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05 Mar 2019

Hudson Yards, Related Cos.’ bold, decadelong gamble, is poised to pay off

Crain's New York Business

The first time Jay Cross visited the West Side rail yard was in the spring of 2000, when he flew up from Miami to meet Woody Johnson and complete the deal to become president of the New York Jets. He was tasked with building a stadium on the site. Having previously overseen a new venue, for the Miami Dolphins, he seemed a perfect fit to take on that challenge.

On March 15—19 years later, almost to the day—Cross and other top Related Cos. executives will be at the site again, this time to open the city's most ambitious development in almost a century. Hudson Yards delivered not a stadium but something far more important to New York: modern office space and a long-sought extension of the central business district to the West Side. It also created a residential neighborhood, making it a prototype of the mixed-use district that today's urban planners champion.

"Hudson Yards will create a new way forward for the city and other neighborhoods and show how we can get better and what we can do," said Cross, president of Related Hudson Yards, during a recent tour of the site. "With the investments in infrastructure and technology, we have really brought the smart city to life, and that's more challenging than it sounds.

"The numbers are staggering. Investment in the first phase of the project, built on a platform over the eastern section of the rail yards, has reached $18 billion in equity and debt. Office space exceeds 8 million square feet and within a few years will house 40,000 workers at top Wall Street and law firms, a few tech companies and a consumer company's headquarters. Retail adds an additional 720,000 square feet for stores ranging from Neiman Marcus to Zara. The project includes 428 luxury condos, 108 rental units on an adjacent site and 139 affordable apartments. The Shed, a cultural center, cost $500 million. Related spent $200 million on a public structure named the Vessel and another $100 million on interior art. Property taxes from the development will pay for the $2 billion extension of the 7 line to its front door.

Degree of separation
Not everyone is sold on what Related has produced. A snarky article in New York magazine labeled Hudson Yards a "billionaire's fantasy," and even people who understand the development's importance wonder if it will be integrated into the city or an island unto itself.

"Hudson Yards was an important, farsighted initiative of the Bloomberg administration to extend Midtown west," said Carl Weisbrod, former chairman of the City Planning Commission. "Related deserves great credit for taking the risk to make it happen. But it's going to take awhile before it blends into the city's tapestry. Right now it's a separate enclave."

The idea for the project began in the late 1990s, when people worried that New York could lose its place at the head of the global economy to rivals such as London and Tokyo, largely because of too little and too antiquated office space. Sen. Charles Schumer convened 35 experts to find a solution. Their report, issued in mid-2001, called for zoning changes to spur office construction in several areas, including the Far West Side, and the extension of subway service to the area. "We're trying to lay out a blueprint for where new businesses can grow in New York City and where existing businesses can expand," Schumer said at the time. "It'll be ignored at our peril.

"The rail yards, where the Long Island Rail Road stores trains, also became the lynchpin of an effort to host the 2012 Olympics. The idea, championed by private-equity executive Daniel Doctoroff and Jay Kriegel, a veteran of media companies and city government, was that the Olympic stadium would later be occupied by the Jets and be the catalyst for the subway extension and other development.

"On my second trip to finalize the deal, I was told I should probably meet Doctoroff and Kriegel," Cross remembered with a wry smile that seemed close to a grimace.

Thoughts about new office space and the Olympics were pushed aside by the Sept. 11 attacks, but they were revived when Michael Bloomberg was elected mayor in November and he named Doctoroff deputy mayor for development. The stadium proposal turned into the city's most bitter fight in decades. Opponents ran TV ads funded by the Dolan family, owners of nearby Madison Square Garden, who were worried about competition for their arena. Albany legislators eventually blocked it. But after a timeout for a bicycle trip to South America, Doctoroff returned to work, determined to push through a different plan.

"The West Side has always been the place to expand Midtown," said Vishaan Chakrabarti, who worked with both Doctoroff and later Related, "and the chicken-and-egg problem that Dan cracked was how to pay for the subway with a quasi-tax-increment financing system allowing the sale of bonds against future tax revenues to pay the debt service." The price tag of the subway extension also meant the site would need density to generate enough property tax to pay it.

 

When the MTA opened a competition to pick the developer, the biggest names in real estate lined up. Winning was so important that executives including Douglas Durst, Stephen Ross and Jerry Speyer trooped around the city selling their visions (including presentations to the Crain's editorial board).
Tishman Speyer won the competition in part by boosting its offer to the MTA above $1 billion in March 2008. But within two months, Tishman reneged as the financial markets began teetering and the developer's costly purchase of the Peter Cooper housing complex seemed increasingly troubled.

