WEBVTT 00:00:00.000 --> 00:00:01.932 align:middle line:90% [SQUEAKING] 00:00:01.932 --> 00:00:04.347 align:middle line:90% [RUSTLING] 00:00:04.347 --> 00:00:06.762 align:middle line:90% [CLICKING] 00:00:06.762 --> 00:00:10.450 align:middle line:90% 00:00:10.450 --> 00:00:14.357 align:middle line:84% ZHENGZHEN TAN: So what happened in the Winthrop Center? 00:00:14.357 --> 00:00:15.940 align:middle line:84% We have been going through extensively 00:00:15.940 --> 00:00:17.242 align:middle line:90% about the decision making. 00:00:17.242 --> 00:00:18.700 align:middle line:84% At the end of the day, you probably 00:00:18.700 --> 00:00:22.040 align:middle line:84% want to ask, how is this a successful project? 00:00:22.040 --> 00:00:25.510 align:middle line:84% And if you recall that we map on the blackboard 00:00:25.510 --> 00:00:29.150 align:middle line:84% about many stakeholder people went into that. 00:00:29.150 --> 00:00:32.110 align:middle line:84% So I think I would encourage you to think about-- 00:00:32.110 --> 00:00:35.080 align:middle line:84% to evaluate the success of a decision or not 00:00:35.080 --> 00:00:37.490 align:middle line:84% from the different stakeholder perspectives. 00:00:37.490 --> 00:00:40.900 align:middle line:84% So let's first take a look at the developer. 00:00:40.900 --> 00:00:44.110 align:middle line:84% Winthrop Center has been decided to go to construction 00:00:44.110 --> 00:00:46.250 align:middle line:90% between 2016 to 2018. 00:00:46.250 --> 00:00:49.610 align:middle line:84% So let's see where the market is at the 2019. 00:00:49.610 --> 00:00:53.770 align:middle line:84% So the biggest deal in 2019, in the same submarket, Boston CBD 00:00:53.770 --> 00:00:55.875 align:middle line:90% area, is 100 Summer Street. 00:00:55.875 --> 00:00:58.930 align:middle line:90% 00:00:58.930 --> 00:01:02.470 align:middle line:84% That building is a single glazed curtain 00:01:02.470 --> 00:01:04.269 align:middle line:90% wall, very broad building. 00:01:04.269 --> 00:01:08.050 align:middle line:84% And that was transacted at 4 cap. 00:01:08.050 --> 00:01:11.170 align:middle line:84% So this is the market signal saying 00:01:11.170 --> 00:01:14.920 align:middle line:84% that, in the asset market, the buyer or the market 00:01:14.920 --> 00:01:18.400 align:middle line:84% isn't really considering any green premium 00:01:18.400 --> 00:01:20.830 align:middle line:84% in the transaction, unfortunately. 00:01:20.830 --> 00:01:27.100 align:middle line:84% And State Street, in 2019, is one 00:01:27.100 --> 00:01:29.830 align:middle line:84% of the anchor tenants Winthrop Center is 00:01:29.830 --> 00:01:34.480 align:middle line:84% trying to gain over with its competitor, 1 Congress Street. 00:01:34.480 --> 00:01:39.360 align:middle line:84% However, State Street decided to go over to 1 00:01:39.360 --> 00:01:42.480 align:middle line:90% Congress instead of Winthrop. 00:01:42.480 --> 00:01:46.140 align:middle line:84% So I asked the head of global real estate 00:01:46.140 --> 00:01:49.770 align:middle line:84% why they decided to go for the 1 Congress 00:01:49.770 --> 00:01:52.140 align:middle line:84% Street, which is a less sustainable building, 00:01:52.140 --> 00:01:53.140 align:middle line:90% than Winthrop. 00:01:53.140 --> 00:01:56.400 align:middle line:84% And it turns out that what drives decision is, one, 00:01:56.400 --> 00:01:57.460 align:middle line:90% the floor plate. 00:01:57.460 --> 00:02:00.840 align:middle line:84% The Winthrop is a T-shaped floor plate, while this is an oval. 00:02:00.840 --> 00:02:03.100 align:middle line:84% In terms of usability of a floor plate, 00:02:03.100 --> 00:02:05.020 align:middle line:84% this is a much better floor plate. 00:02:05.020 --> 00:02:07.500 align:middle line:84% And another disadvantage of the Winthrop 00:02:07.500 --> 00:02:11.860 align:middle line:84% is that it's predominantly a luxury condo building. 00:02:11.860 --> 00:02:15.820 align:middle line:84% So in the design, the office part is kind of secondary. 00:02:15.820 --> 00:02:18.510 align:middle line:84% So when you're an office tenant, you feel the parking, 00:02:18.510 --> 00:02:22.060 align:middle line:84% the entrance is not as grandeur as the whole office building. 00:02:22.060 --> 00:02:27.520 align:middle line:84% So that makes the tenants really not comparing to that. 00:02:27.520 --> 00:02:30.280 align:middle line:84% And last but not least is really the rent. 00:02:30.280 --> 00:02:35.100 align:middle line:84% At the time, Winthrop decided not to give up its rent premium 00:02:35.100 --> 00:02:38.060 align:middle line:84% because, once you sign a lease, it's 10, 15 years, 00:02:38.060 --> 00:02:40.400 align:middle line:84% it's going to hurt your performance significantly. 00:02:40.400 --> 00:02:44.050 align:middle line:84% So they are not ready to give up all the hard work and all 00:02:44.050 --> 00:02:46.900 align:middle line:84% the risks that they have been undertaking. 00:02:46.900 --> 00:02:49.480 align:middle line:84% As you know, you should be compensated for the risk. 00:02:49.480 --> 00:02:52.510 align:middle line:84% But unfortunately, they lost that, 00:02:52.510 --> 00:02:55.000 align:middle line:84% which means that the building is going to sit empty 00:02:55.000 --> 00:02:56.650 align:middle line:90% when it is finished. 00:02:56.650 --> 00:03:02.560 align:middle line:84% And it's going to be a cash drain, unfortunately. 00:03:02.560 --> 00:03:09.790 align:middle line:84% And also, in 2020, in January, when Winthrop Center 00:03:09.790 --> 00:03:13.870 align:middle line:84% is about to close the debt from HSBC, 00:03:13.870 --> 00:03:17.950 align:middle line:84% a couple weeks later, like almost in days, the COVID hit. 00:03:17.950 --> 00:03:21.140 align:middle line:84% And the loan syndication market is non-existing. 00:03:21.140 --> 00:03:24.340 align:middle line:90% So HSBC pulled off their deal. 00:03:24.340 --> 00:03:28.690 align:middle line:84% And Winthrop Center experienced a near death 00:03:28.690 --> 00:03:31.930 align:middle line:84% that has been paused construction for almost three 00:03:31.930 --> 00:03:33.228 align:middle line:90% months. 00:03:33.228 --> 00:03:35.520 align:middle line:84% AUDIENCE: You said, the office was going to sit vacant. 00:03:35.520 --> 00:03:37.800 align:middle line:84% But the case had said that they were over 60% 00:03:37.800 --> 00:03:40.350 align:middle line:84% pre-leased prior to construction. 00:03:40.350 --> 00:03:41.250 align:middle line:90% What happened? 00:03:41.250 --> 00:03:42.750 align:middle line:84% ZHENGZHEN TAN: Prior to construction 00:03:42.750 --> 00:03:45.210 align:middle line:90% is 0%, if you read the case. 00:03:45.210 --> 00:03:46.382 align:middle line:90% The case says it's 0%. 00:03:46.382 --> 00:03:47.340 align:middle line:90% AUDIENCE: It said both. 00:03:47.340 --> 00:03:49.542 align:middle line:84% Another section, it said it was over 58%. 00:03:49.542 --> 00:03:51.750 align:middle line:84% ZHENGZHEN TAN: Oh, are you talking about the Winthrop 00:03:51.750 --> 00:03:52.240 align:middle line:90% Center? 00:03:52.240 --> 00:03:52.770 align:middle line:90% AUDIENCE: Yeah. 00:03:52.770 --> 00:03:53.630 align:middle line:90% ZHENGZHEN TAN: No, it's not. 00:03:53.630 --> 00:03:54.380 align:middle line:90% AUDIENCE: It's 0%? 00:03:54.380 --> 00:03:56.480 align:middle line:84% ZHENGZHEN TAN: Yeah, it's a 0% pre-lease, yeah. 00:03:56.480 --> 00:03:58.980 align:middle line:84% So after the construction, they start to lease the building. 00:03:58.980 --> 00:04:04.230 align:middle line:84% And the State Street is one of the key tenants 00:04:04.230 --> 00:04:05.370 align:middle line:90% they tried to win over. 00:04:05.370 --> 00:04:07.890 align:middle line:84% But unfortunately, they lost it because the-- 00:04:07.890 --> 00:04:09.720 align:middle line:84% and when the State Street, I recall-- 00:04:09.720 --> 00:04:11.100 align:middle line:84% [? Cassie ?] told me State Street 00:04:11.100 --> 00:04:12.242 align:middle line:90% comes to the Passive House. 00:04:12.242 --> 00:04:13.950 align:middle line:84% They had never heard about Passive House. 00:04:13.950 --> 00:04:17.079 align:middle line:84% And they said, what is Passive House, first of all? 00:04:17.079 --> 00:04:20.320 align:middle line:84% And then it sounds like we don't want to be a guinea pig. 00:04:20.320 --> 00:04:23.230 align:middle line:84% But then wait a minute, it's not a guinea pig. 00:04:23.230 --> 00:04:25.690 align:middle line:84% It's way much better impactful building. 00:04:25.690 --> 00:04:29.040 align:middle line:84% But unfortunately, there's a lot of education, and knowledge, 00:04:29.040 --> 00:04:31.500 align:middle line:84% and information asymmetry in the market, 00:04:31.500 --> 00:04:36.730 align:middle line:84% where the market fails to pay for this green premium. 00:04:36.730 --> 00:04:38.870 align:middle line:90% But later, they pull back. 00:04:38.870 --> 00:04:42.400 align:middle line:84% They find a Kuwait-based solvency fund to finance 00:04:42.400 --> 00:04:44.420 align:middle line:90% the $700-million loan. 00:04:44.420 --> 00:04:47.650 align:middle line:84% So that project was getting back to on track. 00:04:47.650 --> 00:04:49.810 align:middle line:90% And it's about to-- 00:04:49.810 --> 00:04:51.940 align:middle line:84% I think this month they are finally getting 00:04:51.940 --> 00:04:57.700 align:middle line:90% their certificate of occupancy. 00:04:57.700 --> 00:05:00.440 align:middle line:84% And talking about the risk, there's one project we cannot 00:05:00.440 --> 00:05:00.940 align:middle line:90% skip. 00:05:00.940 --> 00:05:02.300 align:middle line:90% It's the Cornell Tech. 00:05:02.300 --> 00:05:05.080 align:middle line:84% That project is very instrumental in the decision 00:05:05.080 --> 00:05:08.740 align:middle line:84% making of the Winthrop Center to de-risk the whole bet 00:05:08.740 --> 00:05:10.760 align:middle line:90% of $1.3 million bet. 00:05:10.760 --> 00:05:18.100 align:middle line:84% And at the time, 2018, this was the biggest Passive House, 00:05:18.100 --> 00:05:20.690 align:middle line:90% 250,000 square feet. 00:05:20.690 --> 00:05:24.520 align:middle line:84% And when you look at the story behind the Cornell Tech, 00:05:24.520 --> 00:05:28.870 align:middle line:84% it's a partnership between Hudson and Cornell-- 00:05:28.870 --> 00:05:30.670 align:middle line:90% and between the university. 00:05:30.670 --> 00:05:34.340 align:middle line:84% So I think, right now, everyone should get it. 00:05:34.340 --> 00:05:37.180 align:middle line:84% But Passive House really, according to the president, 00:05:37.180 --> 00:05:39.880 align:middle line:84% is a real deal, comparing to LEED. 00:05:39.880 --> 00:05:42.370 align:middle line:84% A lot of LEED, you can get away with high point, 00:05:42.370 --> 00:05:47.290 align:middle line:84% but not really means your building is much better. 00:05:47.290 --> 00:05:52.900 align:middle line:84% But Hudson has been pulled back, the last minute of a market rate 00:05:52.900 --> 00:05:55.010 align:middle line:90% project before the Cornell Tech. 00:05:55.010 --> 00:05:57.760 align:middle line:84% And the reason, according to David Kramer, 00:05:57.760 --> 00:06:01.000 align:middle line:84% is that the risk return equation when you are doing 00:06:01.000 --> 00:06:02.920 align:middle line:90% things for the first time. 00:06:02.920 --> 00:06:05.980 align:middle line:84% That's why we blinked at the last second 00:06:05.980 --> 00:06:09.250 align:middle line:84% because we knew we would be paying a premium in construction 00:06:09.250 --> 00:06:12.670 align:middle line:84% cost and didn't think we'd be able to get higher rents. 00:06:12.670 --> 00:06:14.320 align:middle line:84% And we weren't sure we were going 00:06:14.320 --> 00:06:17.560 align:middle line:84% to make up through the savings in the operating cost because 00:06:17.560 --> 00:06:19.780 align:middle line:90% of all the uncertainty. 00:06:19.780 --> 00:06:23.230 align:middle line:84% So Cornell Tech, the reason why the Cornell Tech behind that 00:06:23.230 --> 00:06:26.830 align:middle line:84% is that because Cornell took a significant equity 00:06:26.830 --> 00:06:30.460 align:middle line:84% stake in the building, so to de-risk the developer risk. 00:06:30.460 --> 00:06:34.120 align:middle line:84% And it was be able to keep rents affordable for student. 00:06:34.120 --> 00:06:36.940 align:middle line:84% So while the knowledge progressed, 00:06:36.940 --> 00:06:38.412 align:middle line:84% when you look at the history of-- 00:06:38.412 --> 00:06:40.120 align:middle line:84% AUDIENCE: Do you mind if I ask a question 00:06:40.120 --> 00:06:43.240 align:middle line:84% on the previous slide, which says a lot of LEED 00:06:43.240 --> 00:06:44.318 align:middle line:90% is not that impactful. 00:06:44.318 --> 00:06:46.610 align:middle line:84% This is something that I'm actually very interested in. 00:06:46.610 --> 00:06:49.630 align:middle line:84% So is there a difference between LEED Certified, 00:06:49.630 --> 00:06:52.540 align:middle line:84% LEED Gold, in terms of rent levels? 00:06:52.540 --> 00:06:55.067 align:middle line:84% Is there a big difference, would you say? 00:06:55.067 --> 00:06:55.900 align:middle line:90% ZHENGZHEN TAN: Yeah. 00:06:55.900 --> 00:06:56.817 align:middle line:90% AUDIENCE: That's true. 00:06:56.817 --> 00:07:00.940 align:middle line:84% If you look at the first lecture of the green buildings, 00:07:00.940 --> 00:07:02.990 align:middle line:84% many researchers already published papers. 00:07:02.990 --> 00:07:05.680 align:middle line:90% There is a differential. 00:07:05.680 --> 00:07:08.220 align:middle line:90% Differential is a price premium. 00:07:08.220 --> 00:07:10.947 align:middle line:84% The platinum will be the highest, yeah. 00:07:10.947 --> 00:07:13.030 align:middle line:84% ZHENGZHEN TAN: Yeah, I recall that there should be 00:07:13.030 --> 00:07:16.060 align:middle line:90% empirical study on that, yeah. 00:07:16.060 --> 00:07:18.640 align:middle line:84% So when you look at the whole idea, 00:07:18.640 --> 00:07:20.470 align:middle line:84% the, the green building movement, 00:07:20.470 --> 00:07:23.710 align:middle line:84% like starting in 2000, like the early adopters 00:07:23.710 --> 00:07:26.080 align:middle line:90% and the early movers of these-- 00:07:26.080 --> 00:07:30.220 align:middle line:84% any sustainability idea is always the corporate real estate 00:07:30.220 --> 00:07:31.520 align:middle line:90% and the MUSH segment. 00:07:31.520 --> 00:07:34.600 align:middle line:84% By MUSH, we mean municipal government, universities, 00:07:34.600 --> 00:07:36.580 align:middle line:90% schools, and hospitals. 00:07:36.580 --> 00:07:42.860 align:middle line:84% When you look at this diagram, the private developer, 00:07:42.860 --> 00:07:45.210 align:middle line:84% they started very, very tiny in the market penetration. 00:07:45.210 --> 00:07:45.710 align:middle line:90% Why? 00:07:45.710 --> 00:07:46.910 align:middle line:90% It's because the risk. 00:07:46.910 --> 00:07:49.620 align:middle line:84% And so when the information started 00:07:49.620 --> 00:07:52.900 align:middle line:84% to propagate-- in the economics session, 00:07:52.900 --> 00:07:55.860 align:middle line:84% we talked about when the market works and when the market fails. 00:07:55.860 --> 00:08:00.330 align:middle line:84% So this segment are the people who is going to take the risk 00:08:00.330 --> 00:08:05.190 align:middle line:84% and not underwrite the premium to promote the sustainability. 00:08:05.190 --> 00:08:08.100 align:middle line:84% And then the public sector will follow. 