The Poster Child of the Real Estate Bubble
October 16, 2006, 5:01 P. M.
Rob Speyer had spent hours pacing the small conference room near his office on the seventh floor of 50 Rockefeller Plaza, trading locker-room jibes and stories about real state deals with Paul A. Galiano and Fred Lieblich, when the telephone finally rang.
Speyer, a thirty-seven-year-old with a marathoner's lanky build; sandy, close-cropped hair; and a machine-gun laugh, was the heir apparent to Tishman Speyer Properties, an international real estate company that operated on four continents and controlled some of New York City's most enduring icons, from Rockefeller Center to the Chrysler Building. For ten weeks, he and his colleagues had labored over a bid for a property whose size was almost unimaginable in densely packed Manhattan: Stuyvesant Town-Peter Cooper Village, a complex of 110 buildings with 11,232 apartments spread across 80 contiguous acres south of midtown, overlooking the East River.
Galiano, at forty-one years old, was Tishman Speyer's intensely focused co-chief of acquisitions. Lieblich was president of BlackRock Realty Advisors, forty-five years old and a partner in the prospective deal. They had formed a friendship with Speyer as they read the financial history of the rental complex and engineering assessments supplied by the seller, Metropolitan Life Insurance, or as it is known today, MetLife. By noon that day, they submitted their offer. They were up against an international who's who of real estate and finance that had gathered in New York for what promised to be the biggest real estate deal in history. Nearly a dozen rival bidders from around the globe were gathered in similar rooms high above Manhattan waiting to learn whether their multi-billion dollar offers had won the day and if they would spend the night negotiating contractual details of what would be the largest transaction in American real estate history.
The stark white walls of the Tishman Speyer conference room yielded nothing as the hours ticked by. One minute Speyer exuded the cocky confidence of a tycoon who prowled the world making deals, the next he wondered what might have gone wrong as a dark cloud of self-doubt descended over the conversation.
Then with the evening shadows gathering over Fifth Avenue, the phone rang a second and third time. Speyer snatched up the receiver and heard the voice of Darcy A. Stacom, the real estate broker conducting the multibillion-dollar auction of Stuyvesant Town-Peter Cooper Village.
Stacom, who was forty-six years old and a rare woman in the testosterone-fueled world of high-stakes real estate deals, quickly got to the point: "C'mon down to Two Hundred Park, now." But she warned, "Don't bring your whole team together. Come in ones and twos in case any reporters have staked out the lobby of the building." Two Hundred Park housed MetLife's law firm, Greenberg Traurig, and at the top, MetLife's ornate, old-world boardroom.
Stacom had not offered him congratulations, but Speyer knew what the call meant: If they could get through what promised to be hours of arguing over the final terms of the contract, Stuyvesant Town-Peter Cooper was his. He let out a yell as he put the phone down, almost simultaneously pumping his fist and hugging Galiano.
Speyer and Galiano took the elevator to the ground floor and marched out the Fifth Avenue doors of the building, past the fifteen-foot bronze statue of a heavily muscled Atlas carrying the world on his shoulders. Speyer was under his own mythic strain and would remember little of the eight-block walk downtown.
Although not nearly as glamorous as Rockefeller Center, Stuyvesant Town held a pride of place in the minds of many New Yorkers. Stuyvesant Town, and its sister complex Peter Cooper Village, was unlike the real estate properties that seemed to trade like pork bellies on a daily basis in cities from Atlanta to Los Angeles, Boston to Dallas and Seattle during what was now a five-year-old real estate boom like no other in its intensity. Stuyvesant Town-Peter Cooper Village covered eighteen blocks of some of the most valuable real estate in the world.
The two complexes, which were erected by Metropolitan Life in what was once known as the Gas House District, were an urban version of Levittown, an inspiration for housing in the 1950s and 1960s that broke up the street grid rather than conformed to it, while keeping city life affordable to the middle class.
In 2006, there were not eighty, or even twenty, contiguous acres available anywhere else on the thirteen-mile-long island of Manhattan, no matter what the price.
