Steven Kaufman, President of the Kaufman Organization, joined the Real Estate Daily Beat for an interview. We discussed the office market, ground lease deals, the hybrid work model, and other topics.
Daily Beat: Average physical occupancy in SL Green’s office portfolio is approaching 25% as more workers return to the office. For new deals, free rent was typically anywhere from 12 to 14 months and TIs were $17 a foot. How does that compare with your portfolio?
Steve Kaufman: The occupancy has gone up a lot. Our buildings are not the classic Midtown Buildings. We have buildings in the Garment Center and Midtown South. Our main building is 450 7th Avenue at 34th Street – it's a half a million square-foot building, which is where my office is. We're back to probably about 70 to 80% of occupancy there now.
Daily Beat: Wow, that’s a very strong number.
Steve Kaufman: The reason is that we have mostly small tenants with entrepreneurial type firms where people want to or need to be in their office. So it's considerably better than it was.
In some of the other Garment Center buildings where we have larger office tenants who occupy 10,000 to 15,000 SF on full floors, we have tenants who are still not coming back. It's had an unfortunate impact on the food tenants that we have in the area who rely on the tourists and office workers for their business.
One of your competitors – the Commercial Observer – had an article about how the fast casual restaurant sector has really been hurt in New York. That's not been good. Everyone is hoping that there's going to be a broader return to the office in September. I know in the classical Midtown buildings on upper Sixth Avenue and Park Avenue, the percentage of people coming into the office is really very low, so we're hoping that people come back. We plan on bringing our office staff back in September. The 2,000 to 5,000-SF tenants are coming into their offices, but the bigger companies are not.
Daily Beat: Are you going to mandate vaccinations?
Steve Kaufman: We're considering doing what some of these big companies are doing, which is people that have not been vaccinated, mandate them to get tested once a week. We are not, at this time, considering mandatory vaccinations as a condition of returning to work. However, of the roughly 40 people we employ, there's less than 10% who have not been vaccinated.
Nationwide, there's about 30% of people who have not been vaccinated and what's going to cause them to get vaccinated at this point, maybe their employers. The city's even paying $100 to people to get vaccinated!
Daily Beat: The Rudin family recently revealed plans to build a new office development at 415 Madison and are heavily investing in renovations at 80 Pine Street. Do you have similar plans with your older buildings?
Steve Kaufman: Our buildings are all old. They were built in the 1920s-30’s and earlier. New York City is really a city of old buildings, especially the Garment District, which was all built between 1920 and 1930. There are very few new buildings there. So that's where we have a concentration of properties and in the Midtown South area on 19th, 24th, 25th, and 29th Streets. And they're all old buildings.
In the last five years, we put a new lobby and redid all hallways and bathrooms at our flagship building on 7th Avenue. We're also putting in a conference center on the second floor, which is an amenity that we hope will be attractive to tenants. Although it was built in 1930, it looks brand new.
And our other buildings – the newer acquisitions like 135 West 29th and 40 West 25th – we are always modernizing. We just put a new lobby in 22 West 19th Street, which is a 200,000-SF building. That property was built in 1903 and looks beautiful.
Daily Beat: Good bones, especially pre-war.
Steve Kaufman: Yes. This is pre-World War I!
Daily Beat: Nuveen plans on adding simulation golf and other non-typical office amenities at 780 Third Avenue. Is this a fad or the future?
Steve Kaufman: We are looking at outdoor space in some of the buildings, which is a nice amenity. We aren't adding restaurants, fancy chefs and all that. We don't have buildings that are really big enough to support that type of amenity, but we are modernizing lobbies and outdoor space. We are not attracting a 100,000-SF tenant that's going to decide to go to a building based on a fancy chef in the cafeteria.
Daily Beat: At the height of the pandemic, Kaufman’s partnership with AXA closed on 56 West 22nd Street from the Blum family for $48.5 million. And the 67,000 SF building was reported to have been 55% occupied at the time. Can you speak about the deal?
Steve Kaufman: I went into contract before the pandemic hit, and we closed – it's working out fine for us. I don't have the exact percentages, but we've been renting space there and we're very positive on the future of that building and that neighborhood in particular.
Daily Beat: It’s interesting because Jacob Chetrit bailed on a deal with SL Green for the Daily News Building and ended up reaching a settlement on his $30 million hard deposit. Was there any renegotiating on your end?
Steve Kaufman: No. There was not.
Daily Beat: Let’s discuss some of your ground lease deals and the AXA partnership?
Steve Kaufman: 56 West 22nd Street and 40 West 25th Street are two buildings that are part of our AXA partnership and were both ground leases. The same is true of the buildings we leased from Gary Barnett– those are also ground lease deals.
Daily Beat: From the Ring Portfolio?
Steve Kaufman: Yes
Daily Beat: Some people are concerned about valuation resets - what are your thoughts on the ground lease market and what draws you to those deals?
Steve Kaufman: That's always a concern, but being prepared to do ground lease deals rather than fee simple deals opens up a much wider range of possible acquisitions for us and our institutional partners. We like the ground lease structure and that's what we've been successful doing.
We have two parts of our company – the core 10-building portfolio that we’ve owned for many years, which we discussed earlier. Then we've had the newer acquisitions that are structured as net leased deals, including the Ring properties and the AXA buildings. We also net leased a building at 21-01 51st Avenue in Long Island City a few years ago.
Daily Beat: Do you have any WeWork exposure?
Steve Kaufman: No. Todd Bassen was their real estate guy for a moment and I wanted them to take two floors at 519 8th Avenue. But luckily we did not do that deal.
I'll tell you the funny thing. I had Regus as a tenant at 111 West 19th Street on one 23,000-SF floor. All their spaces are single purpose entities, so they threw that one into bankruptcy during the pandemic and closed it down. Meanwhile, I just read that they took 27,000 SF at 14 Penn Plaza. They must have gotten a hell of a deal over there. And why would they close down a place on 19th Street where people actually want to be and open up on 34th Street.
Daily Beat: There must've been a built out co-working space already there! Would you entertain a partnership model with a co-working firm?
Steve Kaufman: I would consider doing that if I had a block of space. But I think the demand for those small desk spaces is questionable. I honestly don't know what's going to happen if that's going to come back or not. I got small 1,000 to 2,000-SF spaces that we're trying to rent and there's activity on it, but it's not what it used to be.
With regard to the future of office space, people want to go back to their offices and they are going to get rented, but I think long term there'll be less use of office space.
Daily Beat: What do you think of the hybrid work model and only working from the office three days a week?
Steve Kaufman: I'm very comfortable with it. You know I'm a perfect example myself. I never worked from home a day in my life before this came and now you're talking to me from home.
Daily Beat: I always love listening to NYC family real estate stories. Can you please share the company’s history?
Steve Kaufman: I'm third generation. My grandfather started the firm. He made a lot of money in the Garment Industry in the 1920s. And he was one of the original builders of the Garment Center. He had built some buildings that we still own – 462 and 470 7th Avenue. So that's always a source of pride for us that you know we have managed to stay in business this long with the same families.
George Kaufman – a cousin of mine – was a very successful entrepreneur and real estate developer. He started the Kaufman Astoria Movie Studio, which is a completely separate business from ours. He died a couple of years ago.I've personally been active my whole career – 50 years – in New York real estate even though I'm a very young 72.
Daily Beat: Are you guys in acquisition mode?
Steve Kaufman: Yes. We have institutional partners that we work with and are in acquisition mode. My team is actively looking for new deals.
*The interview has been edited and condensed for clarity.