00:08:08.100 --> 00:08:13.770 align:middle line:84% Now, Passive House, in 2020, Steve Winter, the Passive House 00:08:13.770 --> 00:08:16.470 align:middle line:84% specialist who worked on the Cornell Tech, as well 00:08:16.470 --> 00:08:19.800 align:middle line:84% as the Winthrop, did a study when the data comes in 00:08:19.800 --> 00:08:22.620 align:middle line:84% because, at that time, after four years, 00:08:22.620 --> 00:08:26.370 align:middle line:84% there's more and more people picking up this idea. 00:08:26.370 --> 00:08:30.490 align:middle line:84% So they studied what is really the cost premium. 00:08:30.490 --> 00:08:34.659 align:middle line:84% It turns out the premium ranges from 1% to 8% 00:08:34.659 --> 00:08:37.650 align:middle line:84% And when you look at all these higher cost premiums, 00:08:37.650 --> 00:08:42.059 align:middle line:84% you notice that there is very inexperienced builders, which 00:08:42.059 --> 00:08:44.010 align:middle line:84% means when you do things for the first time, 00:08:44.010 --> 00:08:46.200 align:middle line:84% there is a cost premium involved, 00:08:46.200 --> 00:08:48.180 align:middle line:84% which is where the knowledge gap-- 00:08:48.180 --> 00:08:52.050 align:middle line:84% we say, the information asymmetry will really 00:08:52.050 --> 00:08:54.210 align:middle line:90% affect even your cost premium. 00:08:54.210 --> 00:08:57.570 align:middle line:84% I believe this building is Winthrop. 00:08:57.570 --> 00:09:01.380 align:middle line:84% And the cost premium ended up being 1% 00:09:01.380 --> 00:09:05.340 align:middle line:84% because we are talking about the top notch developer who 00:09:05.340 --> 00:09:07.410 align:middle line:90% has really perfect execution. 00:09:07.410 --> 00:09:11.230 align:middle line:84% And they learned really fast working with the best consulting 00:09:11.230 --> 00:09:12.190 align:middle line:90% team in the world. 00:09:12.190 --> 00:09:15.850 align:middle line:84% And they work with the construction team 00:09:15.850 --> 00:09:18.280 align:middle line:84% who's willing to take the risk and align 00:09:18.280 --> 00:09:19.960 align:middle line:90% the interests with them. 00:09:19.960 --> 00:09:24.670 align:middle line:84% So who do you think will be happy? 00:09:24.670 --> 00:09:30.200 align:middle line:90% In the people's map? 00:09:30.200 --> 00:09:32.690 align:middle line:84% Well, Winthrop Center-- I don't think it's 00:09:32.690 --> 00:09:35.122 align:middle line:90% the final chapter yet. 00:09:35.122 --> 00:09:38.510 align:middle line:84% As people say, this building may make money second time around. 00:09:38.510 --> 00:09:41.810 align:middle line:84% But for this time, maybe not so much. 00:09:41.810 --> 00:09:45.710 align:middle line:84% I don't think they meet their performer premium just 00:09:45.710 --> 00:09:47.390 align:middle line:90% because the market reality. 00:09:47.390 --> 00:09:50.040 align:middle line:84% But it may catch up in the second round. 00:09:50.040 --> 00:09:52.610 align:middle line:84% But who do you think will be happier 00:09:52.610 --> 00:09:56.905 align:middle line:84% than the developer in this stakeholder map? 00:09:56.905 --> 00:09:59.870 align:middle line:90% 00:09:59.870 --> 00:10:01.040 align:middle line:90% AUDIENCE: The tenants would. 00:10:01.040 --> 00:10:02.165 align:middle line:90% ZHENGZHEN TAN: The tenants? 00:10:02.165 --> 00:10:03.750 align:middle line:84% Yeah, the tenants would definitely 00:10:03.750 --> 00:10:06.110 align:middle line:84% pay less and get a very performance building. 00:10:06.110 --> 00:10:07.282 align:middle line:90% Who else? 00:10:07.282 --> 00:10:08.610 align:middle line:90% AUDIENCE: The city. 00:10:08.610 --> 00:10:10.060 align:middle line:90% ZHENGZHEN TAN: Yeah, the city. 00:10:10.060 --> 00:10:10.780 align:middle line:90% That's right. 00:10:10.780 --> 00:10:12.780 align:middle line:84% So I will say one of the biggest winner 00:10:12.780 --> 00:10:16.490 align:middle line:84% is really the city of Boston or even Massachusetts. 00:10:16.490 --> 00:10:21.830 align:middle line:84% So BERDO 2.0, like the building-- 00:10:21.830 --> 00:10:24.560 align:middle line:84% City of Boston started to push very aggressively on the climate 00:10:24.560 --> 00:10:25.460 align:middle line:90% action. 00:10:25.460 --> 00:10:29.330 align:middle line:84% And as of 2020, Massachusetts has 00:10:29.330 --> 00:10:32.540 align:middle line:84% adopted one of the most stringent US building energy 00:10:32.540 --> 00:10:36.890 align:middle line:84% codes, which is called envelope backstop. 00:10:36.890 --> 00:10:40.480 align:middle line:84% So what this building code tells us 00:10:40.480 --> 00:10:42.640 align:middle line:84% is that they are actually introducing 00:10:42.640 --> 00:10:45.400 align:middle line:84% the elements of Passive House in the building code 00:10:45.400 --> 00:10:47.660 align:middle line:84% without calling it Passive House. 00:10:47.660 --> 00:10:50.260 align:middle line:84% So the Winthrop Center case, when 00:10:50.260 --> 00:10:52.330 align:middle line:84% it goes through the MEPA process, 00:10:52.330 --> 00:10:56.350 align:middle line:84% because they have to go through these thousands pages of MEPA 00:10:56.350 --> 00:10:58.270 align:middle line:90% process, the MEPA learned-- 00:10:58.270 --> 00:11:00.220 align:middle line:90% MEPA is the Massachusetts EPA. 00:11:00.220 --> 00:11:01.960 align:middle line:84% They learned that, oh, actually you 00:11:01.960 --> 00:11:05.650 align:middle line:84% can achieve a vision ratio of 45% to 50%. 00:11:05.650 --> 00:11:08.780 align:middle line:84% And doing a triple-glazed window, it's still workable. 00:11:08.780 --> 00:11:10.340 align:middle line:90% So then they get educated. 00:11:10.340 --> 00:11:13.790 align:middle line:84% See, if they can do that, why not other developers? 00:11:13.790 --> 00:11:16.960 align:middle line:90% 00:11:16.960 --> 00:11:19.390 align:middle line:84% From that provision, the developer has to do 00:11:19.390 --> 00:11:27.130 align:middle line:84% triple-glazed window because the regulation organize-- 00:11:27.130 --> 00:11:28.780 align:middle line:90% requires you to do so. 00:11:28.780 --> 00:11:36.200 align:middle line:84% And in 2021, like two years before, 00:11:36.200 --> 00:11:40.280 align:middle line:84% Boston is now home to three of the largest Passive House 00:11:40.280 --> 00:11:41.870 align:middle line:90% projects in the United States-- 00:11:41.870 --> 00:11:47.000 align:middle line:84% Winthrop center-- Bunker Hill Redevelopment is a 2,700 units 00:11:47.000 --> 00:11:50.630 align:middle line:84% housing, including both market rate and affordable housing. 00:11:50.630 --> 00:11:53.460 align:middle line:84% And then Northland Newton development in Newton-- 00:11:53.460 --> 00:11:56.720 align:middle line:90% that's 800 units in housing. 00:11:56.720 --> 00:12:01.140 align:middle line:84% And Siqi and I visited the Northland Newton Development. 00:12:01.140 --> 00:12:02.690 align:middle line:84% So we asked the developer, oh, how 00:12:02.690 --> 00:12:06.590 align:middle line:84% come you decided to push such a high level of sustainability, 00:12:06.590 --> 00:12:07.830 align:middle line:90% which is Passive House? 00:12:07.830 --> 00:12:10.520 align:middle line:84% And the developer told us they originally 00:12:10.520 --> 00:12:13.190 align:middle line:84% are proposing a LEED Platinum because they think 00:12:13.190 --> 00:12:15.020 align:middle line:90% it's already great enough. 00:12:15.020 --> 00:12:16.830 align:middle line:84% They thought the city would be happy. 00:12:16.830 --> 00:12:19.520 align:middle line:84% Surprisingly, the city of Newton, 00:12:19.520 --> 00:12:23.090 align:middle line:84% because they hang out with city of Boston people, 00:12:23.090 --> 00:12:25.670 align:middle line:84% they come back and say, hey, we heard there's something 00:12:25.670 --> 00:12:26.780 align:middle line:90% called a Passive House. 00:12:26.780 --> 00:12:30.510 align:middle line:84% And there's a huge building in the city of Boston. 00:12:30.510 --> 00:12:34.380 align:middle line:84% And we heard that they are 80% more energy efficient 00:12:34.380 --> 00:12:35.410 align:middle line:90% than the LEED. 00:12:35.410 --> 00:12:37.020 align:middle line:90% And it's like way more-- 00:12:37.020 --> 00:12:38.460 align:middle line:90% it's the real deal. 00:12:38.460 --> 00:12:41.520 align:middle line:84% So the developer gets back to do their homework 00:12:41.520 --> 00:12:44.110 align:middle line:84% and comes out with a Passive House proposal. 00:12:44.110 --> 00:12:51.090 align:middle line:84% And that project is currently under public hearing. 00:12:51.090 --> 00:12:54.900 align:middle line:84% And the NGOs will start to create 00:12:54.900 --> 00:12:58.930 align:middle line:84% grants to prove Passive House to-- for the massive adoption. 00:12:58.930 --> 00:13:02.820 align:middle line:84% So what we learned from how the sustainability propagates 00:13:02.820 --> 00:13:06.570 align:middle line:84% is that usually there's an idea generating 00:13:06.570 --> 00:13:10.650 align:middle line:84% from studies in the scientist or the design community. 00:13:10.650 --> 00:13:13.660 align:middle line:84% They're pushing the frontier of the innovation. 00:13:13.660 --> 00:13:16.590 align:middle line:84% Then there's a pilot, usually in the corporate real estate 00:13:16.590 --> 00:13:20.370 align:middle line:84% or the MUSH segment, which is that they take less development 00:13:20.370 --> 00:13:20.950 align:middle line:90% risk. 00:13:20.950 --> 00:13:23.700 align:middle line:84% Then there will be followers in the wider community, 00:13:23.700 --> 00:13:27.780 align:middle line:84% like commercial real estate, like speculative development. 00:13:27.780 --> 00:13:32.280 align:middle line:84% And then there is a true game changer, 00:13:32.280 --> 00:13:36.030 align:middle line:84% what Siqi will mention in the economics is that when 00:13:36.030 --> 00:13:41.460 align:middle line:84% the regulation truly comes, then it's the market majority. 00:13:41.460 --> 00:13:43.500 align:middle line:90% That's really the scale up. 00:13:43.500 --> 00:13:46.575 align:middle line:84% So if you look at any of the ideas of the sustainability, 00:13:46.575 --> 00:13:48.750 align:middle line:84% it always started with something-- risk, 00:13:48.750 --> 00:13:51.090 align:middle line:84% and then people get to do it, then the knowledge. 00:13:51.090 --> 00:13:53.470 align:middle line:84% The risk has been getting better. 00:13:53.470 --> 00:13:56.340 align:middle line:84% Then once the information started to propagate, the rent 00:13:56.340 --> 00:14:00.270 align:middle line:84% premium, the market starts to react to that, 00:14:00.270 --> 00:14:05.160 align:middle line:84% and then starts to reward such a building performance. 00:14:05.160 --> 00:14:07.740 align:middle line:84% And then it will become the new norm. 00:14:07.740 --> 00:14:10.330 align:middle line:84% Then we move on to the next project. 00:14:10.330 --> 00:14:13.260 align:middle line:84% And for the Passive House, another reason 00:14:13.260 --> 00:14:16.140 align:middle line:84% I want to mention that is that in the Massachusetts stretch 00:14:16.140 --> 00:14:21.000 align:middle line:84% code, which is going to go effect, I think, July this year, 00:14:21.000 --> 00:14:23.380 align:middle line:90% is the net-zero stretch code. 00:14:23.380 --> 00:14:28.170 align:middle line:84% Passive House is going to be one of the optimum pathways 00:14:28.170 --> 00:14:30.270 align:middle line:90% towards the net-zero. 00:14:30.270 --> 00:14:33.570 align:middle line:84% So right now, the developer is also wondering, 00:14:33.570 --> 00:14:36.270 align:middle line:84% looking into the passive house and the standing cost premium, 00:14:36.270 --> 00:14:40.980 align:middle line:84% and to see how they can help them achieve 00:14:40.980 --> 00:14:42.570 align:middle line:84% the net-zero because that's where 00:14:42.570 --> 00:14:45.050 align:middle line:90% the industry is moving towards. 00:14:45.050 --> 00:14:48.130 align:middle line:84% OK, so let's move to the 425 Park Avenue. 00:14:48.130 --> 00:14:49.300 align:middle line:90% Can you help me to change? 00:14:49.300 --> 00:14:52.216 align:middle line:90% 00:14:52.216 --> 00:14:54.160 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:14:54.160 --> 00:14:56.030 align:middle line:90% ZHENGZHEN TAN: Oh yeah, sorry. 00:14:56.030 --> 00:15:00.065 align:middle line:84% AUDIENCE: About the restart [INAUDIBLE]. 00:15:00.065 --> 00:15:01.190 align:middle line:90% ZHENGZHEN TAN: Which slide? 00:15:01.190 --> 00:15:02.900 align:middle line:90% Yeah. 00:15:02.900 --> 00:15:07.090 align:middle line:84% AUDIENCE: Different passive buildings have different cost. 00:15:07.090 --> 00:15:11.170 align:middle line:84% So what was the most important conditional design 00:15:11.170 --> 00:15:14.440 align:middle line:84% to the tenant and the market feedback? 00:15:14.440 --> 00:15:16.863 align:middle line:90% Top three. 00:15:16.863 --> 00:15:18.280 align:middle line:84% ZHENGZHEN TAN: So your question is 00:15:18.280 --> 00:15:22.610 align:middle line:84% that the cost premium seems to vary a lot, 1 to 5% 00:15:22.610 --> 00:15:25.570 align:middle line:84% So are you saying, why the market-- 00:15:25.570 --> 00:15:28.253 align:middle line:84% AUDIENCE: What's the most important design to-- 00:15:28.253 --> 00:15:29.670 align:middle line:84% ZHENGZHEN TAN: Oh, design element? 00:15:29.670 --> 00:15:30.220 align:middle line:90% So-- 00:15:30.220 --> 00:15:33.760 align:middle line:84% AUDIENCE: Tenant and the market from the feedback. 00:15:33.760 --> 00:15:36.340 align:middle line:90% ZHENGZHEN TAN: OK. 00:15:36.340 --> 00:15:39.490 align:middle line:84% I don't think the tenants and the market are there yet. 00:15:39.490 --> 00:15:41.740 align:middle line:84% A lot of these projects are still in construction. 00:15:41.740 --> 00:15:44.860 align:middle line:84% So they are still trying to understand the cost, less 00:15:44.860 --> 00:15:47.200 align:middle line:90% about the benefits part yet. 00:15:47.200 --> 00:15:50.170 align:middle line:84% So for the cost, I think the biggest component of cost 00:15:50.170 --> 00:15:53.630 align:middle line:84% goes to the envelope, triple-glazed window. 00:15:53.630 --> 00:15:57.070 align:middle line:84% And then you will do very special treatment 00:15:57.070 --> 00:16:01.530 align:middle line:84% of the thermal bridge of your envelope. 00:16:01.530 --> 00:16:05.830 align:middle line:84% So I think that's where the biggest money goes to. 00:16:05.830 --> 00:16:10.880 align:middle line:84% But I don't know about the tenants' part yet, which maybe 00:16:10.880 --> 00:16:12.980 align:middle line:84% we'll have more information next year, 00:16:12.980 --> 00:16:17.355 align:middle line:84% hopefully, when the tenants move into Winthrop. 00:16:17.355 --> 00:16:18.855 align:middle line:84% AUDIENCE: What about the condo side, 00:16:18.855 --> 00:16:21.730 align:middle line:84% the LEED Platinum is that affected at all? 00:16:21.730 --> 00:16:24.500 align:middle line:90% What is the take-away from that? 00:16:24.500 --> 00:16:28.910 align:middle line:84% ZHENGZHEN TAN: They decided to go LEED Gold for the condo part. 00:16:28.910 --> 00:16:32.990 align:middle line:84% So the condo part, because they sell it, 00:16:32.990 --> 00:16:36.530 align:middle line:84% they don't hold it, so the BERDO or 2.0 is less 00:16:36.530 --> 00:16:40.020 align:middle line:84% a headache to the landlord than to the condo association. 