Martin Nussbaum, co-founding principal of Slate Property Group, joined us to discuss the current economic environment, Scale Lending, and why he’s so bullish on multi-family in New York City.
Daily Beat: Can you please share your background?
Martin Nussbaum: I started off in real estate investment banking right out of college, which was a great way to learn the underwriting side of the business.
I then moved into the management side of actual construction and development for six years at a large family office. We focused on building apartments, condos, and for-sale single-family homes. The experience helped round out my knowledge.
And then in 2009, I started Silverstone Property Group to acquire multi-family buildings in
Manhattan. I subsequently bought out the partners and took the company with me, which has morphed into Slate Property Group.
A large majority of the senior management is still the same. There’s about 150 people who work in the company.
Daily Beat: I gather that your business is still primarily in New York.
Martin Nussbaum: Yes. I’d say that about 90% is in New York City, while the rest is in California and Florida.
We focus on residential investments on both the equity and debt side of the business. This includes luxury, market-rate, workforce housing, affordable housing, and transitional housing.
The equity business is roughly $6 billion, while on the lending side, we have a debt balance of about $2 billion in loans outstanding.
The equity side is our bread and butter, but we focus on residential anywhere in the capital
We have multiple branches: an underwriting / acquisitions team; a full accounting division; in-house property management; a leasing group; and a construction company. All of those divisions only work on our own assets. They are self performing services to ensure that the entire process is under our control from start to finish.
Daily Beat: What led you to the debt side with Scale Lending?
Martin Nussbaum: Around four years ago, we started to think about getting into the debt space and it was mostly because we were being outbid on many deals. We simply weren’t comfortable at the last dollar basis that other people were.
Our underwriting standards led us to believe that these weren’t deals we could get comfortable acquiring; however, lending at 70 or 75 cents on the dollar was very interesting to us. We could create a business and generate returns in a way that really capitalized on our market knowledge and relationships.
Fast forward to today, our team has done 30 to 40 loans. They all fit into the bucket of what we do on the equity side; namely, ground-up construction, value-add repositioning, and commercial-to-residential conversions. We have financed a lot of deals that we’ve been outbid on the equity side.
Daily Beat: How aggressive are you in leveraging your book?
Martin Nussbaum: We’re somewhere in the 50 to 60% leverage range.
Daily Beat: Do you lend out of a fund? I know you mentioned Carlyle Group in the initial announcement, but I haven’t seen any fundraising announcements since then.
Martin Nussbaum: There are different buckets of capital that we have for the debt business. Some of it is backed by the private equity side, while others are one off deals with existing LP investors. It really depends on the loan, but a big chunk of it comes out of Scale Lending, which is backed by Carlyle Group.
Daily Beat: Are there any plans to raise a fund?
Martin Nussbaum: It’s still to be determined. We have plenty of capital to deploy, so I think we’re going to deploy all of it and then take the next step beyond that.
Daily Beat: Do you keep all the debt on your book or are selling any of the trenches? How do you approach that?
Martin Nussbaum: It depends on the loan, but we have a lot of relationships with specific lenders and they may lever our positions or various different lines of credit. It’s truly just a lot of strong banking relationships that we’re able to take advantage of.
Daily Beat: You hold the loan, so there’s not much a borrower can do, but when you sell off a more senior piece to a bank, do you get pushback or do they understand that it’s part of the business?
Martin Nussbaum: A lot of times we’re doing it behind closed doors. We may close on a loan in cash and lay it off later, so it’s not something that the borrowers are really seeing.
Daily Beat: How are you underwriting rent growth in parts of the Sunbelt where the growth rates appear to be unsustainable? And what are your general thoughts on rent growth in New York City vs. the Sunbelt in the next few years?
Martin Nussbaum: New York has seen dramatic improvement in rents over the past year – high double-digit kind of trade outs and strong year-over-year growth. Although it has certainly slowed down in the last 45 days, it’s still in the high single digits, so I think there’s still a lot more room for growth.
We are particularly bullish on New York in light of the fact that there’s no new starts of any new rental product due to the expiration of the Affordable New York program (aka 421-a tax abatement).
The result will be a huge supply and demand issue that’s going to benefit the supply side and lead to much smaller vacancy rates and higher rents.
Outside of New York, from a lending perspective, we underwrite deals in markets like Florida, California, and the Carolinas based on where rents are today. It’s our right to be conservative.
We don’t assume 7% growth a year like we see other people doing. Our team stays very focused on deals that can support themselves based off of in place rent because there could be a pullback on rent growth.
We also very much focus on deals where there’s been an appreciation of value in land through a rezoning or a recapitalization of an existing landowner. We haven’t financed any deals that are highly marketed where someone’s buying a piece of waterfront land in Florida for $300 a foot to develop a project. That’s not really where we play.
Daily Beat: Insofar as expenses are concerned as a percentage of EGI (Effective Gross Income), how has that changed for existing buildings?
Martin Nussbaum: Those numbers have blown out completely. Repairs and maintenance in general are up. Cost of OpEx has gone up probably 15% in the last 12 months.
