20: John Usdan - The Pioneer

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now, here is your host, James Nelson.

Welcome to show number 20. This is James Nelson, your host of Real Estate Investment Live from New York. And wow, what an interview last week with ian Ross. In three short years, he racked up 70 properties. And then afterwards we had a City Spotlight with Michael Fay from our Miami office. If you have not listened to that show, please go back and listen. And while you're at it, why not start from the beginning? If you haven't heard all of our shows, we are really, really picking up steam here. We had over 23,000 downloads. Thank you, thank you, thank you to everyone who's been listening, sharing with your friends, posting comments, subscribing, rating the show on itunes, Spotify, wherever you download your podcast. Thank you so much. So for today's show, we've got a really exciting interview with John Houston from Midwood, who also has great national experience. So you all are learning about real estate, not just here live from New York, but all over the country. And then afterwards, we're going to have our panel back with us, Mike Santora from SB plus C, Kirsten Beck from Avison Young, and Gene Kaufman, the architect. And so have a really exciting discussion with them. Before we get to that, it's time for our week in Review, powered by the Daily Beat. And the story driving the day this past week was that Oxford Property Group and the Canadian Pension Plan Plan have secured a $973 million construction loan for the redevelopment of St. John's Terminal at 550 Washington St. Wells Fargo has been selected to lead the financing with a number of other banks coming on board as syndicate partners. The loan works out to roughly 55% loan to cost. Google will be the sole tenant in the 1.3 million square foot office building. Plans call for adding nine floors on top of the three stories of the former rail warehouse with massive floor plates. Google will make the mega project the centerpiece of its new 1.7 million square foot Hudson Square Campus and expects to move into the building in 2022. The company will be moving into its space at Jack Resnick & Sons, 35015 Hudson street and Trinity Real Estate's 345 Hudson Street. According to the Commercial observer article. Elsewhere, stocks fell more than 4% last week, extending the market's correction. Since the financial crisis, all three of the US Major indexes slipped into correction territory with a drop of at least 10%. But meanwhile, investors are benefiting from the 10 year treasury, which I checked yesterday was at 92 basis points. Unbelievable. In real estate, Meet Tech CoStar Group beat its earnings as it reported 315 million in net income in 2019. The real estate data firm generated $1.4 billion in revenue in 2019, up from $1.2 billion in 2018. The company's stock prices increased around 8% this year, handily outperforming the S&P's worst decline. The data giant now has a market cap of $24.6 billion. Lastly, Rockwood Capital has put the 44 story two grand Central Tower, aka 140 East 45th street on the market with a price tag of around $580 million. According to the Real Deal, the 650,000 square foot office tower is 92% occupied.

Welcome back everyone to Real Estate Investing. Live from New York, this is your host, James Nelson. It is now time for our Investor Spotlight. Thrilled to have with us today John Houston, who is CEO of Midwest Investor, Developer and Manager. Their mission is to restore and revitalize the fabric of our urban centers and to improve the way people live, work and play through industry leading design, planning and execution. They have been in business. Forget this 34,610 days. I didn't have my calculator with me, but John told me that they are coming up on 100 years in business, which is truly remarkable. We're going to talk about their extensive portfolio. But under John's leadership since 1981, he has grown the company that his grandfather started into an integrated investment, development and management firm with over 130 retail, residential and office properties in nine states and D.C. beyond Midwood, John's philanthropic interests are focused in education and the arts. So, John, thank you so much for joining us today.

My pleasure to be here.

Good. So clearly you grew up in a real estate family. So your grandfather started this business. Now where was this? Where did he start the business? Where did you grow up?

So I grew up in Manhattan. My grandfather was an immigrant from Russia who came in 1905 and sort of stumbled into the business in 1925 selling homes in Midwood, Brooklyn. And his decision to stay in the business was predicated on on his success in selling three homes in one weekend and making $600, which he said was more money than he had made in the previous six Months.

Wow.

So he started as a builder or how did he.

As a residential broker.

A residential broker.

As a residential broker, yeah.

So he sold three homes in a weekend, and then he parlays as he starts specking homes on.

No, no. So I asked him, by the way, how, you know, whether he had a strategy or, you know, how he was able to sell three homes in one weekend with no experience in the business. And he said that he felt that if he told the prospective buyers about all the things that were wrong with the homes first, that they would view him as a trustworthy source and rather than mistrust him and, you know, his conclusion was that it was a pretty good business. He took the brokerage business. He bought the brokerage business from the guy who he went to work for within a year and a half. And prior to the Depression, he expanded his brokerage business and he went into management. And in 1927, he answered an ad that Joe Lubin had put in the paper about a mortgage that was for sale. He met Joe Lubin and Joe Eisner, who had an accounting firm called Eisner and Lubin. The Eisner accounting firm today is a major accounting firm.