00:16:40.020 --> 00:16:42.440 align:middle line:84% But they are going to face fines because they didn't 00:16:42.440 --> 00:16:44.735 align:middle line:90% go for electrification, yeah. 00:16:44.735 --> 00:16:46.860 align:middle line:84% AUDIENCE: Can you [? pull ?] [? up ?] that question 00:16:46.860 --> 00:16:52.215 align:middle line:84% because, as a developer, we also hope to pay less money. 00:16:52.215 --> 00:16:57.150 align:middle line:84% And they got positive feedback from the tenant. 00:16:57.150 --> 00:17:02.040 align:middle line:84% So if the building has a different design, 00:17:02.040 --> 00:17:06.390 align:middle line:84% maybe we can give the important conditional design 00:17:06.390 --> 00:17:09.089 align:middle line:90% to the tenant-- 00:17:09.089 --> 00:17:13.109 align:middle line:84% less money, less cost, and higher revenue. 00:17:13.109 --> 00:17:14.130 align:middle line:90% ZHENGZHEN TAN: Yeah. 00:17:14.130 --> 00:17:16.410 align:middle line:84% Yeah, I'm sure that the community 00:17:16.410 --> 00:17:17.550 align:middle line:90% will start to propagate. 00:17:17.550 --> 00:17:20.849 align:middle line:84% And eventually, I think we'll further reduce the cost. 00:17:20.849 --> 00:17:23.700 align:middle line:84% When the vendor comes in and they feel more comfortable, 00:17:23.700 --> 00:17:27.720 align:middle line:84% and then eventually, thanks to the regulation, 00:17:27.720 --> 00:17:29.210 align:middle line:90% everyone is going to do it. 00:17:29.210 --> 00:17:31.600 align:middle line:84% So it's no longer a debate anymore. 00:17:31.600 --> 00:17:33.270 align:middle line:90% We're just going to do it. 00:17:33.270 --> 00:17:37.140 align:middle line:84% OK, let's move to the 245 Park Avenue. 00:17:37.140 --> 00:17:42.910 align:middle line:84% So this building, again, is 10 years ago in the fall, 2012. 00:17:42.910 --> 00:17:48.240 align:middle line:84% The case is about in the fall, 2012, L&L developer, 00:17:48.240 --> 00:17:52.770 align:middle line:84% who is contemplating the design of their next project, which 00:17:52.770 --> 00:17:55.420 align:middle line:90% is in 425 Park Avenue-- 00:17:55.420 --> 00:17:57.870 align:middle line:84% it's an office-- predominantly office 00:17:57.870 --> 00:18:01.800 align:middle line:84% building with a little bit retail at the bottom. 00:18:01.800 --> 00:18:06.660 align:middle line:90% So Levinson, the LP-- 00:18:06.660 --> 00:18:07.920 align:middle line:90% sorry, not LP. 00:18:07.920 --> 00:18:12.070 align:middle line:84% I think he's the GP, the GP developer in the case. 00:18:12.070 --> 00:18:15.970 align:middle line:84% He had a hunch that the next important trend 00:18:15.970 --> 00:18:19.390 align:middle line:84% in the urban office leases would revolve 00:18:19.390 --> 00:18:22.180 align:middle line:90% around health and wellness. 00:18:22.180 --> 00:18:26.650 align:middle line:84% So he's in a very influential decision to bet-- 00:18:26.650 --> 00:18:31.030 align:middle line:84% it's another bet-- about this $1 billion office project 00:18:31.030 --> 00:18:37.480 align:middle line:84% and to see how they can design the vision of the project. 00:18:37.480 --> 00:18:40.960 align:middle line:84% Can someone give us some high level summary 00:18:40.960 --> 00:18:43.340 align:middle line:90% about the project character? 00:18:43.340 --> 00:18:48.800 align:middle line:90% 00:18:48.800 --> 00:18:50.570 align:middle line:90% Can you put on your name card? 00:18:50.570 --> 00:18:52.320 align:middle line:84% Does everyone have your name card? 00:18:52.320 --> 00:18:58.160 align:middle line:90% 00:18:58.160 --> 00:19:00.890 align:middle line:84% [? Mamu, ?] can you give us a project character? 00:19:00.890 --> 00:19:01.820 align:middle line:90% AUDIENCE: Sure. 00:19:01.820 --> 00:19:04.881 align:middle line:90% [INAUDIBLE] square feet-- 00:19:04.881 --> 00:19:07.670 align:middle line:84% ZHENGZHEN TAN: Oh, what's the square feet? 00:19:07.670 --> 00:19:09.410 align:middle line:90% AUDIENCE: 670,000. 00:19:09.410 --> 00:19:12.110 align:middle line:90% ZHENGZHEN TAN: 670,000? 00:19:12.110 --> 00:19:13.190 align:middle line:90% Yeah? 00:19:13.190 --> 00:19:13.960 align:middle line:90% Square feet? 00:19:13.960 --> 00:19:16.705 align:middle line:90% 00:19:16.705 --> 00:19:18.142 align:middle line:90% AUDIENCE: [INAUDIBLE]. 00:19:18.142 --> 00:19:22.490 align:middle line:90% 00:19:22.490 --> 00:19:23.750 align:middle line:90% So that's for office space. 00:19:23.750 --> 00:19:26.630 align:middle line:84% Then for retail space, it's 18,000. 00:19:26.630 --> 00:19:32.090 align:middle line:84% ZHENGZHEN TAN: Yeah, 18,000 retail. 00:19:32.090 --> 00:19:36.515 align:middle line:84% AUDIENCE: [INAUDIBLE] to a car-parking garage. 00:19:36.515 --> 00:19:37.265 align:middle line:90% ZHENGZHEN TAN: OK. 00:19:37.265 --> 00:19:40.980 align:middle line:90% 00:19:40.980 --> 00:19:51.820 align:middle line:84% Why has LLL decided to develop the site in 2012? 00:19:51.820 --> 00:19:52.930 align:middle line:90% Andy? 00:19:52.930 --> 00:19:57.230 align:middle line:84% AUDIENCE: The property was cash flow negative at the time. 00:19:57.230 --> 00:19:59.400 align:middle line:84% They had a partnership with Lehman, I believe. 00:19:59.400 --> 00:20:01.920 align:middle line:84% And they had a land lease on the land. 00:20:01.920 --> 00:20:04.470 align:middle line:84% And they had acquired it with the intention 00:20:04.470 --> 00:20:06.360 align:middle line:90% of improving the site. 00:20:06.360 --> 00:20:08.520 align:middle line:84% And then the financial crisis hit. 00:20:08.520 --> 00:20:10.712 align:middle line:84% And their partner became insolvent. 00:20:10.712 --> 00:20:13.170 align:middle line:84% They ultimately bought them out and decided to move forward 00:20:13.170 --> 00:20:15.777 align:middle line:84% with their original plan, so it wasn't such a cash drain 00:20:15.777 --> 00:20:16.610 align:middle line:90% on their investment. 00:20:16.610 --> 00:20:18.027 align:middle line:84% ZHENGZHEN TAN: Yeah, that's right. 00:20:18.027 --> 00:20:19.750 align:middle line:90% So it's a huge cash drain. 00:20:19.750 --> 00:20:23.250 align:middle line:84% So they are very motivated to move fast. 00:20:23.250 --> 00:20:24.420 align:middle line:90% What else? 00:20:24.420 --> 00:20:27.090 align:middle line:90% What else about the situation? 00:20:27.090 --> 00:20:28.650 align:middle line:90% David? 00:20:28.650 --> 00:20:30.990 align:middle line:84% AUDIENCE: The city zoning regulations changed. 00:20:30.990 --> 00:20:33.174 align:middle line:90% And the [INAUDIBLE]. 00:20:33.174 --> 00:20:43.727 align:middle line:90% 00:20:43.727 --> 00:20:45.560 align:middle line:84% ZHENGZHEN TAN: So how do you feel about this 00:20:45.560 --> 00:20:47.530 align:middle line:90% retain 25% of the building? 00:20:47.530 --> 00:20:54.190 align:middle line:90% 00:20:54.190 --> 00:20:59.620 align:middle line:84% Yeah, so the situation is that if they don't retain 25% 00:20:59.620 --> 00:21:04.120 align:middle line:84% of the building, they cannot achieve the highest floor square 00:21:04.120 --> 00:21:08.060 align:middle line:84% footage because of the zoning change. 00:21:08.060 --> 00:21:11.350 align:middle line:84% So in order to maximize-- and the investment 00:21:11.350 --> 00:21:13.060 align:middle line:90% is no longer attainable. 00:21:13.060 --> 00:21:16.960 align:middle line:84% So in order to keep the current economics work, 00:21:16.960 --> 00:21:20.730 align:middle line:84% they have to keep 25% of the existing building. 00:21:20.730 --> 00:21:21.855 align:middle line:90% How do you feel about that? 00:21:21.855 --> 00:21:26.770 align:middle line:90% 00:21:26.770 --> 00:21:30.430 align:middle line:84% How do you feel about keeping 25% of the existing? 00:21:30.430 --> 00:21:32.010 align:middle line:90% Bill? 00:21:32.010 --> 00:21:33.940 align:middle line:84% AUDIENCE: It's really difficult to do that. 00:21:33.940 --> 00:21:36.013 align:middle line:90% And it's expensive. 00:21:36.013 --> 00:21:37.430 align:middle line:84% It's hard to do that structurally, 00:21:37.430 --> 00:21:39.847 align:middle line:84% and then it's just going to add to your costs. 00:21:39.847 --> 00:21:41.055 align:middle line:90% ZHENGZHEN TAN: How much cost? 00:21:41.055 --> 00:21:46.710 align:middle line:90% 00:21:46.710 --> 00:21:48.270 align:middle line:90% Extremely difficult, right? 00:21:48.270 --> 00:21:50.502 align:middle line:90% To keep a 25% of a-- 00:21:50.502 --> 00:21:51.460 align:middle line:90% AUDIENCE: I'm not sure. 00:21:51.460 --> 00:21:52.662 align:middle line:90% I I'm looking at my notes. 00:21:52.662 --> 00:21:54.870 align:middle line:84% I don't remember how much extra it was going to cost, 00:21:54.870 --> 00:21:56.480 align:middle line:84% but it was going to be significant. 00:21:56.480 --> 00:21:57.855 align:middle line:84% ZHENGZHEN TAN: Significant, yeah. 00:21:57.855 --> 00:22:08.900 align:middle line:84% So the cost premium is 8% So let's look at the market. 00:22:08.900 --> 00:22:17.160 align:middle line:84% So to summarize the basic project character, 00:22:17.160 --> 00:22:21.620 align:middle line:84% so it's a ground lease, major cash drain. 00:22:21.620 --> 00:22:24.410 align:middle line:84% Then there's the financing uncertainty. 00:22:24.410 --> 00:22:27.320 align:middle line:84% The Lehman Brothers-- and although they are still honoring 00:22:27.320 --> 00:22:29.450 align:middle line:90% the loan, but you don't know. 00:22:29.450 --> 00:22:34.410 align:middle line:84% And the zoning, they have to keep 25% of the structure. 00:22:34.410 --> 00:22:37.130 align:middle line:84% And it's really, extremely difficult 00:22:37.130 --> 00:22:40.550 align:middle line:84% for any engineer or designer for that. 00:22:40.550 --> 00:22:44.420 align:middle line:90% So let's take a look at the-- 00:22:44.420 --> 00:22:48.610 align:middle line:90% take a look at the market. 00:22:48.610 --> 00:22:53.950 align:middle line:84% How is the market in the New York office market? 00:22:53.950 --> 00:22:54.975 align:middle line:90% How is the market like? 00:22:54.975 --> 00:22:57.790 align:middle line:90% 00:22:57.790 --> 00:22:59.820 align:middle line:90% What's the market situation? 00:22:59.820 --> 00:23:08.060 align:middle line:90% 00:23:08.060 --> 00:23:08.690 align:middle line:90% Sorry. 00:23:08.690 --> 00:23:10.520 align:middle line:84% AUDIENCE: They cited One World Trade 00:23:10.520 --> 00:23:13.565 align:middle line:84% center, which has 3 million square feet of office space. 00:23:13.565 --> 00:23:21.510 align:middle line:84% [INAUDIBLE] to live, work, play [INAUDIBLE]. 00:23:21.510 --> 00:23:24.000 align:middle line:84% ZHENGZHEN TAN: So you're saying there's two developments 00:23:24.000 --> 00:23:25.160 align:middle line:90% at the same time? 00:23:25.160 --> 00:23:26.590 align:middle line:90% One is the-- 00:23:26.590 --> 00:23:29.900 align:middle line:84% AUDIENCE: Yeah, both [INAUDIBLE]. 00:23:29.900 --> 00:23:31.970 align:middle line:90% ZHENGZHEN TAN: OK, sorry. 00:23:31.970 --> 00:23:33.180 align:middle line:90% Can I open another? 00:23:33.180 --> 00:23:34.430 align:middle line:90% Can you help me open another? 00:23:34.430 --> 00:23:35.390 align:middle line:90% I think I got-- 00:23:35.390 --> 00:23:39.080 align:middle line:84% I was going to pull up the map to look 00:23:39.080 --> 00:23:41.910 align:middle line:90% at the situation of the market. 00:23:41.910 --> 00:23:44.450 align:middle line:90% So [? Aria, ?] sorry, can you-- 00:23:44.450 --> 00:23:46.310 align:middle line:90% sorry, can I get this? 00:23:46.310 --> 00:23:56.495 align:middle line:90% 00:23:56.495 --> 00:23:58.750 align:middle line:90% Oh, here, yeah. 00:23:58.750 --> 00:24:01.280 align:middle line:84% Yeah, so let's take a look at the market. 00:24:01.280 --> 00:24:04.780 align:middle line:90% So how is the market like? 00:24:04.780 --> 00:24:06.020 align:middle line:90% How about the location? 00:24:06.020 --> 00:24:07.978 align:middle line:84% How do you feel the location about the project? 00:24:07.978 --> 00:24:13.400 align:middle line:90% 00:24:13.400 --> 00:24:16.400 align:middle line:84% [? Aria, ?] you say there is one development going on, which 00:24:16.400 --> 00:24:17.780 align:middle line:90% is Hudson Yard, right? 00:24:17.780 --> 00:24:21.013 align:middle line:90% 00:24:21.013 --> 00:24:22.680 align:middle line:84% [? Erin, ?] do you have anything to add? 00:24:22.680 --> 00:24:24.290 align:middle line:84% I see you raised your hand earlier. 00:24:24.290 --> 00:24:25.873 align:middle line:84% AUDIENCE: I was going to say the same. 00:24:25.873 --> 00:24:28.080 align:middle line:84% There's a hot competition [INAUDIBLE]. 00:24:28.080 --> 00:24:32.523 align:middle line:90% 00:24:32.523 --> 00:24:34.690 align:middle line:84% ZHENGZHEN TAN: So how do you feel about the location 00:24:34.690 --> 00:24:36.856 align:middle line:90% comparing to their competitors? 00:24:36.856 --> 00:24:39.600 align:middle line:90% 00:24:39.600 --> 00:24:40.590 align:middle line:90% Becky? 00:24:40.590 --> 00:24:43.260 align:middle line:84% AUDIENCE: So the location, it's not 00:24:43.260 --> 00:24:48.480 align:middle line:84% as prime as the financial center or the other sectors. 00:24:48.480 --> 00:24:51.630 align:middle line:84% The case also mentioned that, in that region, 00:24:51.630 --> 00:24:53.370 align:middle line:90% the rent price is not-- 00:24:53.370 --> 00:24:56.810 align:middle line:84% the average rent price is not as high as the other as well. 00:24:56.810 --> 00:24:59.030 align:middle line:84% So they have to be cautious about raising 00:24:59.030 --> 00:25:00.893 align:middle line:90% their rent too high. 00:25:00.893 --> 00:25:02.810 align:middle line:84% ZHENGZHEN TAN: Do we have anyone from New York 00:25:02.810 --> 00:25:06.100 align:middle line:84% City who knows about the New York City office market? 00:25:06.100 --> 00:25:10.920 align:middle line:90% 00:25:10.920 --> 00:25:15.000 align:middle line:84% So if we compare these three locations, 00:25:15.000 --> 00:25:17.400 align:middle line:84% the difference is that-- so in the Winthrop Center, 00:25:17.400 --> 00:25:19.770 align:middle line:84% we're talking about it's the same sub-location, 00:25:19.770 --> 00:25:22.830 align:middle line:84% but this is not the same sub-location. 00:25:22.830 --> 00:25:27.510 align:middle line:84% So location-wise, Ground Zero is in the financial district, 00:25:27.510 --> 00:25:30.790 align:middle line:90% is in the downtown Wall Street. 00:25:30.790 --> 00:25:37.020 align:middle line:84% So after 2000-- 9/11, a lot of the financial companies, 00:25:37.020 --> 00:25:39.450 align:middle line:90% they all moved up to midtown. 00:25:39.450 --> 00:25:42.540 align:middle line:84% So among these three locations, the Ground Zero 00:25:42.540 --> 00:25:44.100 align:middle line:90% actually is the cheapest. 00:25:44.100 --> 00:25:47.190 align:middle line:84% Downtown is the cheapest location. 00:25:47.190 --> 00:25:54.790 align:middle line:84% Hudson Yard, it's not really meant to be an office cluster. 00:25:54.790 --> 00:25:57.420 align:middle line:90% So it's a new development. 00:25:57.420 --> 00:26:01.270 align:middle line:90% So how big is Hudson Yard? 00:26:01.270 --> 00:26:04.750 align:middle line:90% 00:26:04.750 --> 00:26:06.480 align:middle line:90% Did anyone look into that? 00:26:06.480 --> 00:26:09.920 align:middle line:90% 00:26:09.920 --> 00:26:20.310 align:middle line:84% So Hudson Yard is about 10 million, 10 million square feet. 00:26:20.310 --> 00:26:23.410 align:middle line:90% 00:26:23.410 --> 00:26:26.148 align:middle line:84% The Ground Zero, the One World Trade Center, 00:26:26.148 --> 00:26:27.315 align:middle line:90% do you know how big is that? 00:26:27.315 --> 00:26:33.010 align:middle line:90% 00:26:33.010 --> 00:26:37.870 align:middle line:84% One Trade Center is about 3 million. 