Related CEO Jeff Blau On Retail's Reckoning And Why He ‘Vehemently’ Disagrees Remote Work Is Here To Stay
In recent weeks, a slew of big-name executives, including Facebook CEO Mark Zuckerberg, have said the pandemic is a watershed moment for the future of work, and they plan to allow their employees to work from home forever, if they so choose.
But Related Cos. CEO Jeff Blau, whose company has built some of Manhattan's priciest office buildings — including Hudson Yards, where Facebook agreed to lease 1.5M SF last year — said those workers will almost all choose to come back.
“I believe that people don't really like working from home, and I think it's not productive,” Blau told Bisnow in an interview Monday. “There's lots of distractions at home and bad WiFi and kids to take care of and dogs that bark. … As we look past this year, I think that people will return back to the office in droves.”
Related owns more than 30M SF of office and retail space, about 13,000 apartments, 5,000 luxury condominiums and 60,000 affordable housing units around the country. It is the sixth-biggest owner of multifamily properties in the country, developed Time Warner Center and is co-developing Hudson Yards alongside Oxford Properties.
Phase 1 of the megaproject on Manhattan’s Far West Side opened last year. When Phase 2 is complete, Hudson Yards will encompass 18M SF of commercial and residential space, some 100 shops and 4,000 apartments, as well as a performing arts center and 14 acres of public space.
Blau is speaking on a Bisnow webinar this Wednesday, alongside Mack Real Estate Group CEO Richard Mack and Ackman-Ziff CEO Simon Ziff, to discuss how the city can move past the crises enveloping the country.
In a phone interview Monday, Blau discussed the company’s rent collections last month, his concerns for small retailers and why he doesn’t think people will be leaving New York City en masse. This interview has been edited and condensed for clarity.
Bisnow: Back in April, you said that your residential tenants had largely paid rent and a large portion of your commercial tenants had met their rent requirements, but about 26% of the retail portfolio had paid up. Now that it's June 1, what kind of collection did you see last month?
Jeff Blau: So it's been consistent. Office and residential tenants have pretty much been paying in full. And actually, our retail collections, there must have been a beginning-of-month number that you're using. We've been averaging just under 40% in Manhattan and actually closer to 70% in the boroughs. So, you know, we've been fortunate certainly in the boroughs. Many of our retailers were deemed essential and have remained open throughout the pandemic. And, you know, we do have many larger-credit tenants that have been paying. So we have been fortunate in that sense, and I do think that there's going to be a real day of reckoning in the retail industry.
I think we will see — and we've already seen — several bankruptcies, and I think there are going to be several more coming. Going back to the idea of acceleration of trends. I don't think there's anything new here. I think this has been happening for quite some time. And, you know, I think only those retailers that have worked to adjust their business model ... over the last couple of years are going to be those that survive.
Bisnow: What kind of arrangements have you reached with the tenants who haven't paid? Is it rent relief, is it frozen rent? How does it work?
Blau: Everything is on a very bespoke basis, and we're talking to all of our tenants individually and, you know, it takes into account whether they're open or not, the size of the tenant and credit profile, liquidity of that tenant. So we have some of the larger, high-credit tenants that really are not getting anything [aside from] in some cases, some slight deferrals. The smaller retailers, the restaurants and local shops, we're doing everything we can to assist them to stay in business and help them reopen.
Bisnow: What kind of predictions are there for this month? Are you expecting it to be similar?
Blau: I do, because I think that there's an optimistic sense among the retailers that we're going to be able to reopen this month. And if they can just get through this month, then we'll start to turn a corner. I don't think people think we'll be back to normal this month. But I think they see kind of an upward trajectory of business and consumer confidence.
Bisnow: You said that those who can pay rent have an obligation to do that. What have you done with tenants, if you have any, who've tried to take advantage? Have tensions lessened or increased as the months have gone on with this crisis?
Blau: We have taken a relatively hard line on large corporate tenants with real credit and liquidity. I do believe that those tenants have an obligation to pay. We're all in this together, and the only way we're getting through it is if everyone does what they can to make it through this time. There aren't many, but there are a few bad actors that just want to take advantage of a situation. And quite honestly, we're not going to stand for that.
Bisnow: So people tried, is what you saying, and you said, 'No way.'
