To say that Swig Equities' President Kent Swig needs no introduction is the exception to the cliché that in this case proves the rule.
His energy and boldness are legendary – he recently acquired Helmsley-Spear Inc – and has made him one of the necessary people to talk to and consult with on the subject that everybody talks about these days and which determined this year’s election: the economic crisis. With more than four million square feet of office space in New York and San Francisco alone, around 1,200 luxury apartments in Manhattan and holdings that include Brown Harris Stevens, Halstead Property, Falcon Pacific Construction, Hudson Land Company, Helmsley Spear, as well as a number of Properties in FiDi, New York's Financial District (48 Wall Street, 80 Broad Street, 90 Broad Street, 110 William Street, 140 William Street, and 5 Hanover Square), Kent Swig has a lot to say not just on the state of real estate, but also the prospects of overcoming this crisis, the worst in US history.
At his Spartan, Lexington Avenue office, on a view level with the city’s imposing skyline, he reaffirms to NEO his faith in New York’s capacity to speedily recover. “Every time New York City has gone down, it’s come back. We gained all the money lost and another 10%,” he points out.
Quite unlikely for a man of his status, he believes that part of the reason things came to be the way they are now was lack of updated regulation. “Obama says it very well. You need 21st century regulation to watch over 21st century market instruments.”
The interview was conducted before the November 4th election and right before Congress approved the bailout plan. For failing to do so the first time, “every one of the 435 Congress people should be fired and let them go out and see what is to be unemployed… Congress did nothing and they lost $1.2 trillion of people’s money in one day!”
He expects, however, things to change after November 4th and more leadership to come out of DC, because during an election period “nobody wants to do anything and that’s a problem.” He went on to argue that this lack of leadership goes back much longer. “For the past eight years we did not have anybody in charge willing to do anything in any way! Unfortunately we had an absentee leader.”
He is a fan of Greek food – at least once a week – and he’s visited both Greece and Cyprus for pleasure – not for business. He even taught himself the Greek alphabet which he finds fascinating.
What’s the situation in real estate today?
On one level, the current economic period is one of the most opportunistic times that we will see in our life time. Opportunity and tragedy are often linked together; it depends on one’s perspective. If you are the one having financial problems, then it is tragic. On the other hand, if you are the one not having financial problems and you are the one seeking to benefit from these problems, then it is opportunistic. The problem is that while new wealth will be created from the opportunities that exist, there will be an associated loss that occurs.
As for the strength and vitality of the New York City real estate market, a story about my recent trip to Spain can provide a macro-economic perspective to our market place. As I was explaining New York City’s market to a group of potential investors, they stopped me and responded that they understood my analysis describing our current situation. They told me that they understand and agree with me that New York City is in the midst of what one could argue is our fourth major economic downturn since World War II. They further said that they understood that the New York market experienced major job loses in the 1970’s (768,000 jobs lost), in 1989-1991 (350,000 jobs lost), and in March 2001 – December 2001 (250,000 jobs lost), and that these three periods were also coupled with “unique” and “unprecedented” events: New York City’s financial crisis in the 1970’s where the City was almost bankrupt, the October 19, 1987 stock market crash that preceded and impacted the 1989 – 1991 period, and the tragic terrorist attack on New York City on September 11, 2001. The potential investors’ made the point that after each of these major recessionary periods of time, what followed was an economic growth period where real estate values increased dramatically beyond even the high point of valuation just before the particular major economic recession that occurred. So, it should then follow, that following our current period of economic downturn with job loses (estimated to be approximately 165,000) coupled with today’s “unique” and “unprecedented” event of the financial melt-down of the capital markets, is really a continuation of a pattern of events that we have experienced over the past 60 years. So, the real estate market should be an investment opportunity as it will most likely increase in value significantly beyond the peak value that existed just before this current economic downturn. The question then becomes: how long does this economic downturn last before real estate values are regained and then exceed prior peak values?
What should we expect in the market?
Nobody really can predict what is going to happen to the New York City real estate market, but if history is an indicator, then one can say that the market will certainly regain any loses that may be experienced; it is just a matter of how long. Each time the real estate market value went down in New York City, the market regained all of those loses and grew in value significantly within several years after reaching the bottom of the economic downturn. In fact, one could argue that New York City’s economy is in a much stronger position now as we head into this downturn as compared to previous downturns. In previous downturn periods, New York City’s unemployment rate was a full 100 basis points higher than the United States National average, whereas during this current economic downturn, New York City’s unemployment rate was 100 basis points below the National average. In addition, the commercial vacancy rate at the start of this economic downturn was among the lowest in its history: at just 5.4%. So, even if the vacancy rate doubled, it would only be about 11%, a percentage that is described by major commercial real estate brokerage firms as “balanced”, and where neither Landlords nor Tenants are in a stronger position than the other. This is indeed a very different situation from previous economic downturns where the commercial vacancy rate was very high prior to the start of the downturn and only got worse.
The real problem that we face today, however, is the lack of available credit in the market place. And real estate is particularly hard hit from the credit crisis as it uses credit for most of its capital transactions. What we need now, most of all, is stability in the credit markets and for lenders to re-enter the market place with money to ease the lack of liquidity that exists today.
Given the situation and opportunities that entails – you just mentioned the connection of tragedy and opportunity – do you see an influx of foreign money coming in and that helping mitigate the recession’s consequences?
