Data Center Development With Chad Fowler

The REI Diamonds Show - Daniel Breslin | Data Center Development

 

Guest: Chad Fowler is an architect specializing in data center design at HED Design part of the mission-critical team which is dedicated to advancing technology integration and implementing sustainable practices. Chad emphasizes the importance of educating communities about the significance of data centers in the digital landscape. His work aims for a better understanding of how data centers support modern technology and infrastructure.

Big Idea: Chad discusses the evolution and significance of data centers in supporting modern technology, particularly in the context of AI advancements, and argues that their crucial role in the digital age requires innovative design and community engagement.

This episode is also sponsored by Lending Home. Lending Home offers reliable & low-cost fix & flip loans with interest rates as low as 9.25%. Buy & hold loans offered even lower. Get a FREE iPad when you close your first deal by registering here now.

Resources mentioned in this episode:

HED

View the episode description & transcript here:

Data Center Development with Chad Fowler – REI Diamonds

Chad Fowler & I Discuss Data Center Development:

  • Data Center Definition and Evolution (00:11 – 00:30)
  • Power Consumption and Cooling Technologies (00:49 – 01:20)
  • Impact of AI on Data Center Design (05:45 – 06:08)
  • Community Education and Sustainable Practices (42:20 – 43:10)

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Data Center Development With Chad Fowler

Mr. Chad Fowler, welcome to the REI Diamonds show. How are you?

I’m great. Thanks for having me, Dan.

You’re with HED Design and on the mission-critical team, which is mostly focused on data center design throughout the US and around the world. What’s the deal with that?

We’re primarily US-based. The global market is there, and it’s something that we have done a little bit of work in future expansions.

This will be a little bit of a diversion from probably a lot of the topics that we have on the show here, but I think this fits for a few reasons. Number one, we’re talking about real estate development. I’d argue one of the most niche values, I would probably guess this is the highest value per square foot transactions that we saw in 2024 and 2023, if I had to guess, on a price per square foot basis. I think $2,300 a square foot was one traded in Elk Grove Village, which our Chicago audience will know that name, but maybe not so much the rest of the folks around the country.

 

The REI Diamonds Show - Daniel Breslin

 

We have real estate development, high-price niche real estate that we normally probably don’t look at. I thought this was an interesting topic. I’m hoping we can get a nice little overview of the industry on our show episode. Chad, what else did I miss from the short introduction here that might help fill in any holes?

I’ll expand a little bit. I am an architect by training, so my background is in architecture. HED is an interdisciplinary company concentrating on advancing our world. It is where we focus on positive impact and the future of what we can offer to our built environment and our communities.

Data Center Definition And Evolution

Why don’t we start with defining a data center? What is a data center? Maybe you’re defining one in the last 18 months because I’m betting that this industry has moved a whole lot in the 20 or 30 years that you guys have been designing these things.

It certainly has. It’s a whole different world now than when it started. It’s a very exciting time. We are interacting with a data center as how you and I are talking virtually. Our everyday lives are becoming connected to data centers the more and more technology we use. That’s driving this rapid expansion in the market and a lot of other factors. What are they? They are information storage locations, and they are information hubs, transferring from one location to another location. They are areas that do calculations. They are areas with AI.

 

Our everyday lives are becoming increasingly connected to data centers as we use more and more technology. This, along with other factors, is driving the rapid expansion in the market.

 

Let’s jump to the AI. AI learning, AI calculations, and AI data are all stored, developed, and figured out in a data center. They can be large facilities. They can also be small facilities. Every office function has a need for some small or medium data center component. They can either be housed by themselves and operated by themselves, or they go to co-location providers, which are larger facilities, and they become part of that larger infrastructure.

On the small end versus the large end, in the number of square feet, talk real estate. What are we thinking? Is it 200,000 on the large end?

That’s a decent-sized medium building, 200,000 square feet. The smaller ones could be 10,000, 20,000, or 50,000 square feet. That’s on the smaller side. Larger, you’re getting into up to a million square feet in there. The power consumption of those is astronomical when you think about it. The 200,000-square-foot building you’re talking about, 2 or 3 years ago, we’re looking at 36 megawatts of IT load. That’s infrastructure load. That is the power that is going to the servers, which is what is housed within the data center.

On top of that, you have to add all the power that is associated with cooling. As you’re using that power, the generator generates a significant amount of heat, and you have to provide the cooling in order to heat-reject that and the overall loads within the building. For 36 megawatts, you’re looking at 36-plus megawatts for total power consumption within that building. It depends on the efficiency you have there.

If we were to put that in context, what is that? Is that 600 houses’ worth of power?

You’re talking about towns. This is going into a 200,000-square-foot facility. When you look at that all within a spot, that is an enormous amount of power.

That was 2 or 3 years ago, you said. What about now?

We’re now getting to the point where we’re not even sure how much power we can fit in that 200,000 square feet. AI has changed our environment and our world to be something completely different. You hear a lot in the news about NVIDIA, what they’re doing, and what some of these companies are producing. Their rollouts are taking an enormous amount of power and putting them in a very small square footage space. If we take that 200,000-square-foot building, 36 megawatts in there, you’re almost doubling that power to that same square footage.

 

AI has really changed our environment and our world, making them completely different.

 

The challenge that it is driving is how do you take all that electricity and that heat that is generated in a smaller footprint, and how are you handling that? Historically, that was done by air distribution going over the servers and air management. The supply air, which is cooled, is forced through the inlet of the servers. It is then separated as it comes out the back of the servers, which is the hot air, and that recycles back into the server.

You can get into the servers. In an individual server, it is roughly 2 feet by 4 feet, and it can vary. Let’s say it’s 8 feet tall. That’s one server. One server was historically somewhere between 8 and 10 KW per cabinet. That same cabinet, that same footprint, instead of that, let’s say the high end of this is 10 KW power, we’re looking at 30 KW, 40 KW, 50 KW, or even more.

Mostly, that’s the AI trend, and NVIDIA’s new chips and that kind of thing that we hear a lot about.

We’re hearing all about those. Those are facilitating the ability in order to do all that compute power in such a small area and so efficiently. In order to get there, you’re providing a liquid-based, or some transferable-based, cooling medium that is transferred, and it’s going directly into the servers or the individual pieces within that cabinet, which is a 2-feet by 4-feet piece. It’s going directly into there, and in some cases, directly to that chip to provide the cooling exactly where you need to provide it at those densities.

It’s almost following the trend of the automobile. I think the early Henry Ford Model T’s were air-cooled. You got a radiator in the car, and you’re using antifreeze and a water pump, and you got the radiator in the front catching the air, going with a liquid base. That’s amazing. That computer power now requires that technological leap.

Think about you sitting in a computer. That computer is going to have a bunch of wires for your power and your connectivity to the outside world and provide a couple of other connections, and some sort of liquid is going in there to cool what’s inside your small little computer at your desk.

The Future Of Nuclear Power In Data Centers

That’s wild. We have a challenge too. You’re generating all this power. I remember a few years ago, I read something, I can’t remember if it was a book or what, Bill Gates probably 5 or 7 years ago. I remember he was pitching the platform of nuclear power. We’re going to run out of energy. I’m thinking to myself, electric cars are coming, and I get where he’s coming from. What a nice guy that he wants to get us on nuclear so that we could have plenty of power for our air conditioner, and refrigerator. I’m coming to the realization he knew AI was a thing.

They had data centers everywhere. Microsoft is one of the most cutting-edge companies, certainly in tech, and maybe in the world. I’m like, he saw this coming, and we need nuclear power to power these data centers. I guess it was more of a business initiative on his part. Do you think that package nuclear power plant facilities are in our future here in the next 5 to 10 years, where a data center is now going to have its own uranium pellet that’s providing this kind of power?

It’s an interesting thought. Yes, in the short term. I think if not that, it’s going to be something similar to that, that we see happen. You’re seeing the large tech companies such as Microsoft and others. They’re looking at acquiring locations and restarting nuclear power plants. That’s simply within the northeast. What you were talking about is the small nuclear reactors, the module pieces that could be located in locations.

That is a hot topic. I think there are a lot of regulations that need to be figured out. Also, how do you get those in certain locations and jurisdictions? How does the community understand what it means to have that? It’s a scary word. I grew up in the 20, 30, 40, or 50 years ago. That was certainly something that was not necessarily viewed as positive.

Still enables if Fukushima went a few years ago, and that was a big deal and scary, and still is scary. It’s still scary to think we would have these little trailers dropped off with little miniature nuclear devices, and that’s going to be powering, not my backyard.

I mentioned Bill Gates and what he’s doing. It’s evaluating new technology and how that can be safer than what it was historically how we’ve been using it, and what our views are on that. I don’t know a lot of information about it. Somewhere in the West, I think the Wyoming area, he’s rolling out a trial of that technology. That’s my belief. I believe that when that happens, I’m assuming that it will help open the doors for more of that to come.

I think this had to do with using the spent rods from the nuclear facilities, which is a big problem, and storing those in New Mexico in some mountain somewhere. We’re going to run out of place to put that stuff. This new technology is supposed to recycle that. We’re out on a limb calling nuclear a green technology. I think it glows green, so we do have that.

They all have their upside and their downside. It’s the technology that’s not fossil-fueled that can efficiently provide the power that the country is looking to move into. As we move off fossil-fuel-driven appliances, cars, and all that stuff, the power still has to be generated in some fashion in order to get it to those points. The advancement in that technology or other technologies is going to be vital in order to keep going.

Green Design Innovations In Data Centers

That must happen. While we’re on the green topic, are there some green design techniques that maybe were developed in the last 2 to 5 years, that you guys have installed in data centers that might be helping with the problem of the pooling, the large amount of power, maybe the way that the properties look?

There’s a lot of that going on. It’s hard to point to one specific thing. I will say the data center market uses an enormous amount of energy. There’s no ifs and buts about that. What you want to do is make the usage of that energy as efficient as possible. There’s a metric that is used in the industry called PUE. The PUE measures the amount of power that goes to the building and then the amount of that power that is used for IT, the end source, and the servers.

Historically, if you’re looking back 20 or 30 years ago, you were looking at facilities that PUE was two-plus. Meaning for every amount of power that was going to the server, you were using that same amount of power to your building and cooling technology. Two is not a good number. One would be all the power going to that building is going straight to your IT. We’re now designing the facilities that are much closer to that one.

That’s 1.2. A little bit below that is 1.15. You can see where we started and where we currently are. Ideally, somewhere we’ll get into below one and where we’re generating power and pushing it back. How do we get there? How does sustainability come into that answer? The market drives a lot of research, and a lot of motivation to make that more efficient. Cooling technologies.

The advancement over the five years of how efficiently the cooling technology is distributing that air to the servers, and functionally how much power it takes to make those work, has grown substantially. The large tech companies, and the large REITs that are developing, are all working with manufacturers in order to help those manufacturers develop equipment that operates the most efficiently that it can. That means more money for your development.

At the end of the day, you’re saving money on the operations and overall. Other aspects of technology certainly in sustainability is with the building itself. I think there’s more of a concentration to make buildings themselves, either some LEED level, higher carbon footprint, evaluating how all that goes into the buildings, what material you’re using, and what’s the efficiency there.

Also, location. Location becomes a big driver, geographic location. The power you’re going to ultimately utilize, where does that come from? Pacific Northwest, there’s a lot of hydropower up there. There’s the good and bad of hydropower, but it’s generally a green power source. We’re talking about nuclear before if it’s nuclear sourced. By far, most of it is still fossil fuel-driven.

When we talk about the location, you can’t put these out in the middle of Wyoming either. Don’t they have to be near the population base due to distance? With the technology for data transfer, can it be halfway around the world, and it doesn’t matter?

It’s what’s happening in the data center. Some of the AI stuff that’s going on can be in the middle of Wyoming because it’s self-perpetuating. It’s working within itself, and then it’s sending information out. It’s not as critical latency, which is how much time it takes the information to go from that server to you. There are things that are latency-dependent. At night, if you’re going to log on to Netflix and you want to start up your movie, you don’t want to sit there and see that wheel spinning for even ten seconds. You’re going, “What’s wrong?”

Not even three seconds.

That’s an eternity. Those are the areas where you want that proximity to be vital. Certainly, if you get to the financial world, the stock market, getting milliseconds is critical as well.

 

In the financial world, stock markets operate where milliseconds are critical.

 

You mentioned that AI can be slightly latent. I think we’re forgiving because AI is a new technology. You go on and you do deep research in AI, Gemini, and Google’s version. You set up your prompts, and then 5 to 10 minutes later, you get back to this nice report. That report probably could have been done by McKinsey or something and probably would have taken 30 days. We’re willing to wait eight minutes for that now, but what’s that going to look like five years from now? Is it going to be like a dial-up modem, and all of a sudden, it’s Wyoming AI data centers? Who’s going to rent that? That thing’s bankrupt. What idiot thought that was a good idea?

One thing on AI, I took a call. I can’t remember what the call was, but I remember thinking there was a big pregnant pause. I think this is AI. It felt like latency. I didn’t ask it if it was AI, but the voice sure sounded robotic. It was some confirmation call, a customer service thing. Somewhere AI certainly would be plugged in. It got whatever I was looking for done because I don’t remember being frustrated at the end. I remember thinking there’s this odd long pause. Maybe that’s the latency of the distance to the data centers that they’re using now.

It could be. Unfortunately, I answered a robocall the previous day because I was thinking it was something else. I had a similar experience where I started to say hello, and then there was a pause. I’m like, “Maybe no one’s there.” Someone started to talk, and then I responded, and then there was the pause, and I was like, “Talking to a machine.” Certainly, in the future, that’s going to change. It’s got to change. There’s going to be some prompt. There’s going to be a point where we’re not going to know what that is.

I think AI is a huge boom and how and what we use it for. I don’t even think we know how we’re going to ultimately use it yet. I’m sure somebody does, but it’s going to continue and continue and continue to improve as it develops. The data centers that we’re doing now are facilitating those AI to become what it will be in the future. There is a learning environment for AI. It’s not our learning, per se, but it’s got to have that data. You’ve got to feed that data into it in order to be able to understand it.

 

The current boom in AI is significantly changing how and what we use it for, but its ultimate uses remain unknown.

 

Are We At Peak Data Center Development?

You’ve been present and operating as an architect for the past 30 years, which was what you mentioned before we started the call. That would have put us through the dot-com boom and bust, and we’re in the AI boom. I wonder from your perspective, with the number and size of centers and the money that’s thrown around for these things, I believe they overbuilt the data centers in 1996, 1997, 1998, 1999, 2000.

They were building and building way more capacity than we needed up until about 2003, 2004, and 2005 when video finally came online, suddenly we didn’t have enough capacity anymore. Do you feel we’re at the peak of data center development yet, or maybe I’m totally off base, and we still have such a humongous runway to go and it’s unexplainable.

I think about the dot-com days and when it’s coming again. I don’t think we’re there yet. I think that was way before its time, the dot-com boom, as we saw, it was prepping for something that wasn’t happening at the same pace. My understanding of the people that are driving this market, what their plans are over the next year, and the amount of money that they’re pouring into this is mind-boggling and will continue to grow for the foreseeable future. It is going to change. When will that happen? I don’t know, but it’s not going to be certainly in the next five-plus years.

I guess we should all buy more NVIDIA stock then, is that it?

I know, yeah. That’s starting. There’s going to be more of them. They’re starting everybody. Others are developing it. Where we are in the data center development and what that means is we don’t understand what that means to the buildings still. In order to deploy an NVIDIA lineup, you’re going into a 60,000-square-foot computer room. That’s what we call white space, where historically, there would be lines and lines of cabinets and servers.

You’re going to a room, and there’s 10% of that room being utilized for the NVIDIA servers. That’s it. It’s a big, empty space. How we plan and how we plan the buildings and how we make these buildings more efficient is something that is coming and will start to happen over the next few years as we see how we can provide all the backbone of the equipment and get that cooling and that power to such a small space.

How big is the actual building? Is it 80,000 feet to make a 60,000-foot white space?

What I say is 60,000 square foot white space, there could be six of those within a 200,000 square foot building. That one would have less than six of them.

Ten percent is the NVIDIA build-out. Is the rest vacant for future expansion?

It’s vacant because there’s no additional power to be used there. That’s an extreme event.

We’re not building a bunch of empty data centers as we speak. That’s not happening.

It’s what’s driving change in the industry. It’s exciting to see what’s going to happen.

The Business Model Behind Data Centers

Would you mind breaking down the owners? We mentioned REITs, and we think REITs are renting out the space. Are we talking 200,000 square feet, and the whole thing is rented to Amazon web servers? They probably are building their own for AWS, and they are 100% full, but what’s the makeup of a 200,000-square-foot building with 360,000 square-foot white spaces? Are they all one tenant, or are there seventeen tenants? What’s the business model behind the scene if you know?

It’s any and all above to be. Large tech companies like the Amazons and the Microsofts of the world are expanding so fast that they’re building and operating their own facilities. They’re also going to these REITs and taking an entire building that they’ve built and developed just because they can get that online faster than they can develop their own buildings.

That’s the speed of the market that they’re working under. That’s a big impact that’s happening there now. Historically, there’s a mixture. I think different companies have different philosophies on how to do that. There are a number of REITs that develop that and then they lease. It’s very much co-location. They’re either leasing cabinet space. It could be one cabinet for a client. It could be ten cabinets in a room that could house 1,000 cabinets.

There’s a breakdown of that. In between that, you have companies that need the computing power of 6, 8, or 10 megawatts of power, and they lease the entire room. That’s all the room in order to do what their requirements are. Any and all above. By far, the biggest impact is from those large tech companies there, where you’re taking old buildings down. That’s the ultimate goal in that world.

Do they built on spec and then they put them out as a co-location? Microsoft is like, “We need it all. Here’s a lease.” Is that how they’re going down?

Kind of. You might have to tweak it. You might have to make some adjustments because the kit that they put in there, which is all their servers and things, might need to have a few different requirements than what that spec build has. You might have to make some modifications.

That would be the developer or the owner of the building making those modifications on their dime. Now Microsoft comes in and will take that for a 5 or 10-year lease, something like that. I guess one of the risks if I’m the developer and I build a site, some new chip could come in. AI could design a better version of itself in a utopian world. Suddenly, what used to take 60,000 square feet happens on one server rack, and now we’re overbuilt.

The other thing is that technology is moving so fast, I would imagine you would know more than me, but in 30 years, how fast technology moved, where after Microsoft has gone, now the layout where they were all air-cooled servers, they’re all liquid-cooled servers. I don’t know what more modification will be necessary for that landlord, but you’d have a pretty big bill to upgrade the technology at the end of each lease.

There are still facilities that are operating that were built twenty years ago in these co-location spaces. Some of those were long-term leases, but they do flip. There’s still a market that people who do not need these high densities that we’re talking about. It is a hot topic in our world in data center design, these enormous loads are driving all the change.

There’s still a strong market of people in the smaller avenue that can still accommodate the historical loading power densities that older facilities were designed for. As designers, forward-thinking, there’s a lot of unknown what is going to happen. You do want to design a facility that is purposely built for what it’s doing now, but in many cases, some philosophy or thought is given if it needs to change.

Can you give me an example of a design decision that fell into that latter category?

It’s very common. Will it need liquid cooling? When you’re designing a space and you’re building it on spec, will it need liquid cooling? Will it not need liquid cooling? You don’t know. You don’t know what those requirements are. You’re looking at the facility and looking at ways your base design will not incorporate liquid cooling, but your planning will allow that to come in some time down the road. Hopefully, it’s still in design, or if it’s being built, it’s easily flexible in order to pivot without having to adjust the bones of the building.

You need to have your structural loading in order to accommodate. You don’t want to go back in and reinforce everything. You want to have your clearances able to accommodate the additional equipment without relaying out the whole building and possibly losing some leasable space. Those are the things that we’re looking at now in the planning to make sure that there is flexibility for what we see possibly coming down the road now.

Is that as simple as a 24-inch between or underneath of the floor where the servers sit with flexible panels or something like that, that would allow someone to modify that at a future date?

Somewhat, the raised floor system, fewer facilities are using that. Twenty-four is a lower density height. We’re getting commonly at 30 or 36 inches or more in order to get the air up to that 10 kW that we were talking about before. The raised floor now is going away, and the room is being pressurized in order to do that. Air management is critical. There is a planning. When you’re planning the facility, it is important that you are planning hot and cold aisles, as I was talking about.

The servers have intake. That’s where the cold air comes out. It has exhaust. That’s where the hot air comes out. You never want those two to mix. There’s containment that surrounds the servers so that those two, the cold air being blown within the space and that hot air being pulled back to the units to be cooled again don’t cross.

Were they like that 15 or 20 years ago too?

When I started my career, you’d walk into a facility, and the servers were blowing hot air and it was a disaster. It’s funny to look back and think that’s what was going on. It’s now unheard of. You would never do that. Why? You’d walk in, and that management philosophy, certainly the first thing you would say, “Fix your airflow.” You have to fix your airflow in order to be more efficient in your power consumption.

I imagine that’s not cheap to do that though. Fifteen or twenty years ago, it wasn’t necessary. Why would you want to spend all the time with plexiglass walls and sealant and everything? It’s expensive to put that. Come on. We’re just trying to get this thing leased.