00:26:37.870 --> 00:26:41.110 align:middle line:84% So in terms of location, it's arguably one 00:26:41.110 --> 00:26:44.320 align:middle line:84% of the best locations in midtown office 00:26:44.320 --> 00:26:48.940 align:middle line:84% because midtown is usually much higher than the downtown. 00:26:48.940 --> 00:26:52.120 align:middle line:84% That's Park Avenue, very prominent address, 00:26:52.120 --> 00:26:56.080 align:middle line:84% closer to the Central Park, and at the plot of the Plaza 00:26:56.080 --> 00:26:57.340 align:middle line:90% District. 00:26:57.340 --> 00:27:01.690 align:middle line:84% So location-wise, this project has a very obvious advantage 00:27:01.690 --> 00:27:03.790 align:middle line:90% than its competitors. 00:27:03.790 --> 00:27:08.235 align:middle line:84% And the competitors-- so this is the New York office market. 00:27:08.235 --> 00:27:10.960 align:middle line:90% 00:27:10.960 --> 00:27:17.950 align:middle line:84% 670,000 square feet isn't really that big of deal, 00:27:17.950 --> 00:27:19.780 align:middle line:84% especially when we look at the Hudson. 00:27:19.780 --> 00:27:22.970 align:middle line:90% And Hudson is almost leased up. 00:27:22.970 --> 00:27:25.890 align:middle line:84% When you check CoStar today, it's almost leased up. 00:27:25.890 --> 00:27:27.140 align:middle line:90% It's 10 million. 00:27:27.140 --> 00:27:29.150 align:middle line:84% So we are talking about a different magnitude 00:27:29.150 --> 00:27:30.680 align:middle line:84% of the market than Boston market. 00:27:30.680 --> 00:27:34.910 align:middle line:90% 00:27:34.910 --> 00:27:38.990 align:middle line:84% So the Hudson Yard-- originally, a lot of people 00:27:38.990 --> 00:27:40.070 align:middle line:90% had doubt about it. 00:27:40.070 --> 00:27:42.350 align:middle line:84% But it turns out working very well 00:27:42.350 --> 00:27:45.800 align:middle line:84% because many financial institutes, 00:27:45.800 --> 00:27:49.010 align:middle line:84% they have been scattered around in the midtown location. 00:27:49.010 --> 00:27:53.660 align:middle line:84% And Hudson Yard, they will be able to sign very big lease 00:27:53.660 --> 00:27:55.340 align:middle line:84% from big companies because they feel 00:27:55.340 --> 00:27:58.540 align:middle line:84% that's their last chance to move into a class A building. 00:27:58.540 --> 00:28:01.220 align:middle line:90% 00:28:01.220 --> 00:28:03.350 align:middle line:84% They can consolidate their company. 00:28:03.350 --> 00:28:07.340 align:middle line:84% Rent-wise, Hudson Yard is around 80 to-- 00:28:07.340 --> 00:28:10.880 align:middle line:84% I would say around $80 to $120 range, 00:28:10.880 --> 00:28:16.580 align:middle line:84% while Ground Zero is less, about $70, $70 per square feet. 00:28:16.580 --> 00:28:23.670 align:middle line:84% And Park Avenue is definitely towards the end of the market. 00:28:23.670 --> 00:28:26.310 align:middle line:90% OK, so this is the supply side. 00:28:26.310 --> 00:28:28.680 align:middle line:90% How about the demand side? 00:28:28.680 --> 00:28:31.145 align:middle line:84% The office market, what are the people-- 00:28:31.145 --> 00:28:34.645 align:middle line:90% 00:28:34.645 --> 00:28:37.954 align:middle line:84% What are the trends in the urban office leases? 00:28:37.954 --> 00:28:41.502 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:28:41.502 --> 00:28:42.960 align:middle line:84% ZHENGZHEN TAN: Sorry, your name is? 00:28:42.960 --> 00:28:45.377 align:middle line:84% AUDIENCE: [? Keban. ?] Towards class A because of the work 00:28:45.377 --> 00:28:46.100 align:middle line:90% at home movement. 00:28:46.100 --> 00:28:47.475 align:middle line:84% ZHENGZHEN TAN: Sorry, I need to-- 00:28:47.475 --> 00:28:48.640 align:middle line:90% AUDIENCE: It's [? Keban. ?] 00:28:48.640 --> 00:28:49.827 align:middle line:90% ZHENGZHEN TAN: Yeah, so-- 00:28:49.827 --> 00:28:51.660 align:middle line:84% AUDIENCE: There's a movement towards class A 00:28:51.660 --> 00:28:54.490 align:middle line:84% buildings because of work at home environment. 00:28:54.490 --> 00:28:56.640 align:middle line:90% ZHENGZHEN TAN: Oh, it's 2012. 00:28:56.640 --> 00:28:58.800 align:middle line:90% We're talking about 2012. 00:28:58.800 --> 00:28:59.383 align:middle line:90% So it is not-- 00:28:59.383 --> 00:29:00.300 align:middle line:90% AUDIENCE: [INAUDIBLE]. 00:29:00.300 --> 00:29:01.758 align:middle line:84% Oh wait, so that's a long time ago. 00:29:01.758 --> 00:29:03.717 align:middle line:84% ZHENGZHEN TAN: Yeah, so that's a long time ago. 00:29:03.717 --> 00:29:04.710 align:middle line:90% AUDIENCE: Nevermind. 00:29:04.710 --> 00:29:07.800 align:middle line:84% ZHENGZHEN TAN: Yeah, so the decision was made 10 years ago. 00:29:07.800 --> 00:29:11.790 align:middle line:84% And the trend is actually not work from home, 00:29:11.790 --> 00:29:14.320 align:middle line:84% but they are moving towards health and wellness. 00:29:14.320 --> 00:29:18.120 align:middle line:84% And that's where the Cognex study comes out, 00:29:18.120 --> 00:29:19.385 align:middle line:90% which inspired the vision. 00:29:19.385 --> 00:29:22.560 align:middle line:84% AUDIENCE: Yeah, around that time, 00:29:22.560 --> 00:29:26.990 align:middle line:84% it was called the green building because of the sick building 00:29:26.990 --> 00:29:27.770 align:middle line:90% syndrome. 00:29:27.770 --> 00:29:30.350 align:middle line:90% It was going up. 00:29:30.350 --> 00:29:34.940 align:middle line:84% It was being calculated and very looked into by government 00:29:34.940 --> 00:29:38.150 align:middle line:84% regulations and landlords across the state. 00:29:38.150 --> 00:29:41.300 align:middle line:84% So people were actually investing quite a lot 00:29:41.300 --> 00:29:44.930 align:middle line:84% in how they were going to improve their buildings 00:29:44.930 --> 00:29:48.870 align:middle line:84% into a more attractive place, both to tenants and landlords, 00:29:48.870 --> 00:29:52.010 align:middle line:84% and also taking into account that 2012 was basically 00:29:52.010 --> 00:29:53.900 align:middle line:90% three years after the GFC. 00:29:53.900 --> 00:29:58.090 align:middle line:84% So there was actually a lot of demand [INAUDIBLE] 00:29:58.090 --> 00:30:01.720 align:middle line:84% rising economy, rising companies, companies going back 00:30:01.720 --> 00:30:05.320 align:middle line:84% into business that were previously probably broke 00:30:05.320 --> 00:30:09.437 align:middle line:84% or not doing very well during the last couple of years. 00:30:09.437 --> 00:30:10.270 align:middle line:90% ZHENGZHEN TAN: Leah? 00:30:10.270 --> 00:30:11.950 align:middle line:84% AUDIENCE: And specific to this building, 00:30:11.950 --> 00:30:13.895 align:middle line:84% they were trying to attract, I believe, 00:30:13.895 --> 00:30:20.270 align:middle line:84% companies that [INAUDIBLE] hourly, so that is [INAUDIBLE]. 00:30:20.270 --> 00:30:22.680 align:middle line:84% ZHENGZHEN TAN: Yeah, that's right. 00:30:22.680 --> 00:30:26.780 align:middle line:84% So the vision, what L&L Development has, 00:30:26.780 --> 00:30:32.060 align:middle line:84% is to build a health system building in the New York City 00:30:32.060 --> 00:30:34.910 align:middle line:84% for the reason [? Carlo ?] and [? Leah ?] mentioned. 00:30:34.910 --> 00:30:41.570 align:middle line:84% So do you think they are well-equipped to do this? 00:30:41.570 --> 00:30:46.760 align:middle line:84% How do you think that their capability? 00:30:46.760 --> 00:30:48.320 align:middle line:84% Does this opportunity, do you think, 00:30:48.320 --> 00:30:50.250 align:middle line:90% fit their investment philosophy? 00:30:50.250 --> 00:30:53.390 align:middle line:90% 00:30:53.390 --> 00:30:57.959 align:middle line:90% [? Tomar? ?] 00:30:57.959 --> 00:30:59.516 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:30:59.516 --> 00:31:03.250 align:middle line:90% 00:31:03.250 --> 00:31:05.320 align:middle line:84% ZHENGZHEN TAN: Can they do it, do you think? 00:31:05.320 --> 00:31:06.120 align:middle line:90% What do you think? 00:31:06.120 --> 00:31:08.755 align:middle line:90% 00:31:08.755 --> 00:31:10.150 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:31:10.150 --> 00:31:11.690 align:middle line:90% ZHENGZHEN TAN: You don't know. 00:31:11.690 --> 00:31:13.790 align:middle line:90% Who knows? 00:31:13.790 --> 00:31:17.490 align:middle line:84% What did the case say about the capability of this developer? 00:31:17.490 --> 00:31:19.700 align:middle line:90% What's your expertise? 00:31:19.700 --> 00:31:21.130 align:middle line:90% [? Clement? ?] 00:31:21.130 --> 00:31:24.740 align:middle line:84% AUDIENCE: So I think they had [INAUDIBLE] buildings, 00:31:24.740 --> 00:31:28.535 align:middle line:90% but they [INAUDIBLE] buildings. 00:31:28.535 --> 00:31:32.410 align:middle line:84% There [INAUDIBLE] buildings that had the [INAUDIBLE]. 00:31:32.410 --> 00:31:33.640 align:middle line:90% ZHENGZHEN TAN: Yeah. 00:31:33.640 --> 00:31:37.400 align:middle line:84% AUDIENCE: But therefore [INAUDIBLE] 00:31:37.400 --> 00:31:41.415 align:middle line:84% that they could do it, and [INAUDIBLE]. 00:31:41.415 --> 00:31:43.540 align:middle line:84% ZHENGZHEN TAN: So there is some uncertainty, right? 00:31:43.540 --> 00:31:44.710 align:middle line:90% It's something new. 00:31:44.710 --> 00:31:48.490 align:middle line:84% So the product vision, the healthiest building 00:31:48.490 --> 00:31:51.400 align:middle line:84% in the New York-- we just mentioned there's a science. 00:31:51.400 --> 00:31:55.300 align:middle line:84% And then there is a regulation coming about the sick building 00:31:55.300 --> 00:31:56.240 align:middle line:90% syndrome. 00:31:56.240 --> 00:31:59.740 align:middle line:84% And from the market demand side, the demand side 00:31:59.740 --> 00:32:01.250 align:middle line:90% is the elite companies. 00:32:01.250 --> 00:32:03.590 align:middle line:84% People would look for health and well-being. 00:32:03.590 --> 00:32:07.810 align:middle line:84% That's the hunch of the Levinson, right? 00:32:07.810 --> 00:32:13.750 align:middle line:84% From the competition side, yes, there is a hot competition. 00:32:13.750 --> 00:32:16.720 align:middle line:84% But I would argue that Park Avenue still 00:32:16.720 --> 00:32:18.438 align:middle line:90% has one of the best locations. 00:32:18.438 --> 00:32:20.230 align:middle line:84% At the end of the day is still the location 00:32:20.230 --> 00:32:21.740 align:middle line:90% the main drive change. 00:32:21.740 --> 00:32:24.400 align:middle line:90% So it's a question. 00:32:24.400 --> 00:32:26.860 align:middle line:84% Do they really need to go that healthy building? 00:32:26.860 --> 00:32:29.650 align:middle line:90% Because it's in Park Avenue. 00:32:29.650 --> 00:32:36.400 align:middle line:84% 670,000 square feet in office in New York is not really that 00:32:36.400 --> 00:32:37.250 align:middle line:90% of a big deal. 00:32:37.250 --> 00:32:42.050 align:middle line:84% So it seems that they can handle probably. 00:32:42.050 --> 00:32:46.910 align:middle line:84% And the capability-- so L&L Holding was founded in 2000. 00:32:46.910 --> 00:32:48.680 align:middle line:84% So they have a decade of brokerage 00:32:48.680 --> 00:32:50.840 align:middle line:84% and the investment side of commercial real estate, 00:32:50.840 --> 00:32:52.020 align:middle line:90% especially in the office. 00:32:52.020 --> 00:32:55.700 align:middle line:84% So they have very experienced in understanding. 00:32:55.700 --> 00:32:58.730 align:middle line:84% So I believe they really understand 00:32:58.730 --> 00:33:01.580 align:middle line:84% office tenants' needs, besides the trend thing, 00:33:01.580 --> 00:33:04.460 align:middle line:84% because they are the one talking to the tenants on daily basis. 00:33:04.460 --> 00:33:08.210 align:middle line:84% And they also have access to capital 00:33:08.210 --> 00:33:09.540 align:middle line:90% for the long-term investors. 00:33:09.540 --> 00:33:12.830 align:middle line:84% So it seems that they are well-equipped for that. 00:33:12.830 --> 00:33:15.230 align:middle line:84% Although, at the same time, it's a new concept. 00:33:15.230 --> 00:33:16.860 align:middle line:90% It's the science breakthrough. 00:33:16.860 --> 00:33:20.190 align:middle line:84% They are not sure about the technology, per se. 00:33:20.190 --> 00:33:24.410 align:middle line:84% So let's look at the options, what they have, 00:33:24.410 --> 00:33:28.190 align:middle line:84% and do the cost benefit analysis. 00:33:28.190 --> 00:33:32.030 align:middle line:84% Now, Levinson will have to decide how much they 00:33:32.030 --> 00:33:35.180 align:middle line:84% are going to invest into making the building extra healthy 00:33:35.180 --> 00:33:36.150 align:middle line:90% as a landlord. 00:33:36.150 --> 00:33:37.555 align:middle line:90% What are the options they have? 00:33:37.555 --> 00:33:44.720 align:middle line:90% 00:33:44.720 --> 00:33:46.550 align:middle line:84% When you look at the performer, what 00:33:46.550 --> 00:33:49.723 align:middle line:84% are the items they are comparing against? 00:33:49.723 --> 00:33:56.420 align:middle line:90% 00:33:56.420 --> 00:33:59.610 align:middle line:84% What are the options, [? Chris? ?] 00:33:59.610 --> 00:34:01.140 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:34:01.140 --> 00:34:02.280 align:middle line:90% 00:34:02.280 --> 00:34:06.770 align:middle line:84% ZHENGZHEN TAN: OK, so ventilation. 00:34:06.770 --> 00:34:09.349 align:middle line:90% Ventilation and the filtration. 00:34:09.349 --> 00:34:11.030 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:34:11.030 --> 00:34:13.739 align:middle line:84% ZHENGZHEN TAN: And the filtration. 00:34:13.739 --> 00:34:18.870 align:middle line:84% And this is related to which aspect of the building? 00:34:18.870 --> 00:34:20.650 align:middle line:84% The ventilation and the filtration? 00:34:20.650 --> 00:34:23.739 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:34:23.739 --> 00:34:26.120 align:middle line:84% ZHENGZHEN TAN: It's mainly the indoor air quality. 00:34:26.120 --> 00:34:28.980 align:middle line:84% I mean, the performance is the indoor air quality. 00:34:28.980 --> 00:34:31.552 align:middle line:90% And what's the other option? 00:34:31.552 --> 00:34:32.969 align:middle line:84% AUDIENCE: [INAUDIBLE] certificate. 00:34:32.969 --> 00:34:34.552 align:middle line:84% ZHENGZHEN TAN: Yeah, WELL certificate. 00:34:34.552 --> 00:34:37.460 align:middle line:90% 00:34:37.460 --> 00:34:39.050 align:middle line:90% What's the alternative? 00:34:39.050 --> 00:34:41.670 align:middle line:84% If they don't do this, what's the alternative? 00:34:41.670 --> 00:34:45.290 align:middle line:90% 00:34:45.290 --> 00:34:46.020 align:middle line:90% [? Derek? ?] 00:34:46.020 --> 00:34:50.239 align:middle line:84% AUDIENCE: I think they were also considering CDC certification 00:34:50.239 --> 00:34:52.880 align:middle line:84% for healthy buildings [INAUDIBLE] WELL certificate 00:34:52.880 --> 00:34:56.179 align:middle line:84% that had less stringent requirements and lower cost-- 00:34:56.179 --> 00:34:57.895 align:middle line:84% ZHENGZHEN TAN: What's the name of that? 00:34:57.895 --> 00:35:00.570 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:35:00.570 --> 00:35:02.790 align:middle line:84% ZHENGZHEN TAN: It's the Fitwell, right? 