Ran Eliasaf  0:00  

Not every office building can be converted to resi. Some of them are too deep with the floor plates you don’t have, they don’t have the right, you know, air and light, especially if it’s some block building, maybe the column spacing, you know, is limiting. So a lot of these office buildings simply cannot be converted to resin, or they can maybe, but it’s not going to be economically to do it. And then the other is that that size? Well, that can it’s a very complex undertaking. Sometimes you have to create light shafts. So you have to open you know, these, you know, atriums inside the core to create the light and air. You have to move risers open up risers, sometimes you have to, you know, realign the elevators, lobby entrance, a lot of complex, heavy work in replacing the windows, installing the HX systems. So it’s a big undertaking, it’s probably more complex to convert an office building to resi than it is to build ground up. And the thing is, you have these unknowns once you open up the walls, you have these, you know, unforeseen conditions, I’m seeing conditions that that that’s where the general contractor contractor might spike up is pricing with change orders, so it’s not easy.

Announcer  1:13  

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross  1:32  

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. 

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Today, my guest is Ran Eliasaf. Ran is the founder and managing partner at Northwind Group. Ran founded Northwind Group in 2008. And oversees all company investment activities across its equity and debt strategies. Today Northwind group has over $3 billion in assets, assets under management. And in just a minute we’re going to speak with Ran Eliasaf off about the rise of office to home conversion in commercial buildings. 

But first a quick reminder, if you like our show, CRE PN Radio there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see our handsome our guests arm, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe with add on welcome my guest Ran Eliasaf off Welcome to CRE PN Radio.

Ran Eliasaf  3:27  

Thank you for having me there.

J Darrin Gross  3:29  

I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Ran Eliasaf  3:39  

Sure. So I actually grew up in Israel, and I founded Northwind in 2008. After I finished my service in the Navy, I served for six years in the Navy as a captain of the battleship and in 2008 financial crisis and I emerged and I launched a very small initial fund that targeted buying distressed debt predominantly on grocery anchored shopping centers and to southeastern Florida and Texas I started flying a lot to the US ended up moving here in 2012 with my wife and son shifted towards Manhattan real estate development ground up condo conversions, and then in 2014, another evolution towards income producing value add properties mostly multifamily and office and in 2017. Pricing and risk started to not make sense. And we stopped doing equity investments in New York and we started lending basically utilizing all the knowledge we’ve gained on the equity side. And we started to deploy capital on the debt side. And that’s what we’ve been focused on since mostly we manage right now three debt funds and our debt funds mostly finance residential properties in New York City and under major gateway cities in the US.

J Darrin Gross  5:08  

Yeah. Well, that’s a quite a, you know, a little background there from a standpoint of So you started off in the debt side, and then you you did get into the equity side and doing ground up construction?

Ran Eliasaf  5:25  

Yes, they started on buying distressed debt. Yeah, became owners of properties, then went into hardcore kind of development prior and deals between I would say, 2011 to 2014. In 14, we kind of stopped doing hardcore development and started doing more existing income producing value, add property, right. And then in 17, shifted, again, towards lending. Basically, all these shifts, and evolutions were the reason or the rationale was the risk. We felt the risk was too high. And the reward was too little on what we were doing before if it was development, and then in, you know, on the equity side, then, and since 2017, what made more sense for us on a risk adjusted return is the debt and providing that mostly first mortgages on residential properties.

J Darrin Gross  6:16  

Yeah, no, I love the ability to pivot like that. Not easy and no, but but just having the the, you know, the understanding that you can, I think, you know, most people I find are, are one way or the other. I haven’t, I don’t know that I’ve talked to anybody that’s, that’s been able to shift from debt to equity to back to debt. As far as the strategy goes, when you’re doing.

Ran Eliasaf  6:43  

Sorry, we tried to ask ourselves a very simple question. And that is, does it make sense? And if the answer starts to be maybe, then we stopped doing it. And then we think What does make sense? Well, and what I found, sorry, and what I found out is that there is capital for any type of transaction, as long as it’s the right, you know, risk profile and the right return. And a lot of the times, unfortunately, especially development deals in New York, the return profile was not adequate for the risks. Now,

J Darrin Gross  7:22  

so when you were when we initially started, you raising capital Did you have a fun than when you did the debt in the beginning, when you’re buying the distressed debt.

Ran Eliasaf  7:33  

So the first one that I launched, was on the smaller side, and we raised it from the family office, I opened shop. And so I opened up the shop inside a family office, and then we raised the initial capital from the clients of the family office. And then we went out to more, you know, other circles ended up also raising capital from institutions, pension funds, insurance companies, and you know, grew my relationships that way that was deal by deal and, you know, asset by acid.