And Stuyvesant Town-Peter Cooper Village, despite its blandness, had been a safe, leafy oasis for thousands of middleclass firefighters, nurses, union construction workers, civil servants, writers, police officers, secretaries and even a few judges for nearly sixty years. For many New Yorkers, the complex had become a cherished landmark akin to the Empire State Building, the Statue of Liberty and Rockefeller Center. Early in their careers, Mayor John V. Lindsay, sportscaster Howard Cosell, reporter Gabe Pressman and presidential adviser David Axelrod had made their homes there. So had author Frank McCourt, mystery writer Mary Higgins Clark, actor Paul Reiser, operatic soprano Beverly Sills and Knicks basketball star Dick Barnett.
In 2006, hundreds of original tenants, many of whom had moved to Stuyvesant Town when it opened in 1947, were still living there. Thousands more had grown up in those twelve and thirteen-story buildings and were now raising their own families in Stuyvesant Town-Peter Cooper Village.
"It's one of the most unique assets in the city," said Lieblich, who had himself lived in Stuyvesant Town when he was a MetLife executive in the 1990s. "A lot of people know of it. There's a lot of fond memories."
Speyer and Galiano settled into a small fifteenth-floor conference room at 200 Park Avenue off the main reception area at Greenberg Traurig, soon to be joined by Tishman Speyer's lawyer, and two associates.
Finally, at about nine thirty in the morning on October 17, they finished. Speyer had a $400 million nonrefundable deposit wired to MetLife for the biggest real estate deal of all time. He and his partners agreed to pay an astounding $5.4 billion — $70 million more than the number two bidder — for a single asset. But that was not the total price tag. When all the acquisition costs were tallied, the sum would total $6. 3 billion. Ultimately, the money would come from banks, foreign and domestic pension funds, a foreign government and the Church of England. A tiny fraction of the money would come out of the well-lined pockets of Tishman Speyer or BlackRock. Both firms traditionally bought property with what is known in the business as OPM (other people's money). They largely made their money on fees — asset fees, management fees, partnership fees, construction fees — while putting up only a sliver of equity, if that. Of course, no pension fund or wealthy family would invest with Tishman Speyer or BlackRock simply for the privilege of paying fees if the firms did not consistently generate annual returns on the order of 20 percent. Of the total cost of $6. 3 billion, Tishman Speyer put up only $56 million of the firm's own money, less than 1 percent of the winning bid, with another $56 million coming from their longtime partner, the Crown family of Chicago.
The deal immediately created a media storm of headlines around the world, generating editorial comment from the Agence France-Presse, the International Herald Tribune, National Public Radio and Bill Maher at HBO.
The New York Post put it succinctly: "$5. 4 Bil Stuy Town Deal Shatters Record." Rob told the tabloid that "the opportunity to buy 11,000 units in Manhattan is what you live for."
Elated but tired, Rob called his father, the real estate magnate Jerry I. Speyer, to deliver the news in a voice scratchy with fatigue.
The two men quickly divided up a list of courtesy calls, with Jerry taking Mayor Michael R. Bloomberg and Rob reaching out to Daniel R. Garodnick, a lifelong resident of Stuyvesant Town-Peter Cooper Village and a newly elected city councilman. Rob assured Garodnick, "There will be no dramatic shifts in the community's makeup, character or charm."
But Garodnick did not greet the news with the same breathless enthusiasm as the New York Post, Wall Street, and city hall.
Garodnick, a smart, handsome, dark-haired lawyer who had grown up in the complexes, was not concerned about corporate profits. For nearly sixty years, Stuyvesant Town-Peter Cooper Village represented a relatively affordable opportunity for construction workers, firefighters, designers, small-business owners and others to live in ultra-expensive Manhattan and raise their children. But all that seemed to be in jeopardy during this real estate boom in 2006. The "average" two-bedroom, one thousand-square-foot condominium in many Manhattan neighborhoods was selling for more than $1.2 million. Residential life in the borough was drifting increasingly outside the grasp of
Garodnick worried that the extraordinary price paid by the Speyers would force them to oust longtime residents in favor of younger, more well-heeled tenants willing to pay rents that were 30, 40 or 50 percent higher. He was at his office at 250 Broadway, across from city hall, when Rob Speyer called. The two men had never spoken before.
Speyer was both cordial and polite, telling the councilman that Tishman Speyer had no plans to make radical changes in the way Stuyvesant Town was run. He assured Garodnick that his intention was to be a proper steward of the property and to do right by the twenty-five thousand current residents.
