On Thursday, we published Pt. I of our conversation w/ Naftali CIO David Hochfelder, which focused on scouting some of the country’s highest-profile development sites and locking in an equity partner at a time of extreme dislocation. Today, we dive deeper w/ him into a couple defining themes of today’s market: the changing nature of the capstack (David provides a super-revealing example), and the depth of the ultra-luxe buyer pool. I wanted David for this because he sits in a fascinating seat, and because he was willing to get specific – which is our whole thing here at The Promote.

800 Fifth, Williamsburg Wharf, these are big swings. But let’s talk about the opposite. There was a period where Naftali wasn’t buying anything, while a lot of Miki’s [Naftali] peers were going haywire buying. You’d hear stuff like “Are these guys still in business? Are they frozen out of equity?” 

Many in our audience, particularly those in multifamily, are dealing with this right now. If you're not transacting, are you even alive?

I joined in ‘16. We didn’t buy anything from early ‘14 till ‘17. And even then, it was not a target-rich environment to buy at attractive prices. But the fact that Miki had been sitting on the sidelines was very appealing to me coming in to help run the investment side. When the market is all screwed up, we go on buying sprees, and when the market is filled with tons of liquidity, we sit on the sidelines because we can't buy assets at prices that we agree with for the equity capital markets. But we had 7 [ongoing] projects. We always wanted to be doing more, but there was a good amount to keep everyone busy.

The biggest evolution in the business wasn't on individual deals. It was moving from smart investing to real company-building. When I arrived, we were a well-respected boutique condo developer. Very good business, profitable, but inherently cyclical, and you have to reinvent yourself basically every project. It's also extremely tax inefficient.

Since then, we've formed four distinct verticals: The condo business, a credit and fund management platform, a very big Florida operation, and then we have a large-scale mixed-use build-to-core division. The profits and fee streams of the business as a whole are diversified and predictable. 

Back to your point about periods of inactivity. We bought a handful of asymmetric deals pre-2020. Then in 2020, right after the pandemic, we went on a crazy buying spree. We bought what's now Williamsburg Wharf. We bought what's now the Henry on the UWS, a large condo project. We bought 255 East 77th St., another large condo project. We did the Willow in Gramercy. We bought 2 very large projects in Florida. In 16 months, we bought 6 deals totaling billions of dollars. And we were willing to have that conviction. On the first deal, which was the Henry, my view was, “we're buying this really, really cheap. I have no clue where the equity capital markets are going to be between negotiating this deal and going hard and closing it.” I went out pretty wide on that deal, because I wasn't sure how the LPs would react, and we got a bid from every single LP. That's usually a good sign that you've probably created a good deal, but we went in with no visibility on that. 

Is there a risk of running out of buyers for the product you’re looking to build?

[The buyer pool] is a lot deeper than many people realize. Betting on the ultra-luxury market is one of the best bets you can make right now – not just in real estate, but in luxury fashion, art, hospitality, timepieces — look at the [latest] Sotheby's results.

I'm distinguishing between ultra-luxury and luxury. I don't know where you quite draw that line. The Bellemont on 86th and Madison, which we sold out for $4,000 a foot, that's at the very top end of luxury, but not necessarily ultra-luxury.

Ultra-luxury buyers are structurally insulated from the macro cycle. Mortgage rates really don't matter. Wall Street bonuses on a seasonal basis don’t drive purchasing decisions. CPI inflation is background noise. Wealth at the top 1% in the U.S. has more than doubled [since ‘17]. This might not be a politically savvy statement for me to make, but the number of billionaires keeps growing. That's not a trend, that's a structural reality. If you take 800 [Fifth], we're going to have 50-some-odd apartments. 220 [CPS, Vornado] had over 100; 15 CPW [Zeckendorfs] had over 200, and they sold swimmingly well.

Promote Insiders: Read on for the full interview 👇 🔒