J Darrin Gross  8:02  

And then did you ever do any kind of syndication with some of the the value add strategies? Or have you always been a fun model?

Ran Eliasaf  8:11  

So yeah, so when I shifted, so the fund money initially, the first fund was the funded by distressed debt on grocery anchored shopping centers. And then when I shifted to New York real estate, doing equity deals, it was really deal by deal syndication, we found a deal, it made sense. We signed a contract and then we went to our network of investors and raise the capital on a deal by deal basis. And then when we shifted again to that strategy, the first few deals were directly below by deal kind of syndication. And then we launched our first one, which enabled us to grow and then since then, on the debt strategy, it’s purely committed funds

J Darrin Gross  8:49  

on it, and as far as the the asset classes, you mentioned the original kind of grocery anchor, talked a little bit about multifamily, where the development deals were those primarily multifamily or what were the development.

Ran Eliasaf  9:04  

There were some of them were condos for sale condos, and actually my largest equity deals were office, we’ve gone about a million and a half square feet of office in New York City. We’ve bought one in 2014, then 2015, and then 2017. And we sold all of them. We sold one in 2018. And then the last office building the large we had a million square foot office building. We sold it in December 2021. So it’s a building we bought for 300 million, renovated it and sold it for 850. Wow.

J Darrin Gross  9:41  

Well, that’s the good math compared to some of the stuff I’m rereading about now with some of the office stuff was a

Ran Eliasaf  9:47  

really good execution. I have to give credit to it. We were coded up with another superb operator and it was just a good execution from start to finish and the stars were all aligned, the buyer kind of came out of nowhere at the end of 2021. And we didn’t expect to sell it. And the building was fully leased. We fully leased it to New York City and to the SEC, and some other, you know, commercial tenants. And so they bought it, you know, with 98% occupancy with, you know, long leases the city and the SEC had like 20 plus year leases.

J Darrin Gross  10:23  

Pretty strong tenant list there, they take it out. That’s pretty good, better, but alright, so. And then right now, as far as your your fun goes, Are you when you’re buying debt? Is there any particular asset class, he kind of made the statement? Does it make sense? Is there a specific asset class that you focus on for your focus on

Ran Eliasaf  10:50  

On residential, so overnight for some of our loans on a residential, both multifamily rentals and for sale condos, about 70% of our loans are in New York City. The other 30% are in major gateway cities. So we’ve done loans in Miami in Houston, Chicago, we’re doing a lot in Philly now, Philadelphia, and we’ve we’ve only want done one loan on an office building, it’s been fully paid off. We don’t do loans on retail properties, pure retail will do a mixed use. I mean, if there’s retail on the bottom, and resi on top, and some of our loans are kind of pre development landlords. But I would say the vast majority is loans on existing buildings, we do a lot of what we call completion loans. So building a project, either multifamily or a condo is has been built, it’s about 70, maybe 80% complete, and there for a variety of reasons, they need to take out the existing construction lender, we would come in and take out the existing construction loan provided loan and the funds and time needed to complete and then our take out is either a refinance the sale of the building, or if it’s a condo, that a sale of the individual units into the market.

J Darrin Gross  12:04  

Got it. Got it. And as far as that, that I guess the demand for your lending. Have you seen a an increase since 17.

Ran Eliasaf  12:19  

We’ve seen a huge increase in the last year and specifically in the last six months. And it’s mostly during driven by the fact that commercial banks have scaled back dramatically, and some of them have stopped completely lending. You know, since we had the crash of Silicon Valley Bank signature and Fourth Republic, so a lot of the banks are on the sidelines. And that opens up the field for that funds like ours to provide the capital needed. So we actually, we see a surgeon in the in the needs side on the demand side for the world for a loan product, we’re obviously more expensive than a commercial bank. Because we manage the funds of our investors. But we couldn’t be more flexible. And honestly, in these days, our main advantage is that we’re open for business and we’re lending

J Darrin Gross  13:07  

ya know, there’s always the you can talk all the rate you want. But if you can’t get a loan, it doesn’t matter. Can I be able to get the capital? What’s an average length the term on on the loans you’re doing?

Ran Eliasaf  13:22  

Our loans are typically one to three year term, we can go slightly longer, we normally wouldn’t do do shorter than a year. And the rates, you know, start that so four plus five and you know, all the way up to sofr plus eight or nine if it’s a higher risk or kind of more complex execution. So pretty standard for for, you know, a bridge lender.

