320. From Skyscrapers to Sublets: NYC Leasing Market with Ruth Colp-Haber

On the Trepwire Podcast, hosts Hayley Keen and Lonnie Hendry welcome Ruth Culpaver, president of Wharton Property Advisors, who shares insights from her 25-year career in New York City's commercial real estate market. Ruth discusses her journey from finance to real estate, emphasizing the importance of tenant representation in securing favorable office leases. She highlights the complexities of lease agreements and the evolving dynamics of the market, particularly the impact of COVID-19 on office occupancy and the rise of subleasing. Ruth also touches on the challenges and opportunities within the industry, noting the resilience of New York's real estate market despite recent uncertainties.

• Ruth Culpaver has been a significant player in New York City's commercial real estate market for over 25 years.
• She has completed approximately 500 office leases for various entities, including businesses, schools, and nonprofits.
• Ruth is the president of Wharton Property Advisors, bringing extensive expertise and global connections to the field.
• She is recognized as an industry expert, holding titles such as counselor of real estate and fellow of the Royal Institution of Chartered Surveyors.

"Thank you, Hallie and Lonnie and Jennifer for having me."

• Ruth expresses gratitude for being on the podcast, highlighting her recognition and appreciation within the real estate community.

"I think it's particularly symbolic. We're having this on the fifth anniversary of the COVID shutdown of New York."

• Ruth acknowledges the timing of the podcast, reflecting on the impact of the COVID-19 pandemic on the real estate industry.

• Ruth's entry into the real estate sector was unconventional, coming from a family of physicians.
• She holds an MBA in Finance from Wharton and initially worked as a mortgage trader at Merrill Lynch.
• Her transition to real estate was guided by business advisor Eleanor Sloan, who identified her potential in office leasing.

"I'm actually the first person in my family to go into business. My parents were both physicians and I'm a native New Yorker."

• Ruth's background highlights her unique path into the business world, diverging from her family's medical profession.

"I saw that I wasn't particularly good at the dynamics of big corporate life and I was looking for something more entrepreneurial."

• Her desire for entrepreneurship led her to explore opportunities beyond corporate settings, eventually leading her to real estate.

• Ruth specializes in tenant representation, focusing on advocating for tenants in negotiations with major landlords.
• The commercial real estate market is dominated by large landlords, such as SL Green and Boston Properties.
• Tenant representation involves understanding complex lease agreements and ensuring favorable terms for tenants.

"We do do just tenant rep. We have done a little bit of landlord rep, but we really focus on representing the tenants."

• Ruth's firm primarily focuses on tenant representation, underscoring her commitment to advocating for tenant interests.

"These leases are complicated documents. They're 80 page documents. And there's the rent, but there's also the free rent and the electric and the escalations and the real estate taxes."

• Lease agreements are intricate, with multiple financial components that require expert negotiation to benefit tenants.

• Having a tenant representative is crucial for navigating the complexities of lease agreements and securing favorable terms.
• Tenant representatives provide strategic advice and protect clients from financial pitfalls over long-term lease commitments.
• Ruth emphasizes the necessity of having a broker, akin to having a lawyer in court, to adequately represent tenant interests.

"Every tenant should get themselves a broker to represent them. Otherwise, you know, it's like going to court without a lawyer."

• Ruth compares tenant representation to legal representation, highlighting its importance in securing the best possible lease terms.

"These are also very long term commitment. And let me tell you, even the little expenses build up over a 10 year lease."

• Long-term leases can accumulate significant costs, making expert negotiation crucial to minimize financial burdens for tenants.

• New York is a complex and competitive real estate market, characterized by a mix of large institutional players and numerous small deals.
• Small deals, defined as those under 8,000 square feet, make up a significant portion of the market.
• Small tenants are seen as valuable because they have the potential to grow, benefiting landlords who retain them.

"It is the biggest rats and the biggest race. It truly is. But a surprisingly large percentage of this big market are small deals."

• New York's real estate market is described as both challenging and rewarding, with a large number of small transactions.

"Small tenants grow, and good landlords know that, and they want to keep those small tenants and reap the benefit of that growth."