Who would have thought you would have been in this problem? Over the last 10 or 15 years, there’s more of a concentration on making sure that doesn’t happen in that containment.

The Cost Of Building A Data Center

That’s smart. Speaking of the costs to build, do you have any big numbers per square foot or anything like that, that you’ve seen go down? What’s the cost? If they’re spending $2,300 a foot to buy an existing data center. I think they were going to put another billion dollars into it or something like that. What is it, $2,100 a foot to build it? $1,600 a foot to build it? Does this include all the equipment as well?

There’s a lot there. The land and the building are enormous costs because it has all the equipment, but then the IT build-out of that is something I can’t even guess for you. The costs that I’m seeing on single cabinets and some of these servers are in the multi-million-dollar range. Millions and millions of dollars. I’m not even going to go to what the IT kit costs, to be honest with you. On developing the buildings, I don’t have a good recent metric. There was a time when we were looking, and we were quoting $10 million a megawatt. I think now, with the things that are changing and the demand in the sector, those numbers are increasing.

It’s probably going to be more than spending $106 a foot to build a three-story Class A self-storage facility in Lawrenceville, Georgia. I can’t just go throw a couple of racks in there and call it a data center.

You could, I’m not sure how much you’re going to lease it for. Your return and your investment might be a little different.

We’d have to go after that old twenty years old rack that’s still operating. Secondary market sounds like. $500 or $400 a foot, do you think, for the envelope, you had to guess?

I think it’s somewhere in there. Don’t quote me on that.

No one is going to call you from my audience and try to build one and be like, “Chad, you said this was $400. What do you mean by $750?” You’re like, “Inflation. What do you want me to do?”

That’s a moving target, but I would say something in that range on a square-foot basis.

Community Education And Sustainable Practices

What else did I forget to ask that you feel might be interesting or important for the audience here before we wrap up?

Something interesting in this space is data centers have gotten a lot of bad publicity. They use a lot of energy, they’re dirty, they’re loud. I think there’s a lot of concentration on what we’re doing now to try to educate the public on what is a data center. Do you know every time you go on social media, you’re connecting to a data center? I don’t think generally people understand how that affects their daily lives and what it means to us.

Communities are a little shy and, “I don’t want that development in my backyard.” I think as an industry, we’re looking at expanding our education to the world on how you use them. They’re not scary. If you look at buildings that were done twenty years ago, they’re gray boxes behind this big security fence. They’re somewhere you never go. You’re not allowed to go there. How do we change that image?

There’s a lot of push within jurisdictions and other areas that buildings are contextually designed to fit within the spaces. That is a little bit more community-friendly, and then certainly educating people on how and what and why they’re there is one thing, what are the benefits they bring to the community and our lives, and then also educating. It’s a market that’s growing so much that it’s hard to find people to come in and help design. One, help operate. There are not enough people operating them.

 

As an industry, we are pushing for better public education on what a data center is, why it matters, and how it benefits the community.

 

There are not enough people to construct them, and the skilled labor that is associated with that. I think seeing more push in the education front in order to promote communities, allowing more of these, understanding them, also promoting knowledge in what it takes to design, operate, or build these facilities in order to encourage people to come into the trades or the design aspects of the space.

It doesn’t sound any different than anything we ever get entitled to or improved. It doesn’t matter if it’s a single-family house, a shed or a hot tub in the backyard, a storage facility, or a giant flex warehouse. They never want it done. Everyone hates it. They don’t want the corners turned into a Wawa, which is the convenience store in the Northeastern United States where I grew up. They don’t want it there, but then they shop there and get their gas there. They’re there 5 out of 7 days a week. It’s like, “You guys were fighting this. What are you doing?” A data center does not necessarily have heavy truck traffic in and out all the time.

Your biggest demand is under construction. When you’re building it out, the actual amount of people in the spaces is minuscule compared to the size of the building and the traffic. There are a lot of benefits in some cases in a lot of communities because you don’t have to upgrade all of your support barriers, roadways, or all that because it’s not a big office space where you’re having a thousand people go to that facility.

A thousand trucks and a million-square-foot bomber of an industrial warehouse are never going to work. Before I ask my final question, is there anywhere our audience can go to get some more information about this, you, or maybe HED Design?

I’m happy to have anybody visit our website. The website is HED.design. You learn more about us and what we do there.

The Kindest Gesture Chad Has Ever Received

My final question. What is the kindest thing anyone has ever done for you?

That is an interesting question. I don’t think I’d be where I am without many people doing a lot of kind things for me. Certainly, how do you pick one of those out of all of them? That’s a difficult choice. When you look at it, family is the kindest thing. Certainly, all my family, my coworkers, and everybody does an immense thing. I have kids, I have to say. I have two sons. When one of them runs up and gives you a hug, that is the kindest thing that happens to me any time. That’s it.

I love it. I have pages and pages of notes here. I appreciate you coming on the show and giving us your time. What an interesting topic at the forefront of our technological revolution known as human existence here. Thank you, Chad, for coming on the show.

Thank you for having me, Dan. It was great to talk to you.

 

Important Links

 

 

 

 

Hampshire Capital CEO Shane Carter On Real Estate Development

The REI Diamonds Show - Daniel Breslin | Shane Carter | Real Estate Development

 

Guest: Shane Carter is a seasoned real estate developer and entrepreneur with over 27 years of experience, specializing in multifamily and single-family development. He is the author of “Optimize Your Life,” which emphasizes balancing professional success with personal well-being. As the founder of Hampshire Capital, Shane leverages his expertise in construction and development to create value and foster community growth.

Big Idea: Shane shares his journey from home builder to successful real estate developer.

This episode is also sponsored by Lending Home. Lending Home offers reliable & low-cost fix & flip loans with interest rates as low as 9.25%. Buy & hold loans offered even lower. Get a FREE iPad when you close your first deal by registering here now.

Resources mentioned in this episode:

Hampshire Capital LLC

View the episode description & transcript here:

Hampshire Capital CEO Shane Carter on Real Estate Development – REI Diamonds

Shane Carter & I Discuss Real Estate Development:

  • Balancing Personal Growth and Professional Success (00:01:46)
  • Real Estate Development (00:07:45)
  • Strategic Insights on Market Conditions (00:30:00)
  • The Impact of Kindness and Networking (00:49:09)

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Hampshire Capital CEO Shane Carter On Real Estate Development

Mr. Shane Carter, welcome to The REI Diamond Show. How are you?

I’m doing great, Dan. Thanks so much for having me. It’s an honor to be here.

Balancing Personal Growth And Professional Success

I’m sure people who will have read the description and the bullet points from our conversation are looking forward to hearing about all of the large-scale single-family development deals and the multifamily assets. Before we dive into that, in September 2024, I believe, you released the book you wrote, Optimize Your Life. I know that a lot of our audience is about family, freedom, and living life to the fullest. Would you mind taking us through a little bit of the journey of putting that book together and maybe what the top-line message is?

Thanks, Dan. I appreciate that. This is a book that, just so we’re clear about it upfront, I didn’t write to be a lead magnet or to be a funnel into a course or to be anything other than a cathartic process of getting my thoughts out and wanting to share with others all that I’ve learned in the 27 years of my professional career and my personal growth journey. I’ve been a personal growth junkie from the very beginning. I’ve read and absorbed about every book you can. This is my recounting of the main lessons that I’ve learned on that journey. It starts with mindset and how we quite literally create the world around us via our mindset on a daily basis.

If you do that consistently and long enough, you craft your own life in a very meaningful way. The rest of the book also goes into what I believe to be a critical balance between mind, body, and spirit. I think that’s a piece that a lot of entrepreneurs miss. There’s a lot of influencers out there. I’m not going to name names, their sole focus is business growth. “Grow your business. Eat, sleep, live, and die, and breathe it. Grow for the sake of growth.”

 

The REI Diamonds Show - Daniel Breslin | Shane Carter | Real Estate Development

 

I offer many counterpoints to that that I don’t think are very healthy for most of us to try to engage in. The main one is relationships. It doesn’t matter how much money you have if you don’t have good relationships with your significant other, with your friends and family, with your children, etc. I personally know several people who are extremely wealthy and have massive regrets because they don’t have the relationship with their children that they wanted or they wish that they had had because they were so focused on growing their company.

That’s something for everyone to hear before it’s too late before they go too deep down that road. Also, physical health and wellness. I’m a big health and wellness guy. I don’t think that anyone performs to their highest and best self without a real clean machine and a highly functioning physical body. The spirit part is, again, something that people don’t talk a lot about, but I believe that a connection to a higher spirit and understanding yourself through that lens as a conduit to the beauty of a higher power is very releasing and freeing so that we can let go of the rope a bit and enjoy the journey more.

 

We create the world around us via our mindset daily. If you do that consistently and long enough, you craft your own life in a very meaningful way.

 

I imagine you must have a couple of kids then.

I have three.

About how old now?

My oldest boy is fifteen. He’ll be sixteen next month. I’ve got a six-year-old and a four-year-old.

You’re in the thick of it then right there.

Yes. I’m loving it.

I’m going to take the opposite side. I think there’s probably a time, maybe we go back. Your 27-year career and your boy’s about to be sixteen now. What about the first ten years? Was there a little bit of an obsessive drive that probably is helpful to get the momentum going? If someone is tuning in now and they haven’t quite got the momentum going in their career yet, I would posit it could be potentially a little bit detrimental and you may not get to where you want without some period of time. Is it 3, 2, 5, or 7 years? Maybe it’s different for a lot of different people. For me, I know I had to push hard for 5, 6, 7, 8, or 9 years before the momentum started to show. Not that I neglected my physical, spiritual, or relationships completely, but there is some place for getting the cart moving.

I can’t disagree with you. I think you’re right. If I reflect back on my journey, there was absolutely that time period. For me, it was similar to yours, probably. It was in that 5 to 7-year time period where it takes a lot of energy to get that flywheel to spin so that it starts to spin on its own. You’re right. It does take a drive and a passion. As a younger man in my 30s, let’s say, that was critical to my ultimate success.

I think you’re right on that. I’m not going to discount that at all. I’m fortunate that I had kids a little bit later so that I was able to establish my flywheel and have the grace to be able to step back and get a little more balanced about it. You’re right. It does take that hyper-focus up front to get something up and running and going.

 

It takes an incredible amount of energy to get the flywheel to spin, but once it does, it starts to spin on its own. The challenge is knowing when to step back and regain balance.

 

Maybe you and I are probably at that place where balance is important. I’m 44 now. My daughter graduated college here, so she’s 23. Got married, and may have another round of young kids running around here. This is a topic that’s hot on my mind. It’s like, what’s that going to look like in the next 5 to 10 years? If I fast forward and I’m blessed enough to have a 4 to 6-year-old there, what will I construct life from there? Falls back to the mindset piece of your mindset creates the world around you.

Real Estate Development And Career Beginnings

I realized that. The options are somewhat endless. How do I want to create the next steps of my life? Good position to be in. Let’s shift gears here if we can. Real estate development background. When I saw the booking agents connect us, God, it must’ve been 5 or 6 months ago at least. I was looking forward to this one on the calendar. It’s like, “This guy has this real estate development background.” Would you mind starting here in your career and establishing that may have been some foundation for what you put together since then?

My background, Dan, is what I like to call the classic self-made man story. I’m a bit older than you, so I bought this late-night infomercial Carleton Sheets’ No Down Payment book way back in the day, in the late ’90s. That was my kickoff to understanding real estate and investing in creative thought processes around real estate. I started wholesaling contracts and flipping houses. Through that process, I developed a passion for construction and development, the process of transmuting old, horrible properties into beautiful homes for families and folks to live in. It was extremely rewarding work, and I loved it.

I loved the whole knowledge base of understanding how a building works and how you build something from the ground up. I started to get into new construction as well and started a general contracting firm, did tons of renovations, tore a bunch of homes down, and built beautiful homes in their place. I grew myself in that capacity over the years, went from building starter homes to middle-market homes, to multimillion-dollar luxury homes.

I got into community development, where we’re getting land entitled and then putting in the roads and then building the homes and building entire communities. I also got into building townhomes and mixed-use projects, etc. That’s how I grew as a developer over the years, but that’s all transactional income. I always took the transactional income that I made in those businesses and invested in income-producing assets, predominantly multifamily, and predominantly value-add multifamily because I was a construction guy.

I didn’t know how to use other people’s money until 2014 or 2015. I think I took in my first investment. The beginning part of my career was, “I’ve got an extra $10,000 or $20,000,” and I would use it as a down payment, go buy a little fixer-upper 3 or 4-unit building, have my construction company fix it up, we’d rent it out, we’d refinance it, and I’d get my money back.

I’d buy an 8-unit, a 20-unit, and then a 60-unit, and so on and so forth. I let my equity and transactional money fuel my income-producing asset acquisitions. I learned how to partner with people and bring in partners to leverage their money and my expertise in construction and development. We started to do bigger projects, which got us into investing in the South, and starting to look hard at that in 2018 and 2019. We’ve acquired a little over 2,000 units and $320 million or so in assets there in the last five years.

What’s the plan? Are you holding those, or is it the buy, add the value, and sell strategy to cash everybody back out?

Those are still mostly value-add projects and properties. The value-add’s been completed on all of them. We’re in the buy-and-hold stage because of the market shift. We’re fortunate that we are in fixed-rate debt and have good leverage positions on all of them. We’re looking to exit assets in 2026, 2027, and 2028. We’re always looking to buy more. It’s been very difficult with the lack of liquidity and the lack of deals trading to find opportunities that make sense for us.

Exciting Real Estate Deals In Recent Years

It’s hard to make them pencil out. What’s the debt now? I haven’t checked, but I imagine you could probably get some Fannie products, like 6, 6.25, maybe 6.50, or something like that. That’s 30 years, you’re stuck in the thing, yield maintenance in the whole deal. What, in the last 12 to 18 months, are the deals that are exciting to you and that you are participating in and getting up off the bench for 2023, 2024, and now we’re in 2025?

We saw the writing on the wall there in late 2022, beginning of 2023, in terms of the rising interest rate environment and what that was going to do to the industry. We were fortunate to pivot back into my background, skill set, network, and experience and got back into land development and got back into that side of the business and are doing it in the growth markets that we already know and understand.

We have folks in Dallas and folks in Tampa, where we have staff and employees in those areas. We’re hyper-focused now on doing what’s called horizontal land development. We do entitlement work, but we also take land that’s already been entitled and approved, and we buy it and put it in the roads and infrastructure. We get construction loans, put in the roads and infrastructure, and then sell finished pad sites or finished lots to the national homebuilders.

Some of our clients are D.R. Horton, Pulte, Meritage, those types of firms, top 50 nationally traded homebuilders. We’re excited about that side of the business and growing that side of our business because there’s a dearth of developers who know how to do that and have the capacity. We’re fortunate, we have a $50 million investment fund that we started last year, that we raised capital for.

That fund allows us to invest in land development. To a builder, we’re an interesting group because we have capital, we have the resources, we have the skill set, we’re vertically integrated, we do the construction management, and we’re able to come in and fill a void or a niche in the ecosystem where there are not enough guys developing lots for the homebuilders. We’re capitalizing on that opportunity now.

It’s interesting, and I’m in a partnership where we’re doing quite a bit of this. I think our fund has 14 or 18 projects, something like that. Each one is probably between around maybe 80 lots on the low end and 250 to 300 on the high end, except ours is all paperwork. It’s sold to the builder as soon as the construction drawings are approved, they’re going to settlement. Not a tree has been moved, and not a curb or a water line has been installed on the property.

You’re now stepping in, and maybe you’re an interim type of person who’s taking that dirt and putting the road work in there. It can be a risky scenario, at least, that’s the way our investment philosophy has worked, which is why we’re exiting on the front end. I think D.R. and Pulte and the rest of them have another third-party developer who comes in, does all the roads, and does it almost work for a fee. Is that you guys, or are you buying the land?

That’s us. After this episode, we have to talk because I’m your buyer for all those deals. That’s exactly what we do. It is because D.R. Horton, a lot of these nationally traded companies, publicly traded companies, I should say, have what’s called a land light strategy. What that means is they keep it off their books, and they keep it off of their balance sheet by leveraging third-party developers. For D.R. Horton, they’ve got an interest in a group called Fourstar Group, another publicly traded company.

All they do is put in roads and infrastructure, and sell the finished lots to D.R. There’s an entire network of other builders, and Fourstar Group doesn’t serve all of D.R.’s needs. There’s still a tremendous amount of opportunity and need for third-party guys like us to come in, and put it on our balance sheet. We take the construction loan, we take the risk, we put in the roads and infrastructure, and then we deliver the lots on a 2-to-3-year timeline.

They get to buy the dirt with finished lots and tranches, take them down, build houses, sell them, and they don’t even have to buy the next tranche until they’ve sold through most of those first ones. It hits their balance sheet, and then it turns into revenue quickly. That’s their strategy. We’re an important part of that ecosystem because we hold it on our balance sheet, and we take that risk, and we take that interest carry, and we hold it on our side.

We make the numbers work well. You brought up something important though, which is risks. The risk on our side of the business is usually, who’s going to buy this? We mitigate that risk by having the contract with the builder upfront before we close on the construction loan. Let’s take one of your examples. You’ve got 120 lots. You got it entitled and approved. You got construction drawings done, and you’re saying, “I’m selling it to the builder,” but the builder is not buying it.

The builder is taking that, and they’re assigning it to someone like me for us to close on and put in the roads and infrastructure. What they’re doing is they’re giving us a forward contract to buy the finished lots at a certain price. There’s even an annual escalator involved in it, etc. They’re locking in their position in their land pipeline and controlling it without having it on their balance sheet. That’s our role.

If a builder is paying $100,000 for a finished lot with all the infrastructure in there, what can your all-in cost basis be with the interest to carry the whole thing? Are you able to pack a 30% profit margin in there, or is it a little thinner than that?

It depends on the deal. That’s a great question. It’s usually in that 20% to 30% range. Our buy box is pretty similar to yours. What we focus on is the 100 to 400 lot community size. We want to be in that $15,000 to $20,000 a lot profit range. That’s what we target and focus from a risk-reward profile. It is because again, these construction loans, I’m personally guaranteeing them. We go out, we get a $20 million construction loan to build all the roads and infrastructure. It’s not on the builder’s books, it’s on our books.

Even if it’s non-recourse to the entity, there are these things called completion guarantees. Anyone who’s done development knows the completion guarantee for a development project is in place the entire time until it’s completed. You are on the hook then, therefore, personally, the entire time due to that completion guarantee clause.

When you guys build them out, if you have a 300-lot subdivision, somebody got that entitlement done. Are you doing the construction drawings and approvals, or is that done also and handed to you when you step in?

We do it both ways. We work with all kinds of different folks. Some folks get the land use zoning approvals completed and the entitlements. We step in and do the engineering drawings and the CDs, and get everything laid out, and then we close on it. We love working with folks who have all the CDs done, the engineering’s done. They’ve already got indications of interest from the builder groups, and we step in, and we close on it, and we go to town, and get those contracts with the builders set up.

Everybody wins there. We’re not taking away from anyone. We’re still giving someone like yourself, or somebody who’s doing the entitlement work, all the money that they want. We’re still selling the lots to the builders at a price that makes sense for them to build their product. We’re sandwiching ourselves in the middle and making a nice profit for taking on the risk we’re taking on.

Do you guys build that out in one tranche, or would you build out 80 lots in four separate tranches as they complete, and perhaps not have to pay interest on the other unfinished sections until it’s time?

That’s a good question, Dan. This gets into my business partner and the highly detailed financial models that we have relative to this, but we try to have our expense build be in concert with our revenue chunks that come in the lots. There is an efficiency though, however, from a site work. I own site work equipment, I’ve been doing site work development for a long time.

There is an efficiency of mobilization and getting there and doing the work that starts to become cost-prohibitive if you’re asking guys to stop and wait, and then remobilize. There’s this fine line of allowing the project to proceed and the expense to build, and then staggering the lot takedown schedule and the revenue build, so that your max exposure and your max interest carry is usually never more than about 40% to 50% of the total cost of the project.

First Subdivision And Land Development Experience

It sounds complicated, complex, and scary. Can you take me back to the first subdivision that you approved? Maybe it was like you turned one lot into two, or something like that. What was the first time you went and did a subdivision where you put infrastructure on the land?

The first time I did that, that was a small four-lot subdivision. It was here locally when I was still an active home builder. Again, someone else had done all the work to get it entitled and approved. It was shovel-ready. Drawings were done for the roads. The lots were laid out. It was a plug-and-play go. Bought it, put in the roads and infrastructure, built the homes, and sold them.

I make it sound easy, but that took us the better part of a year to do that because it was our first one and we didn’t know exactly what we were doing. We screwed up the water lines at first, and we worked with the city to get that corrected. We had to dig up some water lines and put in some curb stops in the right locations instead of the wrong locations. That was a bit nebulous on the plan. That’s why we made that mistake. The water management was fine.