J Darrin Gross  13:48  

Got it. And as far as the structure of your capital, is it 100% investor raised capital that you’re lending or do you guys that have

Ran Eliasaf  13:57  

constantly we have we manage closed end funds, so it’s a closed end fund on a commitment basis and about half of the capital in our funds is committed from institutions, insurance companies, pension funds, you know, and then the other half is, you know, family offices, ultra high net worth and some fun foundations. Karen, Karen so rates from all your IRAs and people can do this through their IRAs as well.

J Darrin Gross  14:26  

Okay, what’s what’s like a minimum investment for your your fund?

Ran Eliasaf  14:32  

Half a million. Okay.

J Darrin Gross  14:35  

Got it. So, let’s talk a little bit about the the office or the office space here, the asset class

Ran Eliasaf  14:47  

so office I’ll talk mostly about New York City but it’s relevant to most major urban markets in the US are we seeing is that the class A office buildings are doing okay, and Some of them are even doing phenomenally. And then the real pain starts in the class B, especially, you know, data properties and secondary locations, even if it’s an even if it’s a major market, like New York City, if it’s a secondary location, like, you know, you know, south of Times Square in the garment district, if it’s a Midmark building, those are suffering financial district and to a certain extent, and the pain is not only in the equity. Now, it’s also on the debt side on some of these projects. So if somebody bought an office building five years ago, paid six aren’t a foot, put some more money into renovations took a loan of about, you know, half that, so it’s conservative leverage at the time, maybe the loan is 300 bucks or so the problem is, if it’s a Class B property, it might be worth only 300 bucks a foot or maybe less. So we started to see keys being handed back to lenders, and we’re starting to see loans being impaired. And there’s serious trouble. And, you know, one of the topics we wanted to discuss here is, you know, office to residential conversions. So the first thing, not every office building can be converted to resi. Some of them are too deep with the footplates, you don’t have, they don’t have the right you know, air and light, especially if it’s a mid block building, maybe the column spacing, you know, is limiting. So a lot of these office buildings simply cannot be converted to raising it, they can maybe, but it’s not going to be economically to do it. And then the others that that size, well, that can it’s a very complex undertaking. Sometimes you have to create light shafts, so you have to open you know, these, you know, atriums inside the core to create the light and air, you have to move risers open up risers, sometimes you have to realign the elevators, lobby entrance, a lot of complex, heavy work in replacing the windows, installing the HX systems. So it’s a big undertaking, it’s probably more complex to convert an office building to resi than it is to build ground up. And the thing is, you have these unknowns, once you open up the walls, you have these, you know, unforeseen conditions, I’m seeing conditions that, that that’s where the general contractor, contractor might spike up is pricing with change orders. So it’s not easy. There’s about in there exceeded, there’s about 6 million square feet that’s being converted right now, from office to resi. And that’s great. But that’s a drop in the ocean, compared to the vacancy that exists, you know, the statistics, talk about, you know, 50 million square feet vacant, maybe a little bit more. So, maybe 10% of it is gets gets converted, what happens to the rest, hopefully, the market bounces back in a few years, it’s going to take time, probably going to take two or three years. I believe work from home is not going to stay, people are more efficient working in the office, but it’s going to take time to do it. And and in that timeframe, this next two to three years, there’s going to be a lot of pain. And unfortunately, some properties will or some property owners won’t survive in if somebody bought the building in the 80s. And 90s has an unlevered or very low level. That’s not a problem they’re gonna see to their side. But the problem is, you know, whoever purchased in the last five or even 10 years, probably overpaid, and probably over levered, and, and now he might be in trouble.

J Darrin Gross  18:30  

Yeah, on all that. I mean, it’s hard to argue with. If he if he got a vacant building, and you got to refinance or something like that, I could see that the key is going back to the bank. With with the financing that you guys are involved in. Have you had any of these types of conversion projects presented to you?

Ran Eliasaf  18:56  

Yes, we’ve looked at a couple, even more than a couple of we’ve looked at three or four, just in the recent few months, we have not transacted on any of them yet.

J Darrin Gross  19:06  

Because you mentioned you know, numerous challenges, you know, from from the Windows light, you know, and just the reconfiguration Is there any any kind of a shortcut or any kind of a an easier way to identify a building that is a good fit for conversion as opposed to one that’s likely not?