Related founder Ross wasted no time. He swooped in to take over Tishman's deal, agreeing to all the terms the MTA had negotiated with his rival. "We saw the economy was tumbling," Ross recalled. "I believed that NYC would survive, and usually in bad times people panic and don't see the long term. I've always taken a long-term approach." He hired Cross almost immediately to lead the effort

.The tasks were daunting—two in particular: finding money amid the worst financial crisis since the Great Depression and persuading tenants to go so far west.

Early hurdles
Related's original partner, Goldman Sachs, soured on real estate and dropped out. Cross's connections with Canadian pension funds paid off when the Ontario Teachers Fund's Oxford Development arm took Goldman's place. Related then scrapped plans for a $2 billion fund to provide equity for the entire project, instead opting for individual deals for nearly every building. It now has investments or loans from 40 partners.

Tenants were wary. The city had granted Hudson Yards what amounted to a 40% property-tax discount, and Related pitched the site as a place where firms could occupy the most modern office space at rents on par with aging Midtown buildings. Cross spent countless hours trying to get Condé Nast to anchor the first building. The magazine publisher eventually said no and headed to Lower Manhattan, whose own tax breaks made the rent even cheaper. Coach took Condé Nast's place.

Then the effort stalled. CFOs would buy the pitch, but CEOs said no. "Their eyes would just glaze over," said Related CEO Jeff Blau.

Blau and Cross switched strategies, seizing on the changing nature of the workforces of the companies they were wooing. Older office buildings were a turnoff to the 20- and 30somethings increasingly dominating the ranks of financial-services and law firms. They wanted to work in mixed-use areas and high-tech, high-ceiling spaces bathed in natural light. CEOs came to the conclusion that in traditional space, they could not adequately compete for talent and reinvent how their businesses operated. Jonathan Schiller, Boies Schiller Flexner's managing partner, whose firm moved to Hudson Yards from Lexington Avenue in January, said his lawyers and staff have been telling him they "love the bright and exciting space"—words he had never heard about a law office.

Schiller bought Related's pitch about future-proofing, but the economics were good too. "Our lease is reasonably priced, and we are able to put more lawyers in fewer square feet because every square foot is usable, and we have designed our offices to enhance our productivity and well-being," he said. The firm has been followed by Equinox, Millbank Tweed, Wells Fargo and, perhaps most significantly, BlackRock, the world's largest money manager. BlackRock will pay $60 per square foot when its building opens in 2020. (Acquiring the McDonald's that stood in the tower's way cost $150 million, making it the world's most valuable fast-food joint.)While the CEOs have bought in, others wonder if Hudson Yards' global—as opposed to New York-specific—aesthetic will work in the long run. It is noteworthy that only a few tech companies have committed to Hudson Yards; most have stayed in or gone to Brooklyn, Chelsea, Midtown South and even downtown.

Knitting Hudson Yards to the city will require making it a destination. The Shed, whose chairman and chief fundraiser is none other than Doctoroff, is crucial to that effort. So is the retail, which will include high-end restaurants. Cross knows that leaves out a lot of consumers, even if the top two retail floors are filled with more reasonably priced stores.

"When you build new, it is expensive, and it's hard to make everything as accessible economically as a lot of people would prefer," he said. "We do our best. We are not social engineers. We cannot fix society's ills.

"In addition to the tax break, the city has covered $360 million in interest costs on the subway bonds and more than $200 million in capital improvements. It will be quite awhile until the revenue from taxes pays that back as well as covers the costs of the bonds.
The logistics and the politics of the project also have been complex. To cite two examples, Related built a factory to produce the facades and is trying to use some nonunion labor for the second phase of construction, triggering a war with the building trades. Related President Bruce Beal oversees both efforts.

Next year, Related will begin building the platform over the western rail yards across 11th Avenue, where it plans to erect six luxury condominium buildings. Cross, 66, won't commit to being on board for the five or 10 years it will take to finish them.

Still, it is easy to lose sight of the accomplishment—and Related's singular willingness to take on the enormous risk that it did. The company says it has lured 4 million square feet of office space from Midtown. The competition from Hudson Yards forced landlords to invest in their buildings and spurred the rezoning of Midtown East.

Related, which calls Hudson Yards the city's largest development since Rockefeller Center in the 1930s, has already seen a payoff. Ross had expected the office buildings to break even and the retail and condos to make money. The office space is already in the black, and he has faith in the retail and the condos despite the rise in online shopping and the turbulence in the residential market.

But profitability aside, Hudson Yards has already proved a lot. "It showed that big infrastructure and big development projects could go from conceptualization to completion in a reasonably short period of time in New York City," said Seth Pinsky, former head of the city's Economic Development Corp. "People had lost faith that that could occur here because it hadn't happened in a couple of generations."

Source: Crain's New York Business


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