Bruce Almighty & Blackstone's Diseconomies of Scale

Bruce Almighty

“Why do we fall, Bruce? So that we can learn to pick ourselves up” - Thomas Wayne

Bruce Eichner has lost a lot of money in his career. His battles with lenders have been long and bloody. He has been forced to walk away from multiple marquee projects (CitySpire, 1540 Broadway, the Cosmopolitan, One Madison) across multiple cycles, so much so that he’s become the Keyser Söze of high-stakes development that players are warned about. And yet, incredibly, he is still in the mix, still radiating infectious enthusiasm for the sport. It’s just the field of play that has changed, from Eichner’s native New York to, of course, Miami.

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Eichner (cont.)

Like his contemporary Harry Macklowe, Eichner employs a cocktail of Borscht Belt humor, creative deal structuring and off-the-charts salesmanship to put himself at the center of the action. When I interviewed him in ‘16, despite knowing the 30Y track record of epic defaults, I found myself taken by his vision for his latest caper, a Flatiron condo tower that too went sideways for years. Eichner has since taken his talents to Miami-Dade’s North Bay Village, where he’s amassed 4.5 waterfront acres w/ redevelopment potential: the latest deal saw him pay $75M for the site that houses Shuckers, w/ Longline Financial (Alex Livingston, Philip Russ) coughing up most of that in the form of a $68M loan 👀 

Eichner’s Continuum already had plans to develop a 200-unit condo on the neighboring site, and the new acquisition could become another condo, plus a luxury hotel and a members-only club. The area’s already brought in a lot of big boys, from a Macklowe/Related Group JV to Masoud Shojaee (easy winner of the “Most Miami dresser” award).

Large condo construction loans in South Florida haven’t been a problem for quality sponsors – Bank OZK has made sure of that. Let’s see if Eichner can convince lenders he belongs in that club.

"When I was a kid and my mom asked what I wanted to do, I said 'I want to be the guy on the phone trading Abyssinia for Mexico,'" Eichner told the Times in ‘94, at the start of another comeback. "Now I realize that these kinds of real estate deals are really what I had in mind."

Blackstone’s Diseconomies of Scale

Size allows you to make a market. It helps you dismiss what for others would be catastrophic losses as a rounding error in a massive portfolio. It allows you lucrative financial engineering opportunities and the opportunity to stay stuff like “reacceleration.” But it also means that when the financial climate changes for the worse, you’re among the most vulnerable – and definitely the most scrutinized.

“This isn’t a time to be a macro player, it’s a time to really understand the real estate,” Oxford Properties (OMERS RE arm 🇨🇦 ) Dean Shapiro told Bloomberg, speaking generally about PE’s real estate playbook. Throwing massive amounts of money at an asset class – something Blackstone, w/ $339B in RE AUM, can do better than anyone else in the cosmos – is no longer a recipe for success. Here’s Bloomberg:

With real-estate yields following interest rates and government bond yields much higher lately, that side of the trade has run out of road. Finding a source of expandable, bulletproof rents — the holy grail of this industry — is the optimal route to profit right now.

“Anybody can go buy anything and benefit from broad market-yield compression and be made to look like a bit of a hero,” says Toby Courtauld, CEO of London office landlord Great Portland Estates Plc. “If you want to generate rent growth, you actually have to know what you’re doing.”

Blackstone has to get a lot more creative to get deals done, such as offering its first-ever BREIT seller financing to KKR on a recent student dorm deal. It has had to guard against speculative secondary traders and investor withdrawal demands, and strike what some have called a painful (but face-saving) deal w/ the University of California, a deal that disrupted RE co-head Nadeem Meghji’s honeymoon on NZ’s 🇳🇿 South Island. It’s taking more construction risk than ever before w/ its megabet on data-center operator QTS, and putting a lot of chips on upscale multifamily w/ its $10B deal for AIR Communities.

Meghji and his counterpart Kathleen McCarthy insist scale is still their best friend: they’ve got $65B in dry powder, and bad news is already “priced in” to property values, per McCarthy. “We’ll be very selective,” she added. “Buying cheap isn’t a strategy.”

(Bonus: Inflated NAVs, hellish disclosures, and mark to magic: If you have an appetite for wonk, this critical analysis of BREIT is worth your time.)

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Spot O’ Bother Across the Pond

Blimey. Another case of AAA CMBS bondholders taking a loss, following the drama at 1740 Broadway. This time it’s at a portfolio of UK regional malls, in delightful-sounding locations such as Kings Lynn, Dunfermline and Loughborough, and it’s notable as the first European case of AAA losses since the GFC. The borrower was Howard Marks’ Oaktree, with GS arranging the debt, which went to special servicing in ‘20. Per Bloomberg, the special servicer has now struck a deal to sell the properties for $40.1M. AAA bondholders are owed $42.5M, meaning that the sale will result in some losses to them and a total wipeout of the lower tranches.

The losses at 1740 back in May rang alarm bells across the U.S. market. “Because we are only in the early stages of office price discovery, we expect this list to expand to include several office deals,” Barclays analysts said at the time. Reminder that nearly 1/3 of U.S. office-backed CMBS is distressed, per KBRA.

Quickies

• 🎥 Your 70s guide to mortgage fraud szn

• Tides (and its principals) sued by AppFolio for failure to pay

• Sales of $100M+ homes on track to double from ‘23 (For more, listen to our Odd Lots ultra-luxury segment here)

• Fatty $430M CMBS for Austin’s biggest hotel 🗝️ (Sponsor Manchester Financial, originator GS)   

• $150M/acre YOLO pricing in Brickell 💃 

• Court strikes down key challenge to Measure ULA, colloquially and misleadingly known as the “mansion tax”  

• Something to watch for: Share of “stranded” CRE assets jumps in Europe due to stricter energy standards 🇪🇺 

• Sakhai bros have dropped $400M+ on NYC office over 18 mos

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