Hudson’s David Kramer on NYC’s Pandemic-Proof Real Estate

David, it’s been about 5 years since TPR’s last interview and over 30 years since you were the inaugural editor of the Planning Report. Let’s begin with a question inspired by a New York Times story entitled, "Is New York City worth it anymore?" With the combination of a pandemic, economic cratering, and people on the streets concerned about racism and police accountability, what’s the answer? 

David Kramer: I can tell you, having lived out the pandemic half the time in Brooklyn Heights and half the time in Litchfield County, Connecticut, it's easier and more fun to be in Brooklyn Heights. It's easier to walk to the market, it's easier to get food delivered, and I can still jog and take bike rides and have a strong internet connection. That is my rational answer/booster answer.

I also believe everybody has a short-term memory. In 2012, Hurricane Sandy ravaged the coastlines in New York City and the tristate area. There were neighborhoods in New York City that were underwater. Everybody thought that nobody in their right mind would live in Staten Island, Sheepshead Bay, or Red Hook anymore. Based on that very concept, we went ahead with an entire investment strategy targeting neighborhoods impacted by Hurricane Sandy. 

Seven months after Hurricane Sandy, we executed the strategy. We went out to the marketplace to find those deals in Staten Island, Sheepshead Bay, and Brighton Beach, and they were selling at a premium; the $10 million building was now $10.5 million! People had short-term memory. Once they survived a hundred-year storm and got their boiler and switchgear working again, everybody went back to normal. 

I think you have to have more than one event in order for people's behaviors to change, so I am hopeful that either when the vaccine comes or herd immunity kicks in, people will throw off their masks, go back to seeing Broadway shows, go to arenas, hold the bars on subways, and forget about this nightmare we're in. 

Last time we spoke in 2015, you shared how Hudson was partnering with New York City’s Pension System and establishing a $200 million account intended to focus on developing outer-borough workforce housing, particularly in neighborhoods affected by Hurricane Sandy. Today, a pandemic and unemployment are the reality; how has the former impacted Hudson’s development plans?

Interestingly, our multi-family rental receipts are outstanding and astounding. If you had told me on March 13th that our receipts from our market-rate rent roll for April, May, and June were going to be 90, 95, and 92 percent, I would've taken the under. Assuming New York is still an appealing place to live, we're bullish on the long-term multi-family market. 

Retail, commercial, office, and hotels are another story. Retail has been tricky and challenging for years. Are restaurants going to survive in the long term? I certainly hope so, but in the short term, if restaurants can only seat 50 percent capacity, that's going to be a problem.

Almost every one of our complexes at Hudson has ground floor retail, and if you add that up it becomes a serious portfolio of more than 100 spaces. Nobody has gone out of business, but we've been enormously generous and flexible with all the mom and pops who are not operating. We have that ability because it's retail revenue at the bottom of an apartment building, so it doesn't dominate.

If we insisted on carrying out the terms of the lease, they would hand us the keys in two seconds, the space would be vacant for a year, then we'd have to spend $200,000 fixing it up for the next tenants. I'm not bullish on looking at new projects that have any substantial degree of retail in the projects. We have one project that has a lot of creative office, but I'm happy sticking with residential from affordable to workforce, and institutional to market-rate.

New York City does not and will never have enough housing or new supply, and I just think that down the road when the smoke clears, people are going to want to live in New York as they have for the last 30 years.

Unlike 9/11, which was a terrorist attack on NYC, or Hurricane Sandy which was a natural disaster, COVID-19 is a public health issue that is likely to impact livability for a long time. As a NYC real estate developer, how is Hudson Companies adapting to the pandemic?

That's a great question, and I wish I was as forward thinking as you suggest. It's really an impossible answer, but one thing you could imagine is home offices for everyone. If, all of the sudden, every one or two-bedroom becomes a one or two-bedroom plus home office, you've just increased the square footage of your units by anywhere from 20 to 40 percent.

Now, it's not $2,000 for a one bedroom, it's $2,700 for a one-bedroom plus home office. The trend over the last millennia is to reduce square footage and increase common space and amenities, so New York City is filled with tight, efficient studios and one bedroom units that rent for great numbers per square foot. Then, when you walk out of your efficient apartment, you have at your disposal a gym, yoga room, party lounge, or media room. If all of the sudden, you add the home office, it's a very different business plan. 

People think developers are at the front of the parade in determining how everybody lives. Developers are at the back of the parade trying to understand the dynamic and giving people what they want. Until there is a sense of what people want and at what price, I don't see people making decisions to make their projects more pandemic friendly. Do you really have a gym or rooftop lounge if there are only four people allowed at a time? There's no quick tweak for a pandemic-friendly building. 

Decades ago, you were one of the first NYC developers to move to incorporate in your projects environmentally sustainable materials and practices; what are analog to today’s public health challenges? 

One of the problems with high-rise living in a pandemic is that if the management company decides not to let more than two people in an elevator cab at the same time, it could create riots because you might wait 45 minutes to get in the elevator. 

The reason you haven't read about elevator cab scuffles in the New York Times is because all of these high rises are 40 percent vacant; these buildings are not at full capacity, and people are staying at home. We create these insurmountable challenges about what to do about a high-rise building, but you're not going to turn a 30-story building with 3 elevator cabs into one with 17 elevator cabs, it's just not economical.