The sewer was fine. The grades, we had to play with some of the grades a little bit. The engineers had laid out grading for the individual lots in a way that wasn’t as ideal when we got there physically on site and started building and developing these homes and having to deal with all the additional fill that they didn’t calculate for. We raised some elevations on some of the homes to account for some of that additional fill and did some tweaks like that. It was a great learning experience on only four lots. This is going back probably fifteen years ago now, but a great learning experience.

Surviving Economic Downturns In Real Estate

You were in the business through the last downturn. I guess it’s the second downturn if we’re counting the COVID downturn. It’s been a while now. In 2007, 2008, or 2009, around that time, what were you up to then, Shane?

I was in the thick of it. I was buying assets. I had, not a ton under my belt at that point, but I want to say I probably had 40 or 50 rentals under my belt at that moment in time. I was doing construction and development work. I was flipping houses, I was renovating homes, and I was doing new construction builds for others as a fee build for clients and building custom homes. I hadn’t quite got to being an entitlement developer yet. I was in the thick of it.

Being a custom home builder through that time is what allowed me to thrive and exist through it without getting through completely unscathed. A couple of things. First of all, everything that I owned, I didn’t over leverage because I bought it cheap. It was all challenged properties that needed to have a ton of work done. I did the construction work ourselves at cost and refinanced them at a low enough level so that they would produce great cashflow for me.

In other words, I didn’t pull out too, too much equity. I didn’t over-leverage those. That was a great lesson to learn through the crash was that in ‘05, ‘06, and ‘07, I was still buying properties and doing this burr method of owning assets. I never over-leveraged. That was something I didn’t think about other than I wanted to make sure that the rents that were coming in gave me a great margin. That’s all I thought about when I was doing it.

I didn’t think that something bad might happen. You might wish that you had lower leverage. I wanted the cash flow. I liked the whole concept of passive cashflow. I already had a transactional cashflow business that was giving me more cash. I didn’t necessarily need to have access to more cash. I wanted to set up a passive machine. That served me through that. That’s what I was doing.

What market was that in?

All here in New England. It was Northern Massachusetts, all of New Hampshire, and Southern Maine.

Very constrained real estate markets with not a lot. I’m guessing you probably have zero subdivisions going or done under your belt that are 120 lots or more anywhere in New England. Am I right?

Correct, you are 100% right.

You get into a market like that and that weathers a storm like the 2008, 2009, or 2010 type of era, a lot better than in the Atlanta, Georgia area where the construction was insane in that go around. Texas, same deal. You got very easy zoning and approvals in Texas compared to Georgia and compared to the Northeast. We have a few storage projects up in the New Hampshire area, all-purpose storage, you probably have driven by them. It’s taking forever to get approvals and the permits and everything. Luckily, I guess it did because maybe we would have overbuilt a bit, who knows? There are pros and cons for market downturns, which in my opinion, the market downturn, I think we’re in a flat era.

I don’t think we’re going to see 10% increases in value again for a few years, pretty much anywhere in the country. I don’t think we have the conditions for a blowout quite yet. If you look at the demographics and the large peaks of people that exist in the home buying year compared to the valleys in the home buyers demographic in 2008, 2009, and 2010, some of that was the underwriting was faulty and some of it maybe more was the window of home buyers.

It was like the lowest population in all of recent history at that age. I think the next time we may see some trouble on the horizon might be fifteen years from now when you start to see maybe some of these demographic shifts continue. The birth rate is low and there’ll be these lower valleys where we had peaks in Millennials and Gen Y and the rest of it.

I would agree with that. I’d say at least ten years. I know that due to the chronic underbuilding that we’ve done since the crash and the GFC, it’s going to take us ten years from the beginning of 2025, it’ll take all of ten years to get back to a homeostasis or a balance in the construction and home-building marketplace. That includes multi and single-family. That’s where we are and we can’t build more because we’re zoning and entitlement constraint.

Has it been that way for ten years already?

It already has. Just about.

Buy and hold, right?

That’s right.

Strategic Insights On Market Conditions

While we’re on the topic of the predictions, we’re in January, everybody is forecasting the future. Other than what we talked about, maybe we could switch gears and touch on some of the predictions and maybe touch a little bit on the development cycle around multifamily residential. You have 300 million plus, 2,000-some-odd units. I’m guessing these are Sunbelt assets, Florida, Texas, Georgia, that kind of thing. Where are we at? We had a lot of multifamily new construction in the last five years, but I think a lot of that’s maybe winding down. Do you have any predictions on the development cycle and the larger multifamily assets and maybe your appetite to jump into that?

It’s something we live and breathe every day. Our asset managers eat, sleep, and breathe this, and they are extremely in touch with the market at a granular level in the markets that we’re at in the Carolinas, Texas, Florida, and the Southeast. You’re right, we overbuilt, and we have the highest surge of multifamily deliveries that we’ve ever had, or that we’ve had in 30 years, I believe, since the ‘70s. The interesting thing is that it’s being absorbed, though. We did see some negative rent growth.

We have some B assets and some C assets. We did see some negative rents occur due to the shifting that happens when you have that supply hit the market and folks moving up, if you’re in C, you move to B, or in B, you move to A. We did see that and feel that over the last 24 months. I believe that is stabilizing now. That new A class is absorbing well, and I think that the best story coming out of 2024, was the absorption of the high deliveries. It could have gone the other way, and we could have been dealing with a much bigger problem on our hands, but thankfully that didn’t occur.

That tells you that we are a renter nation, and we’re going to stay a renter nation. The affordability gap’s never been bigger. Frankly, I don’t see it coming down in the next three years. I think we’re going to have an interesting time period in 2025, there’s still a bunch of deliveries in 2025, by the way, it’s coming off the peak. I think when we hit 2026 and 2027, we see a cratering of deliveries in multifamily, and that’s going to allow rent growth to occur. I think rent growth starts to occur at the end of this year and into Q1 of 2026.

I think you’re going to see great rent growth through 2026 and 2027. When I say great, back to 2%, 3%, and 4% rent growth. To me, that’s great in terms of stability. When we were seeing 5%, 7%, 10% rent growth annually, that’s unsustainable, and anybody who’s been in the business long enough should know that’s not good. It’s not okay. You can ride the wave while it’s there but know that from a macro perspective, that’s not healthy.

For us, we’re thinking about jumping into using our skillset and capacity for multifamily development to deliver products and coming out of the ground in 2026, 2027, and 2028, because that’s when it’s going to feel great to have new products, and hit the market again. We’re going to be in a rent-growth environment. You’re going to see stability of pricing, and I think you’re going to see a lot of liquidity flow back in later this year and into 2026 and 2027. Liquidity is the primer to cap rate compression. It’s not interest rates, it’s liquidity. That’s where I see cap rate compression happening and where I see liquidity happening so that properties can exchange again and we get back into a trading environment.

 

Liquidity is actually the primer to cap rate compression. It’s not interest rates, it’s liquidity.

 

Is liquidity still a function of the interest rates, though? It is like I’m not willing to transact and buy, and I can’t pencil a deal out at a 7% cap if I’ve got to pay 6.5% interest. I’m like I’m going to sit the market out. If I’m a seller, I’m not selling at a 7% cap, so I’m going to have to wait until they get down to 6.5%. The liquidity still is tied to the interest rates at some level, or am I missing something?

You’re right, Dan. It is tied to it, but I think it’s not a direct correlation. I think a lot of people think about interest rates and cap rates as being intimately tied. There’s this intermediary thing called liquidity that ties them both together. I think liquidity is linked to the cap rate and linked to the interest rate. Through that process, interest rates are linked to cap rates, but it’s only through liquidity that it happens.

It’s funny, the interest rates shot up in a six-month period in 2022, unlike anything I’ve experienced in history, but the cap rates certainly did not follow anything near lockstep. I think the latest report I looked at was a week or so back, and they’re still inching up. It’s by 0.25% or 0.18%, but it’s been doing that all the way through. The cap rates are ever so slowly following that curve as time goes on. What would you expect?

I looked at a multifamily development deal within the last three months, and the exit was pro forma at 5% or 5.5%. I don’t know if it was a 6%, or if they did it at a 4.5% as a cap rate to sell. They’re going to merchant build, stabilize it, and sell it. The whole project will be done in 3 to 5 years because it’ll be 1, 1.5, and 2 years to get it built and all the entitlements finished. They thought 1 or 2.5 years to stabilize it, and then 1.5 to buy and let the buy and hold. Those 2.5% rent increases burn off a little bit. They had good financials to sell it.

I felt like a 5.5% cap to me feels low, but I’m more of the old product dealer kind of guy. Most of my industries, like 30-year-old storage facilities, 25-year-old shopping centers, and 100-year-old warehouses. All our cap rates are 7.5%, 8.5%, or 9%. They’re high. That was one of the first instances where I was a little bit shocked. I’m curious because you’re in the business and looking at these new builds potentially for 2027. For you, is it more of a yield on cost as you enter that deal? Do you pay attention and you’re mentally thinking, I hope this is a 5.5% cap product, because when I sell it in year four, it will be a four-year-old vintage product, and it should probably go for this cap rate.

First of all, it’s hypermarket dependent. Even hyper-location dependent within the market. What we do to bake in conservatism to our underwriting is if we were looking at a development deal for multifamily, let’s say in Atlanta, to pick a market that you’re familiar with, we would, first of all, take a close look at where exactly in Atlanta is it. Is it in the Northern section of Atlanta? Is it in the Southeast? As you know, there’s a big difference between those two.

We take a close look at the location, and then we poll the brokers, and we say, “Where are A-class assets trading?” They are assets that are moving, and they might be from REIT A to REIT B, or from Blackstone to REIT B, or what have you, but there are assets still exchanging hands in that A-class. A-class is where all the big money wants to be, and A-class is where most astute, smart money wants to be.

That will give a good indication of what they’re valuing, what they’re seeing in the market, and what they’re valuing A-class now. We would base our pro forma on what things are trading for now in this environment, knowing and expecting that, as we’ve discussed, looking at macro trends, looking at supply drop-offs, and liquidity increases, that cap rate could compress. Let’s pick a number, let’s say things are trading at a 5.75% cap now for A-class in Atlanta.

I think it’s probably less than that, but let’s say it’s 5.75%. We would underwrite that for a future development project that we’re going to deliver in three years from now. We would do a sensitivity analysis on what that looks like if it’s a 6, a 6.25%, or a 6.5%. We’d also offer some potential upside options of what it was to look like at 5.5% or 5.25%. We wouldn’t underwrite at a 5 or a 5.25%, saying, “It’s 5.75%. We expect a 50-basis point compression due to XYZ, and therefore we’re going to underwrite that.” We’re not going to do that, but I do believe that’s going to happen, but that’s not how we underwrite.

That’s what I call delusional optimism. I wrote a blog post on that. When I invest my money in LPs, I have to have some delusional optimism. For me, I need to say, if things go tremendously well in the other direction, what is that going to look like? If there’s nothing there that I can be delusionally optimistic about, I probably don’t want to invest. Most of the time, if they’re higher yield development projects and longer-term things where I don’t get cashflow for 2 or 3 years while the thing stabilizes, there has to be some delusional upside, in a sense. That doesn’t mean, in some instances, it could be a 100% return in month thirteen if things go our way. Is it going to happen? 90% chance, probably not.

Key Metrics or Evaluating Development Projects

I’m prepared to sit here and wait my 3, 4, or 5 years until we’re stable and we exit. It turns out to be more of a 24% IRR. I hope, still good. The 24 is not delusional optimism. That’s more of a realistic pro forma projection based on, like you said, a 5.75% cap rate. Whereas underwriting it at the 5% cap or 5.25% cap would probably be what I call delusional optimism. Do you pay any attention to any other metrics? Is there price per unit or rent growth? What are some other things on a development project that would have to check the box before you’re going to go ahead and entitle a site?

We do feasibility studies on anything that we do like that. We get John Burns’s study, and they’re the industry standard for that type of feasibility study. There’s a wealth of insight, knowledge, and data that comes from those. That’s key. I think our main metric is untrended yield on cost because that shows, whether are we fundamentally creating value and what is that value.

If we say, and again, going back to that example, that we have a conservative forward projection that the asset is going to trade at a 5% or 7% cap in 3 or 4 years in Atlanta. The untrended yield on cost, for us, we want to see that at 7% or higher, maybe even 7.25%, to know that we are 125 or 150 BIP Delta between what our untrended yield on cost is versus what our exit would be. That’s how we know we’re creating value.

That’s smart. That makes sense. Does that yield on cost? That doesn’t apply, or does that apply if you were doing the subdivisions that we mentioned earlier?

No, what we’re doing on the subdivision side is more transactional income. Where we’re buying it for X, we have construction costs, and we’re selling it at Y. It’s a pretty straight-line metric. We have interest carry, and then we have overhead and profit. It’s more of a transactional income business model there. We can apply that same metric, however, to the BTR space, which is something that we’re excited about given that we’re uniquely qualified to have a vertical integration to deliver BTR communities to the market. Where, again, we are focused on that 150-basis point Delta in yield on cost versus stabilized value.

For any of these assets that we mentioned, we lightly touched on built-to-rent. We touched on single-family community development, and we touched on potentially maybe buying value-added multifamily properties or building from the ground up multifamily. Would any of those have the potential to show up in the $50 million fund that you mentioned?

Yes. We can do any of those four items. For us, too, when we think about developing multifamily into 2027, 2028, etc., as we discussed, for us, it’s not to be merchant builders. For us, we’re going to pick the right locations, and we’re going to build that. We’re going to keep that untrended yield on cost Delta.

We are going to keep those assets for a long time. We are in the process of understanding how we want our portfolio to be structured over the next ten years. As we exit some of the B and C class assets, we’re going to be continuing to high-grade into the A minus and A class assets. If we’re going to be developing something, we’re likely going to be developing it with a programmatic LP that will want to stay in and keep the deal with us long-term.

What does that mean Programmatic LP? That’s not the fund. Is that maybe a family office that’s taking a single check investment?

Yes, correct, or a group that understands who we are, and what we do, and is willing to invest in a 90, 10 equity construct with us on a go-forward basis for that type of product. That’s something that we always have our eyes on the horizon for.

Makes sense. I guess that’s the smart money and the big money, and we’re going after the A-class assets at that point.

That’s right.

Investor Insights On Real Estate Fund Structure

Can you run me through an example of the fund? If I am an investor, and I bring $250,000, how long is it locked up? What are my expected returns? How soon is capital due? Any other details that might be pertinent in that example?

Our fund is structured on a five-year timeline and horizon. It’s a 10 PREF, and for that level of investment, it would have an expected five-year IRR of 22%. That’s a little over a 2 times equity multiple in that five years with a 10 PREF. As the dollar amounts go up, we have four different class sizes, A1 through four. Higher dollar amounts have a higher split. They start at 70-30 and then go up to 90-10 for a waterfall based on the check size.

Have you pulled the entire $50 million in, and now you’re forced to deploy it, or is it you get commitments on a certain amount and then do a capital call? Putting $50 million to work tomorrow is a tough task for anyone.

For sure. First of all, we have not raised all $50 million. We do only call capital on an as-needed basis. We take the commitments. Beginning of January, we have opportunities that are closing next month. We would call that capital usually 30 days before closing. It is a commit-and-call system that we have.

What is the usual time distance? If somebody committed, are you usually calling them 30 to 60 days, or is it sometimes 6, 7, or 8 months before the capital is called, or there’s no control of something like that?

I would say it’s probably going to be, certainly no sooner than 30 days, and would likely be within a 90-day to 120-day time period. We have a pipeline of deals. We have all sorts of additional methodologies for solving equity, but our fund is our primary source. If there isn’t available capital there, we have 2nd and 3rd fund options available, fund-to-fund options for us as well.

I have one question I’m going to ask as my wrap-up. Before we get to that wrap-up question, if somebody is interested in getting on an email list for the fund, perhaps there’s another better way that you would have our audience stay in touch.

Check out our website. It’s HampshireCap.com. There are a lot of good resources there. There are tons of buttons you can click to get on our contact list and have one of our team members reach out and have a conversation with you about what your goals are and whether or not we might be a good fit for your portfolio.

The Impact Of Kindness And Networking

My final question is, what is the kindest thing anyone has ever done for you?

Dan, I wasn’t prepared for this. That is awesome. This shot into my head because this is how powerful it is. When I was a teenager, I switched high schools midway through my freshman year, ninth grader. Halfway through the year, around this time, maybe February or so, I switched from one high school to the other. New kid, all these other kids had matriculated together. I didn’t know anybody. I remember sitting in this class, and there were these two girls that sat in front of me, and they turned around, and they were so kind to me, and they asked me who I was, and where was I from, and what my deal was.

They introduced me to people, and they completely made something as stressful as any teenager could ever think it could ever be, it was, and they completely made it effortless and graceful and beautiful and easy for me to integrate into that school. I am forever grateful to them. That’s how I love this. I tell it because that’s how impactful small acts can be. I’ll never forget that. To them, they’ve long forgotten about that because they were being themselves and being fun, outgoing, kind people. That’s who they are. For me, that was forever impactful.

 

Small acts of kindness can have a lifelong impact.

 

I guess we got to pass it along from there. Shane, I have pages of notes here. A ton of great detail. I appreciate you opening the books and being transparent with all the questions, and I appreciate your time coming on the show.

My pleasure, Dan. It’s been great. Thank you.

 

Important Links

 

 

“Work Shop” Author Joe Brady On The Evolution Of Retail Real Estate

The REI Diamonds Show - Daniel Breslin | Joe Brady | Retail Real Estate

 

Guest: “Work Shop” author Joe Brady is an expert in retail commercial real estate. He served as CEO of Americas at The Instant Group as well as head of real estate for Walgreens. His early career includes capital markets & brokerage with a business-sale exit to JLL.

Big Idea: Real estate may go up in value, but it certainly comes with an expiration date. Retail & office are the 2 recent asset classes where much of the product is simply useless and worthless—as many properties have sold at land value minus demolition costs. Joe has observed that retail has been forced to evolve because of the iPhone, and now office is facing the same challenges.

This episode is also sponsored by Lending Home. Lending Home offers reliable & low-cost fix & flip loans with interest rates as low as 9.25%. Buy & hold loans offered even lower. Get a FREE iPad when you close your first deal by registering here now.

Resources mentioned in this episode:

Joe Brady

View the episode description & transcript here:

“Work Shop” Author Joe Brady on the Evolution of Retail Real Estate – REI Diamonds

Joe Brady & I Discuss the Evolution of Retail Real Estate:

  • How to Engage a Mentor with Cold Outreach
  • Effectiveness is Superior to Productivity
  • Recent Grocery-Anchored Retail Development
  • Tenant Driven Development = Lower Risk Development

Relevant Episodes: (200+ Content-Packed Interviews in Total)

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Watch the episode here

 

Listen to the podcast here

“Work Shop” Author Joe Brady On The Evolution Of Retail Real Estate

Joe Brady, welcome to the REI Diamonds Show. How are you?

I’m doing great, Dan. Thanks for having me.

Building A Legacy In Commercial Real Estate

Joe, we’ll talk about your background with Walgreens as head of national real estate, I believe. We were talking before we hit record about how we’re both Philadelphia guys, then Chicago guys and then Florida guys still to this day. With that, do you want to give a brief background of your career history and how that’s led up to what you’re currently doing, Joe?

I’m happy to. I’ve been in commercial real estate for 35 years or so. During that time, I’ve had a chance to sit almost at every seat at the table. I’ve been on the capital market side, the brokerage side, the advisory side, and the principal side. I grew up in the retail business and was a part of some very high-volume rollouts, including Hollywood Video, back when that was an industry. There’s only one Blockbuster left. Did you know that?

Somebody mentioned that two years ago. It must be like a museum now or something.

It’s a swag shop. It’s in Oregon, of all places. That industry doesn’t exist, but I was part of the team that rolled out 2,000 of those stores. We took the skills and the relationships and rolled that into an outsourcing business that we ran from 2000 to 2008. T-Mobile USA became our biggest client. We opened another 2,000 of those stores, the first 2,000 T-Mobile stores in the US. I wound up selling that business to JLL on January 3rd, 2008.

For those who don’t track history, that was lucky timing. I’ll take it. I spent time at JLL running the retail practice, ran the banking industry group. I was doing a combination of retail and office. I had an opportunity to join Walgreens as head of real estate. I was there for almost four years. Right before the pandemic, I left and joined a company called The Instant Group, which is the Airbnb of flexible office space.

If you can imagine joining this company, I was the CEO of the Americas, the company was based in London, it’s the Airbnb of flexible office space. It also builds out office space for Fortune 100 clients, and then Instant would run those spaces, creating a lot of agility and flexibility in the office world, which didn’t exist. I started that in December of 2019. Three and a half months later, the pandemic hit, and everyone was looking around thinking, “What are we going to do about office space? No one was in the office.”

For the next four years, we quadrupled the revenue and the business, building out offices from Buenos Aires to Mexico City to Toronto, throughout the U.S. It was fun. While that was happening, I kept hearing all of the same death knells and chatter that I heard ten years ago about what retail said about office. It struck me that I had seen this movie before.