• The growth of small tenants is advantageous for landlords, as their expansion can lead to increased business.

• The COVID-19 pandemic significantly shifted the real estate market, requiring new strategies for staying informed and navigating changes.
• The pandemic led to increased interest and activity in subleasing as companies downsized or adjusted their space needs.

"The markets have shifted significantly, you know, since 2020."

• The pandemic caused a major shift in real estate markets, necessitating adaptation.

"I got them a 150,000 foot sublet at 55 Water. Water street it was the largest sublease of the pandemic."

• The pandemic saw significant sublease transactions, highlighting changes in space utilization.

• Subleasing is a niche area within real estate that involves more complex transactions but can offer significant savings.
• Subleases are three-party agreements involving the landlord, sub-landlord, and tenant, which can lead to complications.
• Despite challenges, subleases are important for market health and offer competitive pricing against direct leases.

"I gravitated to sublets the same way. I'm just the kind of person that like I walk into a store and I go to the sales rack because to me that's like where all the fun is."

• The speaker has a natural interest in subleasing, viewing it as an opportunity for bargains.

"These sublets, you make less money, they're kind of messy. They're really three party agreements."

• Subleasing is acknowledged as complex and less lucrative but offers unique opportunities.

• Long-term lease structures have helped stabilize the office sector despite pandemic challenges.
• As leases roll over, there will be a need for renegotiation or downsizing, impacting market dynamics.
• The competitive nature of subleases affects lease negotiations and pricing strategies.

"For as bad as it's been with COVID that long term lease structure has really saved them office owners."

• Long-term leases provided stability during the pandemic, delaying immediate market resets.

"Every person that comes in to look to lease space in your building, they're looking at that sixty dollar rent available with furniture."

• Sublease pricing creates competition for landlords, affecting new lease negotiations.

• The real estate market is at a pivotal moment, influenced by the shift towards remote work and evolving company needs.
• The concept of the "urban doom loop" predicted significant declines in building values, partially realized in current market conditions.

"I think we're at the beginning of the end. There has been a second industrial revolution and that is the revolution of work from home society."

• The market is undergoing a transformation due to the rise of remote work, impacting real estate dynamics.

"They came out with this forecast of the urban doom loop and that building values would be going down 54%."

• Predictions of declining building values have been partially accurate, reflecting current market challenges.

• The pandemic has significantly affected New York's office real estate sector, with building values declining, particularly for A minus and B buildings.
• Despite these declines, New York remains a thriving city, with most industries recovering to pre-pandemic levels except for the office sector.
• The office sector is crucial to New York's economy, with a significant ecosystem built around office buildings and workers commuting to them.

"Building values are going down. The A minus and the B buildings, they are going down in some cases 50%. But where they were wrong is New York is thriving."

• The decline in building values contrasts with New York's overall thriving status, highlighting the specific impact on the office sector.

"Our biggest business is the office and all these big office buildings and all the ecosystem that gravitates around that and all the workers coming into the office, it's undeniable."

• The office sector is a cornerstone of New York's economy, emphasizing the importance of addressing its challenges.

• Nationally, office building delinquency has peaked at 11%, which is high but not as severe as initially feared.
• The return to office by major companies like Amazon and J.P. Morgan suggests a potential resurgence in well-located B buildings.
• There remains a significant amount of functionally obsolete office space that needs addressing.

"Delinquency for the office nationally has peaked out at about 11%... that means 89% of the buildings are still paying the mortgage on time."

• Despite challenges, the majority of office buildings remain financially stable, indicating resilience in the sector.

"I think you're going to see a resurgence of well located B buildings. We still have a ton of functionally obsolete office."

• The potential resurgence of B buildings and the need to address obsolete office spaces highlight ongoing challenges and opportunities.

• Recent market uncertainties, including lease terminations and economic factors, have led tenants to pause and reconsider expansions.
• The real estate market is heavily influenced by relationships and external factors like tariffs and immigration, which contribute to the current slowdown.

"Tenants are pausing, they're pausing and you know, do I want to go ahead and make this expansion?"

• Uncertainty in the market has led to cautious behavior among tenants, affecting expansion decisions.