00:35:02.790 --> 00:35:06.120 align:middle line:84% This is probably a cheaper option than WELL. 00:35:06.120 --> 00:35:07.920 align:middle line:90% What's the alternative? 00:35:07.920 --> 00:35:10.265 align:middle line:84% If they don't do this, what's your alternative? 00:35:10.265 --> 00:35:11.140 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:35:11.140 --> 00:35:13.223 align:middle line:84% ZHENGZHEN TAN: Yeah, they can do a green building. 00:35:13.223 --> 00:35:19.920 align:middle line:90% 00:35:19.920 --> 00:35:22.440 align:middle line:84% If you look at the LEED points, they actually 00:35:22.440 --> 00:35:24.390 align:middle line:90% have 20 points in REQ. 00:35:24.390 --> 00:35:27.570 align:middle line:84% So a lot of time, people can argue 00:35:27.570 --> 00:35:30.920 align:middle line:84% green building is also healthy building or actually included. 00:35:30.920 --> 00:35:34.560 align:middle line:84% What are the benefits of the healthy building? 00:35:34.560 --> 00:35:36.090 align:middle line:90% And what are the costs? 00:35:36.090 --> 00:35:37.780 align:middle line:90% How do you compare that? 00:35:37.780 --> 00:35:42.960 align:middle line:90% 00:35:42.960 --> 00:35:45.730 align:middle line:90% [? Yoon? ?] 00:35:45.730 --> 00:35:47.480 align:middle line:84% AUDIENCE: The benefits of the [INAUDIBLE]? 00:35:47.480 --> 00:35:51.080 align:middle line:84% ZHENGZHEN TAN: Yeah, these different options they have. 00:35:51.080 --> 00:35:54.620 align:middle line:84% AUDIENCE: So ventilation and filtration, it's basically 00:35:54.620 --> 00:35:56.060 align:middle line:90% a performance measure. 00:35:56.060 --> 00:36:00.200 align:middle line:84% So, yes, you will get better air quality compared to outside air. 00:36:00.200 --> 00:36:03.230 align:middle line:84% ZHENGZHEN TAN: Yeah, better air quality. 00:36:03.230 --> 00:36:07.100 align:middle line:84% AUDIENCE: The cost is obviously it takes more energy 00:36:07.100 --> 00:36:10.340 align:middle line:84% to run this because you're creating more friction-- 00:36:10.340 --> 00:36:11.890 align:middle line:90% yeah, like resistance. 00:36:11.890 --> 00:36:13.890 align:middle line:90% ZHENGZHEN TAN: What's the cost? 00:36:13.890 --> 00:36:15.170 align:middle line:90% AUDIENCE: I don't know. 00:36:15.170 --> 00:36:19.130 align:middle line:84% ZHENGZHEN TAN: In the pro forma, if you look into the exhibit-- 00:36:19.130 --> 00:36:22.340 align:middle line:90% 00:36:22.340 --> 00:36:25.520 align:middle line:90% if you look into the exhibit 8-- 00:36:25.520 --> 00:36:31.420 align:middle line:84% exhibit 9, what's the cost of this item? 00:36:31.420 --> 00:36:39.090 align:middle line:90% 00:36:39.090 --> 00:36:42.490 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:36:42.490 --> 00:36:44.320 align:middle line:84% ZHENGZHEN TAN: So this is the null. 00:36:44.320 --> 00:36:46.890 align:middle line:84% So what is the cost for adding those? 00:36:46.890 --> 00:36:54.370 align:middle line:90% 00:36:54.370 --> 00:36:56.230 align:middle line:90% AUDIENCE: 43. 00:36:56.230 --> 00:36:58.320 align:middle line:90% ZHENGZHEN TAN: Jason? 00:36:58.320 --> 00:37:01.360 align:middle line:84% AUDIENCE: According to exhibit 9, it's a $3.9 million 00:37:01.360 --> 00:37:03.100 align:middle line:90% operating cost increase. 00:37:03.100 --> 00:37:09.270 align:middle line:84% ZHENGZHEN TAN: Yeah, $3.9 operating cost. 00:37:09.270 --> 00:37:10.700 align:middle line:90% How about the initial cost? 00:37:10.700 --> 00:37:16.374 align:middle line:90% 00:37:16.374 --> 00:37:20.097 align:middle line:84% AUDIENCE: [INAUDIBLE] 12.3 [INAUDIBLE]. 00:37:20.097 --> 00:37:20.930 align:middle line:90% ZHENGZHEN TAN: What? 00:37:20.930 --> 00:37:22.290 align:middle line:90% What's the unit? 00:37:22.290 --> 00:37:23.510 align:middle line:90% $12.3 what? 00:37:23.510 --> 00:37:24.205 align:middle line:90% Huh? 00:37:24.205 --> 00:37:24.490 align:middle line:90% AUDIENCE: Millions. 00:37:24.490 --> 00:37:25.782 align:middle line:90% ZHENGZHEN TAN: Millions, right? 00:37:25.782 --> 00:37:26.620 align:middle line:90% OK. 00:37:26.620 --> 00:37:29.950 align:middle line:84% So what's the cost premium in terms of percentage? 00:37:29.950 --> 00:37:34.003 align:middle line:90% $12.3 million percentage. 00:37:34.003 --> 00:37:34.545 align:middle line:90% AUDIENCE: 1%. 00:37:34.545 --> 00:37:41.698 align:middle line:90% 00:37:41.698 --> 00:37:43.740 align:middle line:84% ZHENGZHEN TAN: So we're talking about 1% premium. 00:37:43.740 --> 00:37:46.810 align:middle line:90% 00:37:46.810 --> 00:37:48.730 align:middle line:90% Actually, this is combined. 00:37:48.730 --> 00:37:49.850 align:middle line:90% This is combined. 00:37:49.850 --> 00:37:54.850 align:middle line:84% And how do you feel about this 1% premium? 00:37:54.850 --> 00:37:55.780 align:middle line:90% [? Andy? ?] 00:37:55.780 --> 00:37:57.730 align:middle line:84% AUDIENCE: I said it in the discussion post 00:37:57.730 --> 00:38:02.170 align:middle line:84% that this seemed optimistic because, in the case itself, 00:38:02.170 --> 00:38:06.220 align:middle line:84% the projections were five times this cost premium, so anywhere 00:38:06.220 --> 00:38:11.050 align:middle line:84% from 3% to 6% just for the added ventilation, 00:38:11.050 --> 00:38:13.950 align:middle line:84% and then for the WELL certification and additional 1 00:38:13.950 --> 00:38:17.650 align:middle line:90% to 3%, I believe, it was. 00:38:17.650 --> 00:38:20.530 align:middle line:90% This seems like an offer-- 00:38:20.530 --> 00:38:23.470 align:middle line:84% a very optimistic scenario that there's only 1% 00:38:23.470 --> 00:38:28.335 align:middle line:84% cost increase for an over 10% revenue increase. 00:38:28.335 --> 00:38:31.400 align:middle line:90% 00:38:31.400 --> 00:38:33.890 align:middle line:84% ZHENGZHEN TAN: Yeah, so the cost aside, 00:38:33.890 --> 00:38:37.310 align:middle line:84% if you add on the WELL and also operation cost, 00:38:37.310 --> 00:38:39.830 align:middle line:84% as well as the commission cost, we 00:38:39.830 --> 00:38:43.305 align:middle line:84% are arriving somewhere between 2% to 6% cost premium. 00:38:43.305 --> 00:38:44.930 align:middle line:84% How do you feel about the cost premium? 00:38:44.930 --> 00:38:48.930 align:middle line:84% If you were L&L, do you think that's a good investment? 00:38:48.930 --> 00:38:53.250 align:middle line:90% 00:38:53.250 --> 00:38:58.788 align:middle line:84% In the case, it wrote 5% rent premium. 00:38:58.788 --> 00:39:01.330 align:middle line:84% If it were you, [? were ?] you [? in ?] [? the ?] [? right ?] 00:39:01.330 --> 00:39:03.530 align:middle line:90% that rent premium? 00:39:03.530 --> 00:39:06.940 align:middle line:84% AUDIENCE: My concern was that, in 2012, this 00:39:06.940 --> 00:39:09.100 align:middle line:84% was the very beginning where people were even 00:39:09.100 --> 00:39:12.590 align:middle line:84% discussing indoor air quality and the potential benefits. 00:39:12.590 --> 00:39:14.980 align:middle line:84% So I thought that, given the location, 00:39:14.980 --> 00:39:17.140 align:middle line:84% the building was already at a premium. 00:39:17.140 --> 00:39:22.630 align:middle line:84% I wasn't sure, in 2012, if the added cost at that time 00:39:22.630 --> 00:39:27.220 align:middle line:84% would actually yield a 10% plus rent premium. 00:39:27.220 --> 00:39:28.720 align:middle line:84% The building already had a lot going 00:39:28.720 --> 00:39:32.800 align:middle line:84% for it based on its location and the stunning architecture 00:39:32.800 --> 00:39:37.250 align:middle line:84% with the three-story function space 00:39:37.250 --> 00:39:41.030 align:middle line:84% that they have in the middle and in the lobby. 00:39:41.030 --> 00:39:44.930 align:middle line:84% It was difficult for me to buy into this pro forma that 00:39:44.930 --> 00:39:48.530 align:middle line:84% seemed like it was overly optimistic versus the numbers we 00:39:48.530 --> 00:39:49.710 align:middle line:90% were given in the case. 00:39:49.710 --> 00:39:51.920 align:middle line:84% ZHENGZHEN TAN: Overly optimistic. [? Carlo? ?] 00:39:51.920 --> 00:39:55.040 align:middle line:84% AUDIENCE: I think there's also a huge part of this 00:39:55.040 --> 00:39:57.980 align:middle line:84% that has to be taken into account in the operating 00:39:57.980 --> 00:39:59.750 align:middle line:90% expenditures. 00:39:59.750 --> 00:40:03.530 align:middle line:84% So L&L, they were not experienced 00:40:03.530 --> 00:40:06.330 align:middle line:84% in this specific type of type of building. 00:40:06.330 --> 00:40:10.910 align:middle line:84% So they were assuming that they had some OpEx premium calculated 00:40:10.910 --> 00:40:14.390 align:middle line:90% as well that was actually high. 00:40:14.390 --> 00:40:19.190 align:middle line:84% If you look into the pro forma, it goes from $40 to $43 million, 00:40:19.190 --> 00:40:26.580 align:middle line:84% which is around like 8%-9% augmentation in OpEx. 00:40:26.580 --> 00:40:30.680 align:middle line:84% And this is only a projection, a forecast. 00:40:30.680 --> 00:40:33.210 align:middle line:84% So you won't actually know what you're going to find. 00:40:33.210 --> 00:40:37.130 align:middle line:84% At the moment, you're actually operating this-- 00:40:37.130 --> 00:40:40.850 align:middle line:84% for example, this ventilation and filtration equipment 00:40:40.850 --> 00:40:42.068 align:middle line:90% that it's rather-- 00:40:42.068 --> 00:40:43.860 align:middle line:84% ZHENGZHEN TAN: What's the equipment exactly 00:40:43.860 --> 00:40:44.990 align:middle line:90% that we're talking about? 00:40:44.990 --> 00:40:45.980 align:middle line:90% AUDIENCE: Innovating what? 00:40:45.980 --> 00:40:48.105 align:middle line:84% ZHENGZHEN TAN: What's the equipment we are actually 00:40:48.105 --> 00:40:48.770 align:middle line:90% talking about? 00:40:48.770 --> 00:40:51.200 align:middle line:84% You said the ventilation and the filtration. 00:40:51.200 --> 00:40:52.440 align:middle line:90% What's the technology? 00:40:52.440 --> 00:40:55.950 align:middle line:84% If you recall in the case, what do you say? 00:40:55.950 --> 00:40:58.140 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:40:58.140 --> 00:40:58.890 align:middle line:90% ZHENGZHEN TAN: Hm? 00:40:58.890 --> 00:41:01.830 align:middle line:90% 00:41:01.830 --> 00:41:04.307 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:41:04.307 --> 00:41:05.640 align:middle line:90% ZHENGZHEN TAN: What's it called? 00:41:05.640 --> 00:41:08.010 align:middle line:90% MERV? 00:41:08.010 --> 00:41:08.952 align:middle line:90% AUDIENCE: MERV 15. 00:41:08.952 --> 00:41:09.910 align:middle line:90% ZHENGZHEN TAN: MERV 15. 00:41:09.910 --> 00:41:11.680 align:middle line:90% What's the industry standard? 00:41:11.680 --> 00:41:13.008 align:middle line:90% AUDIENCE: MERV 8. 00:41:13.008 --> 00:41:14.550 align:middle line:84% ZHENGZHEN TAN: Yeah, so [? Carlos, ?] 00:41:14.550 --> 00:41:18.130 align:middle line:84% you are talking about this MERV, is the filtration. 00:41:18.130 --> 00:41:20.310 align:middle line:90% It's cutting edge. 00:41:20.310 --> 00:41:22.590 align:middle line:84% So you're saying there's a lot of uncertainty 00:41:22.590 --> 00:41:24.030 align:middle line:90% about operation cost. 00:41:24.030 --> 00:41:29.200 align:middle line:84% Assumptions may not be that convincing. 00:41:29.200 --> 00:41:30.620 align:middle line:90% Sorry, your name is? 00:41:30.620 --> 00:41:31.420 align:middle line:90% AUDIENCE: Marco. 00:41:31.420 --> 00:41:32.170 align:middle line:90% ZHENGZHEN TAN: OK. 00:41:32.170 --> 00:41:32.865 align:middle line:90% Marco, yeah? 00:41:32.865 --> 00:41:34.490 align:middle line:84% AUDIENCE: One point they didn't mention 00:41:34.490 --> 00:41:38.850 align:middle line:84% is that, in the pro forma, they add all of the [INAUDIBLE], 00:41:38.850 --> 00:41:47.530 align:middle line:84% so that's another [INAUDIBLE] 8% rent premium [INAUDIBLE]. 00:41:47.530 --> 00:41:48.955 align:middle line:90% That could be a lot. 00:41:48.955 --> 00:41:49.960 align:middle line:90% ZHENGZHEN TAN: Yeah. 00:41:49.960 --> 00:41:51.801 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:41:51.801 --> 00:41:55.410 align:middle line:90% 00:41:55.410 --> 00:41:57.720 align:middle line:84% ZHENGZHEN TAN: So there's a tenants' part. 00:41:57.720 --> 00:42:00.090 align:middle line:84% You're not sure that they are going to pay more, 00:42:00.090 --> 00:42:02.190 align:middle line:90% and then actually spend more. 00:42:02.190 --> 00:42:05.677 align:middle line:84% That doesn't seem a good deal for the tenants. [? Ariel? ?] 00:42:05.677 --> 00:42:07.760 align:middle line:84% AUDIENCE: They didn't really mention vacancy rate, 00:42:07.760 --> 00:42:10.980 align:middle line:84% but they did mention that there was a $1 million per year 00:42:10.980 --> 00:42:13.490 align:middle line:84% commission [INAUDIBLE] ventilation system, 00:42:13.490 --> 00:42:16.690 align:middle line:84% which would be a cost to them regardless if they have-- 00:42:16.690 --> 00:42:20.780 align:middle line:84% so they have less of a buffer in terms of [INAUDIBLE]. 00:42:20.780 --> 00:42:22.280 align:middle line:84% ZHENGZHEN TAN: I don't think they're 00:42:22.280 --> 00:42:24.290 align:middle line:84% going to have it regardless whether they 00:42:24.290 --> 00:42:25.640 align:middle line:90% will have the healthy building. 00:42:25.640 --> 00:42:27.225 align:middle line:90% I think that's an extra. 00:42:27.225 --> 00:42:28.100 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:42:28.100 --> 00:42:29.683 align:middle line:84% ZHENGZHEN TAN: If they go for healthy. 00:42:29.683 --> 00:42:32.360 align:middle line:84% Yeah, I think that's included in the $2 and $6 premium 00:42:32.360 --> 00:42:33.660 align:middle line:90% if you add on everything. 00:42:33.660 --> 00:42:37.100 align:middle line:84% So who else-- do you have anything different 00:42:37.100 --> 00:42:38.540 align:middle line:84% from [? Andy? ?] Because anything 00:42:38.540 --> 00:42:41.330 align:middle line:84% that they already have a premium location 00:42:41.330 --> 00:42:43.520 align:middle line:84% and in terms of the size, it doesn't seem 00:42:43.520 --> 00:42:45.240 align:middle line:90% to be a hard sale location. 00:42:45.240 --> 00:42:46.770 align:middle line:84% It's going to be a very easy sale. 00:42:46.770 --> 00:42:49.190 align:middle line:84% So it doesn't seem to make sense for that. 00:42:49.190 --> 00:42:51.200 align:middle line:84% Who do you think it makes sense to invest 00:42:51.200 --> 00:42:54.430 align:middle line:90% in the healthy building? 00:42:54.430 --> 00:42:57.820 align:middle line:84% I remember quite a few students will say it makes sense. 00:42:57.820 --> 00:42:58.919 align:middle line:90% Celine? 00:42:58.919 --> 00:43:09.897 align:middle line:84% AUDIENCE: [INAUDIBLE] because most of the [INAUDIBLE] 00:43:09.897 --> 00:43:20.784 align:middle line:84% the performance of the [INAUDIBLE] 00:43:20.784 --> 00:43:25.346 align:middle line:84% to address that [INAUDIBLE] environments [INAUDIBLE]. 00:43:25.346 --> 00:43:33.080 align:middle line:90% 00:43:33.080 --> 00:43:36.470 align:middle line:84% ZHENGZHEN TAN: So I think you're saying the science seems 00:43:36.470 --> 00:43:38.210 align:middle line:90% to be pretty rigorous. 00:43:38.210 --> 00:43:40.543 align:middle line:84% It's like they have already proof. 