Indecent Exposure, Luxury Maximalism, Vornado's Meta-Verse & Riverside Rumors

Indecent Exposure

After coming out from under state control in the mid 2010s, German lender PBB was determined to make its presence felt globally. Like so many before it, it was drawn to the siren song of U.S. office and began lending heavily. The bank’s CEO Andreas Arndt made the asset class a key focus, even opening a New York office in 2018. By 2022, U.S. CRE exposure represented a chunky 15% of the bank’s total real estate loan book. 

Rough timing. As of June, the real estate unit’s U.S. exposure, at $5.2B, far exceeds the lender’s total equity of $3.5B, per Bloomberg. The vulnerability to what many now see as a toxic asset class (Bloomberg just dropped a fat primer) has sent bonds and shares into the sewer, and has attracted the attention of activist investors - short interest in the stock has jumped to >17%, per S&P Global.

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Indecent (cont.)

“As a mortgage lender with international aspirations, you have to be in the U.S,” analyst Dieter Hein told the publication. But “there’s a risk from being in a market you don’t know as well as your home country.” 

This desire to play on the biggest stage has brought down many a deep-pocketed international investor (Abu Dhabi’s Chrysler debacle comes to mind), but the appeal of being here remains immense. It was perhaps best articulated by Wu Xiaohui, the former high-flying chairman of Anbang. Explaining to Harvard students in ‘15 why he was betting such massive sums on U.S. trophy real estate (Waldorf Astoria, Strategic Hotels, 717 Fifth), he said:  “If you choose to stay in rural villages, you can only meet common village girls. Yet if you come to Paris, you will have the chance to lay your eyes on the Mona Lisa 💃 .” 

(Wu’s now serving out an 18Y prison sentence for fraud, but that’s another story.) 

Likely Story

I’ve always believed New York 🗽 is the apex mountain of both real estate enterprise and real estate grift. But recent adventures in the Sun Belt are poking serious holes in that theory.

The latest comes courtesy StoryBuilt (catch up here), which is now being sued by its receiver, alleging, among other things, misuse of investor funds and unjust enrichment, per TRD. The one that really pops is that StoryBuilt allegedly raised $6.7M to buy a property and instead put the funds into unrelated projects. It is also accused of taking money from unaccredited investors (so it’s not just Indian doctors 🩺  getting burned this time) and mismanaging funds on behalf of JV partners.   

Luxury Maximalism

Top luxe retailers are going ga-ga for owning their space, and not just on Fifth Ave: WWD reports that LVMH is plotting a showstopping Louis Vuitton flagship on Rodeo Drive, at a site it bought for $245M in ‘18. It had hoped to build a Cheval Blanc hotel there before meeting the NIMBY juggernaut that is Beverly Hills, and now has commissioned designs for a megastore. (I can already picture the endless trips I’ll have to make when the visiting aunties are in L.A. 😭 )  

Cash me Outside

We already know that cash is king at the moment (that powder be hella dry, those walls be hella mature), so no need to rehash that trend: Still, 2 nuggets worth flagging from this WSJ story:

• Jordan Slone’s Harbor Group has spent $600M+ over the past year taking over 7 rental projects: “Given the pressure on regional banks, those extension options were not necessarily available to developers,” said Harbor prez Richard Litton

• RXR/Ares distressed NYC office JV (see a rundown from The Promote here) has already made offers on >$500M of senior debt

Title Talk

There is some (as-yet-unconfirmed) chatter going around in a prominent Whatsapp real estate group that Riverside Abstract’s principals have struck a deal to sell the firm’s assets (such as they were) to prominent nursing home investor Avery Eisenreich. Riverside is 1 of 2 firms named in a DoJ release on the guilty plea of real estate investor Boruch “Barry Drillman,” who in December copped to a $165M mortgage fraud. Below from DoJ on 1 of the deals, in Michigan.

To conceal the fraudulent nature of the transaction, Drillman and his co-conspirators arranged for a short-term $30 million loan, which was used to make it appear that they had the funds needed to close on the loan. On Sept. 25, 2020, Riverside Abstract performed two closings, one for the true $42.7 million sales price and another for the fraudulent $70 million sales price presented to the lender.

Since then, there has been a lot of speculation about Riverside’s future, including talk of some lenders placing it on a no-fly list. There’s been no official communiqué yet from Riverside on this pending deal w Eisenreich, so let’s wait to see what else comes out.

Private Credit Mafia

Love this infographic on Mike Milken’s long shadow on private credit. (For my attempt to document real estate’s answer to the Paypal Mafia, go here.)

Vornado’s Chaotic Metaverse

Live by the Zuck, die by the Zuck. Having Meta as an anchor tenant is both a stamp of prestige and a coffer-enriching premium-rent play. But it is also a monumental challenge, requiring Amazing Yen-level leasing contortions and a steady dose of heartbreak. 

When Meta (then Facebook) first came shopping for space in Midtown South in ‘13, Vornado had a 160K sf spread at 770 Broadway available that it had taken back from Nielsen 📺️ . But Facebook only wanted 100K sf immediately, with the option of expanding later. So Vornado’s in-house leasing czar Glen Weiss rapidly stitched together a short-term 2Y deal with online gambling company High 5 Games for the remaining 60K sf, and it all came together. Then Facebook wanted more space, so Weiss did more tenant buyouts and reshuffling. Its total footprint swelled to about 800K sf. Then in 2022, it was planning another expansion at the property, but bailed.

And now, Meta is shedding some weight (part of a $3B move to slash office costs): On Tuesday, Vornado announced Meta is vacating 275K sf at the property in June. This is space Meta splurged for, too: it is paying $91 a foot currently, per CompStak, a nearly 30% premium over avg. current rents being paid by tenants overall in Midtown South. So not only does Vornado have to fill a big chunk of space at a tricky time to do so, it has to take a reality check on rents.   

Unquotable Quotes

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