One real estate executive’s search for lasting change in NYC through private finance

Blair C. Smith is closely watching a particular set of circumstances facing the commercial real estate market right now in New York City, and with good reason.

He brings decades of experience in asset management to his work with the Upper Manhattan Empowerment Zone Development Corporation and as the CIO of a Community Development Financial Institution (CDFI).

The federal government-backed CDFI Fund, established by the Riegle Community Development and Regulatory Improvement Act of 1994, is a Clinton-era initiative focused on expanding financing opportunities in low-income communities and to people who lack access to such services. Small business loan funds and credit unions are two common CDFI entities supported by the overarching CDFI Fund.

As a designated CDFI, the Upper Manhattan Empowerment Zone (UMEZ) Development Corporation actively sources commercial real estate deals in upper Manhattan often augmenting private capital also secured. His responsibilities include providing leadership in structuring, negotiating and closing of loans and investments, and oversight of credit policies. In addition, Smith identifies market opportunities and develops new finance strategies in furtherance of UMEZ’s mission.

Smith finds that Harlem has been on an exceptional growth trajectory with respect to real estate and other business investments in recent years, but the picture for commercial real estate in Manhattan has shifted suddenly in the last few months due to a plunge in tenant occupancy rates, creating challenges and opportunities.

He recently outlined in an interview his concerns within the NYC real estate market and his current work.

Vailakis: Given your knowledge of this sphere Blair, thank you for agreeing to speak to the Alternatives Watch community.

As COVID-19 has given rise to health, economic and civil challenges, how have they impacted New York City real estate and what does the commercial real estate investment picture look like?

Smith: Thank you for having me, Nancy.

I’m always bullish and optimistic but that has to be backed up with something substantive. According to PricewaterhouseCooper’s 2020 Mid-Year Real Estate Report: “investors hold ample dry powder, and changes in how we live and work could lead to growth in this asset class. For now, demand for many types of real estate remains strong, driven by growth in e-commerce, digitization of business, and the move by millennials to mid-size cities. We expect deal-making to gradually gain strength, assuming the economy revives during the second half.” I believe it will.

To balance all of that, it is reasonable to acknowledge some tough news in the sector. Indeed, headlines like “NYC May Investment Sales Volume Down 93% From Last Year”, speak to the climate. According to CNBC, delinquencies in commercial mortgage-backed securities jumped by 213 basis points in June to 3.59% from 1.46%. This is the largest one-month spike since Fitch Ratings began tracking this, approximately 16 years ago. Hospitality and retail were the hardest hit.

Many seasoned commercial real estate investors are seeing real opportunity here.

A deal that we just closed is a great example of the types of projects we do at UMEZ, and stands as a testament to some of the more positive activity in the sector. We are pairing up with Goldman Sachs as co-lenders to build The National Urban League’s headquarters in Harlem, starting this fall.

As we lined up the loan for this project, on a more practical level, what I found distinctive is how COVID-19 constraints are impacting construction plans. Required protocols on construction sites are being determined in real time and represent an evolving line item on the soft cost sheet. Providing gloves, masks, hand sanitizer, etc. to workers all defines a new awareness for project developers. But while there is a lot of uncertainty in the market, one developer I know mentioned that he is proceeding “as if” and being nimble with regard to any changes in timelines or construction budgets.

Vailakis: Congratulations on the deal closing, Blair! Your intel, with a heavy splash of optimism, is welcome at this time.

Let’s back up a bit. Tell us more about your path in investment management.

Smith: After I left private banking in the mid-2000s, I took that experience with high-net-worth individuals and became a senior investment officer with New York State Common Retirement Fund, overseeing a $5 billion emerging manager portfolio across multiple asset classes, including long-only as well as alternatives like private equity and hedge funds. I followed a very non-traditional path and I was very lucky to find mentorship at a later stage in my career.

Vailakis: And now you are still managing capital on behalf of your firm, a not-for-profit. In your words, tell us what UMEZ does.

Smith: Fundamentally, we are an alternative lender, a CDFI that operates in Upper Manhattan and we provide subordinate loans on commercial real estate projects as well as loans for small businesses. We provide better economics for the borrower than a venture capital firm in many cases.

Vailakis: Please speak to your past experience as an institutional investor, previously co-managing a $5 billion investment portfolio within the New York State Common Retirement Fund, as it intersects with what you’re seeing in your current role.

Smith: My activity as a fiduciary continues in my new role. In the current environment, there’s a heavy emphasis on capital preservation and one must be continually vigilant in the face of further potential market dislocation.

I’m keeping an eye on fixed income along with many other investors.

Vailakis: Speaking of dislocation, recent events surrounding diversity and inclusion have prompted a lot of dialogue backed up by allocations. Many in the investment management space seem to be scrambling to put together ESG solutions. What are your thoughts on this important topic?

Smith: I‘m pleased to read that LPs and other allocators want to do something to bring about more positive change in our society, specifically for African-Americans. We are part of the “S” in ESG.

First there needs to be dialogue, which is happening in the C-Suite all over the country. I hear daily stories of CEOs pulling aside their African-American employees and asking for their thoughts on the issues. No one is squirming in their seats when they hear the word “Black” anymore and that’s a good thing. It’s a new experience for many and is occasionally met with some skepticism. But MOST of the time it becomes an opportunity to have a penalty free conversation that often leads to a review of allocation and hiring policies. In the end, that’s a good thing.

Vailakis: You and I have discussed that the window for such open dialogue may be slowly closing. Please explain what you are hearing.

Smith: Yes, sadly the recent enthusiasm around the diversity conversation may be losing some steam, but I still believe this is a once in a generation opportunity for change that will benefit ESG overall. According to Preqin, all LPs will have some type of ESG policy solution by 2023. I don’t see a reversal of that.

Vailakis: Blair, thank you again for your time.

Smith: Thank you Nancy, I truly enjoyed our conversation.

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