Ran Eliasaf  19:35  

Yes, there are a few so a corner building would fit much better than the mid block building. Then floorplate you want to floorplate on the smaller side so under 10,000 square feet, foreplay is much easier to convert than it is 20,000 square foot floor plates are bigger. Column spacing today important do you want wider column spacing you know? You have 20 feet That’s great. And then how, what’s the current age vac systems? And the current locations of risers and elevators? Those are, I would say the top things you need to look at.

J Darrin Gross  20:17  

Do you think that as we go forward, that the ability to convert a structure from one asset class to another will be more baked into the design? Based on,

Ran Eliasaf  20:35  

I think that we’re not going to see a mass conversion, without some sort of structured incentives from municipalities, you need to create some sort of tax incentives on the property tax side, especially in a city like New York, where property taxes are, takes a big chunk of your p&l. So I think that’s where we need to focus on and against sin, like New York has a supply shortage right now. resi, nobody’s really built new stuff since COVID. It maybe a handful of projects really are everything we’re financing. Most of it is properties and projects that started pre COVID, right in beginning of COVID, and are now you know, getting towards the finish line. But in order to create a mass conversion, it, you need to create incentives for developers to do it, because most projects on their own very marginal on their on their profitability. Right, especially with the high interest rate environment we

J Darrin Gross  21:33  

have right now. Right now, I mean, that’s kind of the thing, it’s partially by design, they’re trying to slow everything down. But it does make it difficult for anything to really pencil.

Ran Eliasaf  21:44  

Think about it, you’re slowing construction down, what you’re really doing is limiting new supply, cities are growing population is growing, you’re not adding more supply. So what happens to the rents rent goes up. Right? Right. And then you create more inflation. I mean, people spend more than a third of their salary on their housing, right? Some people spend 50%. So if they don’t create, if we don’t create more supply, for the ability won’t happen, it doesn’t matter where interest rates will be, your interest rates can be 20%. If you don’t create more supply, you’re not going to stop rents going up. And right now, you have a double whammy effect where, you know, because mortgages are expensive. So people buy units less. So guess where they’re going, they’re going to the rental, right? You have any more people looking to rent on a reduced amount of inventory. So demand is up, supply is down, prices go up? It’s basic economics. Yeah, no,

J Darrin Gross  22:41  

I love the supply and demand, where they meet, that’s the market, you know, kind of pretty easy. Let me ask you, you know, during COVID, there was a least a sense from from afar that New York City was a lot of people moving out that that you know, either going south or it was kind of more like a remote work. People are fleeing kind of thing. At least that was a that was

Ran Eliasaf  23:10  

two years. It changed dramatically.

J Darrin Gross  23:13  

Okay, and so now,

Ran Eliasaf  23:15  

okay, you walk, you walk, the sidewalks are full hotels are full. Tourists are back. People are not back in the office, that that’s the only thing that’s missing. I mean, I think usage wise, the numbers around 60%. Again, some buildings are doing better than others. And most firms are back three days a week, not full, you know, five days, we’re back five days a week, but most firms are not. So that’s the only thing missing by the city’s back, you fill it on the streets, you fill it in retail, you fill it in hotels, occupancy is over 90% on hotels, average daily rates are high. Your restaurants are full but and then maybe the most important data point is the city is growing again, after it lost 40 50,000 people a year in COVID. Now, the last statistics, statistics, I saw that the city is going to grow about about about 100,000 people in the next two, three years. And I’ll throw more one more data out there. So it’s growing, it’s gonna grow by about 10,000 people, let’s say let’s say in three years, it’s only adding about six to 8000 units a year. That’s not enough

J Darrin Gross  24:28  

Not keeping up. So you mentioned kind of the the local government you know, kind of one that can really kind of juice the the demand and the supply from the standpoint of of if they ease restrictions or make it easier to build a feel like that would be a big a big boost to the supply side.

Ran Eliasaf  24:54  

Two things they can do or shouldn’t be doing. One it’s one a harder one is easy. The hard one as, you know, reduce price of land, right? How can you do it, it’s very difficult unless you want to create, you know, kind of joint projects that the city provides the lands for free sort of speak and exchange developer builds, it’s it’s like a BLT to kind of build, operate and then transfer back sort of what they did in the 60s and 70s. That’s less likely to happen, where it’s more easier, although it would be ideal, right, provide the land and that’s built. What’s more easier is providing tax incentives, and, you know, creating, you know, bringing back programs like 421, A, where you get a tax break, or you get a protection against tax escalation for for, you know, 10 or 15 or 20 years in exchange 20, or 30% of the units have to be affordable. Right? Right. All these programs should be reinstated and pushed hard. So it creates an incentive for developers to build right now. We’re interest rate where land prices are, where cost of material and construction and labor as an interest rates doesn’t make sense to build really,

