By Cathy Cunningham | Commercial Observer
There’s plenty going on in New York City to keep Marty Burger occupied.
From Silverstein Properties’ continued development and leasing of the World Trade Center to its acquisition of Disney’s ABC campus to partnering with Cantor Fitzgerald in an opportunity zone joint venture to launching a debt arm that now has a $4 billion pipeline, Burger, the Silverstein CEO, is rarely bored by Gotham real estate.
And yet, Silverstein recently branched out and made its first acquisition in the City of Brotherly Love, paying $452 million for the trophy office building at 1735 Market Street with partners Arden Group and Migdal Insurance.
Of course, work is not the only thing Burger is focused on. When Commercial Observer met with Burger at 7 World Trade Center in March, he’d recently returned from his annual ski trip to Vail, Colo. with 125 industry peers, including lenders, brokers and developers. The trip is now legendary among a certain elite of real estate professional. Each year the trip has a specific theme, and this time attendees had to dress as an animal of their choosing. This reporter was lucky enough to see a group photo, and my eye went straight to three pink pigs.
“They wanted me to be the big bad wolf but they didn’t tell me in time,” Burger said.
But, unlike the fabled wolf, Burger is intent on raising properties rather than blowing them down.
Commercial Observer: You recently purchased 1735 Market Street in Philadelphia, which was Silverstein’s first acquisition outside of New York. Why did this opportunity make sense?
Marty Burger: It’s a 1.3-million-square-foot trophy asset in the heart of Philadelphia, sitting right on top of transit and right in the center of everything. The new Comcast towers are right next door and it has fantastic tenancy, including Goldman Sachs and Boston Consulting Group. What it does for us is [it] diversifies us outside of New York with another trophy asset. But our management team here will manage it with on-site management and our leasing team here will oversee a local leasing team there. So it’s just an extension of what we’re doing here. I actually spent time in Philadelphia when I was at Blackstone; we bought two office buildings there and I got to learn the market.
What’s the main draw in buying properties outside of New York?
We think New York is the greatest city in the world, but there’s one problem with it; it’s really expensive. When you have world capital looking at New York and trying to buy here, it pushes cap rates down and down and down. So, we have not been competitive in buying New York office buildings apart from 619 West 54th street, which had a life science conversion play. We couldn’t justify bidding what [Chinese conglomerate] HNA paid for 245 Park Avenue [$2.2 billion in 2017]—nor could anyone else. [SL Green wound up purchasing a preferred position in the building.]
But that’s what we’ve been up against. We’ve got fantastic capital from all over the world because New York is such an iconic financial capital and people want a piece of it. You can get a better bargain in Philadelphia, but there are also risks to that. Philadelphia is not as big a market as New York. It’s a smidgen of its size. So, if you lose a big tenant it could take you a lot longer to replace them than would be the case in Midtown. That’s why we chose one of the trophy buildings in the Philly market as it will be one of the last buildings that has an issue. We also have solid tenancy at the asset for the next nine years with very little rollover.
Are you eyeing other Philly acquisitions?
We’re looking at stuff in a number of different markets. That’s all I can say right now.
Silverstein recently announced an opportunity zone joint venture with Cantor Fitzgerald. Can you talk me through how that came about?
We thought the two firms were a good combination. We were the landlords of World Trade Center during 9/11 and Cantor lost more people than any other firm that day. So, we’ve both been very socially responsible about its rebuilding. Cantor was going to launch a fund on their own and thought, ‘maybe we should do this in partnership with Silverstein.’ They thought that it would be great to combine their money-raising abilities and all the different companies they own—like Newmark [Knight Frank] —with a developer like Silverstein. I’ve known [Cantor Commercial Real Estate’s] Michael Lehrman for many years and we got together, cut a deal and ended up being 50-50 partners on everything. Cantor is responsible for raising the money; we’re not a broker-dealer, and they are. Silverstein is taking on the day-to-day responsibility of underwriting the properties and investing our fund money in new development deals with other developers or putting Silverstein projects that happen to be in opportunity zones into this fund. So we’re very excited about it. We have to finish the [private placement memorandum], Cantor will do their thing and then we’re off to the races.
Do you have many properties in opportunity zones?
We happen to have three, just coincidentally.
You launched your lending arm, Silverstein Capital Partners, last September. How’s it going so far?
It’s going great. Michael May [president of Silverstein Capital Partners] has built up a $4 billion pipeline of deals very quickly, mostly in the New York metro area—we haven’t even been out of here yet, but we expect to be. It’s going to be a real business for us, and we’re very excited about it.
Why did you decide to get into the lending business at such a competitive time?
It dates back to 2011, when we were working on our Four Seasons hotel in Orlando, Florida. It wasn’t the best time to do a deal as we were still in a recession and trying to do a new hotel development in Florida—those were boxes that weren’t on any lender’s list. We had some great capital partners in the deal; Dune Real Estate Partners was our equity and the Four Seasons had a lot of money in the deal. So, we were trying to do 50 percent debt and 50 percent equity. It was a $360 million project and we were putting in $180 million. But you know what? We couldn’t get it financed. There was nobody home. Finally, Bank of America and ScotiaBank showed up and said, “We’ll do it, but we need to syndicate it and we need recourse.” We said, “Recourse? We’re putting in $180 million in cash, that’s 50 percent—you need more recourse on top of that?!” Then out of nowhere, [Grupo Financiero] Inbursa came in and financed it for us. Afterwards, we said, “Wow. That was a party of one.” I almost had to put a bank syndicate together with about eight different lenders.
