A Conversation with Dustin Stolly and Jordan Roeschlaub

NEW YORK CITY—The chairmen and co-heads of Newmark Knight Frank’s capital markets, debt and structured finance group are industry veterans, both with real estate investment banking experience. In addition to previously working as JLL’s managing director in the capital market practice, Dustin Stolly was an originator at UBS Investment Bank and Eurohypo. He has handled more than $60 billion in capital market transactions. Jordan Roeschlaub has over 14 years of experience in real estate banking with more than $55 billion in capital markets transactions under his belt.

They sat down with GlobeSt.com for a conversation about their work and trends they’re seeing in the market. Excerpts from the discussion are below:

GlobeSt.com: How do you describe and distinguish your work and the services you provide?

Stolly: We are very proud of the team and platform we have built in a short amount of time. We run a consistent and highly institutional process, regardless of the sponsor or the size and profile of a transaction. We drive top results for our clients on deals that are $1.5 billion or $20 million because we truly value these partnerships and the relationships we have with lenders.

Roeschlaub: We are a super competitive group that loves winning new business and delivering the best possible outcomes to our clients. Our business moves fast so we are hyper responsive and always available. The team, with Nick Scribani, Chris Kramer and Daniel Fromm, came from lenders, investment banks and equity investors and with this diverse experience and background, everyone brings something different to the table, making us a more well-rounded group.

Stolly: Our team’s experience and institutional background allows us to provide the most thoughtful guidance on structure and execution, something that sets us apart from much of our competition. We follow an “investment banking” model with a unified team of 18 professionals, dedicated to executing transactions on behalf of our valued clients, who turn to us because of our sophisticated process and the emphasis we put on the needs of each client. In so doing, we are “re-defining” debt/equity brokerage, as opposed to our competitors who rely more on marketing and sales. We also add value by being able to speak thoughtfully to tenant credit and how it applies to real estate.

Roeschlaub: We are also thought leaders, developing creative strategies for our clients. We are not reactive, but instead we move the market based on trends we observe, on which we capitalize. We pride ourselves on being “first movers,” identifying new capital trends that have not historically been invested in and carving out a niche. We originate 95% of our business, without relying on investment sales to drive our business. When you are innovative, creative and thoughtful in what you do and how you do it, and aren’t a jerk, you will get great opportunities!

Stolly: Jordy has great instincts and connects dots better than anyone. He’s tops at corralling information, digesting it and strategically acting on it. We count on each other and hold each other accountable and that mindset is shared by our entire team.

Roeschlaub: As aggressive as Dustin is, he’s equally smart and intuitive. When people hire us, they know he’s going to go to extremes for them, and that really resonates with the market. There’s no complacency amongst us; we are constantly hunting for the next deal and working strategically as to enhance the platform.

GlobeSt.com: What are some noteworthy trends you’ve seen in capital markets?

Stolly: This is the most active and robust debt market that we have seen all cycle, and maybe ever. It is a highly “borrower friendly” market. Lenders are still being prudent but there is a tremendous amount of capital chasing opportunities, thus allowing borrowers to secure competitive economic and structural terms.

Roeschlaub: New lenders continue to enter the debt space and are rapidly ramping up their platforms, including the reemergence of German Banks that are now directly lending in the US. Co-working has also been a prominent topic in real estate, especially in New York City, where WeWork became the largest office tenant in 2018. The lender universe is reacting with caution and pragmatism.

GlobeSt.com: You’ve noted sponsors turning to debt markets to repatriate equity before completing their business plan. Why is this happening and what does it mean?

Roeschlaub: The debt markets are highly liquid today for a variety of reasons, and more competition among lenders has led to more aggressive lending to win business. For sponsors, this means that they can often refinance and maintain the liquidity of the real estate while pulling out equity, without selling the property. Sponsors may be looking to sell in the not so distant future and can still maintain exit flexibility by refinancing. We have seen many deals in transition that have been predicated on stabilized valuations allowing for better execution, extending terms, lowering cost of capital and giving the sponsor flexibility not to sign leases at levels that are less accretive.

Stolly: Because the debt markets are so strong, sponsors are refinancing instead of selling a property, pulling out equity often times. They have been getting more favorable valuations via refinance than today’s sales market would support – so many opt to refinance, with the hope that the sales market will be stronger down the line.

