Stephen Ross is one of the most successful real estate entrepreneurs in US history, with a net worth of $12 billion, according to Forbes. Now 77, the chairman and majority owner of developer The Related Companies remains intently involved in the private real estate market – in particular, the $20 billion redevelopment of Hudson Yards in New York. He was the subject of the fireside chat at the PERE America Summit earlier this month, where he told PERE’s senior editor Jonathan Brasse about: how he is thinking about the US’s biggest masterplan development currently; what risks make sense in today’s market; why a fund management platform makes sense and why winning a Super Bowl is not everything.
Jonathan Brasse: You’re a man with plenty of responsibilities on his plate. Which one gives you the most cause for concern?
Stephen Ross: Certainly, I’m thinking a lot about Hudson Yards. We’re fortunate in how the project has evolved and been positioned. We know it’s going to be successful. It’s been accepted. But the question now is: how do we make it the greatest project? It’s about constantly reviewing and tweaking it. What do we need to really add to it and make it something wholly unique that’s never been done before? I also spend a lot of thought on football games because I’m fortunate enough to own an NFL franchise.
JB: Let’s stick with Hudson Yards. Recent JLL research said the complex has gone from ‘viable’ to ‘highly desirable’ in just the last 12 months. Given development started in 2012 and isn’t scheduled to end until the mid-2020s, does commentary like that coming today come as a relief?
SR: It’s a relief because when you see the caliber of tenants we’re attracting, that gives you confidence knowing we’re on the right path. When we said we’re going to move the center of New York City to the west side, people looked at it and saw railroad tracks. It was a wasteland. The idea of putting together a mixed-use project, a new neighborhood, was thought of by a lot of people as too ambitious. But when you studied the investment by government that was occurring – $4 billion extending the subway line, building the High Line, renovating the Javits Center convention hall, creating Hudson Park & Boulevard – you see this type of money being poured into one specific area and you know there’s going to be opportunity there. We saw the opportunity. We also saw how technology changes cities. We saw how corporations are looking at attracting talent, a major thing today. Today, Hudson Yards is roughly a 20 million square foot mixed-use development.
JB: Have you considered what Hudson Yards will do to New York’s other, older business districts?
SR: I look at London and New York as the two greatest cities for business and where people want to be. Both are changing through technology. Millennials today are a different generation with different needs. They work differently. They think differently. They’re the ones you’ve got to attract. You’ve got to create that environment where they want to be. That’s what corporations need to do. New York is ready to change. Today, 60-70 percent of the buildings are over 50 years old. They’re obsolete. I remember when I first started out, the ratio would be 300 square feet per employee. Now we’re down to 100 square feet per employee. That requires different buildings. That’s the need we saw.
“You never want to bet the farm. If you structure your deals well, then you’re going to survive no matter what”
JB: You mentioned London. It’s natural for me, as a Londoner, to make a comparison with Canary Wharf. Have you made that comparison?
SR: When we talk about Canary Wharf, I think they operated under the theory of ‘if you build it they will come,’ and that’s a good way to go bankrupt. They had no transportation when they first opened. How do you get there? What types of companies were they going to attract? They didn’t look at it as a live-work-play environment. It was strictly to satisfy an office need, and it didn’t work at first.
We looked at Hudson Yards totally differently, that we were creating a live-work-play environment. We’re in the middle of New York City with transportation, and we’re not going to build it and see if they’ll come. We’re going to secure the tenants first and eliminate the risk.
JB: So what, for you, is a tolerable risk? And what is today intolerable?
SR: It depends what situation you’re in and how much you can handle. You never want to bet the farm. If you structure your deals well, then you’re going to survive no matter what. I’ve taken some big bets, but I know if I’m wrong, I’m still not going to have to start all over again. In the early 1990s, the real estate world was probably the worst it had ever been. I had to restructure the company, but fortunately we came out of that well; we didn’t have to raise money in the public markets to survive and we stayed a private company. Real estate of this scale and duration is probably done best by private companies.
JB: Let’s move on to talk about the capital. What is the best type to partner at this point in the cycle?
SR: In doing large projects like Hudson Yards, it’s best to simplify. We single asset-financed most of the buildings. A large portion of the capital that we assembled was global capital. You couldn’t just look to the US banks to finance a project like that because of all the regulations today; you couldn’t put together a syndicate with the magnitude of dollars we needed.
JB: You run third-party money, too, via a fund management platform. What was the purpose of a development business like yours having such a platform?
SR: We got into the fund management business in 2008 with the recession. We knew when there was a financial crisis of that magnitude, there would be opportunities.
In the past, you had different private equity funds investing in real estate and we were looked to as partners. They were identifying projects, getting their 20 percent promote and we were doing the execution work. Investors were often paying a double promote. We saw there was value in the real estate professionals who did the execution work, not just the financial engineers, and that there was an opportunity to distinguish ourselves. We raised an opportunity fund much faster than typical first-time managers because we were a company the public knew about and had a positive track record.
JB: Are you faced with a conflict of interest issue in being both the developer and fund manager?
SR: The biggest question we have to answer concerns conflicts, but we run all ground-up development through Related and not the fund. We drew a real line there. That is done as a developer in private, one-off deals. We’ve increased the scope of what we’re doing, raising money as a lender, things like that. But the investors feel very comfortable that we don’t have conflicts because it’s clear who does what.
JB: You’re a rich man who has had a career with plenty of wins. But one win that has remained elusive is a Super Bowl. You once said you’d give it all up for a Super Bowl. Really?
SR: No. If you look at things and understand what you’re doing, in the long term, it’s all about the vision and the execution. I really love the execution. Sure, winning a Super Bowl takes a lot of execution. And, if there’s one thing I’ve found, it’s a lot harder to put together a winning football team than it is to be successful in business. There’s many rules and regulations in football and the challenge is greater. But my passion is real estate.