The next thing on the hit parade was when we were financing 30 Park Place—The Four Seasons [hotel and residences, in 2013]. It involved condos and a hotel, so you had lenders who would do the hotel [component] and lenders who would do condo [component] but not many that would do both. There were lenders who would do both for a $100 million project, but this was a $960 million project—a little bit different. We put together a syndicate of three of the largest banks in New York for the senior loan and two of the largest money providers in the world for the mezzanine piece. The negotiations got tedious and the three banks couldn’t get together and figure it out. I happened to have met Martin Fräss-Ehrfeld from Children’s Investment Fund. Martin said, “I’ll do the whole thing” and I was stunned. Who can do a $670 million loan? He hired Jon Mechanic, from Fried Frank, who put together a term sheet very quickly, we got it closed and there’s the building [points to 30 Park Place from his window]. I scratched my head and said, “You know what, if I didn’t have Inbursa or Children’s Investment Fund, how would I have gotten these deals done?”
So, my idea was to come at it from a developer’s perspective. We appreciate what a developer has to go through to close a construction loan; how you have to have a GMP, how the plans have to be finished and the thought that has to go into the planning before you actually put a shovel in the ground and how you underwrite all the parts and how to really mitigate the bigger risks. So, with our in-house expertise that we have—from cost-estimating to development to construction—it just seemed like a natural fit for us to bring someone in on the lending side who could benefit from each of the parts of our company and the in-house expertise.
How are owners viewed as lenders today, do you think?
I think we’re very user-friendly. We’re flexible and we’re not regulated. There might be one or two instances where a borrower says, “you know what, they’re a competitor of mine so I don’t want to deal with them.” But for the most part—90 percent of the time—they say they appreciate what I have to go through and so they’re going to make it easy for me. It’s what Michael May likes to call our “secret sauce.”
What’s your take on the debt markets right now?
It’s a good time to be a borrower. We’re in a really great rate environment and there are many different lenders who have big pockets of money to put out. I just want to make sure from a cycle perspective that lenders don’t get too lax on their covenants and start giving money out willy-nilly. I think they’ve been pretty good in giving money out to the right borrowers—so, sophisticated borrowers and not just people who own land, so they give them money to build something. There’s been a lot more responsible lending this time around than in the last cycle, thankfully.
What keeps you up at night, or gets you up in the morning?
I’ll tell you what gets me up in the morning: Larry Silverstein. He’s got the energy level—forget about being 87—of a 40-year old, and it’s intoxicating. He’s excited to come to work every day and think about and plan what we’re going to do next. He and I are both deal junkies so there are other people here [at Silverstein] who temper us. It’s an exciting place to be because he’s open-minded about so many things and there are so many ways that we can expand our core competencies of development, acquisition, operations and leasing in office and residential properties. And one of the ways to expand is on the debt side, so with Silverstein Capital Partners.
Are you and Larry on the same page when it comes to business decisions?
We talk every day and if we’re not on the same page we have a healthy discussion. He always wins [laughs] but he’s open-minded and always open to hearing my views. He’s been a great mentor to me but we’re also partners and friends.
You’ve been busy on the leasing front at WTC. Tell us about some of the activity.
Yes, when we opened 3 World Trade Center in June we were about 30 percent leased. We had our GroupM, which was our anchor tenant and [occupying] 700,000 square feet. We signed McKinsey & Company [186,000 square feet] and to have McKinsey as a tenant was really special because it’s a firm that does studies about everything and when they did their study on where their global home should be, 3 World Trade Center was the place. What we told them was, have every one of your partners come down here and experience the building and experience Downtown. We did 25 tours for 50 of their partners and they all came through and decided it’s where they should be. And now we’re doing that with other tenants, too.
We also have a tenant called IEX. They were an incubator tenant in [7 World Trade Center] and had this great concept of being the 13th stock exchange in the U.S., and the way they distinguished themselves is that they weren’t going to allow high frequency trading. They started to get some more traction and needed some extra space, so we put them in a partial floor at 4 World Trade Center. They then got [U.S. Securities & Exchange Commission] approval to be a stock exchange and so they became the 13th. [So, they] took an entire floor at 4 World Trade Center.
Hudson River Trading had our 57th floor —with the outdoor deck—and the 58th floor at 4 World Trade and did a beautiful build out. Problem is they grew too fast and so they leased four floors at 3 World Trade instead.
Where do you live?
I live on the Upper East Side. I was supposed to move down here but I was vetoed by my wife, only because I have a stepson who goes to school on the Upper West Side. So maybe when he graduates [laughs].
What’s next on Marty Burger’s agenda?
Getting our opportunity zone venture up and running. Then working on 2 World Trade Center, trying to find a tenant or a way to get it built on spec. It’s something I really want to get done. I want Larry to cut the ribbon at 2 World Trade and know he completed the goal he set out to 18 years ago to finish. It’s very significant for him, for me and for the company.