Condo Developers Are Told “No” For A Living

  • The Alexander Twins Scandal Is Changing The Marketing/Branding Calculus
  • Developers Shvo and Stern Show Opposite Strategies In Response To The Scandal
  • With The High Rate Environment, Branding Risks Become Front & Center

Being Michael Shvo and Michael Stern got a lot tougher this week. These well-known luxury residential condo developers have been grappling with weakening market conditions in the super luxury condo sector. If business wasn’t challenging enough for this next generation of developers, now they have the added task of damage control as their onsite marketing consultants imploded by scandal this week.

I’m going a little more People Magazine and less Fed chart, because of the enormity of what happened this week.

I’m a fairly optimistic person, but I could never be a luxury residential condo developer. I just don’t have the stomach for it. Developers must have some sort of personality disorder to be able to plow through the endless array of impossible problems and challenges with blinders on. These roadblocks would discourage most people from going forward, let alone subjecting themselves to significant personal financial risk.

Nope. Not for me. The risks these developers are subjected to when attempting to create value from existing real estate justifies their potential outsized compensation.

There is a lot of multi-family in the pipeline despite the surge in interest rates. The competition will be fierce over the next couple of years until the pipeline runs dry.

Source: CBRE

It looks like Miami has the most multi-family developments underway.

In my experience, these are the stages in a typical luxury residential condo development cycle.

  • Develop and develop and develop with reckless abandon to maintain momentum
  • Develop to support overhead such as staff, offices, administration
  • Develop until the developer can’t develop anymore as the cycle ends
  • Cash-out or Go Bust
  • Hang out for five years, plot a return
  • Retrench as the collective memory fades about the previous hard times
  • Start over like nothing adverse ever happened
  • Repeat (Rinse, Lather, Repeat).

Michael Shvo And His Three Blackberries

I remember meeting developer Michael Shvo, founder of Shvo Development a few times a couple of decades ago at his offices, and real estate events when he was a superstar New York real estate broker, literally using three Blackberries. I saw him use them, personally. Stories about taking helicopters to the Hamptons and other jet-setting tales of excess riled another big broker at the time. Dolly Lenz was allied with Shvo until he began to sell more than her. One of her responses was to try to upstage stories about Shvo’s three blackberries, claiming that she used twelve blackberries. She even had a Blackberry ad deal. When I saw her Blackberry banner ad (I can’t find my saved file) on The Real Deal website back then, I knew this was not the flex she thought it was. After many run-ins with her when she was at the real estate brokerage Douglas Elliman before she left, I eventually blocked her on Twitter because some of her fans would copy my @jonathanmiller handle when paying homage to her. She immediately blocked me.

She went out on her own and Shvo successfully pivoted to luxury residential condo development with success, doing his rinse-lather-repeat cycle as described earlier. I suspect he no longer uses Blackberries. Ha.

But I digress…

Development Basics

I teach market analysis at Columbia’s graduate program for their Masters in Real Estate Development, and this is how I think of the challenges facing the modern developer – there are many. I look at:

  • identifying the opportunity to create value
  • interest rates/cost of capital
  • land/assemblage costs
  • planning/architecture/design
  • community/government/zoning approval
  • the window of opportunity for the anticipated market condition
  • marketing/branding
  • delivering the product to the specification that was promised
  • paying out investors

When I think of the 4-5 year lead time in developing a luxury project, one of the items that would worry me the most is completing within “the window of opportunity for anticipated market condition.”

My window analogy is illustrated in this week’s Wall Street Journal, A New York Developer Binged on Trophy Properties. His Wager Is Flailing: Michael Shvo’s high-price strategy collides with a troubled market.

Unlike many real estate owners who were tripped up when interest rates soared, Shvo enjoys the backing of deep-pocketed overseas investors who have helped him navigate the difficult financing terrain. 

Rather, his projects have wavered because he has shot too high with his asking prices, say people close to the situation. In an industry cemented around personal relationships, he has also alienated business partners.

Wall Street Journal

Business Insider released their piece on Shvo almost simultaneously with Luxury developer Michael Shvo has big plans. Bitter disputes and a soft real estate market threatens to thwart them.

Pam Liebman, Corcoran’s CEO confirmed that her firm had been tapped for the study and said that it was “not unusual for us to be called and asked to do a report on a development by a partner” like BVK.

She said that the report was still being finalized, but had determined that the units at 685 Fifth Avenue were likely worth “much less than what’s being asked.”

Business Insider

And BOOM, a black swan event drops like a bomb on the new development luxury residential condo community. The Alexander twins dominated the real estate news cycle this week. One is a co-founder of the firm OFFICIAL which launched two years ago, a luxury real estate marketing and onsite brokerage company. Their co-founder (Oren), and his twin who is not part of the firm are mired by accusations of rape by approximately thirty women. Almost immediately, Oren was scrubbed from the OFFICIAL website as a co-founder. Wow.

Source: The Real Deal

From The Real Deal coverage of the Alexander scandal:

Michael Stern Goes Tall, Takes Action

Michael Stern of JDS, a young, prolific New York City and Florida luxury developer competitor of Shvo, supposedly might take action and drop OFFICIAL from representing their development known as Dolce & Gabbana, a 90-story 259-unit condo tower in Miami. That’s not confirmed yet. Perhaps JDS has to be more decisive as they scramble to manage their challenges at their super talls known as Brooklyn’s 9 Dekalb and Manhattan’s 111 West 57th Street. Both developments have truly spectacular views.

Shvo seems to be playing the long game, with no decision about OFFICIAL’s representation of their Miami development in their no-response response below concerning The Raleigh project. But it’s still early.

A spokesperson for the Raleigh project said earlier in the week that it was still working with Official. 

“These are serious allegations and we respect the decision made by Official’s leadership,” reads the Raleigh statement, released on Tuesday evening. 

The Real Deal

I suspect Shvo is waiting for the frenzied coverage to settle down before he makes a decision. My goodness, after years of challenges to move these projects forward, a black swan event appears that threatens all that effort.

And I wouldn’t bet against the appearance of more brand-damaging news about OFFICIAL since it’s only been five days since The Real Deal broke the story. To OFFICIAL, it probably feels like a lifetime. I doubt they’ll outlive this damage to their brand.

Did you miss yesterday’s Housing Notes?

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