I started putting some thoughts to paper about what we learned in the retail world and what the office industry could learn from retail, given that there were two dramatically impactful forces. One was this acceleration of technology in our world, and two, how consumers were reacting to that acceleration. The short of it was that real estate wasn’t keeping up with those changes. Retail had to learn the hard way. Office now is going through a tough period.

It’s ironic. My very outside observation of Walgreens’ story, and this is uneducated, so take everything with a grain of salt, this is my gut feeling. I remember from 2015 or 2016 through 2020, you could usually track distress or the assets that are starting to fall out of favor on Ten-X, the commercial real estate auction platform, or any other auction platform. When the distress started to occur, it was in 2009 or 2010 that we started, I started remembering personally seeing shopping malls and retail centers start to hit the auction sites as the retail death knell, as you called it, was starting to pop up.

I think that the trend in retail seemed to happen over a lot slower period. What happened in 2008, 2009, and 2010, and all the bankruptcies, was cycling out of a lot of weaker retailers that went bankrupt, and a lot of vacant space came online during that time period. It felt a lot slower than what we witnessed in office, to me. Again, this could be me talking out my ass, and I don’t have the numbers to back it up. Office was one-two left-right and a knockout punch by COVID. It was like this instantaneous thing with office because Zoom went from $40 to $400 a share, and their subscriber growth was through the roof.

Walgreens Strategy And Retail Trends

We’re doing a Zoom call as a result of that instant tech shift from the black swan event of COVID. I remember Walgreens, being in the retail space, they started showing up on the Ten-X auction platforms, and they were selling for $2.5 or $3.5 million, sometimes less, sometimes more. When COVID came, and the COVID money and the vaccines came out, there wasn’t a single Walgreens site available anywhere in the auction. I’m starting to see them pop back up again. It’s interesting. I’d be curious what your observation, if you’re allowed to speak on it, with Walgreens and maybe some of that trend with the retail death knell and how that might affect someone with such a large footprint like that.

Especially with hard corners all over the US, some of the best-located real estate. That was the strategy for Walgreens, hard corner, the highest traffic corners in XYZ location, with a very large facade, store, and real class A presentation compared to what I remember seeing from CVS and Rite Aid. Middle of the block, kind of weird, nowhere near the caliber of real estate that Walgreens had. I think that that strategy must have served them well for a long time. I don’t know, what would be your comments, if you’re allowed to say anything from the inside, and for the rest of the retail?

I’m far enough removed from it. While I have had some experience having sat in the seat, I’ve also seen what’s happened since. Dan, you said that from about 2010 on, things started to change a bit from a retail perspective. Remember, the iPhone came out in 2007. It took a couple of years for retailers to get good, or at least start to provide a relevant and acceptable shopping experience online.

Everyone thought, this whole cell phone thing or online was going to replace brick and mortar. You heard the death knells of no one’s ever going to go to a store again. The truth was the retailers realized that the consumers were voting with their wallets. They were saying, “You’re either relevant and I want to spend money with you, or you’re irrelevant and you’re going to go on the dust heap of history and you’re going to go away.” That applied to malls as well as to retail locations.

The C malls have largely been bulldozed, and the B malls have largely been D malls. What you’re seeing now is more of a mixed-use layout with live, work, and play. You’re seeing gyms come in. You’re seeing multifamily coming in as well. Quite interesting. From a Walgreens perspective, you’re right. The theory was, how do we get as close to 80% of the US population? How can we be 5 to 10 minutes from 80% of the US population? How do we drive our business from the pharmacy back of house and then enable the front of house, which, frankly, had insult pricing? When you looked at buying a Diet Coke at Walgreens, it was because you were dying and you needed it. You were willing to pay anything.

What happened is these two stories now come together, this confluence. I remember talking to the head of Duane Reade in New York City, which Walgreens owns. He tracked a number of different items, and he was able to get 4 or 5 different items delivered by Amazon to his home cheaper than what he could get himself, buying it in-store with his employee discount. Think about that. The consumer is not dumb. The consumer is very smart, in fact. They’ve decided to vote with their feet. There’s this whole separate parallel conversation we can have, which is a little bit of a rabbit hole, but it’s around organized retail crime.

In addition to having extraordinary competition with the front of the house that Walgreens was experiencing, and having price compression on drug costs from the back of the house and getting proper reimbursements, there was a huge margin squeeze happening in and of itself. You then factor in that there is a Tony Soprano of the dark supply chain that’s sending people, armies of these street urchins, into stores and swiping entire shelves of products. ICSC, which is the retail industry trade group, has done an analysis, and the impact on the US is about $100 billion a year. For Walgreens, it’s about $4 billion a year.

For your audience who goes into a CVS, a Walgreens, or a Target, you see everything behind a locked plastic little door. It’s a horrible customer experience, but what’s the alternative, like having everything ripped off and there’s no product? There has to be a better answer to that. In any event, Walgreens has had a number of pressures on their margin. They tried a number of different things, whether it’s primary care inside the store that didn’t work. They’re trying to dislodge that. What you’re seeing now is, and they announced publicly, that 1,200 stores would be closed. Many of those are going to be natural expirations of a lease.

In other words, Walgreens would initially open and have somewhere between a 15- and 25-year lease and then have a series of five-year options thereafter. It was almost rote that you would click off those options. Sure, we want to stay at that location. What the company has said is, we’re going to let some of these stores naturally expire, go away. We’re going to move on, and we’re going to focus on markets and stores where we have the business, we have the pharmacy business, we have good front-of-house business, the real estate makes sense. Slim down from what was at one point over 9,000 stores to probably a chain that’s going to be 5,000 or less. I’m supposing, but it probably needs to get there.

Career Path Advice In Real Estate

It’s interesting. I’m going to take a detour from our trends. Before we touch on some of the things you wrote about in Workshop, I want to back up to the 30,000-foot level of people who are building their own careers and are tuning in to this. I believe I had it written down here somewhere. Maybe I didn’t. You were in capital markets. You were in brokerage. You were part of this rollout of several thousand locations in two different instances. You talked about being on the principal side. Were they variously happening throughout your career?

Maybe if someone is tuning in, should they also try to take a circuitous route like that and maybe do brokerage to learn and get the contacts? Maybe they should be going after some executive-level real estate job if that’s what their training and background is because there’s a lot more benefit, perhaps, when you get to the principal side. I’ll plug my side, I’ve always gone to the principal side. It’s like principal, principal, principal.

I want to run the deal. I want to make the decisions. I want to take all the risk and hopefully make the gain on the upside. Do you have any advice to somebody, or maybe yourself starting back out again, of paying attention to one of those categories or doing it exactly in that same method? If you had your choice and could wave a wand.

Clearly, you’re smarter than I am.

I don’t know about that.

I was curious when I came out of business school. I went to UNC-Chapel Hill, and I went to work for First Chicago, which is now part of J.P. Morgan, in the corporate finance group. Part of my thinking was, I wanted to understand where the money came from and how it worked. That was 1990. Knee-deep in the S&L crisis, I showed up in the real estate department. All we were doing was real estate workouts. It was a phenomenal opportunity to see how projects and developers had approached situations where, under one condition, things made sense.

You had a major macro change, being a crisis, in this case, the S&L crisis, and how that impacted the value of real estate and what people had to do to work out those projects and who won and who lost. It was interesting. Interesting for me to see because I had no risk. I had no downside. I was learning. I was a sponge. I have had an opportunity to get entrepreneurial, to be that principal. For your true entrepreneur audience, that can mean sleepless nights. That can mean making payroll.

That can mean one thing goes wrong and everything could go. Sometimes you’re on a razor’s edge. It’s not always, as Scott Galloway says, “Champagne and cocaine” when you’re an entrepreneur. You’re up against it. I’ve had situations where I’ve built several businesses that got to a point where I could sell them. When I did sell them, I felt comfortable, for instance, going into JLL and being in a corporate environment. It allowed me to recharge my batteries. It allowed me to get a little bit more balance in my life. It allowed me to think about next.

All along the way, Dan, and I think you’ll appreciate this, I know it’s been part of your success, and I’ve tried to collect as many people as possible. I tried to be a good mentee when I was younger, asking a lot of questions, and trying to meet as many people as possible. It wasn’t always easy because sometimes it’s a bit awkward.

I had this friend who I remember, his name’s Ken Marino, he called me up one day and he said, “I met this guy named Trammell Crow.” I said, “That’s a company.” He’s like, “No, it’s a guy. I called him up and said, sir, I would love to come to Dallas and see you. Could I spend fifteen minutes with you?” I thought you were not allowed to do that. Ken said, “Of course, you can.” It opened my eyes.

For the readers out there, there are senior people in the industry who would love to spend time with you. They’ll give you 15, 20, or 30 minutes. That, I think, is an important point. Don’t be shy. Collect as many people. When you start to get my role in the industry, and you’re approaching it as well, Dan, it’s like all of a sudden, we become the mentor. I’ve always said I’m nice to young people because I never know when I’m going to be working for them, even though maybe they were working for me prior.

 

There are senior people in the industry who would gladly give you their time. That is a crucial point. Don’t be shy. Connect with as many people as possible.

 

That’s come to pass, interestingly enough. This industry can be phenomenal. There are days when it might be hard work. When you’re doing deals with people you like and respect and you’re learning and you’re making money, it’s a super fun industry. That’s why making yourself available to industry groups, to conferences, to constantly learning is vitally important.

I’m going to make a plug for those who don’t recognize Trammell Crow. There’s a great book that was written, probably in the ’70s or ’80s, Trammell Crow, Master Builder by Robert Sobel. This is hands down the best book I’ve read, at least in the last 12 to 18 months. Hands down. To get in the door, to even talk on the phone with Trammell Crow, I don’t know if it was the father or maybe there’s a son by the same name. Either one. We’re talking about real estate development, American royalty if you were. I think Trammell Crow is the largest real estate developer, maybe on the planet, besides the Chinese government.

His son Harlan has been in the news a bit. He has a very good friendship with Clarence Thomas, but we won’t get into that in this episode. Trammell Crow built his business and sold his corporate services side of the business to CBRE, which is interesting. Trammell Crow still exists as a company, and they do development. The things that Mr. Crow did early on were remarkable. He was a visionary. He built some of the first industrial distribution centers in Dallas, and he built these large exhibition halls in Dallas. Anyway, a great book. I know that you’re interested in books, but that’s one on my shelf and one that’s important to me.

Networking And Reaching Out To Mentors

I shared it partially, “Read the book.” The other part is to look at the caliber that Ken Marino was able to contact by reaching up as he was somewhere in his career looking for some additional inspiration. The question I think I’d like to pull on a bit is, Joe, what pro tips would you give to somebody in like Ken’s position, who is sitting here contemplating making the call? What’s the process for that? What is the most organized approach for someone earlier in their career to reach out to someone they might want the 15 to 30 minutes? When people say to me, “I want to pick your brain,” I’m like, “Sorry, I don’t allow brain-picking.” That’s not the format. I’m curious if you have some tips on how that call may go successfully if somebody were to make that to you or someone else in some executive-level position somewhere.

I always default back to homework. You have to have a point of view, there has to be a reason. What kind of gift can you provide to a Trammell Crow in return? In other words, you may be early in your career, but you know something. It is because the world is changing so fast, that if you’re part of the I generation, Gen Z, or you’re a Millennial, maybe you have a different view or a thesis, a hypothesis on some real estate. You say, “I would love to have a conversation with you to share my thoughts.” I’d like to learn from you.

By the way, I think it’s vital to be authentic, to be vulnerable, and to share aspirations. In other words, if I called you up, Dan, I’d say, “I want to learn about being a principal. This is where I am so far. I’ve made some mistakes. You can commiserate,” but get to the crux of it. What is it? Come up with a thesis or an approach. Have your homework done. I sit on the advisory board at the University of Florida’s Bergstrom Real Estate Center, and I have mentees every year. I find myself having more conversations with students who are not my official mentees, but they’ve done their homework. They’ve either read my book, they’re interested in retail, or they’ve approached me after one of my lectures.

They have interesting perspectives that they want to test and say, “Is this on track, or am I thinking about this the right way, or what am I missing?” That type of engagement, for me, is healthy. I also want to prepare because I want to get something out of them. I want the perspective. How are you looking at power? How are you looking at jobs? What is your view of an office? How are you shopping? How much are you buying off Instagram ads? When was the last time you went into a bank? Are you physically going in, engaging in physical banking, or is everything electronic? There has to be this two-way street.

I love that. It’s like if I summarize it, I love the be prepared thing, do your homework. I wouldn’t take the call, I wouldn’t schedule the call if someone didn’t. If it was this blind pick-your-brain thing, it’s like, “Sorry, I’m tied up. I’m busy.” If somebody has done the research, and as a podcast host, I’ll get like, “Your last podcast was great.” Nothing else. That’s copy and paste. That’s not you did your homework.

The other part of the gift, or adding value, I think, to summarize that, have some agenda and how much time you’re expecting. “Can I get 15 to 30 minutes on a phone call? I’d like to talk about this, this, and this. Here’s what I’m thinking on this. Do you have time at 3:00 tomorrow, or would next Wednesday at 4:30 be better?” Two times, two dates, very specific, to allow the other person to not get caught in the trap of, “Can we do this sometime? Sure. When do you want to do it? 12:00 doesn’t work. How about this other thing?” Sorry, but five different replies for the busy executive are going to be overwhelming.

I want to make it very simple for the person I’m reaching out to, to know what’s going to be talked about. They can also prepare, which is the reason I want the agenda. If somebody were to reach out to me, I want the agenda so that I can be prepared to make sure, maybe I’m not the right person to even have this conversation. I can let you know that and maybe even give you direction as to who may be the right person.

Simple bullet points, and be sure to provide two times and dates you’ve committed to so that it’s very easy for them to confirm that. They throw it in their calendar. They can touch the email one time, and then you can move on to the 15 or 30 minutes, or whatever the case is. My final simple one, Joe, would you prefer they reached out that way for a 30-minute phone call or the lunch date?

I would say the 30-minute phone call. I travel quite a bit. The thought of nailing down a lunch date is difficult and remote. You could ask my wife. I think it’s a brilliant aspiration. If you could get to that point, somehow having a face-to-face, if you know you’re going to New York City for a conference in the second week of December, you should have your list of people that maybe you’ve talked to and say, can I buy you a cup of coffee?

It could be in the morning, could be in the afternoon. I do think there’s enormous value in having that face-to-face, having a handshake, and having eye contact in person. There’s neuroscience behind it that makes the bonds even stronger. The oxytocin that exists between two people when they’re together, not when they’re two-dimensional and on a show or a call. I’ll be in Chicago soon, so I’ll track you down. I think there’s an aspiration for you to get together for a coffee or lunch. Probably initially, if you can crack the code with a call, you’re doing well.

The Story Behind Writing “Work Shop”

You’re right about that. Cool. Workshop. The book you had written, did you co-write this with an author? Did you sit down and hatch this over a period of years? What was the genesis for the idea and the thesis of the book?

I had the idea, and I had written a number of articles and had a number of presentations and speeches. I left the Instant Group in June of 2023 and took about a nine-month sabbatical. During that time, another thing that I believe is vital for everyone, it doesn’t matter where you are in your career, is to have a growth mindset and to always be learning. I had this opportunity, and I took a course at MIT in AI and business strategy because I wanted to learn more about what was going on.

I took another course at the University of Chicago on behavioral economics. There have only been five Nobel prizes in economics awarded in and around behavioral economics. I thought that, if we’re going to focus on consumers and people, then it’s going to be important to understand behavioral science and what motivates people, what incentives work. I’ve been interested in this area of behavioral science and behavioral economics, and went to the source and took a course in it. Between those two, it helped form a bit of the backbone for the book. I wound up writing it myself.

I had a great publisher/editor called Grammar Factory. If any of you have ever considered writing a book, it’s not as hard as you might think it is. There are companies out there that can help streamline it. Grammar Factory is based in Montreal but is a global company. Scott McMillan, who’s the CEO, is fabulous to work with. It was affordable and great value for money. My editor was in Perth, Australia. I never met her, but it didn’t matter because we were operating asymmetrically. I’d write something, and then she’d look at it while I slept, and then it came back and forth. That’s the genesis of writing the book.

 

If you’ve ever considered writing a book, it’s not as hard as you might think. There are companies out there that can help streamline the process.

 

It wound up the whole process, probably six months. I wrote it because, A) I always wanted to write a book. I think you should have big life goals. B) I thought that I had something to say, and I wanted to share it. I wanted to provide a different point of view. Probably the best way to encapsulate my thoughts is by an example. Oftentimes, in real estate, we see the ribbon cutting, which is great, cut the ribbon, job done, let’s go play golf. In this new future world, I argue that the ribbon cutting is the beginning of the process because space is being used differently.

The consumer is voting in how they spend their time and money. We know for a fact that the consumer is voting with her wallet in retail. If you’re not relevant, you’re going to go away. If you are relevant, and you stay current, and you engage in the personalization, and if you’re engaging with Alo, or Lululemon, or Apple, or, name it, Restoration Hardware, RH, they’re getting hyper-personalized. They understand your buying preferences, they’re engaging with you on different levels.

In many respects, some of these retailers are now movements that we all want to be a part of, like Apple. The question then remains, how is the office class going to react, now that consumers, who are the employees of the new consumers are able to vote with their feet as to when and where they work? Assuming that you’re not working at a call center, or you’re not a surgeon, if you’re operating in the conceptual economy, your tool in trade is a laptop or a cell phone, you can work from anywhere.

Why are companies like Amazon mandating that people come back to an office five days a week? If part of it is to drive culture, culture is based on trust, and what way to erode trust faster than to issue a mandate? Why hire adults and then treat them like children? In particular, because the employees who are going and working at these companies are the same ones who have, for ten years, engaged in agency, autonomy, and optionality in how they spend their money. What we learned through the pandemic was that many people thought they hated their job, turns out, they hated their commute.

In Chicago, I lived in the western suburbs. If I had to go up to the North Shore to Walgreens, it could take anywhere from 40 minutes to 2 hours each way. That’s a massive trade. That’s why I wrote the book. I think there are a lot of important things that are in the book. I talk about this notion that shop, at one point, was a place you went to, it was a noun. It is because of technology that it became a verb. I argue that work is likewise going through that transformation. It was demonstrably paired up with office. If I said, “Dan, I’m going to work,” that meant I was going to an office. Today, those two are decoupled. Work is a verb.

I know that sounds obvious, but it’s no longer a noun or a physical place. It’s a thing we do irrespective of place. It can happen in an office. It can happen in a satellite office. It can happen in a WeWork. It can happen in an airport. It can happen in lots of different places. We have to be mindful of that. I think there’s some cost bias that a lot of companies have. I’ll use Amazon as an example, they own $50 billion worth of office space. Darn it, people need to go there. Other companies, who aren’t saddled with that much in terms of fixed space, can be smart about how they offer an ecosystem of places for people to work. You can expand your employee base. You can get mothers who are caretakers.

You can get people who are caretakers, whether it’s young children or older parents, to remain in the workforce and be productive. They’re also going to operate at different hours too. At the end of the day, if you’re in the conceptual world, if your tool and trade are ideas and analysis or creating products and things like that, do you have to be in an office 9:00 to 5:00, Monday through Friday, as if we’re still in the industrial era? Those are factory constructs. Things have to evolve. Part of what I wanted to do in the book is give some historical context, talk about how retail has learned, and give some thoughts on what office and the world of work should be looking like for the next couple of years.

Balancing Remote And Office Work

I’m excited. I ordered the book already. I always get the hardcover. I like them on my shelf for the future. The sunk cost theory is interesting with the mandate. Our business has maybe 22 acquisition people on the team, spread between three offices in the Atlanta region, Chicago, and the Philadelphia region. We were 100% remote when this thing started, 8, 9, or 10 years ago. We started forming the organization. We got offices in 2016, some small ones, in 2018 and 2019, a little larger. We’re now in some pretty decent-sized spaces, 5,000 to 10,000 square feet. These are not WeWork-sized type of offices. That comes with overhead.

I notice I get feedback from the team that they do find they’re more productive. They’re a little more creative in the office. They’re more savvy on the phone. They’re showing off for each other. We get this office culture where we do have a generation of more productivity and creative results that occur there because, invariably, whether it’s Netflix, the fridge, or it’s dinnertime, or there’s an Amazon delivery at the door, there’s a lot of interruptions that would occur in the home environment versus the office. We’re not five days in the office required.

We’re probably a few hours here and there, three times a week. There’s probably an all-day Monday and maybe half a day on Friday or something like that. A lot of our business happens out on location, at the physical property where we’re making the deal occur. It’s not like we could do a 9:00 to 5:00 and do it all from inside the office. I wonder to myself out loud, I guess with everybody, I’m not wondering to myself, but it’s like, what is that?

What is the right balance between those who are disciplined to be effective in the home office environment versus those who maybe didn’t spend years developing that home office environment, who love working at home, and who are probably more susceptible to interruptions because they haven’t thought through and built out the home office environment, versus the people who are easily capable of producing the same amount at their home office environment versus the office?

I think the office has its place, maybe for the people at the earlier end of the career, where the momentum’s there. There are people around them who’ve been doing the business for 5 and 10 years. In their first year or two, they will no doubt make more deals, and more productive deals and lose less money on behalf of the company when they’re operating out of the office. I think it’s a push-pull. I wonder, where is Amazon’s heart? Is it the $50 billion in sunk costs, or did they start to notice a falling off of creativity and effectiveness? Who knows?