Blau: And we are not very sympathetic in that case, as opposed to small shops and the restaurants, where we have been very sympathetic.
Bisnow: Neiman Marcus, the anchor tenant at the brand-new Shops and Restaurants at Hudson Yards, has filed for bankruptcy. What's the plan there with that tenant?
Blau: Well, I mean, you really have to ask them. As you know, in bankruptcy, tenants have a right to accept or reject leases. And I think they have 210 days to do so. So we will see. I will say that, prior to the pandemic, the Shops at Hudson Yards was doing terrific and ahead of expectations. I don't have direct insight into the profitability of that Neiman store. But we're waiting to see what their plans are.
Bisnow: So you don't know either way what their plans are, if they are going to stay or they are going to go?
Blau: We have not been notified. No.
Bisnow: Are there other retailers whose leases at the Shops are tied to Neiman Marcus' presence, and how would Related navigate that situation if that in fact is the case?
Blau: A handful of tenants have co-tenancy with Neiman's. It's not a large component. As with most retail centers, there are tenants that are tied to each other. Quite honestly, I think that people are less dependent upon those anchor stores than they were in the past. You see malls around the country that were developed around the department store anchors. And today, I think that is a less relevant concept.
I think a restaurant or a fitness club or a Whole Foods could be as much of an anchor as a department store used to be. And I think other tenants recognize that change. To the extent that we do have any co-tenancy issues, I think the economics of the underlying business will speak for themselves; if they were doing well there — and as I said, most of the tenants were — then I don't think it's going to be an issue.
Bisnow: If Neiman Marcus does go, then what would happen with all that space? It's a lot of space to fill. (Editor's note: Neiman Marcus' store at Hudson Yards spans 188K SF.)
Blau: There are many other tenants or types of uses that could be made out of that space. We'll just have to see what Neiman's does.
Bisnow: You described this moment as a reckoning for retail. Related Chairman Stephen Ross publicly warned last week of a flood of bankruptcy hitting retailers. Do you have retailers in your portfolio that have declared bankruptcy, other than Neiman, or that have indicated they are not reopening?
Blau: We definitely do. JCPenney filed. J. Crew has filed, and J. Crew also owns Madewell, so all those entities are in bankruptcy now. I mean, it's early, so not clear what the outcome of those stores will be. In terms of not opening, I have not directly heard any of our tenants not planning to reopen. Again, it wouldn't surprise me if, you know, throughout our portfolio some of the smaller shops and restaurants decide not to reopen. But we have not received any official notice to that extent.
Bisnow: At The Shops, many of the retailers were selected because they are up and coming. Many of them were starting their first brick-and-mortar locations. Are you concerned that those businesses are more at risk than other established retailers?
Blau: Yes, that's exactly what I'm concerned about. Because they don't have the large balance sheets and liquidity as the larger companies. I think it would be unfortunate if those types of tenants were unable to reopen because, you know, that's what makes New York unique, these great local shops, and it's what makes Hudson Yards special. And as I said, we're going to do everything we can to make sure that those companies survive.
Bisnow: On the office side, Facebook inked a 1.5M SF lease at three buildings at Hudson Yards, which has been considered a massive game changer for the West Side. But then Facebook CEO Mark Zuckerberg recently signaled a greater reliance on remote work in the future. He's not the only one. BlackRock CEO Larry Fink has said remote work could hamper commercial real estate. They're the two main tenants at 50 Hudson Yards, which is the most expensive building in the development. Does it worry you for the building, or for the wider future of office, having those comments out there?
Blau: Well, with regard to the buildings in particular and those new tenants, those are fully committed leases. And no, I don't worry about the buildings or those tenants. With regard to the future of work, I have to say, I vehemently disagree with their positions. I believe that people don't really like working from home. I think it's not productive. I think it's not how innovation and creativity happens.
I think those things happen when people are together and they can brainstorm and they can communicate. I know at our company, a lot of things happen in the hallway by chance interactions. And there's lots of distractions at home and bad WiFi and kids to take care of and dogs that bark. I think having some separation is good for people. Right now, there are reasons to, in the very short term, not go back to the office. Whether it's a pandemic or even some of the recent protest issues. I think it will be a slow return as [we] get past those issues in the short term.
