When Urban Land last spoke to New York City landlord Leslie Himmel of Himmel + Meringoff Properties in March, vacancy within the nation’s largest office market was hovering just below 10 percent. While that still registers below the market’s peak of 11.7 percent in 2010, according to Moody’s, that rate has continued to drift upwards since March.

Leslie Himmel, founder and co-managing partner of Himmel + Meringoff Properties at the 2022 ULI Fall Meeting in Dallas.

Leslie Himmel, founder and co-managing partner of Himmel + Meringoff Properties at the 2022 ULI Fall Meeting in Dallas.

For Himmel, this bumpy market is unsettling—for now. After all, the firm that she and her partner Stephen Meringoff have led since 1985—a privately held, long-term owner/developer of New York City office and industrial properties—has played a central role in this market, and that includes weathering many tricky market cycles.

Urban Land recently sat down with Himmel for a lively discussion about doing business in a recessionary market amid rising interest rates, and her ongoing search for what she calls “brave money.”

UL: The last time we talked, you were the booster club for “returning to the office” in New York City. How has that worked out?

New York City is definitely in recovery mode, that’s the good news, even if it’s not progressing as swiftly as many people, including me, anticipated it would six months ago. But our occupancy rates are solid, and we’re signing leases across the portfolio. It helps that we own many buildings in Chelsea and NoMad [Madison Square North], which are by far the cooler neighborhoods with tenants that typically need 10,000 to 20,000 feet (929-1858 sq m) —and this segment of end users has largely brought everybody back to the office. It’s also worth noting that as a major New York City landlord, we never stopped working or surrendered to the ‘woe is me’ stance. Quite the opposite—our experience with adversity in the past really taught us how to navigate these tough cycles. I may sound repetitive to those who know me well, but I firmly believe you should never bet against New York City.

So overall, yes, New York City feels much better today than it did a year ago even if the general velocity and exponential curve of what’s going on isn’t great.

So, lease rates are still down a little bit and the leases are shorter?

Correct, except for the credit tenants we have leased to. There’s a bifurcated [market]. If you’re doing a tenant lease of 10,000 square feet (929 sq m), they’re going to want to do a five-year deal with a five-year renewal rather than a 10-year deal with a comparable 10-year renewal.

But we’ve also been pleasantly surprised. At 462 Broadway, for example, we own a building that boasts beautiful architecture in a fantastic submarket. We did a very cool deal with DoubleVerify, a media meets tech [company], in late 2021. But now I think we have the huge headwinds of interest rates, and the recession around the corner if not already here. Just when we’re gaining momentum, we have new challenges.

Another example of a long-term lease signed, amongst others, was a new 30-year lease at 525 West 57th Street (a life science property), with Mt. Sinai.

You have dealt with high interest rates in the past. What can those who have not been through this type of cycle expect?

I [recently] spoke to a group called RELA [Real Estate Lenders Association] a lenders group, and there were 99 lenders in the room for the lunch at the Yale Club. The average age of the audience was around 30 to 40 years old, so they had not experienced the fall of October 19, 1987 [Black Monday], or the change of legislation in the early ‘90s, where so many banks just stopped lending…. [then] 2001, of course, the terrible [attack on] the World Trade Center, and then the Great Recession.

From 2008 until recently, it’s been much different with interest rates being so low—it hasn’t totally been easy because we’ve had ups and downs—my comment to this group was ‘I feel prepared to deal with the adversity of this market because I have been through difficult market cycles in the past, and successfully worked through them.’ It’s not fun, and I know a lot of people are just saying, ‘Oh well, wait and see’— there is no wait and see.

One has to take the long-term view here—interest rates will come down again. It’s just going to take time. My message to lenders is this: Work with your borrowers because COVID wasn’t their fault, nor was it the borrower’s fault that rates went from three and a half to roughly six percent and a half in a very short time.

A lot of loans will be hard to replace, which means it will be interesting to see what lenders ultimately do—will they ‘kick the can down the road’ and work with their borrowers, or will they instead start to sell their debt and foreclose? I don’t know the answer. Not sure anyone does. But I suspect that they will choose to work with the borrowers rather than pursue more adversarial solutions. To bring it back to my luncheon with RELA, my message to these young lenders was ‘you need to work with borrowers because if you own debt that’s worth 100 million dollars that you can’t really replace, you don’t want to ignite a much more serious chain reaction such as what happened in the early 1990’s.

What is your strategy going into a recession if we’re not already in one?

Look, our company has been around a really long time. Recessions are nothing new to us. We’re just going to continue to do what we have always done, and that means focus on our core business. We always improve the lobbies and elevators—keep things modern. We’re just going to keep doing the same.

As far as new acquisitions—not time yet?

I think that within the next six months or so, there will be a lot more opportunities. Price discovery is still hard to gauge because, with interest rates going up so dramatically, many lenders are not actively in the market—at least not until things settle down. We need the Federal Reserve to signal that ‘Now we’re going to go back the other way.’ I think everyone’s concerned about whether the Fed will keep raising rates. And if the answer is yes, well, what happens next?

The good news is that pricing, at least in New York, has not really come down. Capitalization rates have not moved in lockstep with interest rates, and one could argue that perhaps they shouldn’t. Opportunities will arise, especially for long-term, seasoned operators who have a battle-tested track record. I think the smaller owners with one or two properties who have frozen up by simply neglecting their business will struggle going forward. In addition, highly levered lenders with mezzanine debt may face challenges.  Now is not the time to lose focus or succumb to panic; it’s the opposite—you need to fully direct your attention on your core business, and you also have to work twice as hard today as you did five years ago.

What is your process?

I think it’s extremely challenging to have interest rates shoot up against the backdrop of Covid and the work from home/hybrid trend. And then you have all of these other issues such as crime in the subways and the migration of people out of big cities. Well,  I look at these macro trends and ask, ‘What can I do about this? And do I want to double down with what I have because New York City always comes back?’ The answer to that last question is emphatically ‘yes’!

It also helps that I am very data driven. The same goes for my team: Andrea Himmel, our head of acquisitions, is even more data driven and analytical. She’s a Wharton grad and she spends a lot of time studying trends because now is the time when you have to almost be your own McKinsey, so to speak—you have to take a step back and ask, ‘Where are the opportunities, and how do I place myself in front of them?’ Trying to be proactive by seeing trends around the corner is the key to getting through these uncharted times. A certain degree of courage also is vital. We’re trying to raise new equity with groups that want to come in and be brave. You need really brave money to go forward.

Where is the brave money coming from?

When I find it, I’ll let you know (laughs). It’s not the traditional [sources]. Unfortunately, as of now, we’ve typically invested as partners with the traditional groups. And there’s a little bit of this deer-in-the-headlights dynamic that’s going on in which traditional [capital sources] such as private equity funds and pension funds have changed their underwriting plans. They were always a key source of financing. But you wait. They will get brave again.

But I also think that a number of the financial institutions are investing in commercial real estate—even if they’re underwriting at such high rates that there’s no equity. And I think if you can see the long view, there will be properties in New York and other areas that are going to struggle in a manner very similar to what occurred in the early ‘90s.

So, this is going to be family money…?

Maybe foreign, maybe family office money. It will be interesting to see who the brave ones are because they are the ones who will help this market fully bounce back. The only thing I can say for certain is that our firm will be brave and seize opportunities.