Winston Fisher of Fisher Brothers joined us for an interview. We discussed the positive momentum within the office sector, Local Law 97, the firm’s lending platform, and other timely topics.
Daily Beat: What have you been seeing in your office buildings ever since the mask mandate was lifted?
Winston Fisher: We are seeing a return to the office with real occupancy again. The office traffic patterns definitely indicate a hybrid model with many employees working from home on Fridays.
The notion that hybrid work would reduce office footprints is being dispelled. Unless you’re fully remote, hybrid doesn’t really change much. Tenants are now looking for a different type of space – one that fosters community and mentorship. People want to be in the office.
Daily Beat: The Journal reported in January that physical occupancy at 299 Park went all the way down to 10%. How has the entire portfolio improved?
Winston Fisher: Physical occupancy within our office portfolio has risen to over 50% and continues to go up. It’s important to note that office buildings never achieve 100% physical occupancy.
In 2019, we were likely running close to 70% physical occupancy when accounting for travel, sick days, and vacation. With the numbers in the 50 to 60% range, we are starting to feel really good.
There’s also an energy back to the city. Restaurants are busy. I was just at Del Frisco’s the other night and the old school business crowd was back.
Daily Beat: There has been a lot of talk surrounding “flight to quality” within the office sector. I don’t think location is discussed nearly enough. Jeff Gural recently referred to it as “flight to cool”. What are your thoughts on the leasing market?
Winston Fisher: We did 800,000 SF of leases last year. There’s an old rule in real estate that still holds true today: location, location, location.
Tenants are interested in highly curated spaces that meet the market, so we will continue to see a flight to location and quality. We’ve spent significant money reinvesting in our buildings by adding designed amenities space and upgrading lobbies and public areas.
For example, we added David Rockwell designed amenities at 1345 Park and also signed leases with Wagamama and Quality Bistro. In our building at 605 Third Avenue, we brought in Wagamama, Orange Theory, and a Starbucks. We’re seeing the success of our strategy.
Daily Beat: With regard to the leases that you’ve done last year, what have the Tenant Improvement (TIs) packages looked like?
Winston Fisher: TI packages have been going up over the last 15 years. Back in 2007, they were $40 to $50 per SF and have now increased to $100 to $150 a foot. Free rent was six months and now it’s around 12 to 18 today. We see that stabilizing and the market continues to demonstrate that we are through the worst of it.
Daily Beat: Do you think work-from-home will lose its luster?
Winston Fisher: Employees are already starting to realize that work-from-home doesn’t mean that you aren’t being monitored. Software programs are already being put on computers to track employees. Contracts are also now including a commitment to have childcare at home.
For some companies, work-from-home will be very powerful, but there’s going to be a lot more rigor and structure around how it’s administered, which will change how people feel about it.
Daily Beat: Microsoft owns Team and lots of the software needed for remote work and they’re demanding their employees come into the office three days per week.
Winston Fisher: Agreed. Office space helps foster collaboration. Another consequence of remote work is proximity bias, which disproportionately affects women who are single mothers. People who show up more will have a higher probability of being promoted. This new reality will not translate into the type of loss in space that people are projecting.
Daily Beat: Local Law 97 seems to have unrealistic expectations. Al Gore snipped the ribbon at Durst’s One Bryant Park opening ceremony and the law would deem the building unacceptable. There has to be a different solution here.
Winston Fisher: I deeply believe in climate change – it’s real and manmade; however, when ideology to prove a point dictates policy, you end up with unworkable solutions. Why would you pass legislation when building owners can’t actually institute it? The law is ideologically driven without thought of implementation.
I support smart realistic policies that can reduce transmission and give us the appropriate tools and incentives to execute on the vision of reducing carbon.
Daily Beat: Even the chief sustainability officer at the DOB who is implementing the policy said she’s considering exceptions for larger buildings.
Winston Fisher: The problem with the law is that it’s a response to the political climate. When one party goes right, the other shifts left. The answer is always in the middle.
I don’t support the right that still denies climate change – that approach is detrimental and leads to more radical policies from the left when they have the opportunity to implement it.
Daily Beat: What are your thoughts on 485-w, the potential 421-a replacement?
Winston Fisher: We have an affordability crisis in the city. The existing program has had some success, but the public and private sectors clearly need to work together to think of better ways to get affordable housing built. The right answer always rests in the middle. I think that it’s time for reform that allows for a robust development of affordable housing that is public-private.
Daily Beat: Fisher Brothers announced a $250 million JV with Schroders for a lending platform with affiliate Lionheart Strategic Management in January 2021. How is that coming along?
Winston Fisher: Great. The has already placed more than $250 million. It’s a really nice platform where we’re offering 75% LTV that continues to generate really good risk-adjusted returns. We are not in the loan-to-own business.
We underwrite every debt deal the exact same way we look at an equity deal. It might be classified differently, but since we are putting our money into it, the underwriting is the same.
Our team primarily focuses on national construction and transitional deals. We did the Moxy Hotel and projects in Nashville and Vegas. We’ll end up with somewhere between a 13% to 15% IRR with healthy and safe returns.
Daily Beat: And the mezz piece on the Tribeca Clock Tower condo?
Winston Fisher: Many in the market were scared of condos, but got in at a good basis and lent money at a price that’s a no brainer to clear. We’re capable of understanding the asset value that we’re lending on and the deal ended up being a very nice loan for both parties.
Daily Beat: You also lent $35 million on a multi-family development at Gotham’s 550 10th Avenue.
Winston Fisher: Excellent sponsorship and good basis. We’re very comfortable with multi-family in New York City.
Joel Picket, their head of development, is someone we know very well. The most important thing is to be comfortable that you’re going to get paid back. We’re not sharp elbowed and are not looking to take over properties. Our team is just focused on providing really smart loans.
Daily Beat: With so many alternative lenders out there, some people are getting very aggressive, but it sounds like you’re avoiding that and not going under 70% LTV?
Winston Fisher: If you have a strategy, stick to it. My dad always said, if you’re gonna hit on 16, always hit on 16. Don’t switch it. Your odds worsen when you start deviating from your strategy. If you don’t have conviction, then make a conscious effort to change it, but don’t just chase yield because that’s how you get in trouble.
Daily Beat: If you had to hold a REIT for 10 years. What would you buy?
Winston Fisher: I really like Blackstone Mortgage REIT. It’s got a really healthy dividend yield. They are really smart people who run an excellent process with their loans. Cashflow as king – we’re old school!
Daily Beat: What shows are you watching these days?
Winston Fisher: I really enjoyed Yellowstone and am watching Marvelous Mrs. Maisel too.
*The interview has been edited and condensed for clarity.