I love that you bring up effectiveness because, in the conceptual age of this new-collar economy, is it about productivity, or is it about effectiveness? If I send out a hundred emails and I call you up, Dan, you’re my boss. It was like, “Dan, I sent out a hundred emails.” I could say I’ve been productive, and I’ve worked my ass off. Maybe another day, I send out three emails, and two of them turn into deals. I also got to play nine holes of golf that day. Do you care? I’m not here to say it’s all about working from home.

What I’d love to emphasize is that hybrid work is the flip side of the coin of omni-channel retail or hybrid retail. What we’ve seen in hybrid retail is about 20% of the time, 20% of total retail sales of $3 trillion, are happening in the e-commerce channel. What we’re dealing with is these multiple channels of how people are spending their money. I think there’s an equal and opposite example of how people make their money. Do we need to be Monday through Friday, 9:00 to 5:00, in an industrial-era construct? I don’t think so.

I think what has happened is that we have generations of Dilbert middle managers who have determined that if you’re sitting at your assigned station, you are therefore being productive, which is complete and utter bull hockey. It’s not true. I argue that leadership is greater than management, that we need leaders at all levels who are helping drive the company mission and mandate, who help define what being effective is, who then surround younger people with resources, and even mid-career people with resources.

 

Leadership is greater than management. We need leaders at all levels who drive the company’s mission and mandate and who help define effectiveness.

 

Michael Jordan needed a coach. Tiger Woods needed a coach. Everyone needs a coach. How many coaches are out there for the middle managers that we have? Very little, unless someone has some get-up-and-go, and they’re reading books, and they’re listening to podcasts like yours, and they’re doing a number of things. By and large, I argue that leadership is greater than management and that you need to focus on that. I argue that effectiveness is greater than productivity. Being in an office is fantastic. As a young person, you want to be in an office.

It’s generally a target-rich environment to find a mate. It’s where you find your friends. It’s where you develop your social networks. It’s vital. It’s where you learn from the silverbacks that are in and around. For middle management and even more senior people, you’re able to give back. What we’re seeing is this desire to have more of this experience happen in office settings, as opposed to passive attendance. Purposeful presence over passive attendance. During the pandemic, we were doing some research, and I heard this phrase that I loved, and I carry it with me, and it’s in the book, which is a philosophy that on-site is the new off-site.

When we have people coming together, is there an agenda? Is there a meal prepared? Is there a guest speaker? Are we challenging each other in a different way? I think mandates are an intellectually lazy, blunt instrument, and that we have to get a lot smarter to provide incentives for people. This is where it goes back to this whole notion of behavioral science and behavioral economics. What are the nudges that can get people to make the decision to be in an office? If it’s an environment where everyone’s there if it’s an opportunity where, if you’re not there, you have to opt-out, but otherwise, everyone’s opted in and going to be in the office.

If there’s something that can sway you and make the two-hour commute a day worth the trade, people will be in the office. I know there was a law firm in New York, and they had this mandate one day for everyone to be in the office, and out of 120, maybe 58 showed up. By the way, there’s no bite or bark in the event people miss a mandate. There’s no wholesale firing going on unless you’re Elon and you want a complete reduction in force, which he did at Twitter. That same group had another event two weeks after, and there was a social event after, call it business hours, and out of 128 people, it was 115 showed up. It’s not that people don’t want to show up, but they want to show up for a reason.

If you mandate that I have to come to an office and commute 15 miles each way or take public transportation, and I’m sitting at a cubicle and I’m on a Zoom call that I could be doing from home, and I could have seen my kids when they wake up, could have helped get them dressed, I could have been on the Zoom call, and then I could see them when they come home. I think there’s this interesting push-pull like you said, that goes from work-life balance to life-work balance, and you can still get some of the same things done.

I love it. I could go on this, this is a hot topic, debate it. We’re looking at office assets, we’re passing on everything. Some friends of mine have bought some very cheap, $10 a foot for class A space and class B plus, if not class A minus location, phenomenal deals. They’re going to make a shitload of money. It’s going to take 5 to 10 years. Certainly, for the next 24 to 36 months, it’s probably not going to be fun for them to own these assets.

Joining LRG Investors and Future Plans

I think you’re right and spot on with the experience being created, people rethinking, and turning this into more of the omnichannel retail model. We have to evolve what the office is for and what we’re doing to attract people back to the office. I’ll digress, and we’re going to shift gears here a little bit. You joined as a partner, LRG Investors and you guys have in, I believe, in the portfolio, shopping centers with grocery anchors, things of that nature, and have done quite a bit of tenant-driven development, which, for those tuning in, that’s what Trammell Crow built a significant portion of his business on, who we were mentioning earlier.

The tenant comes and says, “I need 100,000 square feet.” The landlord builds the 100,000, has the lease lined up, and the tenant day one. It’s a phenomenal development strategy if you can do that right. Would you mind pulling on the thread of the decision to join LRG and what you guys are anticipating doing over the next 18 to 24 months?

I’m happy to. LRG is the development and investment arm of Lockehouse Retail Group, which was founded by my friend Steve Cutter. He partnered with Josh Amoroso. They’ve built both companies. Again, this goes back to my earlier point of collecting people. I was doing deals with Cutter 25 years ago, easily, if not more. We’ve become friends and colleagues and have a great deal of mutual trust and respect. When it came time for me to think about doing something next, he and I always talked about doing something. With Josh and Steve, now we’re together.

What the company has done over the last 3 or 4 years is focused on acquiring grocery-anchored daily needs centers that have some adaptive reuse and some uptick in rental rates and outpads and things of that nature. It was difficult to build ground over the last 3 or 4 years. Rates were high, input costs were crazy, and labor was off the charts. It was a difficult time. We’ve seen a number of areas ease. Clearly, we’ve had two, a 50 and then a 25 basis point drop from the Fed.

We haven’t seen a reaction in ten years. In fact, the ten-year has gone up. We’re seeing more dollars, more equity capital dollars, chasing retail deals now than we have in the last five years. That’s for a number of reasons. One, there’s been over 100 million square feet of supply taken out of the retail equation. Those are the old B malls. It’s the last Kmart closed, if you can believe it, this fall. I say that most people say, “I didn’t even realize one was open.’ You have a number of retailers who are in a growth mode.

The jet fuel for those retailers is net new stores, adding to the store base. Starbucks is still blowing and going. The banks, Chase are opening up. I think they added something like 250 or 300 new bank branches. We’re seeing companies like CAVA coming into the picture. Their stock is up 300% since the beginning of the year. Wish I would have bought it. My friend Jeff Gaul is the chief development officer there. They’re blowing and going and doing great. It’s interesting because what they’re offering is this Mediterranean menu, have you been to a CAVA? Are you familiar with it?

Not yet. Tell me about it.

Think Mediterranean menu in what looks like a Chipotle. You have the whole lineup, the walking line to construct your pita or your bowl or whatever. Super healthy food, reasonably priced, great lifestyle. These guys are blowing and going, and they need to expand. The grocers are still expanding, the Sprouts of the world. We talked earlier about Trader Joe’s. You’re seeing Kroger and Publix following the demographics. I’m here in northeast Florida, in Jacksonville. You start looking at places like Daytona, which hearkens back to spring breaks and racing cars.

There are 10,000 new houses going in the Daytona market. It’s staggering. There are 1,200 people a day still moving to Florida. There’s a great opportunity to capture some of these demographic shifts to help meet the demand for growth. We feel like inflation has subsided some. We’re seeing better pricing, not super great yet. We tend to be doing, looking at single-tenant, built-to-suit, multi-tenant buildings under 10,000 square feet still don’t pencil great. Over 10,000, we’re seeing better probabilities. We think that our thesis is that the environment is going to continue to get better. I think the election means that carried interest is probably going to stay put.

Taxes are likely going to be reduced, regulations will be reduced. Hopefully, inflation on inputs will come down. It’ll start making a lot more sense. The capital markets are strong. Banks want to lend to retail. That wasn’t the case five years ago. I was at an ICSC trustees meeting. One of the phrases was, “Thank God we’re not office,” because there was a long time there where retail was out of favor, but it’s now back in favor. We’re looking at opportunities across the country. We have great coverage along the West Coast, Rocky Mountain West, as well as the East and the Southeast. We think that there’s a place to be, and to help clients grow and to make some money.

Trends In Retail Development And Store Sizes

The trend in retail, the new ground-up developments I know of personally, a friend of mine built a Starbucks, came out of the ground. That was under construction, I think last summer, maybe. I’m sure they’re serving coffee. Another friend of mine signed with 7 Brew. It’s a drive-through concept, red hot. They’re trading at lower cap rates than Starbucks. Who else do I have? Some car wash buddies who built 15 or 16 of those, maybe in the last 36 months, but they’re small.

It’s 2,000 square feet, give or take, maybe 3,000 or 4,000, small developments. I don’t know of any shopping centers, 100,000 or 80,000 square feet, that have gone ground-up anytime at all. We had a lot of that built in the 2000 to 2008 era. We were probably well oversupplied during that time period, like offices now. The bigger boxes, I don’t know, maybe you would have a little more accurate number, but are you seeing the grocery concepts also, where they may be used to be 35,000 or 40,000 square feet, and now it’s 20,000 or 25,000 square feet?

What are the trends in terms of the actual size of the store? Have they been shrinking the footprint and becoming more effective with inventory turns and the iPhone, the ability to order, or stable? What insight could you provide on the size of the stores that may have been developed in the last three years, and what you would expect to continue over the next three years as the development marketplace hopefully becomes a little more favorable?

That’s a good question. I would say, I’d point to Target. Target was very busy doing a lot of their in-city Targets, reducing their footprint, trying to go on college campuses in high-dense urban areas, and they came up against some of the same challenges I mentioned earlier around organized retail crime and difficult to operate. On their philosophy going forward, and I believe they announced over 100 new stores, they’re reverting back to their 125,000 and 135,000 square foot large prototypes.

Again, it goes hand in glove with the hybrid retail, because as much as the four-wall experience is well-lit and great, and the associates are fantastic and have a smile on their face, it’s also a last-mile distribution center. People are buying online, either having it delivered to their home or buying online and pick up in-store. You’re seeing more and more of these opportunities where “I’ve got two bagfuls that I need to pick up at Target”. I text them, pull into parking lot B, someone comes out, puts it right in my trunk, and I leave. Great experience.

We’re seeing an increase in some stores, and we’re seeing retailers test and learn. That is an important lesson, to see how the consumer is acting and reacting to different examples. A lot of A/B testing going on. It’s difficult to do with a capital asset as expensive as a piece of real estate, but if you’re a national retailer, you can test some things in one market, get learnings, and try something different in other markets. I think that’s important. The grocers, 50,000 or 60,000 square feet.

Walmart is back out again with their Neighborhood Market, a little bit reconstituted, but again, a super strong anchor that can help drive a lot of other daily needs. I am now, for the first time, starting to see the potential for ground-up grocery-anchored centers, starting to see site plans circulating and deals being talked about.

Are those deals in proximity to Daytona? I think it’s Daytona. We had a 250-lot subdivision I’m an investor in, where we’re selling that to Pulte or something like that. If I imagine that going in on the outskirts of Daytona or whatever the big city is, are those projects you’re seeing located near those newer development sites, I’d imagine?

The new housing development site? Absolutely. There’s an interesting project called Margaritaville that’s residential in focus. I think there’s probably less than half a dozen of these Margaritaville. There’s one by Hilton Head, there’s one that’s on LPGA Boulevard by Daytona. These things are sold out. There’s the next Lennar or Pulte or whatever is going.

D.R. Horton is building next to them. You have the initial public center that’s phase one, and now all of a sudden phase two is happening. You’re seeing all this happening in almost a step curve. As more and more people are moving full-time to different parts, particularly the Sunbelt, the daily-needs retailers have to respond.

Investment Philosophy: Hold Vs. Sell

It makes sense. One question on philosophy, a lot of times, I don’t know how true it is or whether it holds up, I thought I was a hold my rental portfolio forever kind of guy and buying things and holding them forever. That’s what I’m going to do. I signed a deed package for one the previous day. I have contracts on the others. I can’t wait to sell them all off because I’m going into partnerships where I’m a little more passive instead of dealing with the day-to-day management.

Curious, Lockehouse Retail Group, LRG investors, what’s your philosophy in terms of holding everything forever on one side of the scale, and then on the other side of the scale, maybe it’s buying it, get it stable, and immediately take it to market and cash out? Where do you guys fall in terms of the own forever or flip and get out of it philosophy?

I would say there are two different flavors. One, the grocery-anchored center, the daily-needs centers, we tend to hold those a little bit longer, allow them to season, and give us time to lift the rates. We typically look at a 15% uplift in rental rates. We try to capitalize or redevelop out pads and create value. A little bit longer horizon there. As far as the single-tenant assets go, given where the capital markets are, we’re more in the churn-and-burn mode, where it’s almost merchant building. We’re going to build them and then take them to market. It depends on the asset type, but it’s a mixed approach.

If we look back at Walgreens, you build it as a merchant, and from the outside or the inexperienced observer, you’d say, “You’d want to hold that forever, that’s Walgreens.” If you held it forever, they’re letting the lease expire on you. What are you going to rent that out to, a daycare center? What goes into the corner? Very difficult to backfill. That was one of my own lessons over the last 24 months, that nothing lasts forever, in a sense. You get this great collection of national tenants, solid credit, strong cap rate, and you have a length of term left on the lease.

You’ve got to sell it while it’s marketable because you get down to someone bringing you that same Walgreens deal, and there’s 2 or 3 years left on the lease. You’ll get the loan, but you’re guaranteeing a $3.9 or $3.8 million mortgage on a $5.2 million purchase. Not a comfortable position. That’s why the owner is selling that asset because the lease term is at the end. I think that’s a great model. We built our Vegas shopping center. I think we’re either going on the market by the end of the year or we’re going on the market in early 2025. Some of the retail numbers that we’re seeing are you’re selling on twelve more months after you own it.

It’s like this projected pro forma seasoning thing. There are buyers out there in the market who will pay it to maybe be in there as the demographics are improving, and maybe it’s a location. They’ll laugh at us for selling it at the price four years from now, maybe. It’s interesting to see the trend of retail properties getting hot again.

There was an interesting article in The Wall Street Journal this week, on November 12th, about how the real estate scions in New York City are breaking the cardinal rule, which was never sell, but they are having to sell. Rudin was one example, and a handful of others. Nothing’s forever. That’s sound advice.

Impactful Book Recommendations By Joe Brady

True enough. As we wrap up here, I have a couple more questions before we close. The first will be book recommendations. We talked about Trammell Crow earlier. Are there 1 or 2 other books, maybe real estate related or otherwise, that you found profoundly impactful and might be interesting to the reader?

One is around behavioral economics, and it’s called Nudge by Richard Thaler and Cass Sunstein. Thaler is a Nobel laureate in economics. His buddy Sunstein is a professor at the Harvard Law School. This is an important book, I recommend it often. It talks an awful lot about how you can engage in choice architecture to help people make good decisions without taking the agency and autonomy away from them. I think this is going to be an important area for us to focus on. We can’t be that intellectually lazy, blunt instrument when it comes to dealing with people interacting with our real estate.

How do we nudge them to come back into our space? The second book I would mention is probably a little bit more personal, but it’s called Build the Life You Want: The Art and Science of Happiness. It was written by Arthur C. Brooks with Oprah Winfrey. Arthur Brooks is the most popular professor at Harvard Business School, and he teaches a class on leadership and happiness. I’ve found his message to resonate and to be important as we navigate difficult times. I’m on the board of my national fraternity, the president of the board, responsible for, I’ve got 11,000 undergrads, and I have a 22-year-old son as well. I see what’s happening in the world with these kids.

We’re in an epidemic of loneliness, anxiety, depression, self-harm, non-accidental deaths. It’s not something that we should be proud of as a society. We need to arm not only ourselves, but we need to help arm our younger people with tools to be more resilient, to be more anti-fragile, to know that you’re going to have bad days, and so how do you deal with them? These lessons about happiness that Arthur Brooks talks about are impactful.

 

We are in an epidemic of loneliness, anxiety, and depression. We need to arm our younger generation with the tools to be more resilient.

 

I’ve had a chance to meet him. I’m working with him with the national fraternity as we take some of his lessons and bring them into the associate member education process. Again, another area, we can’t have successful real estate unless we have successful, functioning, energized, entrepreneurial, enterprising people to either shop or work in them. That’s another area that I’m pretty passionate about.

Jewel Of Wisdom For Young Professionals

I appreciate that. We’ll have to get those ordered myself. The crown jewel of wisdom, if you could go back, let’s pick a good point here, a good way to phrase this question because we talked a little bit about the principal and the banker and the brokerage side of things, let’s say you were starting with zero and you were one of the young people in your fraternity, what would be the crown jewel of wisdom that you would share with them, knowing everything you know now?

It might sound like a broken record, but I’d go back out to who are the most successful alumni out there, and how can I go and engage with them? I mentioned earlier about the University of Florida, the Bergstrom Real Estate Center. It turns out that Kelly Bergstrom, who’s the benefactor, was the president of J&B Realty out of Chicago, and he’s a fraternity brother. Not only have I but there’s been an army of young men who went and worked at J&B, who got to learn under Kelly.

Find a mentor, find a leader, and learn as much as you can. Sweep floors and fetch coffee, there should be no job below you. Show up early, stay late, and work hard. Ninety percent of winning is showing up, the other 10% is not leaving until you’re done. It’s almost like sending a handwritten note, it stands out. If you do that, and you work your ass off and don’t expect anyone to give you anything, and you’re going to outwork the next person, I think it’ll serve you well.

 

90% of winning is showing up. The other 10% is not leaving until you’re done.

 

That ties into our conversation earlier about doing your homework and reaching out to that person for some insight. One thing I think I would have had challenges with when I was 18, 19, 20, 21, I didn’t have enough perspective to maybe even select the right mentor. If there was some guy who had five rental properties, he would have been like the king of the hill, and I would have been ready to worship at his feet, for lack of a better, I would have thought he was the pinnacle.

What type of strategy advice would you additionally layer on for that person around trying to figure out who is maybe the right person to go out and contact? Maybe that’s step one, you’re asking the first mentor you identify, something like that. How would you go about maybe selecting that person, that you invest the time through the homework, come up with the agenda, and then schedule and do the meeting?

It can be that formulaic, or it can be super opportunistic. I’ll give you an example, Dan, and you’ll appreciate this from our Philadelphia background. As a kid, I thought the best job in the world was being a caddy. I was a caddy at the Philadelphia Country Club. You’re outside, you get paid in cash, get a little workout, you meet interesting people. There was a member-guest, and this gentleman named Tony Hayden, for those in Philadelphia, he was the head of the Cushman and Wakefield office.

I was his caddy. Very first day, he looked at me and said, “You’re going to forecaddy as much as you want, ride on the back of the cart, and we’re going to have a good couple of days here. By the way, here’s $100.” That was 40 years, that was a lot of money. I said, “Mr. Hayden, this is awesome.” I was studying electrical engineering at Villanova, that’s where I got my degree, but I got to interact with him. I asked if I could come interview with him, which I did.

Again, there was that opportunity. He looked like he was having more fun doing real estate than what I saw people doing in engineering. My golf game still stinks, even though I live on a golf course. In any event, I think you have to be open to it. Do these people match your goals and aspirations, your character, and your ethics? Does it feel good? If so, probe and ask questions. It doesn’t have to be like a master’s thesis on day one. It can be a couple of questions, and then follow up and work the angle.

Maybe it’s as simple as sitting down and thinking it through. No one gave me that idea when I was heading into Villanova. I remember my mom’s like, “Fill out the application. You might get in.” I’m like, “I’m not getting in.” I was working at a car dealership. All I wanted to do was drive the brand-new Trans Ams that they were delivering every day, like $9, whatever.

Eagle on the front, right?

Yeah, $6 or $7 an hour, whatever it was. It was like, it didn’t matter. These cars were so much fun that I had the chance to drive. I filled it out, and I thought, I’ll design cars. I’ll be a mechanical engineer. I checked the box. When I got there, I had a similar experience. I had always wanted to do real estate since I was a kid. Grandpop was a property manager and did the early math and figured out that was a good plan as far as making money. When I looked around at mechanical engineering, I had no idea what it was, or what I was getting into.

I was like, I don’t know if I want to do this. Sitting down to think it through is a great point. Maybe the action item is, and they did tell me this, someone told me this back when I was that age, go caddy, because you’ll meet interesting people. There you go. There it is. Go caddy, and you’ll get at least 6, 10, 15, or 20 in a summer’s worth of caddying, and interesting conversations to help develop the strategy. Joe, where can people go to get more Joe Brady?

You can go to my website, which is JoeBrady.ai. On the website, there are links to Amazon and Barnes & Noble for the book. There are some links to articles I’ve written, and podcasts and presentations that I’ve done.

The Kindest Thing Someone Has Done For Joe

My final question, Joe, what is the kindest thing anyone has ever done for you?

