Wall Street’s New Aristocracy

One generally thinks of the office market in cute acronyms: FIRE, TAMI, etc. Members of each group, goes the thinking, have similar tastes, price sensitivity, and desired locations – think of how for a hot second in the mid 2010s, Midtown South was the country’s buzziest tech corridor. FIRE (Financial, Insurance and Real Estate) in particular, dominates big-city leasing, which is why Jamie Dimon’s “get back to the office or GTFO” diktat was such a big deal for landlords.

But the concentration of power & riches on Wall Street has shifted so much that there’s a new ruling class of firms that deserve their own bucket. They’re already beginning to shape-shift the office market, and in time will play an even bigger role. The main reason: they make such an obscene amount of money.

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Wall St. Titans (Cont.)

Take Jane Street: The secretive trading firm, founded in ‘00 by Tim Reynolds, Rob Granieri, Marc Gerstein, and Michael Jenkins, has an avg. pay of $900K/employee 😲 compared to Goldman Sachs’ $340K, per an analysis by the FT, whose exploration of the “New titans of Wall Street” is something I haven’t stopped thinking about since it dropped in the fall. Jane St. has generated net trading revenues of $10B+ 4Y in a row, and its profit margin is 70%. When you have numbers like that, you can get pretty much any office space you want, incl. the landlord’s: recall that Jane St. expanded last month to nearly 1M sf at Brookfield’s 250 Vesey, in a deal that will see Brookfield’s parent company BAM skedaddle out of its own space to accommodate.

Or take XTX, the algorithmic trading firm founded by Alex Gerko that’s been dubbed the “kings of the geek world.” The UK-based firm handles $250B in daily trading volume, and set up shop at 50 Hudson Yards in ‘23: Its space there is small – just 13K sf – but pricey: per CompStak data, it’s paying in the low $170s a foot. Or consider Susquehanna, founded by Jeff Yass, who views options trading as a “mission from God.” 🤲 The firm has 74K sf at 30 Hudson Yards in a sublease deal in the low $100s/foot from Warner Bros.; in ‘34, it will move to a direct deal w/ Related in the low $130s, per CompStak.

It’s best to think of these transactions as harbingers of these firms’ future footprints: as they continue to eat the big banks’ lunch, they’ll want their offices to reflect their place in the pecking order. The most high-profile member of this group, Citadel Securities, provides a clue: its boss Ken Griffin is co-developing 350 Park w/ Vornado & Rudin, and CS will anchor the tower in addition to its global HQ in Miami.

DOGEball: How Big’s the Hit to Office Landlords?

We were waiting for the breathless first wave of coverage on DOGE’s impact on the office market to pass before covering the matter, hoping that there would be soon be a meatier piece to dive into. And now there is: Bloomberg pulled both Uncle Sam’s nationwide footprint on the office market – 144M sf for which it pays $5B annually in rent – and dove into DOGE’s impact on specific submarkets. DOGE has already cut about $100M in lease costs, and per Bloomberg the govt. has another $385M worth of leases on the chopping block. In some cases, the govt.’s exit would leave landlords w/ an entirely empty building, so you can imagine the blunt-force trauma to the capstack 🏏 : About $12B of CMBS is at risk from the DOGE plan, per Barclays, w/ SASBs in particular peril. Muni bonds tied to GSA leases have also taken a whack, in some cases pricing at 50¢/$. Owners now get that once a certain govt. agency vacates, “it’s very unlikely that they’ll get another federal government tenant in,” said Moody’s Ermengarde Jabir.

The pain will be felt nationally, but nowhere more pronounced than in the DMV area: nearly ¼ of the GSA leases expiring this year are concentrated there, and one corner of the DC market has already had $32M worth of leases cut. Meanwhile, lenders are taking back properties at a fraction of their recent appraised values - recall Blackstone’s Oct. credit bid of the ≈900K sf L’Enfant Plaza for $84M. “The DC office market is wiped out,” said Fundrise CEO Ben Miller, whose father, Herb, was a pioneering developer in the market. “Almost no office has equity value.”

Reed Hastings’ Private Powder

In ‘13, 4 techbros – incl. a co-founder of Bisnow – bought a mountain in Utah for $40M, w/ plans to turn their 10K acres into a utopian community embodying “generational ideology, innovation and entrepreneurship.” This was peak WeWork energy era, and the partners managed to rope in several notable figures as investors: ad titan Martin Sorrell, self-help guru Tim Ferriss, Netflix co-founder Reed Hastings, and even WeWork co-founder Miguel McKelvey. “There was a moment where they served coconut water,” one investor in their plan recalled to the Guardian in ‘18. “And I thought, 'These guys just get me. '“ 🥥 But real estate development is a little more complicated than that, and the partners struggled to get the project off the ground. Last April, the techbros sold a majority of their stake to Hastings, who dropped the utopian mumbo-jumbo and is focused on creating a haven of private powder for the well-heeled.

“I know that in Europe the idea of private skiing is just awful,” Hastings told the FT. “But there’s no social stigma here and the market is so underserved.” The members-only enclave is positioned as a quieter alternative to the mass affluence (h/t @GoodGuyGuaranty) vibes of the mega-resort operators Vail and Alterra. Hastings thinks of his purchase as a defensive one – if he hadn’t bought Powder Mountain, the mega-operators would have gobbled it up. “Whenever the Netflix stock goes up 100 bucks, my team here are like, ‘that’s another lift we can buy!’” he quipped to the FT.

I know this isn’t core CRE markets stuff. But I am so fascinated by the machinations of these resort projects – they often bring up Qs of public-private partnerships, backroom deals, dances w/ city/state officials, and concerns of exclusivity & affordability that are v much core issues in CRE development today. And every so often, a core player like Gary Barnett gets into the game and makes things even more fun. Check out our deep dive into his Deer Valley masterclass 👇️ ⛷️ 

Security Blanket for Construction Loan

Missed this one last week but too interesting not to note: Lender X-Caliber has pledged $234M to fund the construction of a resort on Lake of the Ozarks, and, in an exceedingly rare move, is looking to securitize part of the debt. Per CMA, X-Caliber has tapped Baird to help it find suitors for a SASB deal backed by the $92M sr. portion of the mortgage. The 25-acre project’s being developed by Tegethoff Development’s Jeff Tegethoff and Fred Ross (owner of boat dealership Big Thunder Marine), and will feature an amusement park and a 401-key Marriott. An add’l C-PACE loan of $65M that X-Caliber’s providing thru its CastleGreen subsidiary is part of the capstack, as is $132M in tax-increment financing and $73M in equity. The developers will be able to draw funds from a lender-controlled acct. as they hit construction milestones, par for the course in construction-finance deals, but again, something you don’t see much of in CMBS. $43M will fund a reserve acct. that covers 2Y of debt service. 🛝 

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