Yes, in times of world economic instability, America becomes the recipient of international investment. This is primarily because the American investment market is, for the most part, stable, transparent, and relatively liquid. In addition, although the United States dollar has recently gained value against other foreign currencies such as the Euro, the value of the Euro is still strong from a historic basis, thus creating value for the holders of Euros. In addition, with real estate values most likely declining, the Euro denominated buyers have that advantage as well. As an example of this, almost 29% of all condominium apartment sales in New York City this year have been to foreigner purchasers. Also, tourism to New York City is up about 30%, so that brings in money for shopping, hotels, restaurants, and the like.
It is election time and is anybody really in charge? Is that affecting the recovery process?
I would argue that for the past eight years, America did not really have anyone in charge that took proper and responsible leadership positions from both an economic and international point of view! Unfortunately, in my opinion, we had an “absentee” leader. Now, America is transitioning to a new president with new economic and international goals and objectives and there is hope for America’s new policies. Of course, we are in a transition period, and with that, the market place may take a pause to determine what the next policies will be.
What do you make of this mess?
First of all, the financial markets are in disarray. The current capital crisis is similar to the banking problems that existed in 1931 and in the 1981-1991 period. Our Federal Reserve and Treasury have taken extraordinary steps that had not been taken since the 1930’s, all of which has helped to stop the financial meltdown that was occurring. Now, however, we must deal with the economy, and the solutions will not be achieved within a few months. Rather, the solutions will take 12 to 18 months to take hold, so it is going to be a very difficult year in 2009.
Could we have avoided this economic mess through regulation?
I would say, probably yes. Listen, when I drive down Lexington Avenue, I would like to go straight down the street without ever having to stop for a red light, i.e., I would like not to be regulated by traffic lights so that I can get to where I am going without stopping. But, that would not allow for the “free flow” of cross traffic and pedestrian traffic to move. So, as a society, we install traffic lights to help “regulate” the “free flow” of traffic. This creates safety, opportunity, and predictability. Like traffic flow, the capital markets need some sort of regulation in order to insure the free flow of capital transactions within the marketplace. And, instead of having these regulations, the traffic lights, the current Administration actually “undid” or “deregulated” the marketplace, which in my opinion, made the current financial crisis much worse. So yes, I think much of the financial meltdown could have been avoided by thoughtful and proper regulations. I think that Obama said it well in his debate with McCain when he said that we need 21st Century regulations to meet 21st Century investment scenarios.
But regulation is a word that many people in the investment markets are not willing even to pronounce!
Yes that is true. But the capital markets seek stability, structure, and predictability, such as the “Up Tick Rule” in regards to short selling of stock. This rule has worked for many, many years, and I would argue that the Bush Administration’s elimination of this rule over the past year, added instability and unpredictability to the marketplace at precisely the time that the financial markets need stability and predictability so much.
Bear Stearns and Lehman Brothers come to mind.
Precisely. The “Up Tick Rule” basically prevents people from “piling on” during a bad situation and limits the ability of investors from putting artificial downward pressure on stocks that would create additional instability and unpredictability to the market place. While Bear Stearns and Lehman Brothers may not have survived just because of the existence of the “Up Tick Rule”, it certainly would have been less volatile with that rule in place.
Another area where I think regulation could have been helpful was with the Credit Default Swap market. While Credit Default Swaps have a place in the capital markets, the lack of regulation added to, and may have been a primary cause of, the financial market meltdown that we experienced. With a “traffic light” (regulation) being in place via the “Up Tick Rule”, and with some additional regulations regarding the Credit Default Swap market, I think that much of the financial tragedy that we recently experienced could have been avoided. We live with regulations everyday, such as with traffic lights, and unfortunately we lacked that type of regulation within the capital markets.
Is it just lack of regulations or lack of enforcement too?
I think that it is both. We also have good regulations that exist today for capital markets, but the current Administration chose not enforce these regulations.
What do you think of the rescue package by Congress?
I think that, unfortunately Congress had little choice but to pass the legislation. We were facing a true economic meltdown of our financial system and something needed to be done immediately. (Unfortunately, Congress also added $150 billion to the $700 billion package and this additional money contained pure “pork,” or money for pet-projects of politicians that was certainly not needed in today’s economically challenged environment). Now, we will have to see how the $700 billion will be spent and its ultimate benefit to the market place.
On other note, is it true that you tried to learn Greek?
Yes, when I visited Greece a number of years ago I tried to learn at least the alphabet so that I could read and write. The alphabet is like a code and it was fascinating and fun for me to learn. I did not learn to speak, but at least I could read and correctly pronounce what I was reading.
I have been to Greece several times: the first in Athens in 1974 when Turkey invaded Cyprus; that was quite a remarkable time to be in Greece. I have since been back to Athens and traveled by boat to the various Greek Islands which are truly beautiful and magical. I went to Sifnos, Kimolos and Santorini. I have also been to Cyprus in 1991 with the United Nations, and toured both the Turkish and Greek sides and the “Green Line” area.
Do you also do business in Greece and Cyprus or it’s just for pleasure?
No, I do no business yet, but I have negotiated deals with several Greek banks, and have several Greek tenants in my commercial properties. Perhaps soon, I may be able do business in Greece.