00:43:40.543 --> 00:43:41.960 align:middle line:84% Although it's in the lab, but it's 00:43:41.960 --> 00:43:45.410 align:middle line:84% proved that the performance-- and the L&L, 00:43:45.410 --> 00:43:49.130 align:middle line:84% if they are the one talking to the tenants on daily basis, 00:43:49.130 --> 00:43:51.180 align:middle line:84% they should know the market really, really well. 00:43:51.180 --> 00:43:54.530 align:middle line:84% So they are the ones believing that this is going to sell. 00:43:54.530 --> 00:43:56.790 align:middle line:90% How about the rent premium? 00:43:56.790 --> 00:43:59.620 align:middle line:84% How do you feel about this rent premium in this pro forma? 00:43:59.620 --> 00:44:02.500 align:middle line:90% 00:44:02.500 --> 00:44:06.340 align:middle line:84% AUDIENCE: [INAUDIBLE] I think this [INAUDIBLE], 00:44:06.340 --> 00:44:09.460 align:middle line:84% like, how can the improvement of the [INAUDIBLE] can 00:44:09.460 --> 00:44:10.790 align:middle line:90% recoup [INAUDIBLE]? 00:44:10.790 --> 00:44:11.540 align:middle line:90% ZHENGZHEN TAN: OK. 00:44:11.540 --> 00:44:15.590 align:middle line:84% So you say, OK, the story, the science looks seems nice. 00:44:15.590 --> 00:44:17.460 align:middle line:90% But then you are still unsure. 00:44:17.460 --> 00:44:18.085 align:middle line:90% Derek? 00:44:18.085 --> 00:44:19.460 align:middle line:84% AUDIENCE: Yeah, I think that it's 00:44:19.460 --> 00:44:22.363 align:middle line:84% a pretty compelling argument because, especially given 00:44:22.363 --> 00:44:23.780 align:middle line:84% the data that's recently come out, 00:44:23.780 --> 00:44:25.520 align:middle line:84% I think it's pretty easy for the tenants 00:44:25.520 --> 00:44:27.350 align:middle line:84% to go to the health insurance providers 00:44:27.350 --> 00:44:31.757 align:middle line:84% and recoup the rent premium just by negotiating better 00:44:31.757 --> 00:44:32.840 align:middle line:90% rates on health insurance. 00:44:32.840 --> 00:44:36.080 align:middle line:84% And then any additional savings in terms of employee retention 00:44:36.080 --> 00:44:38.630 align:middle line:84% or absenteeism is kind of just going 00:44:38.630 --> 00:44:40.532 align:middle line:90% to be pushed to the bottom line. 00:44:40.532 --> 00:44:41.990 align:middle line:84% ZHENGZHEN TAN: So, Derek, you think 00:44:41.990 --> 00:44:44.150 align:middle line:84% the science is pretty solid and you are confident 00:44:44.150 --> 00:44:48.830 align:middle line:84% that, if you go to the tenants, they should buy into that? 00:44:48.830 --> 00:44:50.810 align:middle line:84% AUDIENCE: Well, I think it's good enough 00:44:50.810 --> 00:44:53.720 align:middle line:84% to put it as a point of negotiation 00:44:53.720 --> 00:44:55.330 align:middle line:90% with the insurance providers. 00:44:55.330 --> 00:45:00.240 align:middle line:84% And I think that they would probably find it to be-- 00:45:00.240 --> 00:45:04.150 align:middle line:84% ZHENGZHEN TAN: So then how about-- 00:45:04.150 --> 00:45:06.220 align:middle line:84% because if you think about this, they already 00:45:06.220 --> 00:45:11.200 align:middle line:84% have an 8% cost premium to build that because the structure 00:45:11.200 --> 00:45:12.310 align:middle line:90% difficulty. 00:45:12.310 --> 00:45:17.920 align:middle line:84% And for 1% of the premium or 2% to 6% 00:45:17.920 --> 00:45:20.890 align:middle line:84% if we add on into the operation, as well 00:45:20.890 --> 00:45:22.090 align:middle line:90% as the WELL certification-- 00:45:22.090 --> 00:45:23.960 align:middle line:84% WELL is very expensive certificate. 00:45:23.960 --> 00:45:28.280 align:middle line:84% So how do you feel about adding this money into green building? 00:45:28.280 --> 00:45:32.410 align:middle line:84% Because they originally designed for gold. 00:45:32.410 --> 00:45:34.260 align:middle line:90% How about updated to platinum? 00:45:34.260 --> 00:45:37.380 align:middle line:90% 00:45:37.380 --> 00:45:40.140 align:middle line:84% Because it seems that there's less risk. 00:45:40.140 --> 00:45:41.520 align:middle line:90% People understand about it. 00:45:41.520 --> 00:45:44.040 align:middle line:84% And it actually includes the IEQ. 00:45:44.040 --> 00:45:48.580 align:middle line:84% How do you spend this money onto elsewhere? 00:45:48.580 --> 00:45:51.220 align:middle line:90% 00:45:51.220 --> 00:45:52.795 align:middle line:90% Bill? 00:45:52.795 --> 00:45:55.450 align:middle line:84% AUDIENCE: [INAUDIBLE] we've been talking about 00:45:55.450 --> 00:46:01.810 align:middle line:84% as a theme in this class is the lack of continuous examination 00:46:01.810 --> 00:46:04.750 align:middle line:84% with LEED and the fact that it's just a checklist and it's one 00:46:04.750 --> 00:46:05.600 align:middle line:90% and done. 00:46:05.600 --> 00:46:07.517 align:middle line:84% I think something we haven't talked about here 00:46:07.517 --> 00:46:09.970 align:middle line:84% is the continuous commissioning, which I think is huge, 00:46:09.970 --> 00:46:12.820 align:middle line:84% to come back every year and ensure that the health 00:46:12.820 --> 00:46:15.820 align:middle line:84% benefits are actually continuing rather than just being designed 00:46:15.820 --> 00:46:18.490 align:middle line:90% and then let go forever. 00:46:18.490 --> 00:46:20.650 align:middle line:84% I think that would really be a huge selling 00:46:20.650 --> 00:46:23.620 align:middle line:84% point for a sophisticated tenant who's really 00:46:23.620 --> 00:46:26.080 align:middle line:84% caring about the health of their employees, to say, hey, 00:46:26.080 --> 00:46:28.288 align:middle line:84% we're going to come back and check that all the time. 00:46:28.288 --> 00:46:30.130 align:middle line:84% I think that'd be a big selling point. 00:46:30.130 --> 00:46:31.550 align:middle line:84% ZHENGZHEN TAN: Yeah, I hear that. 00:46:31.550 --> 00:46:33.440 align:middle line:84% We mentioned the tenant stores a lot. 00:46:33.440 --> 00:46:35.575 align:middle line:84% Who do you think is the tenants in Park Avenue? 00:46:35.575 --> 00:46:40.920 align:middle line:90% 00:46:40.920 --> 00:46:42.500 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:46:42.500 --> 00:46:44.810 align:middle line:84% ZHENGZHEN TAN: Ultra-premium, like a hedge fund? 00:46:44.810 --> 00:46:48.830 align:middle line:84% Yeah, the Park Street is the banks, 00:46:48.830 --> 00:46:50.420 align:middle line:84% is really the financial industry. 00:46:50.420 --> 00:46:53.365 align:middle line:90% 00:46:53.365 --> 00:46:56.360 align:middle line:84% So you are saying that this commissioning-- actually, they 00:46:56.360 --> 00:46:57.950 align:middle line:90% are very sophisticated. 00:46:57.950 --> 00:47:03.400 align:middle line:84% So if we look at this, look at this healthy building 00:47:03.400 --> 00:47:06.130 align:middle line:84% that Juan shows on his lecture, this 00:47:06.130 --> 00:47:09.370 align:middle line:84% is the argument where the scientist, after they 00:47:09.370 --> 00:47:15.430 align:middle line:84% did a cognitive study, they put this into the balance sheet 00:47:15.430 --> 00:47:20.520 align:middle line:84% and arguing that there is four types of value 00:47:20.520 --> 00:47:22.230 align:middle line:90% add from the revenue-- 00:47:22.230 --> 00:47:29.880 align:middle line:84% rent premium to payroll, rent, utilities, and other expenses. 00:47:29.880 --> 00:47:34.380 align:middle line:84% So there is some solid numbers behind that. 00:47:34.380 --> 00:47:38.800 align:middle line:84% But then nevertheless, it's still a lot of assumptions. 00:47:38.800 --> 00:47:45.240 align:middle line:84% If you look at this reading from Muldavin and Chris Mier, 00:47:45.240 --> 00:47:47.620 align:middle line:84% they talk about this is the performance. 00:47:47.620 --> 00:47:51.040 align:middle line:84% They come up with sample tenants. 00:47:51.040 --> 00:47:54.320 align:middle line:84% And the assumption is that, if it is a 1,000 employees, 00:47:54.320 --> 00:47:58.680 align:middle line:84% it seems like where the Park Avenue-- 00:47:58.680 --> 00:48:02.130 align:middle line:84% if you look at-- they probably look at that size 00:48:02.130 --> 00:48:05.610 align:middle line:84% of the company, 1,000 employees, total square footage. 00:48:05.610 --> 00:48:13.650 align:middle line:84% They underwrite four types of the number for the gain 00:48:13.650 --> 00:48:15.000 align:middle line:90% is the total-- 00:48:15.000 --> 00:48:18.480 align:middle line:84% so what they did is the health insurance 00:48:18.480 --> 00:48:21.930 align:middle line:84% reduction, 10%, as Derek mentioned, 00:48:21.930 --> 00:48:25.163 align:middle line:90% productivity increase. 00:48:25.163 --> 00:48:27.330 align:middle line:84% Getting back to the question, your earlier question, 00:48:27.330 --> 00:48:30.360 align:middle line:84% how do you actually measure the productivity? 00:48:30.360 --> 00:48:34.830 align:middle line:84% Based on the lab study, I think they underwrite about 1.5% 00:48:34.830 --> 00:48:38.040 align:middle line:90% about the productivity increase. 00:48:38.040 --> 00:48:41.740 align:middle line:84% Then turnover reduction, why it is important? 00:48:41.740 --> 00:48:45.880 align:middle line:84% Because it's very expensive to hire people, 00:48:45.880 --> 00:48:50.450 align:middle line:84% probably three months salary and the absence reduction. 00:48:50.450 --> 00:48:55.400 align:middle line:84% So what they calculate is they come out with this IRR huge. 00:48:55.400 --> 00:48:59.410 align:middle line:84% If they did three scenarios, sensitive analysis, even looking 00:48:59.410 --> 00:49:02.930 align:middle line:84% at the lowest scenario, 0.5% productivity increase, 00:49:02.930 --> 00:49:08.925 align:middle line:84% you are looking at IRR 298 and [? NVP ?] $5.6 million. 00:49:08.925 --> 00:49:11.600 align:middle line:90% 00:49:11.600 --> 00:49:14.240 align:middle line:84% So I want to do-- yeah, [? Qingyuan? ?] 00:49:14.240 --> 00:49:16.093 align:middle line:84% AUDIENCE: I'm wondering, [INAUDIBLE] 00:49:16.093 --> 00:49:17.510 align:middle line:84% if we have, in this kind of study, 00:49:17.510 --> 00:49:22.880 align:middle line:84% we have [INAUDIBLE] based on the research 00:49:22.880 --> 00:49:25.940 align:middle line:90% that they've done [INAUDIBLE]. 00:49:25.940 --> 00:49:28.340 align:middle line:84% But how do you convince attendants 00:49:28.340 --> 00:49:34.080 align:middle line:84% that by moving your employees [INAUDIBLE] 00:49:34.080 --> 00:49:35.013 align:middle line:90% actually [INAUDIBLE]. 00:49:35.013 --> 00:49:36.680 align:middle line:84% ZHENGZHEN TAN: That's a very good point. 00:49:36.680 --> 00:49:37.960 align:middle line:90% I don't think they have. 00:49:37.960 --> 00:49:40.960 align:middle line:84% But this form, I'm sure that they probably 00:49:40.960 --> 00:49:44.470 align:middle line:84% will have this form, but it's not the empirical data. 00:49:44.470 --> 00:49:46.630 align:middle line:90% It's assumptions. 00:49:46.630 --> 00:49:50.819 align:middle line:84% And in this case, I think it's corporate real estate. 00:49:50.819 --> 00:49:52.655 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:49:52.655 --> 00:49:55.460 align:middle line:90% 00:49:55.460 --> 00:49:57.050 align:middle line:84% ZHENGZHEN TAN: Yeah, it's after that. 00:49:57.050 --> 00:49:59.760 align:middle line:84% Yeah, and even that, it is assumption. 00:49:59.760 --> 00:50:00.990 align:middle line:90% It's assumption data. 00:50:00.990 --> 00:50:04.700 align:middle line:90% So I want to do a little poll. 00:50:04.700 --> 00:50:07.860 align:middle line:84% Now, I want you to put into the shoes of the tenants. 00:50:07.860 --> 00:50:11.870 align:middle line:84% Imagine if you are Citadel or a hedge fund 00:50:11.870 --> 00:50:16.340 align:middle line:84% that this landlord is trying to pitch you, to sell you. 00:50:16.340 --> 00:50:20.600 align:middle line:84% And they show you this pro forma, as well as 00:50:20.600 --> 00:50:21.950 align:middle line:90% a cognitive study. 00:50:21.950 --> 00:50:24.710 align:middle line:84% And they may invite Juan over to give you 00:50:24.710 --> 00:50:26.870 align:middle line:84% a lecture about the science building. 00:50:26.870 --> 00:50:29.820 align:middle line:90% And I want to do a poll. 00:50:29.820 --> 00:50:31.710 align:middle line:90% Is that three options? 00:50:31.710 --> 00:50:35.170 align:middle line:84% Number 1 is that, yes, with no reservation. 00:50:35.170 --> 00:50:37.820 align:middle line:90% I believe in the science. 00:50:37.820 --> 00:50:40.280 align:middle line:84% B is that, yes, with minor reservation. 00:50:40.280 --> 00:50:41.580 align:middle line:90% And C is that. 00:50:41.580 --> 00:50:45.930 align:middle line:84% I highly doubt it, which means I don't buy into it. 00:50:45.930 --> 00:50:54.380 align:middle line:84% Raise your hand if you pick A, yes with no reservation. 00:50:54.380 --> 00:50:56.980 align:middle line:90% 00:50:56.980 --> 00:50:57.480 align:middle line:90% What? 00:50:57.480 --> 00:51:01.863 align:middle line:90% 00:51:01.863 --> 00:51:04.090 align:middle line:84% I think we need to invite Juan back 00:51:04.090 --> 00:51:07.000 align:middle line:84% to give you a better lecture on the science. 00:51:07.000 --> 00:51:07.905 align:middle line:90% How about B? 00:51:07.905 --> 00:51:19.430 align:middle line:90% 00:51:19.430 --> 00:51:20.280 align:middle line:90% How about C? 00:51:20.280 --> 00:51:30.460 align:middle line:90% 00:51:30.460 --> 00:51:33.610 align:middle line:84% OK, there's something called the law 00:51:33.610 --> 00:51:35.240 align:middle line:90% of the innovation of diffusion. 00:51:35.240 --> 00:51:36.150 align:middle line:90% This is a law. 00:51:36.150 --> 00:51:39.850 align:middle line:84% So what the law tells us is that-- 00:51:39.850 --> 00:51:44.980 align:middle line:84% so every one of us sits somewhere at certain times 00:51:44.980 --> 00:51:45.970 align:middle line:90% on this scale. 00:51:45.970 --> 00:51:49.060 align:middle line:84% What the law told us, the law of innovation of diffusion 00:51:49.060 --> 00:51:53.020 align:middle line:84% told us that if you want a success, a mass market 00:51:53.020 --> 00:51:57.670 align:middle line:84% success of an idea, you need to achieve this tipping point, 00:51:57.670 --> 00:52:03.250 align:middle line:90% which is about 15% to 18%. 00:52:03.250 --> 00:52:05.310 align:middle line:90% And then the system will tip. 00:52:05.310 --> 00:52:09.385 align:middle line:84% So if we set all the segments, what we get is that-- 00:52:09.385 --> 00:52:12.130 align:middle line:90% 00:52:12.130 --> 00:52:20.716 align:middle line:84% so 5%-- 2.5% of our population are innovators. 00:52:20.716 --> 00:52:23.820 align:middle line:90% 00:52:23.820 --> 00:52:26.990 align:middle line:84% They are the people called the tech enthusiastic. 00:52:26.990 --> 00:52:29.830 align:middle line:84% They are the people who are waiting in the line for hours 00:52:29.830 --> 00:52:31.930 align:middle line:84% to get the first iPhone while you can perfectly 00:52:31.930 --> 00:52:34.690 align:middle line:90% get it a week later. 00:52:34.690 --> 00:52:41.350 align:middle line:84% Then you have the next segment, 13.5% of the people 00:52:41.350 --> 00:52:43.080 align:middle line:90% is called early adopters. 00:52:43.080 --> 00:52:50.510 align:middle line:90% 00:52:50.510 --> 00:52:54.920 align:middle line:84% So they are also called visionaries. 00:52:54.920 --> 00:52:59.740 align:middle line:84% So they usually act on the hunch, which 00:52:59.740 --> 00:53:01.320 align:middle line:90% analysis-- oh, there's a hunch. 00:53:01.320 --> 00:53:05.200 align:middle line:84% So they are willing to bet $1 billion on a hunch. 00:53:05.200 --> 00:53:13.580 align:middle line:84% Well, you don't really have this quantitative empirical data 00:53:13.580 --> 00:53:14.250 align:middle line:90% to show that. 00:53:14.250 --> 00:53:19.530 align:middle line:84% And 34% of our population is called early majority. 