When I was first out of college and working in Charlotte, North Carolina, I was working for my national fraternity. The executive director, one of my lifelong mentors, Durward Owen, knew that something went awry with the local bank branch. He grabbed me by the collar and took me in there. Somehow, they were taking advantage of me. It was a horrible experience.

I tried to forget it, but he brought me in, sat me down in the manager’s office, ripped this guy up one wall down the other, and said, “You don’t know who you’re dealing with here. This young man is going to be a leader of tomorrow. He’s going to be one of your biggest depositors here. You should rectify what happened. What you did is wrong.” I never had anyone stand up for me like that. I never thought I deserved it until that time. I felt that kindness and support allowed me to stand a little bit taller that day. I never forgot it.

Nice. Joe, I have four pages of notes. I had a fantastic time. I appreciate you coming to the show.

Dan, it was so good to be with you, a fellow Philadelphian to Chicago, and I wish you well. I hope to meet you live someday.

We’ll get it done.

 

Important Links

 

 

Redeveloping U.S. Malls Part 2 with Brait Fund Saul Zenkevicius

 

Redeveloping U.S. Malls Part 2 with Brait Fund Saul Zenkevicius

 

Guest: Saul Zenkevicius is a personal friend and prior business partner of mine.  We used to flip houses together in Chicago & Miami. Now he’s moved on to redeveloping underperforming Malls with his partner Rafik and their team. 

 

Big Idea: The biggest opportunity in commercial real estate is leasing up large amounts of vacant space.  This is how to earn profits exceeding $10,000,000.  The key to doing this is building a business focused on attracting tenants and building an ecosystem of tenants that will bring traffic to those properties over a long period of time.

 

 

    

Dan: Saul Zenkevicius, welcome back to the show. How you doing?

Saul Zenkevicius: Good. How are you, Danny?

Dan: Good. For listeners who’ve been around a while, March 1st, 2019, Saul was on the show. We talked about leveling up in real estate, and he was just getting into industrial properties, and I think getting out of the house, flipping business. Saul and I were also partners in the Miami market, and we did quite a bit of business together in the Chicago market before the focus became commercial. Saul is the founding member of Z Equity. Do you have another company or any other company associations at this point we know.

Saul: Yeah. I am also managing partner in Braid Fund where Rafik Morris is my partner over there and we’re buying malls with that company.

 

This Episode of The REI Diamonds Show is Sponsored by the Deal Machine. This Software Enables Real Estate Investors to Develop a Reliable & Low Cost Source of Off Market Deals. For a Limited Time, You Get Free Access at http://REIDealMachine.com/

 

This Episode is Also Sponsored by the Lending Home. Lending Home Offers Reliable & Low Cost Fix & Flip Loans with Interest Rates as Low as 9.25%.  Buy & Hold Loans Offered Even Lower.  Get a FREE IPad when you Close Your First Deal by Registering Now at  http://REILineOfCredit.com

 

Resources mentioned in this episode:

www.Zequitygroup.com

 

For Access to Real Estate Deals You Can Buy & Sell for Profit:

https://AccessOffMarketDeals.com/podcast/

 

Saul Zenkevicius & I Discuss Redeveloping Commercial Real Estate:

  • Climbing Mt Kilimanjaro
  • Leasing 300,000 sq. ft. in 15 months
  • Creating $10M in value in that same period
  • Simplifying Life instead of Chasing Money Exclusively

 

    

Relevant Episodes: (200+ Content Packed Interviews in Total)

 

The transcript of this episode can be found here.
Transcripts of all episodes can be found here.

Real Estate Development With Darcy Marler

The REI Diamonds Show - Daniel Breslin | Darcy Marler | Real Estate

 

Guest: Darcy Marler is a seasoned real estate investor and developer with over two decades of experience in flipping houses, rental properties, land development, and new construction. From an MIT graduate to a successful real estate entrepreneur, Darcy’s journey has been marked by valuable lessons and insights. Passionate about transforming raw land into subdivided lots ready for construction, Darcy specializes in building and flipping houses, duplexes, and small multifamily properties.

Big Idea: In this episode, Darcy Marler delves into the transition from fixing and flipping houses to land development and new construction, stressing the need to align real estate strategies with personal preferences. He outlines risk mitigation and profit maximization strategies, emphasizing the substantial benefits of new construction, including higher returns, better tenants, and efficient management. Darcy highlights advantages such as ease of financing and incentives for developers addressing the housing crisis. He underscores opportunities for smaller investors in smaller-scale projects like multifamily units or residential development. Understanding market demand, leveraging financing, and exploring exit strategies are key takeaways for maximizing returns in real estate development.

This episode of The REI Diamonds Show is sponsored by the Deal Machine. This software enables real estate investors to develop a reliable & low-cost source of off-market deals. For a limited time, you get free access here.

This episode is also sponsored by Lending Home. Lending Home offers reliable & low-cost fix & flip loans with interest rates as low as 9.25%. Buy & hold loans offered even lower. Get a FREE iPad when you close your first deal by registering here now.

Resources mentioned in this episode:

Hutton Radway

View the episode description & transcript here:

Real Estate Development with Darcy Marler – REI Diamonds

Darcy Marler & I Discuss Real Estate Development:

  • Budgeting and Risk Management in New Construction (3:31)
  • Philosophies on Holding vs. Selling Properties (10:02)
  • Pre-Selling Land vs. Building Spec Homes (15:54)
  • Identifying Potential Land for Development & Subdividing (18:21)
  • Evaluating Opportunities in Aging Neighborhoods (23:16)
  • Benefits of New Construction for Rental Properties (36:38)
  • Importance of Demographics and Location in Real Estate Investment (45:36)
  • The Significance of Partnerships and Operational Support in Real Estate Ventures (49:48)

Relevant Episodes: (200+ Content-Packed Interviews in Total)

—

Watch the episode here

 

Listen to the podcast here

 

Real Estate Development With Darcy Marler

Darcy Marler, welcome to the REI Diamonds Show. How are you?

I am doing very well. Thanks for having me on. I appreciate it. This is great.

I was excited by the topic. I think our audience will be equally as excited. Most of us are probably fixing and flipping houses. We are interested in buying and selling real estate. We would improve said real estate to get to that profit. I think that our discussion around land and development, and making that transition will be a very much well-received topic by the audience and by myself. Darcy, would you mind giving us the background and the career evolution to get where you’re at now?

I was an actual IT guy way back in the day, about 23 years ago. I got tired of that, so I wanted to get into real estate. I started flipping and doing long-term rentals, and that led to some land development and new construction. I’ve done all the strategies. I had close to 1,000 tenants and 240 renovated units and written a couple of books. I’m now doing a bit of everything. I keep coming back to new. I like new. I like being creative. I like knocking stuff down instead of fixing it up now. That’s where I’m at now.

Biggest Lessons From Early Development Deals

Why don’t we start with an example then? This could be your first development deal, or you can not do that one if that one’s not maybe the biggest lesson. Maybe you could pick one that came with a big lesson that helps us expand our vision from single-family fix-and-flip or buying duplexes that exist to ground-up new construction.

The first one is perfect. I had this 1950s bungalow. I was going to flip it. The person next to me passed away, so I bought that as well. I said I’ve always wanted to build. What does that look like? I moved both of the old houses off. I didn’t even demolish them. I sold them. They got moved off. I split those two lots into four.

I made sure all four lots were serviced, and then I built four new homes. I loved it. It was exactly what I wanted. The big thing that I’m all about, too, is matching your personality to your strategy. If you’re not enjoying what you’re doing, what’s a better fit? I love the creativity. I love the pride of watching the stuff come out of the ground. I think it’s awesome.

 

Match your personality to your strategy. If you’re not enjoying what you’re doing, what’s a better fit?

 

You say it so calmly now, and I have friends who are developers bringing stuff out of the ground. Some of them are calm, others maybe not so much. How do I say it? I feel like some of the developers have this innate riverboat gambler mentality. I feel like it’s hard to, at least for me, because I’ve never brought something out of the ground where I was a sponsor. I’m a partner in the fourteen developments for self-storage, but I’m not the guy who’s budgeting that. I am a money guy.

Budgeting And Risk Management In New Construction

I don’t have the emotional barrier. Personally, I do have an emotional barrier. I could do a $150,000 flip, get architects, the whole thing. We can get that done, no problem. I have this mental block of getting past dirt. Is it going to be $400,000? Is it going to be $500,000? Is it going to be $600,000 to build said property? Am I going to be able to sell it otherwise? It feels like a humongous risk to put the shovel in the ground when I’m not clear on that budget on the front end. Maybe we could pull on the thread of the first deal. You’ve got four houses coming out of the ground. How did you budget for that new construction, or did you take a riverboat gamble?

They say God protects the naive and the stupid, so I’m not sure which one I was. Let me go at it a little bit another way. As flippers, we have to finish. You can’t half finish a flip and expect to sell it for any profit. In this world, let’s say every building, whether it’s residential or commercial, whatever, starts with grass and ends with a building. There are all these things that have to get done. We don’t have to do the whole thing. There are three parts. There’s the permitting, entitlement kind of thing. There’s the pipe in the ground, getting the infrastructure in, and then there’s the physical build. You don’t have to do the whole thing. You can pick one of those pieces.

I did the whole thing with that story I told you, but once I had the four units or four lots separated with four different sets of pipe in the ground, I could have sold four serviced lots. There are a lot more entry and exit points in this world that don’t exist maybe in the flip and rental world, and that can take some of the scariness out of it because I’ve got a clear exit point. Let’s say I’m going to go, and I’m going to do the whole thing, and then the economy changes, and interest rates go crazy, and costs go crazy.

There are multiple exits. I can sell it to a builder because his internal costs are less than mine would be, so maybe it doesn’t pencil out for me anymore to finish that final product, but it still makes sense for the builder. I can sell it and make a lift from changing zoning and density and usage, or whatever, or putting some pipe in the ground, knocking down the old house. There are lots of exit points, which may help you feel better and help mitigate the risk along the way.

Even when we flip houses, we’re throwing darts at the number. I think it’s $60,000. It ends up being $82,000. That’s okay. We sold it, and we got a little luck in the market, and maybe we made the profit we targeted, or maybe more. Usually, my exit price, Darcy, on the product, a house, whatever, I’m going to go low. If I think I can get $525,000 with luck, maybe I’m building a deal on $485,000 or $500,000. Maybe I’m so conservative that it sells for $550,000 when it’s all said and done. We did a little nicer job. We got lucky, the spring market, the market moved, etc.

On the front end, we’re throwing a dart at that renovation budget still. I’m not price per square foot, making sure the electrical is $8,000 versus $11,000. We roughly know it’s going to be $8,000 to $10,000. We’re using $10,000 when we come up with the budget. Did you have any exact budget for these four houses when you were building?

It is because I’ve done a bunch of flips in my day too, and the worst thing is you don’t want to go into the wall because you don’t know what scary things are behind the wall. Here, we’re going to tear down that old house anyway, so we don’t care. It’s a lot easier to get a fixed budget to do this job, this is going to cost me this much because it’s brand new out of the gate. With the four houses, I went to an actual quantity surveyor because I was my onsite supervisor guy, even though I’d never built a house before. I wouldn’t necessarily recommend that. Here’s the budget, and then you’re out there getting quotes.

 

The worst thing in flipping is going into a wall because you never know what scary things are behind it.

 

Here’s what it costs to tear down the house, or in my case, move them off. Here’s what it’s going to cost me to bring the utility lines in from the street, from the city. Here’s what it’s going to cost to frame. Here’s what it’s going to cost to throw the HVAC system in. It’s a lot easier to get cleaner quotes on that than I found with the flipping world.

You were committed at that point. You did. You already owned the dirt. You knew you were going to do it. At that point, it was bidding out the job efficiently versus underwriting the deal on the front end to figure out if that one works. You’re not going to call and get 15 or 20 quotes together before you make your offer. You have to have some gut feeling for how much each is going to cost to build.

In that case, my fallback position was it’s too hard, it costs too much, whatever. I’ll flip both these houses now. I had that luxury. Even if I hadn’t bought the houses yet, let’s say I was looking at a house that I think is a better teardown than it is a renovation, the great thing about it is it’s linear. Things have to be done in the order. You can’t put on the roof before you put on the walls. Utility pipes have to go in.

It’s linear, and that makes it like a to-do list. Psychologically, it can be all intimidating for us that this is hard, but it’s one step at a time. You get the quotes. I can call a couple of demolition companies, what’s it going to cost to tear down that old house? Perfect. Check. Call the city, what’s it going to cost to hook up to the city waterline? Check. It allows us to move through and make that whole process simpler for us but also less intimidating. It’s not throwing darts, as you say.

Got you. I have friends who, we’re talking $20 million profits, and I feel like they threw darts on what they were going to put in the property, and it worked out for them. At some level, all of us in real estate are throwing darts at some point and taking a risk. That’s what risk’s all about, in a sense. You do have to take a little bit of a gamble. Hopefully, we’ll be educated. On the four-lot package, what was the total duration from the purchase of that first house to the sale of the final fourth house? I assume you sold them, not rented them?

I sold them. I prefer to sell instead of keep stuff. The actual knocking down of the first house to finishing the fourth was about ten months. I was in and out within ten months.

Built the fourth house in ten months and then sold maybe 4 or 5 months later, settlement?

I had them all pre-sold. The whole thing, let’s say, was permitting and all that. Let’s call it sixteen months from cradle to grave.

Philosophies On Holding Vs. Selling Properties

That’s pretty quick. You’ve mentioned two philosophical things that I want to highlight for readers. We get, a lot of times, a buy and hold everything forever philosophy, and then we get an everything is for sale. I’m more of the everything is for sale kind of guy. We did 331 deals last year. All of them are sold and gone already, and I do hold a handful of rentals in my portfolio, but they’re a savings account.

In that aspect, I’d be lying if I said I’m a buy-and-hold forever. I try to be more of a buy-and-hold forever with my portfolio. I don’t know why. I think it’s more work for me to try to slice and get out of them versus keep renting them out, and the management company handles it. Why is it that you prefer the sell everything versus the buy and hold forever?

I get bored easily. The other thing too that 23 years has taught me is no strategy works all the time, everywhere in every economy. Stuff changes, as we’ve seen in the last few years. I don’t like the concept of, “I’m going to get in bed with a JV partner and own this apartment building for twelve years.” I barely know the guy, and I don’t know what’s going to happen in twelve years, and all of a sudden, I bought it at a 1.9% interest rate, and now I refinance and my mortgage payment is three times what it was. I don’t like that. I’ve got Darcy-isms, and in and out quick is one of my favorite ones.

 

No strategy works all the time, everywhere, and in every economy. Things change, as we’ve seen in the last few years.

 

As I said, those are the three parts of development I would recommend picking one, do the entitlement bid, get the lift from changing zoning density and sell, or buy land in this state, put the pipe in the ground and sell service lines, or buy land that’s already serviced and build the fourplex or tenplex, whatever you’re going to build, so that you can get in and out quick. This is because rising interest rates are a big deal. If you’re going to hold something over twelve years if you’re in and out in sixteen months, it’s a factor, but it’s not anywhere near as big a factor as if you’re holding it long-term. I find these strategies are a lot more recession-proof to get in and out quickly.

I got into real estate in 2006. I was 26 years old. The market was at its height through 2003, 2004, 2005. I knew that, like my parents’ house, I think they paid $89,000 for it, and houses on the block were selling for $150,000 to $185,000 or something like that. It was a long time later. We bought it in 1987. To me, real estate prices didn’t feel like they should move that fast. When I got in, in 2006, everything was inflated beyond where it should be. You got to get out as quick as you possibly can.

We started flipping and doing those kinds of things, and it turned out the market did go down from 2006 to 2013 when it bottomed out, various different places and points in the timeline around the country, I’m sure. We’ve been on a pretty good appreciation run. I don’t know if it’s because I got in as the bubble was bursting last time, or maybe the Darcy-ism and the sell everything quick is the right methodology. Where I’m going with it is that real estate has always felt like a game of hot potato to me. I’m flipping a house, and that thing is hot. I’m losing sleep.

The construction is going on. “Can we get it done faster? Can you guys work on Saturday? How about Sunday afternoon?” I’m exaggerating a little bit with my pressure on the contractors. I want to be out of that house as soon as I possibly can. It’s a hot potato. I got to pass it on to the next. If someone’s going to live there, it’s not a hot potato for them. That’s going to be their home and their location for a very long period of time. I’m on board with the Darcy-ism of selling it quickly.

I’m 57. I bought my first personal residence when I was twenty, in 1987, and I paid 12.5% interest. I thought I was getting a deal because three years before, it was 16%, 18%, 20%. I thought this was awesome. It’s a perspective.

Pre-Selling Land Vs. Building Spec Homes

You’re right about that. The other philosophical thing you touched on here, which I don’t even know if it’s a Darcyism or not, is pre-selling the houses. I had Brandon Cobb, a friend of mine, on the show, I think I’ve had him on twice now, and his original philosophy around pre-selling versus finishing it and selling it was that he wanted to pre-sell. That jammed him up during the inflationary period because he had already sold and locked in some prices, so he got into a little bit of a jam. He flipped to the other side of that philosophy, which is, “I’m not pre-selling anything because I want to make sure I can continue to ride the market.” That probably was a good strategy for the last 38 months, give or take.

We’re now in probably a little bit of a different market. It would be worth noting that Brandon then moved on to the thing you mentioned before. You’ve got these three components, permits and entitlements, adding new utilities, selling finished lots, or building vertically and coming out of the ground. Brandon had mentioned now, on that second episode, that he’s more partial to running numbers 1 and 2, buying the land, getting the permits, putting in the infrastructure, and then selling those lots, sometimes in an entire package to the end builder. Did you go back and forth? Do you sometimes pre-sell and sometimes not pre-sell? Where’s the Darcyism in that, if any?

A couple of things. I tend to not like the pre-selling of the final house to the end people that are going to live there because then they’re picking colors, and they’re painting my ass as I’m trying to build this. You are better off building spec in that sense. At least you’re not fighting the owners, “I want to move that wall.” It’s too late. I already got the building permit, the wall has to be there. I’m doing a land development deal in Houston. The goal is to pre-sell the final finished service lots. I’m not going to build the houses. I’m going to create service lots to sell to the builders before you’re even in the ground.

That gives you security in terms of, “Here’s the end price, and here’s the dates.” They’re going to take blocks of so many every three months. That makes your lenders happy and makes everybody happy. It goes back to your personality, what are you more comfortable with? I like the security, maybe, of having the final number there. In that scenario you talked about, I got my butt kicked in the 2008 recession doing a 36-unit development where I was doing the land and the builds of the houses. Pre-sold probably twenty of them, so two-thirds. The recession hit, and I was scrambling. There was a massive boom before that. You’re seeing run-ups of both costs and revenue. It was a roller coaster. In and out quickly.

Analyzing Houston’s Real Estate Market

I vaguely remember the 2008 inflation at the gas pump. We were complaining about the price of copper, but I didn’t have the scale in my career at that point, from 2006 to 2008, where I was affected by it like we were this time around, doing a higher volume of deals. History repeats itself. Pre-selling the land is a smart idea. We have a project that we have an LOI for. I think it’s 16 to 20 townhomes, and we have a rezone clause in there, and that would be pre-sold to them before we have to enter this rezoning. That might be an ideal scenario. How big is that in Houston? Could we pull apart that example a little bit?

What I did there is, it’s still in the works, rather than buy the land and then try to raise the money, I went the other way. I did what’s called a blind pool, or a blind raise, and I raised some money. I’m now on the hunt for the land. Again, 23 years of experience. I’ve built close to 50 houses, duplexes, and small multifamily. I’m okay with it. I like it, but I don’t love it. I love the dirt bit.

I’m going to focus on what I like. We’re looking for 20 to 50 acres of land that we’ll subdivide into smaller lots, whether it’s city lots, half-acre lots, or larger, and then we’ll get the builder set up. The way that works is you’re typically looking at a 15% deposit of the final agreed-upon end sale price once they’ve done their due diligence.

At the time when all the drawings are done, and the permits are in, they know that this is going ahead. That’s a great way of also getting funding as you’re going through. I now have to have that much less financing with my construction loan. That now saves a ton of money in interest costs and whatever. That’s another benefit of maybe figuring out the end piece before you’re throwing darts at the wall.

Will you take that 20 to 50-acre parcel through the utilities and sell finished lots there?

Yeah. Piping in the ground, the internal road, sidewalk, subdivision, the light poles, the fire hydrant over there, and then selling it to one or more builders.

Have you successfully got a couple of those closed so far?

Not this one, but over the past 23 years, I’ve certainly done that. As I said, when I was first starting out, I had to do the whole thing. You’ve got to do the whole thing. It’s like flipping, but after a while, pick the bit you like and do that bit.

A hundred percent. We’re flipping houses. Chicago is a great market. Philly is a great market. Atlanta is a great market. There are great markets all over the country, and there’s a need for what we do. In Philadelphia, there are a lot of products available where I’m not necessarily flipping in the lowest-end areas, let’s say, in the Philadelphia region, there in the city. I would guess you have investors who are making $30,000 to $40,000, maybe $50,000 in profit if the contractor guy’s in there offsetting his labor costs. There’s probably some higher-end stuff, and they’re making more money there as well.