J Darrin Gross  26:10  

right, right now it goes right back to your questionnaire doesn’t make sense. And that’s a no. So let me ask you, you mentioned these tax incentive programs, are they currently not in place in New York City

Ran Eliasaf  26:23  

421 A expired? Okay, politicians are fighting over it, and it has not been reinstated. So it’s currently expired.

J Darrin Gross  26:32  

Got it? Now that that’s, you know, I’ve always viewed tax policy as kind of a means to creating behavior. And, you know, when, when use that’s kind of, you know, people will, will go towards that that’s beneficial to them. So if you can incentivize the construction that would solve for your, your homes, or the demand for homes. And it seems like a win win. So on trying to think on some of these conversion projects, can you describe kind of the, the timeline, one will be looking at as opposed to if they’re going ground up new construction,

Ran Eliasaf  27:21  

we talked about the same time, it’s gonna take two, up to three years to do it.

J Darrin Gross  27:27  

Okay. Okay. And as far as the New York City is there, much of a boom and a bust cycle, just based on the constraint of land is there,

Ran Eliasaf  27:43  

it’s more volatile than people think. But then, if you look at the residential, in 2008, for example, the market almost completely stopped for six months, no transactions, and then it bounced back really quickly. So New York is volatile, but it’s shorter timeframes. And then it bounces usually before and faster than other markets in the US. Then, but then you have certain segments where you have a pain point that takes time to solve like, retail, which hurt from the last five years, and now is finding a new equilibrium. Man, it was hotels, now it’s obviously back. Now it’s office. So every time you have an asset class that kind of suffers a bit where we’re just some sort of shift that happens from external reason, right? Can we do because of E commerce? Hospitality was COVID offices now you know, work from home post COVID. Every time there’s an external reason. So these risks, these black swans they happen and then they hurt a certain asset class residential is a bit tougher to disrupt because they all get to live somewhere. But even that, usually what hurts revenue is supply over supply. Which is true. Right now. Maybe in some other parts of the country. Maybe South Florida is starting to be an oversupply. Maybe some parts of Southeast New York right now feels under supplied.

J Darrin Gross  29:05  

Right. When I think New York is such a unique marketplace, just based on the the concentration of of people and demand. And, you know, the more of the vertical city rather than the spread out.

Ran Eliasaf  29:22  

National it’s a global financial center. Yeah. political center with the UN, it became a global tech center. It’s definitely a cultural center. So there’s a lot of academic we know top notch University. So there’s a lot of reasons, different reasons for people to be in New York. Right after we create this market, probably impossible in our lifetime.

J Darrin Gross  29:46  

No, agreed, agreed. IRan if we could, I’d like to shift gears here for a second by dam an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk and There’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s done an option, we’ll see if there’s a way we can minimize the risk. And if we cannot avoid or minimize, and then we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. And as such, I like to ask my guests, if they can look at their own situation, could be the market, the Fed, you know, supply chain, whatever, whatever it is that that you’re focused on as far as risk and identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Ran Eliasaf, what is the BIGGEST RISK?

Ran Eliasaf  30:51  

Our biggest risk is determining the value of the collateral we’re lending on? It’s never a scientific answer. You can get all the appraisals, you want third parties and all of your internal knowledge. But eventually, a value of an asset is only what somebody else would be willing to pay for it as a term at a certain point in time. So we spend a lot of time on the writing and diligence thing and trying to determine what’s the value and then what’s our LTV, what’s our loan to value. And that’s where we focus most of our engine, that’s the biggest risk, because if you gave a loan and you find you’re at 50%, LTV, and then you realize you’re at 80 or 90, then then that’s that’s a big problem. That’s a big risk. What we do to mitigate that risk, first of all, we lower their LTV. If you know two years ago, we learned that 65% LTV, now we’re more around 54% LTV to we kind of focus on asset classes that are less volatile, like residential in New York City where there’s, you know, yeah, prices can shift. But the chances of, you know, the value of residential in New York dropping 50% is less likely than it is for an office building, for example. And that’s where we’re the biggest risk for us. And that’s where we focus on

J Darrin Gross  32:11  

Iran, where can listeners go if they’d like to learn more or connect with you?

Ran Eliasaf  32:14  

They can follow on LinkedIn, my profile on LinkedIn, my name Ran Eliasaf, off, and if anybody wants to connect, you can message me there and I always try to respond in a timely manner.

J Darrin Gross  32:27  

Awesome. Ran, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot and I look forward to doing it again soon. Thank you there. All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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