At Hudson, we constantly try to talk about our triple bottom line and doing the right thing. A lot of us have a civic background, and we've spent a lot of time talking about the Black Lives Matter protests. That's very real to all of us but we haven't quite figured out quite what all of this means our day jobs.

In both New York and California, housing development is deemed an “essential” service, thus permitted to proceed. Has Hudson modified any of its building practices?

The most difficult and anguished conversations among the Hudson partners in the 25 years I’ve been at Hudson pertain to our moral responsibility overseeing affordable housing construction when the governor deemed it essential.

Everybody thought we were lucky that we could continue working while the condo and commercial projects were all shut down. It shifted the burden to the owners of those companies to figure out what we should do. What are our obligations to the workers, our investors, the city, and its economic pulse?

Every argument had 16 different counterarguments. The Hudson partners felt incredibly strongly and didn’t particularly agree. One would say that we’re sending people to their death and we didn’t want our construction workers to stumble into a hospital or ER needing a ventilator. We were making these decisions when the hospital beds were filling up and the ventilators were in demand; it was a very scary moment around late March or early April.

Some of our construction specialists said that if we were to voluntarily shut down our site—thinking that we were on the side of angels—construction workers weren’t going to be self-quarantining at home like the Hudson bourgeois, they were going to be out hustling to find the next job.

These were very difficult questions that we did our best to navigate, and I can tell you now that all of our construction sites have been opened. And it’s a whole new world where a medic meets a construction worker at the entrance to take their temperature, subcontractors are separated by floor and we have extra hand washing stations, and social distancing within interior spaces. 

Hudson—in the two decades you’ve been its principal owner—hosts brown bagged lunches for your team to update them on the latest development technologies, regulations, and practices. What’s been on the agenda of late? 

We do, we have Lunch & Learns via Zoom! I was at a real estate conference in February when the head of the Columbia Real Estate program mentioned that over a weekend, some Columbia computer science students were doing a hackathon trying to figure out what public data could help determine the preconditions to gentrification. 

I know gentrification is a bad word, but Hudson's DNA for 20-plus years has been looking for neighborhoods with an upside that's been ignored for one reason or another—we buy low and sell high. We're the first in the neighborhood, and we build new market-rate housing where it hasn't been built. We've had enormous success doing that.

Most recently, we built the first new development in Prospect Lefferts Gardens since Fred Trump 40 years ago. The idea of looking at data and trying to make decisions was a light-bulb moment for us. I have a son at MIT who has a classmate that’s a sophomore with his own AI company that does all sorts of data science. We hired this kid to look at what some of the sources of data are and what can they tell us about neighborhood development.

Now, I'm not going to divulge any of this, but if you think about commonly known apps—whether it's Instagram, Yelp, or Uber—there are all sorts of ways you can determine which neighborhoods are on the upswing. We're having a brown-bag lunch on Friday to review his results, and half of the neighborhood recommendations he’s making have not been on my radar at all.

One of the challenges for us at Hudson is that 15 or 20 years ago, we were one of the few developers who were willing to take a risk in the outer boroughs and pioneer neighborhoods. Institutional equity wouldn't have looked anywhere in Brooklyn or Queens 15 years ago, and now there isn't a bad neighborhood to be discouraged from. You have neighborhoods where land should be trading at $80 per foot that—at least pre-COVID—was trading for $180 per foot because there's no more concerns to overcome.

It creates sort of an existential crisis for Hudson now that everyone is in the business. There are no bad neighborhoods, so where do we look now?  We were also one of the first pioneers of Passive House, and now we have two or three new Passive House projects in the pipeline. That is slowly becoming more of a standard than LEED, and for good reasons. 

Lastly, pivoting to the federal role in assisting with housing, what constructively could the administration, through federal policy and funding, do to best address the shelter challenges made abundantly clear by the pandemic? 

We're big supporters of Hakim Jeffries; he has a bright future. But I would say that what Congress didn't do when they were passing the trillion-dollar stimulus was create the Manhattan Project of testing, which we need at least until the vaccine comes along. The lack of federal leadership is just embarrassing, and it's not just Trump. Why didn't the Senate and the House make it a priority to have, not thousands of tests available, but millions of tests available? China tested 6.5 million people in Wuhan in less than two weeks.

In New York, we worry about when people are going to feel comfortable getting back on the subway. One of the things that makes New York unique to almost every place else—other than pedestrian oriented cities like Chicago, Boston, D.C., and San Francisco—is that you can rely on mass transit. 

What's going to get people comfortable getting back on the subway and going into office buildings? Millions of tests—the same kind that they envision doing for the NBA playoffs where every team is tested constantly. That should be the standard for the whole country, and the fact that it hasn't become a priority is such a huge disappointment.

Once we take back government, I'd like to see if the corporate tax rate goes back up; that will help the tax credit world. A lot of people don't know this, but in the housing world, when the corporate tax rate was decreased in the 2017 tax bill, it really screwed affordable housing because it's number one resource—the low-income housing tax credit—was based on the corporate tax rate. We lost millions of dollars in every project because of that tax rate, and it would be great if the blue states could get their deductions back.