Location: Have you been better protected from this credit crunch because you sell buildings in the below-$100 million market?
Mr. Knakal: Clearly, the market for buildings over $100 million is much slower than the market for buildings under $100 million, mainly because of the availability of credit. … To the extent you’re looking for a nine-figure loan on an acquisition, that’s very challenging to find, mainly because most of those loans were provided by [commercial-mortgage-backed securities] lenders that are no longer active.
How have your sales been affected?
Our number of transactions is off by about 21 percent compared to 2007. … The lower end of the market, particularly the market under $50 million, is much more stable, operating on a much more sound basis than the market for larger properties. … But, I think it’s very important to understand [that the] 21 percent decline in the number of transactions [is] completely a supply-constraint dynamic [caused by] all the negative stuff that people are reading about and hearing about, and they believe the market is not a healthy market to sell in. The statistics show that prices have not fallen.
So who’s the bigger demon—the press or the credit crisis?
I think it’s a combination, for sure. I don’t mean to blame the press. I just think that negative issues are more topical to write about today. But the fact is, there is a fundamental problem in the credit markets that is affecting things, but the effect is exacerbated by the constant reports of negativity.
Sure. On the other hand, it’s hard to know what to believe. You and other brokers have quite a vested interest in being bullish about the market.
Well, I’m happy to show the statistics that we work on. But I think there are absolutely some fundamental problems in the marketplace. … I wouldn’t be surprised to see more upheaval in the markets, based upon another big institution perhaps facing bigger losses than they have disclosed so far.
You’re a bit of a fiscal policy wonk, I see. I know you went to Wharton, and then worked for Coldwell Banker?
I got my B.S. in economics from Wharton. And I did work for CB during my three summers in college.
And then you went to work there. I read that when you applied, you thought Coldwell Banker was a bank, and not a brokerage?
I grew up in a little town in Jersey called Maywood, which is right next to Hackensack. And I went around spring break of freshman year dropping my résumé off at every investment bank trying to get a job that would look good on the résumé; and I walked out of the Paine Webber office in Continental Plaza, and directly across the hall was Coldwell Banker. And I walked in thinking it was a bank, and the rest is history.
What did you like about real estate?
It was a generally young, hardworking, energetic group of people that seemed to really enjoy the business, enjoy the camaraderie of the office. I liked the fact that the buildings were tangible. … Although one of the things Paul [Massey] and I realized very early on is that we’re not in the real estate business. We’re in the information business. The information is just predicated on bricks and mortar.
What do you mean by that?
Well, everything we do is based upon information. Knowing what is happening in a particular neighborhood, knowing what’s happening in a particular building, knowing the income, the expenses, the cash flow, the finance-ability, what else is on the market, what people are paying for properties …
Brokers seem to be some of the most voracious consumers of newspapers, which would support your thesis. What do you read every morning?
I don’t read anything necessarily every morning, but on the weekends I catch up on a lot of reading. During the day I’m very, very busy. I have a very short commute to work, so I don’t get that opportunity to read when a lot of people do.
Where do you live?
At 45 Park Avenue, so it’s four blocks from the office.
How nice. How does this market compare to prior slowdowns in your estimation?
In the early ’90s, the [savings-and-loan] crisis was about a $250 billion issue in what was a $6 trillion economy. Today, a lot of people think this subprime crisis thing could be as much as a $1 trillion event in a $14 trillion economy. So on a relative basis, this would appear to be a lot worse than the recession of the early ’90s.
However, the fundamentals going into this period of time are much healthier. If you look at vacancy rates, they’re significantly lower than they were in the early ’90s; corporate balance sheets are in much better shape today then they were in the early ’90s. … And, today, there are billions and billions of dollars of equity sitting on the sidelines waiting for a buying opportunity. When prices come down a certain percentage—and I don’t know if that is 10 percent or 15 percent or 20 percent—at some point one of those funds sitting on the sidelines is gonna jump in and make an acquisition, which is likely to be the first in a series of dominoes where all of those funds are going to jump into the market, fearing that they’re going to miss a buying opportunity.
Such a herd mentality.
It absolutely is.
I was s
peaking to a broker at a recent REBNY event who said he was voting for McCain because he feared Obama would close the 1031 loophole that allows sellers to defer capital-gains taxes by reinvesting in real estate. Is that a real possibility?
There are a couple of issues politically that come to mind when you look at how legislation could affect the real estate market. One is the 1031 exchanges. Right now, nothing can be done on that until 2010.
Where do you stand politically?
I normally support the candidate who I think will do the best job for the country.
And which one is that?
I’d rather not say.
It seems to me real estate types tend to lean right. Do you find that to be the case?
Not necessarily. A growing number of people in not only the real estate industry but in the country are fiscal Republicans and social Democrats. And I think that it’s very hard not to believe that fiscal issues and monetary policy are very, very important. And it’s also very difficult to believe that taking care of our citizens and doing what’s right socially is not the best course of action. So I think there is a great opportunity for moderate candidates from either party, or for the creation of a very strong third party.
How did you and Paul [Massey] find each other?
My first day on the job at Coldwell, which was July 16, 1984 … the manager of the office told me to follow Paul around, and he would teach me what was going on; and the second day on the job, we said, ‘Hey, why don’t we work together, be partners, you take this small area, I’ll take the one next to you, and let’s go to it.’ That was literally the start of our partnership, and we’ve been partners for 24 years now.
Are you friends?
Absolutely. He’s one of my very best friends.
Do you ever fight?
Does it bother you when reporters cover things like the length of your hair? [Editor’s Note: Mr. Knakal famously cut his three-year-old mane in April.]
Well, I don’t understand the … [long pause] … fascination with it. I’m just a guy trying to sell some buildings.