Garodnick was encouraged. Tishman Speyer, after all, had a well-burnished reputation and might be a better landlord than some of the other bidders. But after an exchange of pleasantries, he asked about specific terms. He asked what his plans were for preserving the long-term affordability of the complexes. He felt Rob avoided the question other than to say he was open to any ideas.
"I thought, 'This is going to be a problem,' " Garodnick recalled. "I wanted to hear their plan for long-term affordability, and he didn't have one. Their plan was the opposite of long-term affordability. He said there wouldn't be any major changes, but when we saw him raining legal notices on tenants we realized we were in for a struggle."
Rob Speyer's relationship with Garodnick would be a source of endless frustration.
In a city of renters, the real estate boom in the early 2000s was prompting not only poor and working-class but also middleclass New Yorkers to wonder how much longer they could afford to make their home in one of the five boroughs. The real estate titans who had spent billions grabbing glamorous landmarks like the General Motors Building in New York and the Sears Tower in Chicago or building glassy condominium towers had turned their attention to brick, "meat-and-potatoes" tenements, unabashedly paying previously unheard of prices to unlock future profits as they accumulated thousands of apartments and boosted rents from New York to Chicago and San Francisco. In 2006, Mayor Michael R. Bloomberg would declare that MetLife had every right to sell Stuyvesant Town to the highest bidder, despite the very real public investment in the project by an earlier mayor, Fiorello H. La Guardia.
But many others decried the fact that easy credit and the real estate boom had turned a valuable urban resource, housing built with a sizable public investment for the middle class, into a commodity no different than corn futures.
From the beginning, Rob Speyer and the tenants were locked in a battle in which neither side ever spoke the same language as the greatest real estate deal of all time devolved over three years into one of the biggest business failures of all time. The tenants would file lawsuits, attack Rob Speyer for trying to evict what he claimed were unlawful tenants and even scorn his $19 million beautification program that introduced more trees, shrubs and perennials to the grounds.
At the same time, as tenants died or moved away, Speyer and his partners converted previously rent-regulated apartments to market rents, thus generating desperately needed revenue. They could not, however, convert enough apartments fast enough to cushion the crushing debt they had placed on the property. The legal battles, the landscaping and the conversions, which required more than $50,000 per apartment for installing granite countertops, stainless steel appliances and other renovations, all cost money, lots of it.
Instead of appreciating rapidly as his business plan predicted, the estimated value of Stuyvesant Town-Peter Cooper Village plummeted. In October 2006, Tishman Speyer and BlackRock valued the properties at $6.3 billion. Within two years, it was valued at $1.9 billion after the collapse on Wall Street in September 2008. The subsequent recession wiped out billions of investors' dollars. Rob Speyer and other moguls who bought and sold properties between 2005 and 2008 blame their gut-wrenching troubles on one of the most severe recessions in the country's history and a sharp 20 percent decline in the average rent in Manhattan.
After all, Tishman Speyer was in good company with other commercial and residential landlords who expanded rapidly in this period only to default on tens of billions of dollars in loans.
But the Stuyvesant Town-Peter Cooper Village deal became the poster child for the first great economic bubble of the twenty-first century, a period in which tens of billions of dollars from insurance companies, pension funds and sovereign funds poured into real estate deals in every part of the country with the expectation that prices and values would soar forever, or at least until the property could be sold at a fat profit.
The story of New York City throughout the centuries is by and large the story of real estate. Even the epic social history of Stuyvesant Town-Peter Cooper Village and the extraordinary financial deal of 2006 fit into that story line. But, as we shall see, the Wall Street financiers and many deep-pocketed investors could be a forgiving bunch. Especially when the deals are done with other people's money. Even as Jerry and Rob Speyer wrote off their $56 million investment in Stuyvesant Town-Peter Cooper Village and walked away from the property in 2010, their company had already raised over $2 billion for a new real estate fund. A company spokesman was emphatic: the default had no effect on Tishman Speyer. Their partner also came out unscathed. By the last quarter of 2010, BlackRock, the world's largest asset manager, reported record earnings.
An excerpt from OTHER PEOPLE'S MONEY: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever Made by Charles V. Bagli. Copyright 2013 by Charles Bagli. Reprinted with permission from Dutton, member of Penguin Group USA