"Real estate is a relationship business... insiders are telling them, well, we think tariffs may have this impact or we think immigration may have that impact."

• The relationship-driven nature of real estate and external economic factors contribute to the current market slowdown.

• Different sectors are experiencing varied impacts; nonprofits are heavily affected, while hedge funds and crypto businesses benefit from market volatility.
• The real estate cycle is typically 10 years, and there is hope for stabilization by 2026.
• Companies are grappling with the implications of remote work and its impact on office space needs.

"Nonprofits, from what I can see, are those that are most impacted... for the hedge funds, the volatility is great."

• Sector-specific impacts highlight the diverse challenges and opportunities within the market.

"The cycles are typically 10 years, the real estate cycle. So we're halfway into this cycle. Hopefully next year, 20, 26, things will stabilize."

• The cyclical nature of real estate suggests potential stabilization in the coming years.

• The adoption of hybrid work models, such as the Tuesday-Thursday in-office schedule, offers a compromise for both employers and employees.
• Companies face challenges in reducing office space due to the need for in-person collaboration and private spaces for virtual meetings.
• Generational differences in attitudes toward remote work create a dynamic challenge for companies.

"We've adopted a hybrid. Tuesday, Wednesday, Thursday in the office. We've been doing that since we came back to the office."

• Hybrid work models offer a balanced approach to maintaining office space needs while accommodating employee preferences.

"A lot of companies, let's face it, they've been trying to take advantage of... let's at least cut our office footprint and save some money."

• Attempts to reduce office footprints are complicated by the need for adequate space for collaboration and virtual meetings.

• Younger employees have a different relationship with screens and remote work compared to older generations.
• This generational divide presents challenges for companies trying to balance remote work benefits with the need for in-office presence.

"The young people have a different relationship with screens than older people do. Their whole life is screens."

• Generational differences in technology use and work preferences impact company policies and office space planning.

• The transition to remote work has necessitated adaptations in office environments, such as the need for Zoom rooms and private phone booths for virtual meetings.
• The office leasing business is facing significant challenges due to the pandemic, including lower occupancy rates, decreased demand, and financial strain on landlords.

"You need zoom rooms or you need private phone booths or whatever so people can be on zooms for those meetings that are not in the office."

• The shift to remote work has created a demand for private spaces within offices to facilitate virtual meetings.

"Eric...was an attorney at Cooley in his practice, a restructuring and bankruptcy attorney. And he was kind of done with big law."

• The speaker's husband transitioned from a large law firm to join the speaker's boutique firm, bringing valuable skills in restructuring and bankruptcy.

• The real estate market is highly leveraged, with many building owners facing financial difficulties due to lower occupancy and increased costs.
• The need to modernize buildings to compete with newer constructions adds to financial pressures on landlords.

"Real estate's a very leveraged business. These owners have mortgages at three and a half percent. And the minute that mortgage comes due...they're looking at this confluence of bad situations."

• Real estate owners are under financial strain as they face mortgage renewals amidst challenging market conditions.

• The Counselors of Real Estate organization provides a platform for networking and professional development in the real estate industry.
• There is a focus on increasing female representation in real estate, particularly in leadership roles.

"The Counselors of Real Estate has made a big push to have women join. I mean, it's a hard organization to join in that their criteria is high, but they've made an effort to get more women involved."

• The organization is actively working to increase female participation and leadership in the real estate sector.

• Honesty, intelligence, and creativity are crucial traits for success in the real estate industry.
• Building a professional reputation and maintaining good relationships are essential, as past colleagues and contacts may reappear in the future.

"It's very important in this business to operate always with honesty, intelligence, and creativity."

• Success in real estate requires a commitment to professionalism and ethical conduct.

"Realize that everyone you work with can come up again in the future and don't burn any bridges."

• Maintaining positive relationships and a good reputation is vital for long-term success in the competitive New York market.

• Interested individuals can reach out to the speaker through their website for further information or inquiries.
• The podcast concludes with an invitation to join future discussions and engage with the content through provided contact details.

"They can go to my website, www.whartonproperties.net, and all of our email addresses are up there and phone numbers, account, etc."

• The speaker provides contact information for those seeking to learn more or connect professionally.