00:53:19.530 --> 00:53:26.090 align:middle line:90% 00:53:26.090 --> 00:53:30.090 align:middle line:90% Those are the pragmatic people. 00:53:30.090 --> 00:53:32.990 align:middle line:84% They make decisions based on something quantifiable. 00:53:32.990 --> 00:53:34.850 align:middle line:90% And you have to show me it. 00:53:34.850 --> 00:53:38.930 align:middle line:84% It's not assumptions, scientific, lab study. 00:53:38.930 --> 00:53:44.170 align:middle line:90% Another 34%, late majority. 00:53:44.170 --> 00:53:50.860 align:middle line:90% 00:53:50.860 --> 00:53:53.010 align:middle line:90% 60%, is called lagger. 00:53:53.010 --> 00:53:57.920 align:middle line:90% 00:53:57.920 --> 00:53:59.250 align:middle line:90% Those are conservatives. 00:53:59.250 --> 00:54:00.780 align:middle line:84% Even more conservative than that, 00:54:00.780 --> 00:54:03.570 align:middle line:84% they won't try something new until someone else tried it. 00:54:03.570 --> 00:54:05.880 align:middle line:84% They think innovation is the bleeding edge. 00:54:05.880 --> 00:54:07.670 align:middle line:84% They don't believe in the cutting edge. 00:54:07.670 --> 00:54:09.260 align:middle line:84% And then the lagger, finally, they 00:54:09.260 --> 00:54:11.460 align:middle line:84% have to do it because you don't have any choice. 00:54:11.460 --> 00:54:16.100 align:middle line:84% So this half of our population really 00:54:16.100 --> 00:54:18.590 align:middle line:84% won't move until the regulation says 00:54:18.590 --> 00:54:23.160 align:middle line:84% yes, until your competition is become new norm, 00:54:23.160 --> 00:54:24.030 align:middle line:90% you have to do that. 00:54:24.030 --> 00:54:25.850 align:middle line:90% So looking at our-- 00:54:25.850 --> 00:54:29.810 align:middle line:84% unfortunately, we don't have innovators in this classroom. 00:54:29.810 --> 00:54:35.060 align:middle line:84% I think someone up here, 14 of you, may become early adopters, 00:54:35.060 --> 00:54:35.660 align:middle line:90% I think. 00:54:35.660 --> 00:54:38.300 align:middle line:84% So actually, this sample class actually 00:54:38.300 --> 00:54:40.560 align:middle line:84% followed the law of the diffusion of innovation. 00:54:40.560 --> 00:54:41.498 align:middle line:90% Jason? 00:54:41.498 --> 00:54:43.040 align:middle line:84% AUDIENCE: I mean, I just find the way 00:54:43.040 --> 00:54:46.845 align:middle line:84% the question is constructed, [INAUDIBLE] hypothetical 00:54:46.845 --> 00:54:47.720 align:middle line:90% [INAUDIBLE]. 00:54:47.720 --> 00:54:52.787 align:middle line:90% 00:54:52.787 --> 00:54:55.120 align:middle line:84% And he's showing you how they're going to make money off 00:54:55.120 --> 00:54:57.550 align:middle line:90% of that, off of you. 00:54:57.550 --> 00:54:59.320 align:middle line:90% Of course, [INAUDIBLE]. 00:54:59.320 --> 00:55:02.230 align:middle line:90% 00:55:02.230 --> 00:55:05.530 align:middle line:84% ZHENGZHEN TAN: But what if they show you the cognitive study? 00:55:05.530 --> 00:55:09.100 align:middle line:84% AUDIENCE: Well, they'd be like, oh, did you pay for this study? 00:55:09.100 --> 00:55:10.600 align:middle line:84% ZHENGZHEN TAN: Actually, it's a peer 00:55:10.600 --> 00:55:12.460 align:middle line:90% reviewed scientific journal. 00:55:12.460 --> 00:55:14.120 align:middle line:90% You cannot pay for that. 00:55:14.120 --> 00:55:16.600 align:middle line:84% AUDIENCE: It's just like the way that it's being presented. 00:55:16.600 --> 00:55:20.550 align:middle line:84% Your landlord is the one showing you this. 00:55:20.550 --> 00:55:23.170 align:middle line:84% ZHENGZHEN TAN: Then can you think about a better way 00:55:23.170 --> 00:55:26.800 align:middle line:84% to educate your tenants, if you don't show them the study? 00:55:26.800 --> 00:55:31.270 align:middle line:84% AUDIENCE: I mean, I know a lot of [INAUDIBLE] 00:55:31.270 --> 00:55:39.130 align:middle line:84% will try to [INAUDIBLE], how to [INAUDIBLE]. 00:55:39.130 --> 00:55:41.322 align:middle line:84% ZHENGZHEN TAN: What do you mean by back it up? 00:55:41.322 --> 00:55:45.250 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:55:45.250 --> 00:55:47.092 align:middle line:84% ZHENGZHEN TAN: Yeah, that's understand-- 00:55:47.092 --> 00:55:48.820 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:55:48.820 --> 00:55:52.280 align:middle line:84% ZHENGZHEN TAN: PR, yeah, they can publish some media papers, 00:55:52.280 --> 00:55:56.320 align:middle line:84% say quote a Harvard study, MIT study, instead of saying, 00:55:56.320 --> 00:55:57.310 align:middle line:90% I show you this. 00:55:57.310 --> 00:55:58.620 align:middle line:90% Bill? 00:55:58.620 --> 00:56:00.370 align:middle line:84% AUDIENCE: How does this factor in for age? 00:56:00.370 --> 00:56:03.580 align:middle line:84% Because I feel like, [INAUDIBLE], as you get older, 00:56:03.580 --> 00:56:06.940 align:middle line:84% you tend to be conservative and especially with technology. 00:56:06.940 --> 00:56:11.572 align:middle line:84% [INAUDIBLE], everyone in the same age group? 00:56:11.572 --> 00:56:13.280 align:middle line:84% ZHENGZHEN TAN: That's an important point. 00:56:13.280 --> 00:56:14.238 align:middle line:90% Let's get back to that. 00:56:14.238 --> 00:56:17.806 align:middle line:90% 00:56:17.806 --> 00:56:25.670 align:middle line:84% And that's why it's spread in this document. 00:56:25.670 --> 00:56:29.955 align:middle line:84% And so what they think, I think-- 00:56:29.955 --> 00:56:34.140 align:middle line:90% 00:56:34.140 --> 00:56:36.600 align:middle line:84% I think, Jason, what you mentioned 00:56:36.600 --> 00:56:38.940 align:middle line:84% is that I believe 9 out of the 10 people 00:56:38.940 --> 00:56:40.740 align:middle line:90% will just laugh at you. 00:56:40.740 --> 00:56:42.520 align:middle line:90% But you may get one person. 00:56:42.520 --> 00:56:47.170 align:middle line:84% You only need 1 out of 10 that they trust their gut feeling. 00:56:47.170 --> 00:56:48.240 align:middle line:90% They say, you know what? 00:56:48.240 --> 00:56:50.940 align:middle line:84% Actually, it's a peer reviewed journal. 00:56:50.940 --> 00:56:53.520 align:middle line:84% It's not that you have some fluffy consultancy 00:56:53.520 --> 00:56:57.130 align:middle line:84% report, which I agree, this part is kind of a consultancy report. 00:56:57.130 --> 00:56:59.310 align:middle line:84% They're written by consultant people. 00:56:59.310 --> 00:57:01.310 align:middle line:90% But this is not, right? 00:57:01.310 --> 00:57:03.090 align:middle line:84% But if you tell Siqi, [INAUDIBLE], 00:57:03.090 --> 00:57:05.490 align:middle line:84% Siqi is like the scientific journal. 00:57:05.490 --> 00:57:10.440 align:middle line:84% There's no way you can sway the economist data. 00:57:10.440 --> 00:57:12.510 align:middle line:84% So in terms of rigorous, I agree, 00:57:12.510 --> 00:57:16.110 align:middle line:84% there's rigorous in the scientific peer-reviewed journal 00:57:16.110 --> 00:57:19.440 align:middle line:90% instead of the gray literature. 00:57:19.440 --> 00:57:24.780 align:middle line:84% But what informed this project is that all you need to get 00:57:24.780 --> 00:57:28.670 align:middle line:90% is this 1% of one people. 00:57:28.670 --> 00:57:34.220 align:middle line:84% And what L&L decided to do is that they decided to go all in. 00:57:34.220 --> 00:57:38.650 align:middle line:84% What do you think is their game plan? 00:57:38.650 --> 00:57:40.270 align:middle line:84% By the way, if you haven't read-- 00:57:40.270 --> 00:57:43.110 align:middle line:90% 00:57:43.110 --> 00:57:44.535 align:middle line:90% if you haven't read-- 00:57:44.535 --> 00:57:47.430 align:middle line:84% there's Geoffrey Moore, Crossing The Chasm. 00:57:47.430 --> 00:57:49.270 align:middle line:90% I highly recommend the book. 00:57:49.270 --> 00:57:52.410 align:middle line:84% That a book is a must-read for any entrepreneurs who 00:57:52.410 --> 00:57:53.850 align:middle line:90% are launching a new product. 00:57:53.850 --> 00:57:57.480 align:middle line:84% And what Geoffrey Moore called this gap is that you have 00:57:57.480 --> 00:58:02.680 align:middle line:90% to get it, is that the chasm. 00:58:02.680 --> 00:58:06.910 align:middle line:84% There are over 600 green building certificates 00:58:06.910 --> 00:58:08.500 align:middle line:90% around the world. 00:58:08.500 --> 00:58:11.170 align:middle line:84% But we only know a handful of like LEED. 00:58:11.170 --> 00:58:14.840 align:middle line:84% And why have we never heard about another 500? 00:58:14.840 --> 00:58:17.010 align:middle line:84% Because they never cross the chasm. 00:58:17.010 --> 00:58:19.975 align:middle line:84% And the wider chasm is so difficult to cross. 00:58:19.975 --> 00:58:26.470 align:middle line:90% 00:58:26.470 --> 00:58:28.683 align:middle line:84% Actually, 90% of the companies fail at this point. 00:58:28.683 --> 00:58:30.100 align:middle line:84% And they couldn't cross the chasm. 00:58:30.100 --> 00:58:32.160 align:middle line:84% And why it's so hard to cross the chasm? 00:58:32.160 --> 00:58:36.890 align:middle line:90% 00:58:36.890 --> 00:58:40.820 align:middle line:84% AUDIENCE: [INAUDIBLE] and then, next, you 00:58:40.820 --> 00:58:42.935 align:middle line:84% have to have enough early adopters. 00:58:42.935 --> 00:58:46.080 align:middle line:84% And they can form the non-adopters, [INAUDIBLE] 00:58:46.080 --> 00:58:49.990 align:middle line:84% and then [INAUDIBLE] strategy to get more people 00:58:49.990 --> 00:58:56.460 align:middle line:84% and customers [INAUDIBLE] so that initial energy [INAUDIBLE]. 00:58:56.460 --> 00:58:58.860 align:middle line:84% ZHENGZHEN TAN: Yeah, that book is actually 00:58:58.860 --> 00:59:01.060 align:middle line:90% for the marketing executive. 00:59:01.060 --> 00:59:05.857 align:middle line:84% It is extremely demanding in terms of the capability 00:59:05.857 --> 00:59:06.940 align:middle line:90% of the marketing strategy. 00:59:06.940 --> 00:59:10.360 align:middle line:84% And that's why 90% of the startups fail at this chasm. 00:59:10.360 --> 00:59:13.950 align:middle line:84% And why it's so difficult is because of the dilemma 00:59:13.950 --> 00:59:15.930 align:middle line:90% that we talk about. 00:59:15.930 --> 00:59:19.410 align:middle line:84% You can't really convince this early majority 00:59:19.410 --> 00:59:21.060 align:middle line:90% until you have enough data. 00:59:21.060 --> 00:59:23.670 align:middle line:84% But if you don't have enough early adopters, 00:59:23.670 --> 00:59:25.530 align:middle line:90% you won't have data. 00:59:25.530 --> 00:59:31.020 align:middle line:84% So that's the juggle that you have to tackle in your marketing 00:59:31.020 --> 00:59:31.830 align:middle line:90% strategy. 00:59:31.830 --> 00:59:38.070 align:middle line:84% Now, getting back to their game plan, they decided to target, 00:59:38.070 --> 00:59:43.610 align:middle line:84% as Juan mentioned, the important belief you cannot change those 00:59:43.610 --> 00:59:44.110 align:middle line:90% people. 00:59:44.110 --> 00:59:45.693 align:middle line:84% It's very hard to change those people, 00:59:45.693 --> 00:59:47.130 align:middle line:90% to change people's belief. 00:59:47.130 --> 00:59:47.950 align:middle line:90% It's very hard. 00:59:47.950 --> 00:59:51.070 align:middle line:84% You can only find those who believe what you believe. 00:59:51.070 --> 00:59:56.380 align:middle line:84% So what do you think it tells about their leasing strategy? 00:59:56.380 --> 00:59:59.770 align:middle line:90% Bill, you mentioned the age. 00:59:59.770 --> 01:00:01.310 align:middle line:90% What else can inform? 01:00:01.310 --> 01:00:02.205 align:middle line:90% Who is your tenants? 01:00:02.205 --> 01:00:04.790 align:middle line:90% 01:00:04.790 --> 01:00:06.800 align:middle line:84% Who do you think is likely your tenants? 01:00:06.800 --> 01:00:13.220 align:middle line:84% You're talking about maybe a younger age, younger, firm, 01:00:13.220 --> 01:00:13.720 align:middle line:90% startup? 01:00:13.720 --> 01:00:17.140 align:middle line:90% 01:00:17.140 --> 01:00:19.070 align:middle line:84% But do you think they actually care? 01:00:19.070 --> 01:00:22.108 align:middle line:84% Because if I'm a startup, I'm struggling to raise money, 01:00:22.108 --> 01:00:22.650 align:middle line:90% making money. 01:00:22.650 --> 01:00:24.670 align:middle line:84% Do you think I actually care to pay a premium 01:00:24.670 --> 01:00:28.060 align:middle line:90% to stay in Park Avenue? 01:00:28.060 --> 01:00:29.095 align:middle line:90% Wilson? 01:00:29.095 --> 01:00:32.065 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:00:32.065 --> 01:00:58.733 align:middle line:90% 01:00:58.733 --> 01:01:00.775 align:middle line:84% ZHENGZHEN TAN: How about the size of the company? 01:01:00.775 --> 01:01:05.090 align:middle line:90% 01:01:05.090 --> 01:01:06.220 align:middle line:90% I agree with you. 01:01:06.220 --> 01:01:08.000 align:middle line:84% So when you look at their floorplate, 01:01:08.000 --> 01:01:11.240 align:middle line:90% it's about 14,000 square feet. 01:01:11.240 --> 01:01:14.000 align:middle line:84% So imagine if you are a 20-people law firm, 01:01:14.000 --> 01:01:15.960 align:middle line:90% are you going to care? 01:01:15.960 --> 01:01:18.070 align:middle line:90% Probably not, right? 01:01:18.070 --> 01:01:21.060 align:middle line:84% But who is going to care is probably going to-- 01:01:21.060 --> 01:01:25.210 align:middle line:84% they probably aren't going to target this 20-people smaller 01:01:25.210 --> 01:01:25.710 align:middle line:90% firm. 01:01:25.710 --> 01:01:29.710 align:middle line:84% They are going to look at a full, whole plate signup. 01:01:29.710 --> 01:01:32.075 align:middle line:84% And it's most likely in the finance industry. 01:01:32.075 --> 01:01:34.980 align:middle line:90% 01:01:34.980 --> 01:01:36.930 align:middle line:84% How about their leasing strategy? 01:01:36.930 --> 01:01:41.040 align:middle line:84% If they find their tenants, say Citadel, actually 01:01:41.040 --> 01:01:43.540 align:middle line:84% end up being one of their anchor tenants. 01:01:43.540 --> 01:01:46.350 align:middle line:84% It's a hedge fund, fit the profile perfectly well. 01:01:46.350 --> 01:01:49.264 align:middle line:84% Citadel, I think, at the time probably needed 200,000 square 01:01:49.264 --> 01:01:52.680 align:middle line:84% feet, so a space they can actually grow into that seems 01:01:52.680 --> 01:01:56.670 align:middle line:84% a perfect space, probably not for JP Morgan because JP Morgan 01:01:56.670 --> 01:02:00.870 align:middle line:84% end up leasing 2 million because they are too big, They're very, 01:02:00.870 --> 01:02:01.660 align:middle line:90% very big. 01:02:01.660 --> 01:02:09.190 align:middle line:84% So Citadel seems to be a very ideal size tenants for them. 01:02:09.190 --> 01:02:14.460 align:middle line:84% Who do you think will be the leasing pitch? 01:02:14.460 --> 01:02:17.410 align:middle line:84% Who actually makes the decision in the office 01:02:17.410 --> 01:02:18.645 align:middle line:90% lease from the tenant side? 01:02:18.645 --> 01:02:26.435 align:middle line:90% 01:02:26.435 --> 01:02:28.060 align:middle line:84% AUDIENCE: I don't want to be obnoxious, 01:02:28.060 --> 01:02:31.080 align:middle line:84% but I don't understand the A0 part, which 01:02:31.080 --> 01:02:34.080 align:middle line:84% I think is actually important to understand because Citadel 01:02:34.080 --> 01:02:35.350 align:middle line:90% does not pay for their rent. 01:02:35.350 --> 01:02:37.830 align:middle line:90% The LPs pay for the rent. 01:02:37.830 --> 01:02:40.950 align:middle line:84% So Citadel will go for the most expensive office. 