In Atlanta, the renovations are significantly lower cost. In the Philadelphia market, we’re talking about 1900s to 1920s products that are going to need $40,000 to $80,000, depending on if the guy’s doing the work, to make the $30,000 to $40,000 to $50,000. In Atlanta, the product is newer. An older product is built in the ’50s or the ’60s in Atlanta, and then you have a lot coming up through the ’70s, ’80s, ’90s. Maybe you put $20,000 or $25,000 in there for your average flip, and then your upside is probably $40,000 to $50,000, give or take. The South Side of Chicago is interesting.

It’s always been an interesting market to me because we have so many products where you’re going to spend $80,000, $90,000, or $100,000 in renovations. When I first moved from Philly to Chicago, I was shocked when they were telling me how much, “We got to spend $100,000?” Back then, it was $80,000. It’s now $100,000 or $110,000, something like that, to renovate these bungalows. The upside there is it’s $70,000 or $80,000. There’s so much product and inventory.

Best Entry Points For Real Estate Developers

I don’t know how long that’s going to last but to flip houses on the South Side, you’re going to have challenging neighborhoods and a certain contractor, and some contractors are not going to be willing to go down and work in these areas. The product is there, and there’s a volume of deals available to flip houses in the city of Chicago. It’s a great market. I’m curious. We’re in 2024. The interest rates are high.

If you were talking to one of those investors in any one of those three markets, who is making those kinds of spreads, what would be your advice to them as far as here’s what might work for you to consider going into the development space? Would it be ground-up new construction? Would it be fine multis? Would it be skip right ahead to the land development? Where would be the best transition for that flipper to proceed into development as a career?

If life is working well for you and the numbers are working, then fine. I’m more talking to the person who’s not happy with their rentals or their flips or whatever. This isn’t what I signed up for, sorry. A couple of quick facts here. The average lifespan of a wooden structure in North America is 70 years. Brick is 90. That puts us in 1954 and 1934. Anything 1970 and newer, keep that. That’s a flip for sure.

Of the ’40s and older, tear it down. Why are we keeping those? Obvious exceptions for the historically or architecturally valuable, but that’s a small percentage. Most old crap is old crap. The ’50s and ’60s is your call, what you want to do. For the most part, the problem with what we’ve been taught over the last 40 years in real estate education is we’re taught to fix up something. That’s all we know. Fix up an old building, keep it as a rental, flip it, Airbnb it, rent, and whatever. We need a building.

Sometimes you’re sitting there as a flipper and you go to that 1910 and say, “I can’t, I don’t know, this is too far gone. I don’t know what to do with this,” and off you go to the next one. As the inventory starts to age, we’re always taught the values in the building, and to create value, you have to add value to the building. As the inventory ages, the value more and more is in the land. Can you bring out the value of the land?

 

We’ve always thought that the value is in the building, but as the inventory ages, the value is in the land.

 

For example, most of your readers probably, as they’re flippers, if they come up with a vacant lot, they don’t know what to do. If they come up with a 1910 piece of crap that is a teardown, they can’t deal with that either, so off they go. If you tear down the 1910 piece of crap, now you’ve got a vacant lot. What can we do with a vacant lot? That’s part of an educational process to learn.

What’s great about that is that now that separates you from almost all the rest of the competition that ever read a real estate investing book, took a course, or listened to a podcast. We’re all looking for the same product. If you know how to deal with vacant lots and old crap, that sets you apart because most investors don’t know what to do with that. That would probably be the, as you’re dealing, like I said, in Chicago and Philly and some of these, Baltimore, some of these old places, it’s got a lot of that old product.

Let’s stop fixing it up. I used to be the fix-it-up guy. I’m now a tear-it-down guy. Let’s tear it down. What you come back with, instead of one-for-one, because with a flip, typically, we fix it up, we had one unit before, we got one after. If we did do tear down before, we tore down the old house and built one nice house. Let’s come back with a duplex, fourplex, or a sixplex. Let’s help the housing crisis. Let’s help the missing middle that we’re talking about all the time with a nicer, newer product.

Let’s revitalize. Let’s stop the urban sprawl as we’re heading out and spending all that money as taxpayers, on new roads, new schools, and hospitals. Let’s come back in and revitalize some of these older inner-city neighborhoods with some new products. It is because everybody likes new. Nobody likes to live in that 1930s burr. Let’s come back with the new stuff that people want.

We notice in these areas, South Side Chicago, a lot of the areas in Philadelphia, Atlanta, it’s a night and day difference in Atlanta by the West End and the Beltline area. They put a walking trail in the railroad loop going around Atlanta. It’s been a project going on for a long time. It’s a great example of bringing the area back to life. When we started in 2016 in Atlanta, you’d walk around and maybe there was one occupied house on the entire block.

Maybe now there’s 1 or 2 vacancies, and maybe there’s a handful of them that are in decrepit shape, and everything else like brand-new renovations. They weren’t necessarily tearing those down, but I think what we’re seeing is a lot of these challenged areas are benefiting from the housing shortage, and they’re seeing the investment, and there’s no other options. People are willing to move there, willing to buy there, willing to own there.

Site Selection Criteria For New Construction

The question is about the new construction. If I’m looking at this 1910 house in the neighborhood, Darcy, and this is what we run into a lot of times in the area, there are no other comps for new construction in this town, in the school district, or the zip code. Is that an automatic pass? Should I be now looking for neighborhoods that do have some new construction, or is there a case to be made for being somewhat visionary and providing somewhat of this unique product and a build-it-they-will-come mentality? Fill me in on a site selection or the site pass criteria.

I like the precedent. I use the analogy in World War I, it’s nobody wanted to be the first guy going over the hill. Make sure some other people have done it. You come into a neighborhood, and what we’re looking for, like I said, because of the age of the houses, I specifically target neighborhoods that are 1960s and older. That was the outskirts of town in 1940. Those are what I’m looking for. I want precedent there. It is because there’s typically a NIMBY, not in my backyard, installation. In some of these older neighborhoods, people bought this house 30 years ago for $40,000 or $50,000. This is a retirement. They’re scared.

I want somebody else to have fought that fight with both city hall and with the local community so that they’re allowing their whole house to come down and a duplex to come up, or maybe some triplex or fourplex scenario. That’s what I’m looking for. In the other situation, where there isn’t precedent, try to stick to the borders, stick to the main roads, the high-traffic arteries kind of thing. It is because the city will usually almost always approve permits for higher zoning, and higher density, on the main traffic.

The neighborhood community group could care less. They care more about what’s inside. It’s almost like a wedge. That’s how you get there. We’re going to build something new on the main street. It’s harder for the neighborhood to block, or the city to block, if you bought the house right next door. You got approval. How come I can’t get it? It wedges itself in there. It’s two ways to look at that, but you never want to be the first guy over the hill, that’s for sure.

In the small development space, meaning 1 to 4 units, buying a single-family house, tearing it down, is the competitive advantage, or the edge, finding a single-family where 2, 3, or 4 units can be built on the lot? Is that part of the strategy?

Yeah, because I think most people with land development, new construction, they have it in their head that’s for the big companies on the outskirts of town. They’re going to buy 400 acres and put up a thousand homes. As smaller investors, we can get into this world too, by focusing on that one old house on the city block, the 50-foot frontage city, regular city lot.

The other thing, too, is that I think it’s a mistake to assume that most people who want new, that they want a new 2024 build, only want to live in the suburbs. Lots of people want to come back to where there are high walkability scores, where there’s existing infrastructure, and where there are mature trees. Lots of people like that inner city vibe.

There isn’t the product, as you said, like most of the stuff, because all we’ve been taught, is how to fix stuff up. If we knew what to do with the old stuff and the vacant lots, I think we, as smaller investors, there’s a real opportunity for us to come in, and then we’re not competing against the deep-pocket developers in the outside of town.

Navigating Development Without Sales Comparable

It’s logical. I have two friends working on a similar strategy. They would get areas in the Philadelphia market where these lots are practically free. It’s a thousand bucks, $2,000, or $5,000, or $10,000, you’re getting a lot. They would rezone that lot, I believe, to build either two, I guess it would be three-flat, so triplex, maybe a quad on there. They would build them, and there were zero comps for new construction. There’s not a lot of that 2, 3, 4-unit product in the city of Philadelphia. There’s enough, there’s duplexes that are around, but they’re not like they are in Chicago, New York City, Boston, cities like that. It is because he had no other sales comparables, he would simply rent them all out, Section 8 program, and then refinance based on the income.

He’d built himself this wonderful portfolio of buy, build, rent, refinance, and recycle the cash. He’s now got all this wonderful product that he built that has low maintenance, that’s probably got a long lifespan ahead of him. That was how he was able to get around not having comparables. It is because he’s doing that, there’s zero competition because he’s not selling them once he’s done. No comparable sales are popping up. Everyone else wants to fly in and capitalize and drive the land values up. I have another friend who does magnificent design. I ask myself, or I observe, some visionary developers win on design.

At some of the highest levels, they’re taking risks with money that’s not theirs, family office money, and they’re building these trophy projects, and they work out. I don’t know how long they work out because we’re seeing some of these trophy-project-type things cycle back through the system and foreclosure as we speak, some of the multifamily stuff across the country. His strategy was like it’s a neighborhood where there are million-dollar homes, stuff is probably selling for $600,000, $700,000, or $800,000, and maybe the new construction is selling for above a million. Maybe he’s putting a second story on something and using the existing foundation.

Sometimes he’s building completely brand new. It’s an amazing product. It seems like there’s no price too high for someone’s willingness to pay. There’s some limit on it, but there’s not a lot they can compare it to because it’s such a magnificent product. Whereabouts would you fall on that spectrum of design versus functionality? The four units I was talking about are probably, that’s builder’s grade, the cheapest thing we can do. You have bedrooms, bathrooms, closets, a kitchen, not much else. On the high end of the design spectrum, you have floor-to-ceiling glass windows and a magnificent and stunning property when you pull up. Whereabouts would you fall on that scale, and where would you maybe advise somebody to get in the game?

There’s always the opportunity, and it depends on the neighborhood. If it’s a nice neighborhood, maybe the opportunity is to knock down an old house and build a nice house in its place. There’s certainly a market and profit to be made there. Probably most of your readers are at the smaller investor level. What’s great again about getting into this is, as I said, we knock down the old house and let’s say build a fourplex. The exit strategies could be, I build it, I refinance it, I rent it up, I refinance it, or I keep it in my own portfolio.

Option two is, I sell the fourplex to another investor that wants multifamily. As we said, there’s a ton of competition for everybody looking for multifamily. One of our real estate investing brethren is going to buy that as an investment. We could also turn that into four condos and sell them as four individual condos in certain places where you’ve got basements, so maybe it’s a two-story duplex up and then two down. That’s your fourplex.

You can sell one half to one young couple that lives there and then has a mortgage helper in the basement, and then there are other exit strategies. As we said, if the cost got too high during the builds, you can sell it out at the various stages up till there. It’s those multiple strategies that I like, for the smaller regular-size investor to hedge their bets as they’re going in. You can run the numbers, sold as a building, sold as condos, kept in my own portfolio, what do these numbers look like?

You can make those decisions before you even go on the ground. The other thing, too, in a lot of places now, because there’s this housing crisis, all three levels of government, there’s incentives for a lot of time to incentivize a multifamily build. Anything over typically five units, government rebates, incentives, better tax or better mortgage rates, and higher loan-to-cost on the build, you’re able to get some of these opportunities as well that aren’t available in a typical flip or rental world.

Have you ever done any projects where you’ve got a government subsidy or some kind of alternative financing? It sounds like a lot of paperwork and a lot of, I don’t know how to get that.

Typically, what happens is it’s on the final build. Let’s say land development, it’s not necessarily there. You have to physically build the final one, but you can get up to a 95% loan instead of a 75% loan. It’s 95% loan to cost. Those are available. Typically, you can port those into a 40 or 50-year mortgage. I understand most of your audience is flippers, but if you’re looking for rentals, and you want to be a landlord to build this, there are a ton of benefits to having a new rental portfolio, a better class of tenants, and they qualify easier.

They’re willing to pay more. The building’s brand new. Your maintenance budget is next to nothing because of all of that. Your management is much less and a lot easier to manage. They’re easier to insure. A lot of these 1910 things, you can’t insure them anymore, asbestos and the aluminum wiring and all this stuff. They’re easier to mortgage too because we’ve got to scrape to get a fifteen-year lifespan expectancy out of this building.

A new build is going to last a long time. So much easier to insure, much easier to lend. Throw that all in. It’s easier for governments to get behind that as well. It could be a local, a municipal thing, here in this town, we’re looking for housing for lower-income or seniors. It could be a statewide thing. It could be a federal thing. It could be tax rebates, incentives, cheaper loans, these kinds of things that incentivize us because we’re trying to get rid of the housing crisis here. It’s a big deal. Lots of things are available for us.

You’re right about that. The products I own are also old, all brick. I think I have one that was built late 1800s that might be stick-built. I’m replacing wooden footers under this part of the foundation and probably wish I didn’t buy it. I think I’m okay still in the profit zone, and maybe I should sell it. The allure of owning a product that would even have been built in 2010-plus, as an investor, I wish that all of my products in the portfolio were that newer product, but I could never get the numbers to work out with the low cap rates that they trade for.

If I’m looking at a 2, 3, or 4-unit property, I’m fighting with the house hacker. That is a red-hot market. It’s a 2, 3, 4-unit building house hacker, meaning someone’s going to live in one unit and rent the others out to offset the mortgage. They can pay more than the investor can pay. It’s a good thing. A lot of them are getting FHA financing and starting off their careers with the right move.

Balancing Design Vs. Functionality In Development

I wish I would have done that myself. If I’m going to build a four-unit, and maybe it’s not me who does have contractors, maybe it’s somebody who you alluded to a little earlier in the show, Darcy, where they tried a few flips, maybe they broke even, lost a little money on it. It’s not working out how they want to.

How would you advise an investor at that experience level? Let’s say they’re going to build that three-unit triplex somewhere. How would you advise them when we get to the construction phase to bring that out of the ground? Are we talking about finding the right GC? Are we having them go down and look at the permits pulled? What’s going to be the 1, 2, 3 step action item for them to find the right construction partner to build that out?

I was the onsite supervisor guy. I was the project manager of my own property all the time, and I would not recommend that. Let’s back up a step, and think of ourselves as investors. We got to learn some new stuff. What is the highest and best use? What is zoning? What is density? As I said, we’ve been taught the values in the building. The value is more and more in the land. How do we increase the value of land? There’s some new stuff that we need to learn.

Geography is important because there are certain places, certain municipalities, where they’ll approve your application for a zoning change in two months, in other places takes two years. Where we invest is important. Specifically, to that fourplex, what’s different about the pricing there, if you think about it, again, we’re used to one unit for one unit. We’re not adding, that’s new to us here. The cost of the lot, the old house, or the vacant lot doesn’t change whether you’re building one new unit or ten. You can split that cost amongst the new units.

In general, ten units is better than eight, which is better than six, which is better than four. A way to increase land is to have more units. The other thing too is certain things like your architectural costs. For your architect to sit there and design a duplex, he’s not going to charge you twice as much to design the fourplex. Some of the costs aren’t split. Some of the costs change, but not on a prorated basis based on the number of units.

So far, part of my action item is I probably should consider building 6, 8, or 10 at a time versus 2, 3, or 4 because I’m getting a little more cost benefit. Am I hearing that right?

Yes. How do you do that? We have to understand zoning and density and how that works. I now find this 1910 teardown, it’s on a 50-foot lot, and the zoning is a single-family home. What is realistic for how many maximum units I can get on there? Let’s say the house next door to me is a 1910 teardown too, going for the vacant lot, going for $1,000. Before I ignored that because I didn’t know what to do with it as a normal flipper, if now I got 2, now I got 100 feet of frontage, how many units can I put on that? Your costs go down based on that.

Builders are more apt to be interested in you because now you’ve got more land downtown. In most cities, it’s hard to find large continuous areas of land, not outside of town. You’re coming in. If you can learn about land assembly and we can figure out if I put 2 together, now I got 50 feet of frontage, maybe the play again in the entitlement world is to split that up into four 25-foot lots, sell that, three 33s, or maybe you put pipe in the ground and those, and now you sell serviced lots. Maybe you go through and you amalgamate those 2 lots and you put a little mini apartment building together, or you do some townhouses. We have lots of options. I love options.

I love more tools in the toolbox instead of flips, rentals, and Airbnb rentals, and that’s all wholesaling. Let’s learn different ways to separate us from the competition so that we’re all not just fighting for the same thing and dealing with it the same way. In general, at some point, we’re going to be the investor, we’re going to find the deals, put the deals together, but then you hand it off to your team, your architect, your civil engineer, planner, they’re going to do the back and forth with the city. If you stay there with the paperwork and the entitlement world, perfect. If you’re going to do work on-site, hire builders, project managers, general contractors, whatever works in whatever situation. I think you’ve got more value as an investor trying to find the next one.

It sounds like you might be advising me not to buy the building and get the project to a point, and then skip the construction risk. Maybe it sounds like your heart might be more in the dirt aspect.

It depends. I think of it this way, if I’m doing paperwork only, I’ve got like three tradespeople. I’ve got a lawyer, I’ve got a civil engineer, and I have a surveyor. If I’m putting a pipe in the ground, maybe 12 or 15, it takes 50 trades, material suppliers, and people that are involved to build a house. It’s not that far off to do flips and the BRRRR strategy. There’s a lot of churn. When you’re doing flips, one of the bad things about flips, as I found out, was that all these different tradespeople are making money, and hopefully, there’s some at the end for you too. Lots of churn.

The more you do, the more risk there is in terms of time, but also more and more people sticking their hand out. That’s why I say if you’re going to build, perfect, nothing wrong with that, but try not to do the whole thing. Buy the land that’s already serviced, and properly permitted. You can start building, I can knock down that old house. If the old house is empty, I can knock it down tomorrow and go ahead. In and out quickly. That’s some of the things that 23 years have taught me.

Importance Of Demographics And Location In Real Estate Investment

My final question before we get to our wrap-up here, number one, what is the market that you invest in now and why? Number two, what would be your next second and third choice markets? Maybe you’re already there. Maybe those would be ones you would consider.

Because we’re adding units, as I said, in the past flips, rentals, it’s one for one. In this world, we’re adding units. We’ve got to make sure we’re where people want to be. Demographics play a larger role. I pay a lot of attention to domestic migration, not necessarily foreign immigration, but how people are moving around the states, and they’re moving from the Californias, the New Yorks, the Chicagos, and Bostons down towards Texas, the Floridas, the Carolinas, the Nevadas kind of thing.

Make sure you’re in the right area statewide, lower taxes, no state tax in those places, a real quick turnaround time usually for permits, and a lower cost to build in a lot of these states because of the cheaper labor down South. That’s the thing. I like Texas, for example. One of the things I don’t like is the up and down and up and down. I like consistency. The population in Texas is supposed to double by 2050. I like that. That’s as a developer. You pick Texas, there are now 3 or 4 major cities. I like Houston for a bunch of reasons.

I know it best, for one thing. There are pros and cons to every strategy. The downside of maybe development is you’ve got to do some upfront thinking and planning first because we’re adding units. We’ve got to make sure that people are going to buy or rent our units when we’re done. We can’t assume that in my town it’s a great place to be, because maybe my town sucks. Maybe my town’s anti-development, they don’t want me there. The permits and fees are huge. It’s going to take me two years to get stuff. We’ve got to be able to do that upfront homework first to make sure we’re in a great place.

 

Development requires upfront thinking and planning. You can’t just assume people will want to buy or rent your units.

 

Makes sense. Is Houston your home market? Is that where you live?

No. In the late ’90s, I was a computer guy, and I lived and worked in South America, Venezuela, Mexico, Colombia, and Brazil. My client was in Houston. I made a bazillion trips back and forth to Houston. I’ve seen the growth. When I was there in 2001, let’s say for IT, they had the one-ring road, and they were three-quarters done the second. I come back in 2022, I’ve been there about three or four times in the last two years, they’ve done the second ring road, and they’re now 90% done with the third. Consistency of growth is what I’m looking for as a developer because I’m adding units.

Recommended Books And Podcasts For Investors

Makes sense. Last couple of questions here as we wrap up. Darcy, do you have any books or shows or other YouTube videos, or anything inspirational that you might share with the readers?

I do a YouTube video every week. It’s my name, Darcy Marler Channel, and then I’ve written four books. I got my first book given to me in real estate when I was fifteen, so over 40 years ago. I’ve watched Real Estate Education. Again, flips, rentals first. I wanted to be different. Nobody’s talking about this other stuff. As you can tell, I’m passionate about this development stuff. Every week, I put out a video related to this world, and then I’ve written four books on real estate that are different. I love this. I’m passionate about it.

Wisdom For Aspiring Real Estate Developers

You go back to 2001, you’re in IT, and knowing everything now, what would be the crown jewel of wisdom you would share with yourself back in 2001 when you were visiting Houston and it was not quite as grown up as it is now?

