The Selling of Stuy Town

by Brendan O’Connor

On Tuesday, the Blackstone Group, a colossal investment firm based in New York, and Ivanhoé Cambridge, the part of Quebec’s public pension fund manager that invests in real estate, signed a contract to pay around 5.4 billion dollars for Manhattan’s largest apartment complex, the long-disputed Stuyvesant Town-Peter Cooper Village, which sits on the east side of the island, between 14th and 23rd Streets. As part of the deal, Blackstone and Ivanhoé committed to rents that would keep forty-five hundred apartments — forty-five percent of the total — affordable to middle-class families (as defined by the federal government), and five hundred apartments affordable to low-income families, for the next twenty years. In return, the New York Times reported, the de Blasio administration gave Blackstone a hundred-and-forty-four-million-dollar low-interest loan through the Housing Development Corporation and waived seventy-seven million dollars in mortgage recording taxes. (Although, they’ll still have to pay a hundred and sixty million dollars in transfer taxes.) Blackstone also agreed not to convert the apartments into condos or to build any new towers.

Stuy Town was ushered into existence by Robert Moses in 1947, intended largely for returning veterans and their families — imagined as a middle-class oasis set in Manhattan, the product of an era when civic-minded people did things for the city and its residents because they were right, not because they were profitable. But it is also built on the ruins of the Gas House District, which Moses had bulldozed, displacing eleven thousand residents, and it was segregated until the sixties. The Gas House District was a diverse, working-class, neighborhood filled with light industrial businesses — the kind of place Moses considered a slum. A New York Times story from 1946 marks the occasion of the older neighborhood’s last resident being evicted: “Mrs. Mary Plotkin looked out the window of her stationery store at 444 East Fourteenth Street yesterday and scanned a scene of desolation. A dismal rain dimmed the vista of wrecked buildings and hills of debris. Workmen moved forlornly about, adding to the seemingly chaotic effect.”

Tuesday’s deal is being celebrated by the de Blasio administration and its allies as a big win. City councilman Daniel Garodnick, a lifelong Stuy Town resident, lent his support. “This deal achieves our core goals of preserving the community as a stable home for New Yorkers today and into the future,” he said. “This time, the buyer not only has a more patient and stable investment structure, but goes to great lengths to preserve long-term affordability,” he continued, referring to Tishman Speyer and BlackRock’s disastrous 2006 joint acquisition of the housing complex that led to the investors defaulting on 4.4 billion dollars of debt in 2010. “This has been a priority for us since Day 1,” the mayor said in a statement Monday. “We weren’t going to lose Stuy Town on our watch.”

According to the Times, the Blackstone Group manages ninety-three billion dollars worth of real estate in the form of hotels, warehouses, and office and residential space worldwide. The company “routinely” gets eighteen percent returns on its more opportunistic, speculative investments, which is pretty good. But the company is expanding into longer-term deals, having raised a 15.8-billion-dollar real estate investment fund in March — reportedly the largest in the world. Last month, for six hundred and ninety million dollars, Blackstone bought twenty-four market-rate rental buildings in Chelsea and the Upper West Side.

The Blackstone Group is buying Stuy Town through Blackstone Property Partners, the Real Deal reports, which is a fund it launched in July 2014, raising around six billion dollars in equity, largely from pension funds, to pursue investments with longer holding periods. (“I think the important thing to note here is the kind of capital we’re using,” Blackstone’s Global Head of Real Estate Jonathan Gray said. It sure is!) From TRD:

For Blackstone, the push into core real estate is an attempt to address a dilemma faced by all private real estate funds: it’s never been easier to raise capital, but with more players gunning for deals it’s become harder to deliver high returns. Some funds are tackling this issue by entering new markets or structuring creative deals. Others, like Blackstone, are embracing lower returns on some deals. “The core-plus asset class is about three times the size of what we’re doing in the opportunity class,” Blackstone’s co-founder and CEO Steven Schwarzman said in an earnings call last year, adding that the company could well add $100 billion worth of core-plus assets within the decade.

Ivanhoé Cambridge, meanwhile, has invested more than five billion dollars in Manhattan real estate over the past five years, the Real Deal reports, more than any other pension fund manager — and even more than real estate companies like Related, Brookfield Properties, or American Realty Capital. In February, the Montreal-based company acquired 3 Bryant Park for 2.2 billion dollars. Apparently, no one from Ivanhoé was present at the formal announcement of the contract’s signing on Tuesday — despite having invested, at 1.3 billion dollars, half of the equity in the Stuy Town deal (and possibly even more, really, given that it says it’s invested in every Blackstone real estate fund). Not to worry, though: “We love New York and have loved it for a long time,” Ivanhoé Cambridge’s executive vice president and chief global investment officer, Sylvain Fortier, told the Real Deal.

When Rob Speyer led his ill-considered bid to acquire Stuy Town in 2006, he not only failed to anticipate the global economy’s imminent implosion but also the hostility older tenants would have to their buildings being converted to market-rate housing for finance and marketing yuppies. In 2012, CWCapital, which came to control the property after Tishman Speyer defaulted on its loans, agreed to settle a class-action lawsuit filed by Stuy Town residents over illegal rent deregulation for 68.7 million dollars in damages. “Stuy Town is the quintessential rent-stabilized apartment filled with well-educated old Jews, and you shouldn’t fuck with them,” one affordable-housing advocate had earlier told New York magazine. “What the hell were these guys thinking?”

After the plans for Stuy Town were announced in 1943, one study estimated that no more than three percent of the people living in the Gas House District would be able to afford the proposed rents for the new development. More than half of Stuy Town’s apartments already lease at market rates — more than forty-two hundred dollars per month for a two-bedroom, the Times reports, and Blackstone will be able to bring another twelve hundred apartments up to market-rate rents in 2020: It’s only a matter of time before the rest can be brought to market rates as well. “This is the type of asset we want to own for a long time,” one Blackstone senior managing director said. “This is a long-term hold,” added Fortier. “We’re not looking to flip it and make a quick buck.” How long is twenty years, anyway?

Photo by Marianne O’Leary