It's all Related

Trio dominates development in NYC.

“IF THE CITY DOES WELL, WE ALL DO WELL,̶: said Related Cos. CEO Stephen Ross, depicted here with partners Jeff Blau (left, in illustration) and Bruce Beal Jr. (right).

By Daniel Massy

When Jeff Blau started at The Related Cos. in 1989, the first task Chief Executive Stephen Ross gave the 21-year-old was to buy up auto shops in Willets Point, Queens. Related built stores for Kmart, and the retailer wanted one in the area. Nothing came of it, but 23 years later, Related is about to gain control of Willets Point in a high-stakes gamble to salvage the city's most complicated real estate development project.

To understand why Related triumphed over three other bidders there is to understand why it has become the leading developer in a city notoriously difficult to build in: Related thrives on that complexity. It is better at navigating the obstacles—from bargaining with unions to compromising with city officials—and more willing to take risks than its rivals. It thinks in decades, not quarters.


"What makes them unique is they have a tremendous propensity to take on non-as-of-right projects and to engage with government in a collaborative way," said Jed Walentas, principal of Two Trees Management Co., referring to projects requiring political approval.

That has led to sneers from critics that Related succeeds because it is a favored developer of the Bloomberg administration, a charge fueled by Mr. Ross' close ties to former Deputy Mayor Dan Doctoroff. But interviews with two dozen real estate and government insiders revealed a company that has built a competitive advantage mostly by taking on challenging projects and learning from each how to better execute the next.

"Their lack of fear of public process, bureaucracy and unions is what allows them to be the player they are," said former city Housing Commissioner Rafael Cestero, president of the Community Preservation Corp. "Too often, the larger development companies get scared of that."

At Willets, Related didn't offer quite what the city wanted. The cleanup costs at the highly contaminated site were enormous, and rents for the 400 proposed apartments wouldn't justify the expense. But Related knew the mayor's office needed to get something done.

Instead of asking for additional subsidies or for the city to maintain liability for the contaminated land, Related forged a partnership with Sterling Equities, which is controlled by Mets owners Fred Wilpon and Saul Katz. They proposed to delay the housing and first build a 1 million-square-foot retail and entertainment complex on the parking lots just west of Citi Field, on land leased by the Mets. The retail project, the thinking goes, will generate economic activity and interest that will allow for higher rents when the housing is built starting in 2025. It's chancy—the cleanup is incredibly complicated, and the builders agreed to pay a $35 million fine if the housing construction doesn't begin by 2025—but Related puts a price on risk in a way that would make many developers' heads spin.

At Hudson Yards on the far West Side, Related took essentially the same $1 billion deal from the government that Tishman Speyer had just abandoned. As in the Willets case, Related tweaked the agreement to make it work for both sides. Similarly, instead of telling the state that its plan to have developers build two towers above Moynihan Station was too expensive, Related and Vornado Realty Trust proposed to transfer air rights to a nearby site that would be cheaper to develop.

Related was also first to recognize the potential for big-box retail in the outer boroughs, partnering with the city and state on projects in Queens, the Bronx and Brooklyn.

WORKING WITH GOVERNMENT

"Not many people would have said, 'We can put big-box along the Belt Parkway in East New York' in the late 1990s," Mr. Cestero said. "They had the vision and foresight to do that. And it's been wildly successful."

Related's willingness to engage with government dates back to the company's infancy. Mr. Ross first emerged as an affordable-housing developer—perfect training for learning to navigate mazes of approvals and incentives. He sold interests in subsidized housing developed by others, moved on to building it himself and eventually graduated to market-rate housing, retail and office buildings.

Related's rise hasn't always been steady. It fell on hard times during the early 1990s recession and was "on the brink of oblivion," according to a 1995 Crain's article. Mr. Ross restructured $100 million in unsecured debt and sold about 30% of the company to friends and family for about $40 million (he later bought it back). But when the economy turned and demand surged in Manhattan, his portfolio soared in value, and he had the resources to make bigger plays—like his career-defining move to develop Time Warner Center at Columbus Circle.

