bisnow, and in his keynote address, Gaw discussed why his company — in a JV — acquired the 463K SF Hollywood & Highland, his plans for the entertainment and shopping center, how the Hong Kong protests are affecting commercial real estate, where his company is planning to invest, the trade war between China and the U.S., and his thoughts on a possible downturn.
Bisnow: Gaw Capital and DJM were all over the news recently after the JV announced the acquisition of the Hollywood & Highland retail and entertainment center in Hollywood. So why Hollywood & Highland? Why make this purchase now?
Gaw: [ç keynote] Everyone was saying, 'Why are you buying a shopping center when everyone is trying to go away from shopping centers?'
This is not actually a shopping center. This is the gateway to Hollywood. You get 20 million to 25 million people through the center every year. Do you know how hard it is to build something and attract that many people? It’s really, really hard. So if you get that amount of people you just have to figure out what people need and what they want. And I think if we do a little bit of spending [on the center] we should do well.
It needs to be highly permeable so you can go through it so it could be part of the neighborhood and not a fortress blocking everyone out.
Stay tuned in the next 24 months … This is not going to be a shopping center. It’s going to be an experiential center. This should be the new Times Square of Hollywood.
[to Bisnow] We started the gentrification of Hollywood with the renovation of the Roosevelt. I feel like this is a new phase.
Bisnow: Hollywood & Highland will be upgraded. What kind of upgrades should we expect to see?
Gaw: If you've followed our press and seen what we've done in Europe and Asia, and in Beijing, for example, we took a 1.7M SF center with a 700K SF retail component and changed it into a cool creative office. So there could be something along that line. I can't disclose it but I can tell you, it's going to surprise the market.
The retail center has got great bones, great outdoor space, five levels ... These days some people say that retail is dead but if you go to Asia and spend some time in Asia, you'll understand that people who understand experiential retail are capturing dramatically more traffic than traditional retail. So you have to transform [it] into an experiential center and not just a shopping center.
Bisnow: Why Hollywood? What's happening there that's driving the market?
Gaw: Traditionally in Hollywood, you always have tourists. There are some locals [that frequent the area] but the majority are tourists. It's only the past five or seven years that now we're seeing a lot of office tenants. You've got Netflix, NeueHouse and media companies. So I think that's creating an anchor that's drawing in more amenities to the neighborhood and eventually drawing more locals. So eventually it's going to be a balance of locals and tourists.
Bisnow: What other markets are you looking at either domestically or internationally?
Gaw: If you look at our portfolio we are very active in Seattle and Portland, Southern California, San Francisco, Oakland and Santa Clara to New York ... The West Coast, in particular, I quite like and see more growth. It's a good jumping off point in Asia and there is a lot of growth in Asia. Hopefully, the trade war dies down and if that gets moderated we'll see more growth on both sides.
Some of the other projects we are doing in Southeast Asia are very exciting and rewarding. We are being very active in Vietnam, keeping a close eye on the Philippines. I think the demographic and story makes a lot of sense.
We are quite active in the U.K. market. Five or six years ago, I thought, "London has a lower tax rate and institutional quality buildings and it offers the same opportunities to an international-minded Asian investor compared to New York." New York is so much higher tax, so much more friction to transact real estate. It made no sense that London was much cheaper than New York. So five, six years ago, I started buying in London and it was a good bet. We are doing quite well. Obviously, Brexit caused the currency to drop, which reduced our gain, but we were buying assets in the low 5 and 6 cap rates for the trophy buildings.
Bisnow: About Brexit, does that worry you at all?
Gaw: No. It's still London. It's Anglo-Saxon, it's English speaking and it's still one of the three financial centers of the world — Hong Kong, London and New York. If you are so close to the money, you can't go wrong in the long run. I actually wish there was more disruption in the property market. We would have bought more. But I just haven't seen enough disruption.
Bisnow: What are your thoughts on the trade war between China and the U.S.? Do you think that's going to be solved any time soon?
Gaw: No. Unfortunately not. When you look back at the history of mankind, whenever you have a sitting No. 1 and a rising No. 2, there's inevitably conflict. Because of their nuclear capabilities, a traditional war is no longer the new paradigm. The new paradigm could very well be economic and financial war. Ultimately, I think U.S. and China are mutually dependent. Hopefully, after the egos and dust get settled, there will be a truce, probably a temporary truce. But I think we'll continue to see conflict.
Bisnow: What are your thoughts on the ongoing conflict in Hong Kong? How are the protests affecting the commercial real estate market there?
Gaw: It's temporary. I think it is the same problem happening globally these days, the crux of the problem is the wealth gap in many of these countries. In Hong Kong, there's discontent in the younger generation, who are going to college and they feel their future looks a bit bleak and they feel it's hard to reach, [like] buying their first time home or getting a job ... It's part of a social problem that many developed countries are trying to solve.
Regarding commercial real estate, not a whole lot [of impact] for the time being. Hong Kong has gone through SARS and enough downturns. There is so much liquidity in the market. I wish there was more disruption. I have not seen any. Even in the residential market, with all these protests going on, I think I saw two developers a couple of weeks ago launch a 500-unit compound and it sold 80% over the weekend.
Bisnow: There has been so much talk about a recession or some type of economic downturn. Do you see a recession happening any time soon?
Gaw: I do worry about that because it has been a prolonged up cycle for a long time. I certainly did not expect to see reduced interest rates in the U.S. So I am quite surprised a sitting president in the U.S. could put a lot of pressure on the Fed to reduce interest rates despite the economy doing so well. The U.S. economy is the strongest among everyone in the world, so why the hell would you have reduced interest rates to a historic low? The 10-year Treasury is 1.6%. It's ridiculous with the growth the U.S. has that they could have those low interest rates. That is actually going to continue to fuel the real estate market ... I think it's going to continue in the next three to five years.
Bisnow: What are your thoughts on the opportunity zone program. Is this something that your company is looking into or possibly capitalizing in?
Gaw: No. I looked into it. I thought it was a great idea but we further saw how restrictive the program really is. Ultimately, I think it will benefit a very small percentage of wealthy technology executives where they can sell their stocks and place it into an opportunity zone property. We looked into it and it's a lot more hot air than expected. Maybe it will get tweaked in time. Right now, it's not too interesting for us.
I don't need that benefit to do what we do. I'd rather not have the restrictions and be completely free to do what we want to do and make social impact part of what we do and generate the profit we need. If we get the project right, we don't need any of that help.