Daily Beat: That’s a big number. Rent growth has been strong enough to gloss over it.
Martin Nussbaum: We’ve seen growth in the 20 plus percent range in the last 12 months, so right now that’s okay, but hopefully both of those will settle into a place that’s more normal.
Daily Beat: I’m sure you’ve a lot of the deals on the equity side in the Sunbelt that were bought on the 3.5 caps, projecting rents of 10%. That just doesn’t seem to be a recipe for long-term success.
Martin Nussbaum. We have never gotten involved in that space on the equity or debt side. In fairness, people who have in the last few years have done well, but we’ve lived through a couple of cycles over our career, which leads us to believe that you’re playing a game of musical chairs and when that music stops, it can be very dangerous.
Daily Beat: The CMBS special servicing rate rose for the first time in two years in August. Granted, it was primarily due to the retail sector, but there was some slight distress on the multi-family side. How do you see this playing out in the next year in this macro environment where the Fed continues to raise rates?
Martin Nussbaum: This is all going to come down to where interest rates ultimately settle. Retail and office have obviously suffered pretty dramatically.
On the multi-family side, there’s not as much distress as other asset classes. Since property owners can reset rents on an annualized basis, they have the ability to get through tougher times. The real question will be when does inflation come and when can the Fed start pulling back on interest rates.
If you can live through the next 18 to 36 months and allow the economy to get back into a normal place and the Fed can contract rates, you’ll be in a much better place.
The question will be who can sustain themselves until then and I think that’s where “rescue capital” will come in. Take an owner who has to refinance a building in the next six to 12 months where they have to pay down the loan by 20% because the debt yield has blown out due to interest rates. If that firm can’t write the check themselves, it might look for someone to come in and write a check on your behalf. That will address the distress in that market, but I don’t think that will be the case with office and retail assets because people don’t believe in the equity position.
Daily Beat: Have you tightened your lending standards since the macroeconomic changes?
Martin Nussbaum: Yes. We’re obviously underwriting an exit and takeout that’s now going to require a new lender to be underwriting in the current interest rate environment. We’ve also adjusted our underwriting from a rent growth perspective. Proceed levels have also been impacted.
When you combine these factors with a lot less deal flow due to the environment, the result has been less loan origination. We’re holding all of our other metrics the same.
Daily Beat: There’s a very interesting dynamic with the national housing market and the rental market. When buyers are priced out, they need to rent. Moreover, if the Cost of Shelter (i.e. rentals or housing) goes down, interest rates can potentially follow suit. How do you deal with these inverse relationships on a macro level? Do you focus on them or do you just underwrite deals, trust your process, and live with the consequences?
Martin Nussbaum: All you can do is update your underwriting based on what you see in the marketplace regularly. Real estate is typically a very slow moving asset class compared to the stock market and other asset classes that almost get marked to market hourly, daily, or monthly.
What I find interesting now is that since interest rates are fluctuating so much, real estate is marking to market much more frequently.
For us that means that almost every week we sit down and go through our underwriting assumptions as a company. We look at changes to operating expenses and rent growths on our properties, in addition to reviewing what’s happening to construction costs.
Fortunately, we have a very large portfolio of almost $8 billion worth of real estate that we can leverage to get real time data to make decisions. That’s been our competitive advantage. Others might read about it in a CBRE report six months after we see it.
Daily Beat: How long does the average deal on the lending side take from start to finish?
Martin Nussbaum: It could be as quick as 30 days to as much as 90. Generally speaking, it’s a 45 to 60 day process.
Daily Beat: How many are direct versus those that come through brokers?
Martin Nussbaum: I would say at least 40 to 50% are direct. A great example is the $185 million loan we just did with Namdar Group in Florida. That’s a repeat borrower that we’ve done three or four deals with. They have been great.
Daily Beat: Let’s take a ground-up rental development. What are your ballpark numbers on rates and LTC / LTV?
Martin Nussbaum: We are somewhere in the range of 70 to 80% of cost, which typically
equates to somewhere between 55 to 65% of value. Our pricing ranges from 500 to 600 bps over SOFR.
Daily Beat: Slate recently bought a pair of Upper East Side rental buildings for $78 million. Can you speak to the play?
Martin Nussbaum: On the equity side, we are bullish on buying existing multi-family below 96th Street in prime Manhattan. We think that there’s a huge need for rental products with no new starts on anything. That’s a very attractive buy for us right now.
Daily Beat: I gather that Slate is further exploring the Environmental, Social, and Governance (ESG) side of the business. Trying to capitalize on the massive inflows with the housing shortage in the country is a smart idea.
Martin Nussbaum: We’ve really branched out into the ESG side of the business over the past 18 to 24 months. Our team develops transitional and fully affordable housing buildings, which is something that’s very needed today.
We’re trying to figure out how to bring our experience in New York into other markets that have the same needs in terms of homelessness and housing.
*The interview has been edited and condensed for clarity.