GlobeSt.com: You’ve also said ample capital in the market has led to tremendous refinancing with over 57% of your debt placement in refinances. Is there a time when sponsors should start to pull back?

Stolly: There is no reason to think that sponsors need to pull back in the economic climate today. Sponsors are keeping their eye on the indicators and are still being prudent in their decision making. Just as the lender universe is keeping a level-headed approach to the capital they are deploying, sponsors are similarly deploying capital intelligently.

GlobeSt.com: What would a potential recession mean for all the refinancings out there?

Roeschlaub: The loans being made today are not overly aggressive or too stretched on debt service coverage or debt yield covenants. Lenders have opted to compete to win business on pricing/return. We are living in a different regulatory environment today than in 2008-2009, and we are better protected against a downturn today. Thinking ahead, in a recession there is typically much less liquidity in the lending markets, as was the case in the Great Recession. Some investors and lenders with flexible capital will be able to take advantage of this by being able to generate outsized returns by opportunistically lending in that environment.

GlobeSt.com: You observed softening in, for example, the hotel sales market, and a resulting greater hotel refinancing volume. Why is this happening and should it cause worry?

Stolly: If a sponsor cannot get the sales price that they want or believe their property to be worth, this usually leads them to refinance instead of selling at a lower basis. It is not a cause for alarm, but a dynamic in the market that occurs within the business cycle. Sizeable hotel supply coming online has led to a softening of the market, which in turn, has led sponsors to refinance versus sell in many cases. One thing to note in New York City, Local Law 50, which put restrictions on hotels from converting to condos/residences or other “non-hotel” uses, did not get renewed when it expired on June 2. Experts estimate that up to 5,000 keys in the city could be converted to condos, which could put a strain on supply.

GlobeSt.com: What does this mean with New York City condo sales weakening?

Stolly: Similarly, this is a very relevant topic in the New York City condo sales market, as there are several “cranes in the sky” building ultra-luxury, high-rise condominiums. Many developers are building, or have recently built, brand new condo properties with asking sales prices upwards of $8,000-$9,000 per square foot. These astronomical prices cannot hold up with the new supply coming online, which is leading sponsors to refinance, and take out some of their equity, providing them more time to sell their condo units instead of taking a sizable price reduction to offload the units.

GlobeSt.com: You also mentioned seeing more developers serving as construction lenders. Is this becoming a trend?

Roeschlaub: There are a few examples out there, most recently Silverstein Properties, who has invested significant capital in starting a debt platform. Five or 10 years ago, debt was a less popular investment strategy as there were different market dynamics at play. Over the past few years, in search of yield, many parties are turning to debt, including developers. In this case, their value-add is really their expertise in knowing what developers really want and need out of their lenders. In instances where they would need to step in and operate, they know the complexities of construction and what it takes to develop a property.

Another reason developers are turning to the debt market is because they perceive current values to be too high and related returns are too low to justify investing at the equity level. However, in debt, they find an attractive risk/reward trade off by investing at a lower basis than the equity investor and close to equity-like returns in a subordinate debt investment.

GlobeSt.com: What’s your view on competition in the lender market driving spreads down and how this affects the market?

Roeschlaub: Lines are blurred now with banks, life insurance companies and debt funds all pricing consistently, and deals are stacked with different business verticals competing for the same business. Finance companies are entering the market and to win business they are offering lower interest rates. This leads other lenders, including banks, to also lower their pricing in order to compete.

GlobeSt.com: Finally, how is co-working affecting financing?

Roeschlaub: Co-working drove the leasing market in 2018 and is continuing to gobble up space in 2019. WeWork is getting ready for an IPO and is now the largest office tenant in Manhattan. The lending world’s view of co-working is continuing to evolve, and many lenders are waiting for more clarity on the credit of these companies. Most, if not all lenders, are averse to lending on offices that are entirely occupied by a co-working tenant; instead they will have a threshold that can be occupied by a co-working tenant to whom they are comfortable lending.

Stolly: We have financed properties where WeWork, Knotel, Regus/Spaces, among other co-working start-ups, have a significant presence. We are considered the authorities in selling this credit, as well as other burgeoning start-up credit, to the real estate industry. Like anything, these types of transactions take perseverance and a creative approach, suiting the needs of each client.