Unlike many New York City developers, Related isn't a family firm or an investment trust. Mr. Ross, 72, has two partners: Mr. Blau, now 44, who handles financing and deal structures, and Bruce Beal Jr., 42, who takes care of project planning, building costs and execution. The private company's more than 2,000 employees receive equity stakes in projects on which they work.

"A lot of our success has to do with the way Stephen originally set up the company," said Mr. Blau, the president. "People join Related and they know it's a meritocracy. We hire the best and the brightest, train them and allow them to grow."

It's also obsessed with growth. In 2006, Related bought luxury fitness chain Equinox. Earlier this year, it bought a stake in Danny Meyer's catering company, Union Square Events. Related launched a business that manages $1.5 billion of capital for sovereign wealth funds, public pension plans and endowments. It does more than 80% of its business in New York City but also has projects in Miami, Chicago, Los Angeles and other U.S. cities, as well as operations in China, Brazil and the United Arab Emirates. It even has a company in China that lowers costs by sourcing materials like stone, moldings and wood there.

"We continue to be extremely ambitious and think big, well beyond just our developments," Mr. Ross said. Today the company owns and operates $15 billion in assets, with another $17 billion in the pipeline in the city alone.

LONG-TERM PROSPECTS

Mr. Ross believes Related's success is tied to New York's long-term prospects. He's part of a team that's building middle-income housing at Hunter's Point South in Long Island City, Queens, and is working with 32BJ SEIU to get the city to develop more affordable housing. "You have to continuously find ways to enrich the city," he said. "If the city does well, we all do well."

Investors' faith in Related has fueled its growth. Goldman Sachs, Michael Dell's MSD Capital and sovereign wealth funds from Abu Dhabi, Kuwait and Saudi Arabia sank $1.4 billion in equity and debt into Related in 2007 for a 25% stake in the company—the first outside investment in Related. Some three years later, Oxford Properties Group, the real estate arm of one of Canada's largest pension plans, bought a 50% stake in Hudson Yards for a commitment of $475 million.

"We've been very impressed with their track record in executing complex projects in New York and elsewhere," said Blake Hutcheson, Oxford's chief executive. "There are a handful of visionaries, and I would classify Steve as one of those."

But that track record is far from perfect. It withdrew a plan for a BJ's Wholesale Club in the Bronx rather than face defeat by the City Council. City planners shot down its plan for an 1,800-seat theater for Cirque du Soleil on West 42nd Street. The council rejected its plan to turn the Bronx's vast Kingsbridge Armory into a mall.

Related has failed to close the deal on a Walmart in East New York despite reports that it was in advanced lease negotiations a year ago. And now, with its Willets Point project likely to require City Council approval, it might be forced to abandon its Walmart dalliance.

Related's role as the city's most prolific developer is still evolving. Although the company is at the forefront of potentially lucrative projects, it faces tremendous uncertainty. At Willets Point, scrappy property owners have delayed the project for years, and some experts question whether a huge mall will succeed near Citi Field. The Moynihan Station project has yet to be built. Related signed luxury goods maker Coach to anchor its first tower at Hudson Yards, but it still must secure tenants that would allow it to build two $800 million platforms crucial to the bulk of the project. A handful of developers are competing for the same small pool of mega-tenants.

Related's negotiations with unions to reduce construction costs are complex and intense. It wants Hudson Yards to be union-built but hasn't ruled out using some nonunion workers if it doesn't get the savings it wants. It put labor costs under a microscope to make its MiMa development on West 42nd Street happen and is trying to replicate that process on a grand scale.

Paul Fernandes, chief of staff at the Building and Construction Trades Council of Greater New York, characterized the conversations as "a genuine effort to figure out how we resolve these issues to get their project built."

Another cloud on the company's horizon is the departure in 2014 of Mayor Michael Bloomberg, whose view of the city and penchant for big projects has meshed perfectly with Related's. But the developer—clearly—has shown an ability to adapt.

"We continually question the way we do things and take the time to really understand what makes up every component of our developments," said Mr. Beal, Related's executive vice president. "It's about the details, getting into the weeds on every aspect."



“IF THE CITY DOES WELL, WE ALL DO WELL,̶:  said Related Cos. CEO Stephen Ross, depicted here with partners Jeff Blau (left, in illustration) and Bruce Beal Jr. (right).