01:02:40.950 --> 01:02:44.773 align:middle line:84% And the LPs get a little bit annoyed about it. 01:02:44.773 --> 01:02:45.940 align:middle line:90% ZHENGZHEN TAN: That's right. 01:02:45.940 --> 01:02:47.910 align:middle line:84% Yeah, Citadel, this hedge fund, those 01:02:47.910 --> 01:02:51.150 align:middle line:84% LP they pump tons of fees on them. 01:02:51.150 --> 01:02:53.170 align:middle line:84% That's why they are willing to do that. 01:02:53.170 --> 01:02:53.840 align:middle line:90% And I'm sure-- 01:02:53.840 --> 01:02:55.330 align:middle line:90% AUDIENCE: [INAUDIBLE] A0. 01:02:55.330 --> 01:02:57.216 align:middle line:84% ZHENGZHEN TAN: What do you mean A0? 01:02:57.216 --> 01:02:58.770 align:middle line:90% AUDIENCE: [INAUDIBLE] why A0? 01:02:58.770 --> 01:03:00.720 align:middle line:84% ZHENGZHEN TAN: Why didn't you pick that? 01:03:00.720 --> 01:03:02.097 align:middle line:90% AUDIENCE: Because I'm an LP. 01:03:02.097 --> 01:03:03.430 align:middle line:90% ZHENGZHEN TAN: Oh, you're an LP. 01:03:03.430 --> 01:03:04.305 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:03:04.305 --> 01:03:06.870 align:middle line:84% ZHENGZHEN TAN: So you're not happy that your GP-- 01:03:06.870 --> 01:03:08.340 align:middle line:84% AUDIENCE: If I were a GP, I would 01:03:08.340 --> 01:03:11.413 align:middle line:84% have gone for A. I think all GPs would have gone for A. 01:03:11.413 --> 01:03:12.830 align:middle line:84% ZHENGZHEN TAN: That's interesting. 01:03:12.830 --> 01:03:13.740 align:middle line:90% But does LP-- 01:03:13.740 --> 01:03:15.907 align:middle line:84% AUDIENCE: [INAUDIBLE] building that's why it's full. 01:03:15.907 --> 01:03:17.710 align:middle line:84% ZHENGZHEN TAN: But actually LP, when 01:03:17.710 --> 01:03:19.825 align:middle line:84% you make decision which GP you go to, 01:03:19.825 --> 01:03:21.290 align:middle line:90% do you go to their office? 01:03:21.290 --> 01:03:26.153 align:middle line:84% If they live in a fancy office, do they impress you as LP? 01:03:26.153 --> 01:03:27.320 align:middle line:90% AUDIENCE: It's not up to us. 01:03:27.320 --> 01:03:29.072 align:middle line:84% We have to pay them whatever they ask us. 01:03:29.072 --> 01:03:30.530 align:middle line:84% ZHENGZHEN TAN: But you're not happy 01:03:30.530 --> 01:03:33.830 align:middle line:84% if they go to a more expensive because it's all your money. 01:03:33.830 --> 01:03:35.120 align:middle line:90% AUDIENCE: Yes, I'm unhappy. 01:03:35.120 --> 01:03:36.330 align:middle line:90% That's very true. 01:03:36.330 --> 01:03:40.670 align:middle line:84% But we have a very unattractive office. 01:03:40.670 --> 01:03:43.350 align:middle line:84% But we're paying for a very fancy office for them. 01:03:43.350 --> 01:03:47.900 align:middle line:84% And that said, I think you mentioned John Hancock Building 01:03:47.900 --> 01:03:51.140 align:middle line:90% as one of the nicest buildings. 01:03:51.140 --> 01:03:52.440 align:middle line:90% They have the highest building. 01:03:52.440 --> 01:03:54.920 align:middle line:84% They have the top floor ArcLight Capital, [INAUDIBLE], 01:03:54.920 --> 01:03:56.812 align:middle line:90% but beautiful office. 01:03:56.812 --> 01:03:59.270 align:middle line:84% We don't get anything out of it, but we have to pay for it. 01:03:59.270 --> 01:04:01.200 align:middle line:84% ZHENGZHEN TAN: Yes, That's actually an interesting point. 01:04:01.200 --> 01:04:03.420 align:middle line:84% I was talking to one of the local PE firms. 01:04:03.420 --> 01:04:07.220 align:middle line:84% They went to a very fancy view, very impressive view 01:04:07.220 --> 01:04:10.830 align:middle line:84% building and moving from a less impressive building. 01:04:10.830 --> 01:04:12.780 align:middle line:84% And I said, why do you pay for that? 01:04:12.780 --> 01:04:15.260 align:middle line:84% It's probably like 20%, at least in premium. 01:04:15.260 --> 01:04:19.360 align:middle line:84% They said, because we want to impress our LP. 01:04:19.360 --> 01:04:21.730 align:middle line:84% It sounds ridiculous that the better view 01:04:21.730 --> 01:04:24.228 align:middle line:84% is, in fact, the skill, the investment skill-- 01:04:24.228 --> 01:04:26.020 align:middle line:84% AUDIENCE: I'll tell you what the reason is. 01:04:26.020 --> 01:04:28.812 align:middle line:84% It's because the LPs are paying for it, not them. 01:04:28.812 --> 01:04:30.770 align:middle line:84% ZHENGZHEN TAN: Yeah, the LP is paying for that. 01:04:30.770 --> 01:04:33.220 align:middle line:84% But then in order to get the LP, they 01:04:33.220 --> 01:04:39.342 align:middle line:84% need a granular office, healthy office to impress their LP. 01:04:39.342 --> 01:04:41.050 align:middle line:84% AUDIENCE: Well, I think it's because they 01:04:41.050 --> 01:04:41.925 align:middle line:90% aren't paying for it. 01:04:41.925 --> 01:04:43.750 align:middle line:90% That's why. 01:04:43.750 --> 01:04:45.190 align:middle line:84% ZHENGZHEN TAN: So who do you think 01:04:45.190 --> 01:04:48.190 align:middle line:84% is making the decision in Citadel 01:04:48.190 --> 01:04:51.070 align:middle line:90% or any financial institute? 01:04:51.070 --> 01:04:52.870 align:middle line:90% It's the leasing people. 01:04:52.870 --> 01:04:55.750 align:middle line:84% Do you think the leasing people care about those-- 01:04:55.750 --> 01:04:59.140 align:middle line:90% payroll cares about the rent? 01:04:59.140 --> 01:05:00.850 align:middle line:84% Or they may care about the utility. 01:05:00.850 --> 01:05:04.030 align:middle line:84% But do you think they care about health insurance? 01:05:04.030 --> 01:05:07.150 align:middle line:84% How about the split incentive within the tenants' 01:05:07.150 --> 01:05:08.240 align:middle line:90% organization? 01:05:08.240 --> 01:05:17.920 align:middle line:90% 01:05:17.920 --> 01:05:19.120 align:middle line:90% Carlos, what do you think? 01:05:19.120 --> 01:05:24.730 align:middle line:84% You are in the negotiation for the lease in the office section. 01:05:24.730 --> 01:05:28.240 align:middle line:84% If you were into that and you are leasing, 01:05:28.240 --> 01:05:31.100 align:middle line:84% you are the facility, usually the facility people, 01:05:31.100 --> 01:05:32.660 align:middle line:90% they are probably older people. 01:05:32.660 --> 01:05:37.420 align:middle line:84% And when you do that, if they show you this, 01:05:37.420 --> 01:05:38.895 align:middle line:90% do you think you will care? 01:05:38.895 --> 01:05:39.770 align:middle line:90% AUDIENCE: As tenants? 01:05:39.770 --> 01:05:41.196 align:middle line:90% ZHENGZHEN TAN: Yeah, as tenants. 01:05:41.196 --> 01:05:45.650 align:middle line:84% AUDIENCE: I mean, taking into account that, for example, 01:05:45.650 --> 01:05:48.440 align:middle line:84% if I do come from some place that I 01:05:48.440 --> 01:05:54.920 align:middle line:84% do need to have a premium office space to attract new clients, 01:05:54.920 --> 01:05:57.650 align:middle line:90% I will most certainly go. 01:05:57.650 --> 01:06:00.410 align:middle line:84% It does not affect my revenue at all. 01:06:00.410 --> 01:06:04.480 align:middle line:84% But for example, as my background [INAUDIBLE], 01:06:04.480 --> 01:06:09.900 align:middle line:84% I'm in a business company, we need premium space. 01:06:09.900 --> 01:06:13.120 align:middle line:84% It would not change our revenue at all. 01:06:13.120 --> 01:06:19.560 align:middle line:84% So we wouldn't even consider a premium office space 01:06:19.560 --> 01:06:22.080 align:middle line:84% unless you have a foreign investor that 01:06:22.080 --> 01:06:29.430 align:middle line:84% has a green mandate that we have to spend x amount of our OpEx 01:06:29.430 --> 01:06:34.650 align:middle line:84% or CapEx investments, yeah, in green buildings 01:06:34.650 --> 01:06:35.847 align:middle line:90% or in green assets. 01:06:35.847 --> 01:06:37.180 align:middle line:90% ZHENGZHEN TAN: I agree with you. 01:06:37.180 --> 01:06:43.960 align:middle line:84% So if you are, say, a construction firm or, say, 01:06:43.960 --> 01:06:50.320 align:middle line:84% a law firm, maybe it's less important than the LP and GP. 01:06:50.320 --> 01:06:53.650 align:middle line:84% So this is most likely actually going 01:06:53.650 --> 01:06:57.160 align:middle line:90% to be someone who has an LP. 01:06:57.160 --> 01:06:59.620 align:middle line:84% AUDIENCE: [INAUDIBLE] the package [INAUDIBLE] 01:06:59.620 --> 01:07:03.220 align:middle line:84% always lack something [INAUDIBLE]. 01:07:03.220 --> 01:07:04.920 align:middle line:84% And [INAUDIBLE] always [INAUDIBLE]. 01:07:04.920 --> 01:07:21.667 align:middle line:90% 01:07:21.667 --> 01:07:22.500 align:middle line:90% ZHENGZHEN TAN: Yeah. 01:07:22.500 --> 01:07:25.452 align:middle line:90% So in terms of time, I think I-- 01:07:25.452 --> 01:07:27.590 align:middle line:90% AUDIENCE: [INAUDIBLE] 01:07:27.590 --> 01:07:31.317 align:middle line:90% 01:07:31.317 --> 01:07:32.150 align:middle line:90% ZHENGZHEN TAN: Yeah. 01:07:32.150 --> 01:07:34.910 align:middle line:84% So in terms of the time, I think let's find out 01:07:34.910 --> 01:07:38.600 align:middle line:90% what happened with the case. 01:07:38.600 --> 01:07:39.570 align:middle line:90% You are right. 01:07:39.570 --> 01:07:41.120 align:middle line:84% I think, in the leasing strategy, 01:07:41.120 --> 01:07:43.010 align:middle line:84% it's very important to engage with people 01:07:43.010 --> 01:07:44.390 align:middle line:84% who care about the balance sheet, 01:07:44.390 --> 01:07:47.330 align:middle line:84% about the tenants' cost, which they are typically 01:07:47.330 --> 01:07:52.650 align:middle line:84% going to be your HR person and going to be your CFO. 01:07:52.650 --> 01:07:54.770 align:middle line:84% And when you're leasing, how do you 01:07:54.770 --> 01:07:59.000 align:middle line:84% engage those people beyond the facility [INAUDIBLE] people? 01:07:59.000 --> 01:08:03.150 align:middle line:84% That's something that you need to consider. 01:08:03.150 --> 01:08:05.820 align:middle line:84% And let's find out what happened. 01:08:05.820 --> 01:08:07.540 align:middle line:90% [INAUDIBLE] 01:08:07.540 --> 01:08:09.560 align:middle line:84% So what happened is that, actually, 01:08:09.560 --> 01:08:16.040 align:middle line:84% because of-- when you look at the adoption of the WELL, 01:08:16.040 --> 01:08:17.660 align:middle line:90% they started 2014. 01:08:17.660 --> 01:08:21.899 align:middle line:84% And 2016 is when they make the decision. 01:08:21.899 --> 01:08:23.750 align:middle line:84% So when you see this adoption, it 01:08:23.750 --> 01:08:28.319 align:middle line:84% has been accelerated because of indoor air quality 01:08:28.319 --> 01:08:31.729 align:middle line:84% and for all the reasons that Juan's lecture has mentioned, 01:08:31.729 --> 01:08:35.550 align:middle line:84% that they were being massive [? mack ?] exception. 01:08:35.550 --> 01:08:39.770 align:middle line:84% And then the happy story is that they 01:08:39.770 --> 01:08:43.490 align:middle line:84% did break the record of the most expensive office 01:08:43.490 --> 01:08:45.779 align:middle line:90% lease in the NYC history. 01:08:45.779 --> 01:08:50.100 align:middle line:84% 300-- like the rumor is about close to 300 per square foot. 01:08:50.100 --> 01:08:52.550 align:middle line:90% But that's the penthouse level. 01:08:52.550 --> 01:08:55.550 align:middle line:84% Citadel originally signed a 200k. 01:08:55.550 --> 01:08:57.140 align:middle line:90% Again, someone has the LP. 01:08:57.140 --> 01:09:00.109 align:middle line:90% 01:09:00.109 --> 01:09:02.327 align:middle line:90% And they later extended to 300. 01:09:02.327 --> 01:09:04.369 align:middle line:84% But they still have half of the building to fill. 01:09:04.369 --> 01:09:08.660 align:middle line:90% 01:09:08.660 --> 01:09:13.560 align:middle line:84% In 2020, the building is actually in financial distress. 01:09:13.560 --> 01:09:15.810 align:middle line:84% Unfortunately, the LP lost all their money. 01:09:15.810 --> 01:09:18.279 align:middle line:84% And LP, in this case, is the Japanese money. 01:09:18.279 --> 01:09:22.050 align:middle line:84% The reason why is because 25% of the office structure 01:09:22.050 --> 01:09:25.080 align:middle line:84% has proved to be extremely difficult. So the project 01:09:25.080 --> 01:09:26.740 align:middle line:90% was delayed for over a year. 01:09:26.740 --> 01:09:28.479 align:middle line:90% That cost them $100 million. 01:09:28.479 --> 01:09:34.390 align:middle line:84% And I think BXP is trying to buy the deal from them. 01:09:34.390 --> 01:09:40.380 align:middle line:84% But then later, Blackstone, I think, salvaged the project. 01:09:40.380 --> 01:09:43.840 align:middle line:84% But the equity was wiped out, unfortunately. 01:09:43.840 --> 01:09:48.029 align:middle line:84% But that's not something to do with the healthy building. 01:09:48.029 --> 01:09:50.550 align:middle line:84% It's just the risk of this project. 01:09:50.550 --> 01:09:52.878 align:middle line:84% And in the recent thing-- and now, 01:09:52.878 --> 01:09:54.420 align:middle line:84% let's get back to the final question. 01:09:54.420 --> 01:09:59.310 align:middle line:90% Is this a successful decision? 01:09:59.310 --> 01:10:02.880 align:middle line:84% So in 2021, you see a lot of news 01:10:02.880 --> 01:10:05.110 align:middle line:84% in the current about the office sector. 01:10:05.110 --> 01:10:06.900 align:middle line:90% They are in a lot of distress. 01:10:06.900 --> 01:10:09.930 align:middle line:84% But there is a flight to quality trend, apparently, 01:10:09.930 --> 01:10:12.630 align:middle line:84% in the top tier office sector right now. 01:10:12.630 --> 01:10:16.770 align:middle line:90% 01:10:16.770 --> 01:10:22.530 align:middle line:84% And one of the new data shows that in 5 US CBD, 01:10:22.530 --> 01:10:25.590 align:middle line:84% in the past two years, there are 7 million square feet 01:10:25.590 --> 01:10:29.100 align:middle line:84% of increase in the demand for the ultra-healthy, 01:10:29.100 --> 01:10:33.480 align:middle line:84% ultra high quality building, while the demand in the lower 01:10:33.480 --> 01:10:36.150 align:middle line:84% quality building, which is usually cheaper, class B, 01:10:36.150 --> 01:10:38.860 align:middle line:84% is down by 25,000,000 square feet. 01:10:38.860 --> 01:10:42.810 align:middle line:84% So there's a winner and a loser in this project. 01:10:42.810 --> 01:10:46.610 align:middle line:84% And again, we won't have time to discuss this. 01:10:46.610 --> 01:10:48.950 align:middle line:84% But I encourage you to think about will 01:10:48.950 --> 01:10:52.250 align:middle line:84% this building strategy work in a wider market? 01:10:52.250 --> 01:10:57.170 align:middle line:84% And finally, I want to wrap up this case 01:10:57.170 --> 01:10:59.030 align:middle line:84% is about the science and the performer 01:10:59.030 --> 01:11:02.280 align:middle line:90% as well as if you go for that-- 01:11:02.280 --> 01:11:05.040 align:middle line:84% go for that risky play, what is your strategy 01:11:05.040 --> 01:11:10.050 align:middle line:84% to engage your tenants and the market? 01:11:10.050 --> 01:11:12.280 align:middle line:90% That's all. 01:11:12.280 --> 01:11:13.780 align:middle line:90% [APPLAUSE] 01:11:13.780 --> 01:11:15.630 align:middle line:90% Thank you. 01:11:15.630 --> 01:11:34.000 align:middle line:90%