Match your personality to your strategy. I think, like I said, we get into real estate investing, and all there is, am I going to be a landlord? Am I going to be a flipper? Wholesale, Airbnb, whatever. Make sure that matches your personality. Maybe you don’t like tenants. Maybe you don’t like dealing with nasty flips. Part of the bad side about flips is you’re always on the conveyor belt, trying to find the next deal. You’re always on the hunt because you’ve got to keep your trades busy. Does that match your personality? Are you staying up late at night, worrying about it not getting done quickly enough?

 

A disadvantage of flipping is being constantly on the conveyor belt, searching for the next deal. You’re always hunting to keep your trades busy.

 

We’re told that property management’s the answer, it’s hands-off. No, it’s not. Rentals aren’t. Learn both the pros and the cons of all the strategies first, and then pick one that aligns better with your own, what you like, what you don’t like, and your strengths and weaknesses. Try to get an operational partner. I was the lone wolf guy forever. I see a real benefit to having someone strong where you’re weak and vice versa. Anyway, some general advice there.

Do you have some other contact information or websites you’d like to share with the readers?

I’ve got a Linktree. A Linktree is an app that lets you put everything, the YouTube or Amazon and all that stuff. It’s Linktr.ee/DarcyMarler. You can find me there and go down the rabbit hole about development and new construction, land assembly, upzoning, entitlement, and all that kind of stuff.

The Kindest Gesture Ever Received

My final question is what is the kindest thing anyone has ever done for you?

I was sitting there in Venezuela one time, and I had to pay an exit tax to get out of the airport. It was a long line. I’d already gone to the front. I didn’t have the right number of pesos or deliveries. The guy behind me paid on my behalf. I paid it forward, and I paid it forward a little bit later, but that was cool. I liked that.

What was the thought you had in your mind when you realized at the front of the line that you didn’t have the right change or whatever it was? What was the thought that crossed your mind?

I’d miscalculated. I had some, but not enough. I was like, “Christ, now I’m going to have to go to the ATM and get something. I’m going to have to go to the back of the line. I’m going to miss my flight anyway.” The guy behind me is an angel. Saved my life.

I like it. I got a couple of pages of notes. I had a blast recording the episode, and I appreciate you coming to the show.

I had a blast too. I love this stuff. Nobody else has talked to me about development. Let’s change that and let’s bring some new stuff to the world.

—

The REI Diamond Show is sponsored by Diamond Equity Investments, a private equity firm focused on buying and selling residential and commercial property throughout the United States. If you are an accredited investor seeking double-digit returns, you can sign up to review Diamond Equity’s passive investment opportunities at www.FundRehabDeals.com. If you’re an investor who is seeking deals that you can buy, fix, and flip, please go to www.DealsWithROI.com.

 

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Tom Dunkel: Strategies to Build Wealth Through Alternative Assets

 

Tom Dunkel: Strategies to Build Wealth Through Alternative Assets

 

Guest:  Tom Dunkel is an experienced entrepreneur and corporate finance leader who specializes in value-add self-storage investments, distressed mortgage note investing/dealing, private lending, and private investing in multi-family and self-storage properties.

 

Big Idea: Tom Dunkel is an experienced alternative asset investor who has completed over $40MM of transactions in fragmented, dislocated markets such as distressed debt and self-storage. He has over 25 years of real estate and investing experience, including $1.2B of middle-market M&A and financing transaction experience. Tom is passionate about helping alternative investors build wealth while improving communities through disciplined real estate investment initiatives.

 

 

    

Dan Breslin: Tom is an experienced entrepreneur and corporate finance leader who specializes in value add self-storage investments, distressed mortgage note investing in dealing private lending, and private investing in multi-family and self-storage properties. Today, Tom and I are going to discuss this $40 million plus of transactions in fragmented dislocated markets, such as distressed debt and self-storage. Tom also has over 25 years of real estate experience and investing experience, including $1.2 billion of middle market M&A and financing transaction experience.

We’re going to discuss the internetization. Yes, I made that word up. The internetization of real estate as a trend, especially pertaining to the self-storage real estate industry. We’re also going to touch on market selection and of course generating high passive returns. Let’s begin. Hi, welcome to the REI Diamond Show Tom, how you doing today?

Tom: Doing great, Dan. It’s great to be with you. It’s been a long time.

Dan: Yeah, for sure, so for listeners, Tom and I go back to the early days, probably 2006, when we were both dipping our foot into the Philadelphia Regional Real Estate Networking meetings.

Tom: That’s right.

Dan: What a path since then, right Tom?

Tom: I know, man. It’s been quite a wild ride, but I wouldn’t change it for the world. I know about you. It’s been a lot of fun.

 

This Episode of The REI Diamonds Show is Sponsored by the Deal Machine. This Software Enables Real Estate Investors to Develop a Reliable & Low Cost Source of Off Market Deals. For a Limited Time, You Get Free Access at http://REIDealMachine.com/

 

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Real Estate Development with Karl Krauskopf

 

Real Estate Development with Karl Krauskopf

 

Guest: Karl Krauskopf is a multi family real estate investor and developer based in Seattle, Washington. He is the managing partner of Auroras Investment Group.

Big Idea: Real Estate development, specifically the entitlement process can produce large gains without the risk of construction. Flipping houses is a great place to start in real estate, but can be challenging to scale. This is why many real estate developers progress to development of land and larger projects after finding success in single family homes.

 

 

    

 

Dan Breslin: Welcome to the REI Diamond Show. I’m your host, Dan Breslin, and this is episode 209 on real estate development with Karl Krauskopf. Karl is a multi-family real estate investor and developer based in Seattle, Washington. He is the managing partner of Aurora’s Investment Group. Real estate development, specifically the entitlement process, can produce large gains without the risk of construction. Flipping houses is a great place to start in real estate, but it can be challenging to scale, which is why many real estate developers progress to the development of land and larger projects after finding success in single family homes. On this episode, Karl and I discussed this as his recent or past transition to larger deals and the same transition that I am currently going through myself.

Karl: Sure. Happily. So, how I got into real estate was probably a little bit different from most folks. I got into real estate. That was 10 years back, I was a veteran and working in the healthcare industry. I was a director of corporate strategy and business development. So, that is where my passion lies, which is really around growth partnerships. How do we basically, how do we grow an entity of business?

And what ended up coming to fruition and what bore the real estate endeavour was my wife and I going into a conversation about wanting to start a family, wanting to have a kid, and what better way to start a side business, which would become my future business, is having a kid. So, spent about six months during my wife’s being pregnant, self-educating myself, really learning how to maximise my income, as well as getting into diversifying my income by adding additional streams of revenue. Decided it was time to take the first leap, which was buying a duplex, a remote duplex across the state from me, and with full intentions of rehabbing, refinancing it, and repeating it. Come to find out that I was not the right asset for that. And now I just spent about $75,000, the majority of my at that time, disposable income in putting it, parking it into a duplex that had no direct path for the refinance. So, I started sweating. I was nervous, didn’t know what to do. We were about to have a baby. So I figured what’s the best next step? Well, the best next step, apparently at the time was to flip a massive home. My first flip ever, it was a hoarder home too. Fantastic idea, right? No, it was awesome. I believe it was four dumpsters’ worth, 440-yard dumpsters’ worth, of junk that we took out of this home. All this direct to say back is, I’m working a 40, 50 hour a week job as well as we just had our newborn, and apparently I’m a glutton for punishment.

 

This Episode of The REI Diamonds Show is Sponsored by the Deal Machine. This Software Enables Real Estate Investors to Develop a Reliable & Low Cost Source of Off Market Deals. For a Limited Time, You Get Free Access at http://REIDealMachine.com/

 

This Episode is Also Sponsored by the Lending Home. Lending Home Offers Reliable & Low Cost Fix & Flip Loans with Interest Rates as Low as 9.25%.  Buy & Hold Loans Offered Even Lower.  Get a FREE IPad when you Close Your First Deal by Registering Now at  http://REILineOfCredit.com

 

Resources mentioned in this episode:

www.AurorasInvestmentGroup.com/

 

For Access to Real Estate Deals You Can Buy & Sell for Profit:

https://AccessOffMarketDeals.com/podcast/

 

Karl & I Discuss Real Estate Development:

  • Entitlement Process-Real Estate Development

  • Finding Mentors doing Larger Deals

  • “Covered Land” play-teardown deals

  • The Microsoft Real Estate Market-Seattle, Washington

    

Relevant Episodes: (There are 209 Content Packed Interviews in Total)

 

The transcript of this episode can be found here.
Transcripts of all episodes can be found here.

Franchise Investments with Kim Daly

franchise_investment

 

Franchise Investments with Kim Daly

 

Guest: Kim Daly is an independent franchise consultant with FranChoice. She is also the co-author of Franchising Freedom & Mission Matters Volume 5, Top Tips to Success.

Big Idea: Kim Daly is an expert in franchise investment. Kim Daly has spent the last 20 years helping people achieve financial freedom by enabling them to find the perfect franchise opportunities. Her skill for matching a client’s background, interests, skills, finances and life goals to the ideal opportunity has made her one of the top franchise consultants in the country. On today’s episode we discuss the way some real estate investors transition from house flipping to owning a portfolio of franchise businesses-which might be a great solution in today’s low inventory real estate market. We also discuss the process of getting started and then building to scale, where you reap the real rewards of the franchise business.

 

 

    

 

Dan: Love it. I found a quote online. I think this would be a good place to start. I don’t know if you wrote this or someone wrote it about you, but it said “She worked as a personal trainer and had medical school dreams before entrepreneurship and franchising found her.” Tell me about that.

Kim: That is all true. In franchising, Dan. The question that’s commonly asked is, how did franchising find you? Because nobody really wakes up and says, “Oh yeah, I think I’m going to go get into franchising.” Right? It’s more like you’re looking for some outcome in your life and you stumble upon the advantages of franchising and go, “Ooh, this is a way to get where I want to go.” That’s pretty much what happened to me. There were two things I wanted to do when I was young. One was to become a motivational speaker, but like, how does one do that? You pursue the more logical thing. I was a straight-A student. I’m going to go to medical school and help people. Like I just always desired to be a person of influence, to do something that genuinely improves the lives of other people.

After undergrad, I answered a classified ad in the newspaper that was for a franchise consulting company, not the one I’m part of today. But literally, that classified ad changed my life when I found what franchising as an industry is and does for people, which is, it’s an industry of people helping people. It’s an industry where every single day people are realizing their dreams, living their dreams, just inspiring, and helping each other. I knew that I had found my homeland. I did make a temporary deviation into entrepreneurship because like every good business owner, I think we all think that we can go out there and do it on our own. I tried to do that for five years and figured out how hard it is and mainly how lonely it is and the things that I now help other people realize and learn about in franchising like that.

In a franchise, you’re in business for yourself, but not by yourself. You have the comradery of, not just a corporate office, but all of the other franchise owners that are out there that are part of this brand. Together you are building something. It’s like people who go off to war together often talk about the part they miss about being in the military is the comradery, right? People that go through an intense situation together in anything in life, they’ll reflect back fondly on the people that they went through that experience. Like if you’re bringing a company up to an IPO, right? I think the same thing is true in franchising. We’re all trying to achieve our own individual dreams, but collectively we’re coming together to build a brand altogether and so it has that same sense of camaraderie. Once I came back to entrepreneurship at the very old age of 29, I’m sorry, but once I came back to franchising at 29, I never left. I’ve spent 20 years now as a franchise consultant.

 

This Episode of The REI Diamonds Show is Sponsored by the Deal Machine. This Software Enables Real Estate Investors to Develop a Reliable & Low Cost Source of Off Market Deals. For a Limited Time, You Get Free Access at http://REIDealMachine.com/

 

This Episode is Also Sponsored by the Lending Home. Lending Home Offers Reliable & Low Cost Fix & Flip Loans with Interest Rates as Low as 9.25%.  Buy & Hold Loans Offered Even Lower.  Get a FREE IPad when you Close Your First Deal by Registering Now at  http://REILineOfCredit.com

 

Resources mentioned in this episode:

How to Invest in a Franchise Business with Jon Ostenson

 

For Access to Real Estate Deals You Can Buy & Sell for Profit:

https://AccessOffMarketDeals.com/podcast/

 

Kim & I Discuss Franchise Investing:

  • Is Franchising Safe in an Uncertain Economy?

  • Why does Franchising Grow in Challenging Times?

  • How to Find the RIGHT Franchise for You

  • Best Franchise Opportunities in the Market Today

    

Relevant Episodes: (There are 208 Content Packed Interviews in Total)

 

The transcript of this episode can be found here.
Transcripts of all episodes can be found here.

Nashville Tennessee Real Estate Development with HBG Capital Founder Brandon Cobb

 

Nashville Tennessee Real Estate Development with HBG Capital Founder Brandon Cobb

 

Guest: Nashville Tennessee Real Estate Investor Brandon Cobb is the founder of HBG Capital.  He is also a licensed and bonded General Contractor in TN managing more than $1O Million of new development annually.

Big Idea: Investing in Nashville Tennessee real estate is like most of the U.S. at the time of this recording:  Low inventory combined with an insanely inflationary environment.  There is also a housing shortage which has created profitable conditions for residential real estate developers who are capable of building with scarce & expensive building materials and labor.  Not an easy task.  On today’s episode Brandon & I discuss this situation and the system he’s developed to build profitably.  Shall we begin?

 

 

    

 

Daniel Breslin: Today’s guest, Nashville Tennessee Real Estate Investor, Brandon Cobb, is the founder of HBG Capital. He’s also a licensed and bonded general contractor in Tennessee, managing more than $10 million of new development each year. Investing in Nashville Tennessee Real Estate is like most of the US at the time of this recording, super low inventory combined with insanely inflationary environment. There’s also a housing shortage, which has created profitable conditions for residential real estate developers who are capable of building with scarce and expensive building materials and labor, not an easy task.

In today’s episode, Brandon and I discussed this situation and the system he’s developed to actually build profitably.

Brandon: Yeah, so I could probably speak to Nashville more than I can in the other markets. I know Memphis is a very heavy rental market. Over there, you can still scoop up properties for pretty cheap, but you got to be really careful because your tenant base is if you don’t have a good system to processes for vetting tenants, you will get hosed on that. Knoxville, you’re probably referring to Gatlinburg and Pigeon Forge, tons of cabins going up Airbnb, right? COVID kind of blew that area up. Everybody wants to go on a vacation, but they’re scared of COVID or there’s a lockdown. So those areas where you can kind of get the whole glamping experience or cabin experience blew up, that area’s phenomenal. The Smoky Mountains are obviously one of the best places to go and hike, especially during the fall when the leaves change. A little tip for everybody, right? If you have not been in the Smoky during the fall, it’s great.

Nashville’s probably the only city that has gosh, 30, 40 cranes downtown. So you can just look if you just had a picture of three cities, you be able to identify Nashville from those three because it’s got a ton of cranes. Nashville’s just exponential growth. I think all the national builders are now officially here. They set up shop in the building. That mean, you’ve got these ginormous developments that are being announced every single year. They just announced one. It was like a $2 billion development over in the Bordeaux area, which is your first development where you’re going to have heavy commercial skyscrapers that are kind of outside the downtown core. If you look at Nashville, you get the Cumberland River that kind of rolls through it, and that’s sort of your barrier to all these heavy, deep skyline commercial buildings. Well, now, it’s starting to get outside of that and it’s across the river now. So it’s very interesting, and you’re going to start to see that area really kind of explode. So Nashville’s just a hot, hot, hot housing market.

This Episode of The REI Diamonds Show is Sponsored by the Deal Machine. This Software Enables Real Estate Investors to Develop a Reliable & Low Cost Source of Off Market Deals. For a Limited Time, You Get Free Access at http://REIDealMachine.com/

 

This Episode is Also Sponsored by the Lending Home. Lending Home Offers Reliable & Low Cost Fix & Flip Loans with Interest Rates as Low as 6.99%.  Buy & Hold Loans Offered Even Lower.  Get a FREE IPad when you Close Your First Deal by Registering Now at  http://REILineOfCredit.com

 

Resources mentioned in this episode:

www.HBGCapital.net

 

For Access to Real Estate Deals You Can Buy & Sell for Profit:

https://AccessOffMarketDeals.com/podcast/

 

Brandon Cobb & I Discuss Investing in Nashville Tennessee Real Estate:

  • Nashville Tennessee Real Estate Market

  • Developing Residential Real Estate

  • Lessons Learned from Losing $40,000

  • Getting Past a Bad Deal

    

Relevant Episodes: (There are 207 Content Packed Interviews in Total)

 

The transcript of this episode can be found here.
Transcripts of all episodes can be found here.

How to Become a Real Estate Developer with Adam Gilbert

 

Episode: How to Become a Real Estate Developer with Adam Gilbert

 

Guest: Adam Gilbert is the President of The Firm Commercial where he leads a team of agents specializing in commercial real estate sales, leasing, land acquisition, development, government relations, and value added entitlement development deals.

 

Big Idea: Any Real Estate Agent, Developer, or Investor Generates Consistent Income by Positioning themselves to Receive a Continuous Flow of Deals Crossing their Path.  Adam has a unique way of doing this in the realm of commercial real estate, as discussed during this episode.

 

 

    

Dan Breslin: Some of my best partners have come through listening this podcast. Maybe you’re the next. Today’s guest is Adam Gilbert, the president of The Firm Commercial, where he leads a team of agents specializing in commercial real estate sales, leasing, land acquisition, development, government relations, and value-added land entitlement development deals. Any real estate agent developer or investor will generate a consistent income through positioning themselves to receive a continuous flow of deals that are coming across their desk. Adam has a unique way of doing this in the realm of commercial real estate as discussed during this episode. And we also dive deep on how to become a real estate developer covering details of a few recent development deals and we also touch on the Palm Springs, California Real Estate market.

So, I was doing some research for our show here and I found that you’ve recently exited your vacation rental business. So, I’d like to begin right at that point if we could, and maybe you could touch on how you built the business, how it operated at scale, and then what was the ultimate reasoning that led you to selling and exiting.

Adam: Sure. So, quick background, I’m born and raised here in Palm Springs, and I left for school. I came back in about 2011, which was an interesting time in the market for a variety of reasons. But that summer, I had stayed in this new thing called an Airbnb in 2011, Washington, DC. We had spent the summer in New York and my wife was like, “We’re going to spend the night in someone’s room at their house? This is crazy.” I’m like, “We did it. This is the future, honey. This is going to be amazing.” And so, when I moved back to Palm Springs, there we have like a long history of vacation, rental properties for 50-60 years, but not on the platform of Airbnb. So, I was one of the ones who got just a couple of condos on the platform and they just started crushing. Absolutely amazing because this whole new marketplace of people were looking for properties on Airbnb. So, it kind of just grew organically. I was like, “Okay. Well, I’ve got a housekeeping service, I’ve got a handyman, I know how to do these reservations, and we just built this business.” By the time 2018 came around, I had 35 full-time properties. We had like, 50 around the time Coachella came. It was a great business. It’s a very labor-intensive business and it takes a lot of time, and it’s holidays and all that kind of stuff. So, at that point in my real estate investing career, it was just a little bit too much. And so, I made a deal with TurnKey, who’s a venture-backed vacation rental company out of Austin, Texas and they were acquiring small companies like mine at the time. I made an exit and focus my attention on other ventures.

Dan: Okay, so was it more of a freedom thing? Or was there some timing and pricing that also made it worthwhile?

Adam: There were a few factors in there. Just the perils of running a business, partners, all that kind of stuff. I think it was more timing. I had to decide. It was that point when I had 35 properties, I would have needed to invest in the business, in terms of employees. I did some calculations, I wasn’t going to make any money again until I got 75 properties, and I’m like, “Okay. Is this what I want to spend my time doing?” So, it’s kind of an 80/20 principle thing of “Where am I going to focus my time to have the best ROI?”

Dan: Got you. So, what’s been the focus of your career? Since 2018, you exited, you jettisoned the responsibilities, which was kind of what I was expecting an answer there. So, what’s been the focus since then?

Adam: Yeah. So, mostly since then, it’s been building of my real estate brokerage, both commercial and residential, here. It’s mostly commercial, but on the residential side, I do specialize in short-term vacation rentals, which the Palm Springs Market is well known for and has been absolutely blasting since COVID. Palm Springs has been a great market since that’s happened and then, I’m also working on my own deals and I have a little niche in value-add entitlement deals and zone changes. And so, I spent a lot of my time kind of doing that and entitlement work.

 

Episode Sponsored by the Deal Machine:

Driving for Dollars Software to Build a Team of Drivers, Manage Routes, & Even Automate Marketing.  Free Access at  http://REIDealMachine.com/

Resources mentioned in this episode:

www.TheFirmCommercial.com

 

 

Adam & I Discuss Commercial Real Estate Syndication:

  • Government Relations During Land Development

  • Identifying Value in Underzoned Property

  • Palm Springs California Real Estate Market

  • The Group Any Commercial Real Estate Broker is Wise to Join

    

Relevant Episodes: (There are 191 Content Packed Interviews in Total)

 

The transcript of this episode can be found here.
Transcripts of all episodes can be found here.