But I think as we look past this year, I think that people will return back to the office in droves. And quite honestly, I think and we know from hearing from our tenants that many tenants are going to look for even more space as they look to de-densify their current spaces.
Bisnow: What's the latest on construction of 50 Hudson Yards? I understand construction started back up recently, but then it was stopped. What's happening right now, and is the 2022 completion date still on the table?
Blau: Well, as you know, the governor has announced Phase 1 opening on June 8. So that will be when all construction sites throughout the city reopen. We've had various projects continue, some throughout this pandemic and some in starts and stops. There were exceptions made for essential construction, some was for affordable housing, some was for safety, security or structural allowances. And so, at 50 Hudson Yards, we operated on a skeleton crew for most of the time as we were completing kind of essential projects there.
Bisnow: So still 2022 at this stage?
Bisnow: What about the second phase of Hudson Yards? Related stopped providing a timeline for the second phase last year. As far as I understand, it used to be 2024. I know that you've said that the dispute over the Gateway Tunnel will delay construction. Now there's the pandemic and the impact of the crisis. Have you reviewed the timeline for Phase 2? If so, how does it look now?
Blau: I'm not sure we actually ever issued a timeline. We continue to work on our master plan for that side. That side will be a combination of office and residential developed buildings. We continue to work on our planning of that now. The Gateway Tunnel issue is something that we continue to have conversations with Amtrak about. And hopefully all that gets behind us shortly and we can continue moving forward.
Bisnow: You are on Mayor Bill de Blasio's Construction and Real Estate Sector Advisory Council, providing advice on how to reopen. What message have you given so far to the administration?
Blau: It's been very productive with regard to construction, which is the subcommittee that I am on, in addition to the overall council. It's been very technical about how we reopen these developments and how to interact with the building department during this period of time and how we keep our workers safe as we go back through to work. So we have provided our best practices for returning to construction work, in terms of safety and protocols and temperature checks and masks and distancing and all the things that you would expect. And many of those ideas were adopted by the city and state as standards for reopening. And so that's been very helpful to have the direct communication with the mayor's office and the building department.
Bisnow: With 40 million Americans filing for unemployment, everyone agrees that affordable housing and workforce housing is even more critical. Related started as an affordable housing developer and now has thousands of affordable housing units across the country. Are there plans to double down and expand on that? And what kind of role do you think a developer like Related plays in dealing with this really persistent problem?
Blau: It's something that has been ongoing and continuous through all of our developments and ingrained in the culture of our business. We are very, very active in an acquisition and preservation and development of affordable housing. I think it is one of the absolute critical components for the success of cities. And we will continue and, to the extent that it is possible, even increase the affordable housing production that we do as a company, because I think it's one of the most important things that we can provide cities, and we directly have the hands-on resources to be able to do that.
Bisnow: Have the rent collections been OK with the affordable housing portfolio?
Blau: For the most part, it has been. You know, every one of these are different. In some cases there are federal, state or local subsidies that help tenants with their rents. And so, to the extent that we're collecting from governments or the tenants are using subsidies that they receive from government, that has been able to help people continue to pay their rent in those portfolios. So collections have actually been OK there, too.
Bisnow: You're a New Yorker, there are stories every day about people leaving the city, reassessing what this will mean for their lives or losing their jobs. Do you have any concerns about the city's future because of that? Its lifeblood is talent. And if the talent doesn't want to be there, it doesn't bode well.
Blau: I mean, of course, we all have concerns, but we've been at this for a long time. And, you know, if I think back, I've had four of these major disruptions in my career, starting in the early '90s.
And every time, including 9/11 and the financial crisis, everyone predicted the demise of New York. 'Everyone's going to move out. No one's ever going to live in high-rises again.' After Sandy, [they said,] 'No one's ever going to be by the water.'
I think this, too, shall pass. And when we get to the other side of this pandemic, people will want to live in cities. I think people like to be together. They enjoy the activities, the culture, the excitement, the gathering, the intellectual capital. Ultimately, I think that there might be some short-term slowdowns in the cities. But I think people will gravitate back to all the things that they originally liked about the cities and New York. Never bet against New York.
Hear more from Blau Wednesday at 11:30 a.m. ET on Bisnow's "Beyond The Crisis" webinar. Click here to register.