Sure.

And they were his partners. And they recognized that when the Depression rolled around, the financial markets had frozen, nobody could collect rents, unemployment was 35%, and that there was an opportunity to buy the debt that encumbered many, many apartment buildings in Brooklyn and Queens, so that by the end of the depression, they controlled 10,000 apartments.

Wow.

And my grandfather said that during the Depression, when they first started acquiring debt on these buildings, you could acquire a hundred unit apartment house for $100 because the debt had been sourced through private syndications. And those private investors had no way of selling their position and, you know, had to take over the buildings which were losing money.

Yeah, I was going to ask. I mean, that must have. I'm sure he walked into a lot of situations that were a mess, were.

An absolute mess, and they decided to liquidate the portfolio. After the war, Joe Lubin became a major investor in New York, owned a lot of property on 42nd street, owned some major office buildings. But Joe Lubin, like my grandfather, had. I think he had two daughters. My grandfather, my mom was an only child. And my grandfather made the decision in 1945 to create a foundation and to start liquidating his real estate. And he went into the finance business. And so by the time he passed away in 1981, there were about three dozen properties. Some was vacant land, and the balance, aside from one Property were all net leases or taxpayers that required very little or no management at all. And his strategy was to simplify the business. He always said to me, I don't want my responsibilities to become your burden. It's something that I think about often. And I went to work for him when I was about 10 years old, but I didn't know I was working for him. I got paid, but it was always a lot of fun to come up with to his office.

Take me Back to. You're 10 years old, you're working in the office. What are you doing? Any childhood memories from working?

Very, very clear, other than being taken to, oh, I forget the name of. There was this great store that had a counter and a fountain. It was like Schrafts. I'll think of the name.

But.

We were chubby kids, and my grandfather would always order us a banana split and we would. With seven scoops of ice cream. So he contributed to our weight issues growing up.

The original serendipities.

Right, right. But when I was in the office, the first thing he had me do was take the rent checks and fill out a deposit slip and add up, you know, all the rent checks that had come in and then take it to the bank to deposit the money. He wanted me to understand who the tenants were, what they paid and when they paid. And from there he would have me read the tenant leases. And so I learned how to read a lease at a very early age. And those are the foundations of the business. So you have to understand your obligations, your contracts, and the economics of how you're, you know, how your tenants are performing. By the time I had graduated from College, which was 1980, I graduated from college with an English. With a degree in English literature.

And where was this?

This was from Wesleyan.

Okay.

And had I been able to speak a foreign language, which I had no talent for, I would have been able to double major in art history. And those were my interests. But I was very fortunate because, you know, just knowing that I was going to go work for my grandfather eventually I could really take the classes in college that I had an interest in and really learn how to think critically. And one of the last classes I took was a government course. And I happened to read a book written by Jane Jacobs called the Economy of Cities. And it opened up a whole different perspective about the business because she really had great insight into how neighborhoods functioned just in terms of their social structure, their cultural structure, their educational structure, and what kinds of jobs the people within that community worked at and how they did so she was one of the early critics of what was then started in the 1930s, urban renewal. And the strategy behind urban renewal of taking, of knocking down whole neighborhoods and building high rise buildings in a park setting. And she understood very early on that that did not work because you disrupted the social, cultural, economic connections that people had with one another. They became anonymous, living in, you know, high rise buildings. And as a result, the economy of that neighborhood declined. Stores became vacant, crime went way up because you created green spaces which were ripe for, which were ripe for crime. When you have a lot of people and activity on the street, you have much, statistically there's much lower incidence of crime.

So she was really the early urban planner. And I guess this was the counter to or at the same time as Robert Moses, is that it was a.

Reaction to Robert Moses. Very much so. And the reason that was important is that I got a job. My grandfather helped me get a job out of college. I worked as an acquisition analyst for a wonderful guy by the name of William Felton, who at the time was a early investor. He, one of the deals that he did in the early 80s was or the late 70s was he bought the old Abercrombie and Fitch department store on 45th and Madison and converted it to a modern office building. So he was very smart. And I went to work for him. And six months after I started working for him, my grandfather came to me and said, I was 22 at the time, I'm not feeling well, you know, need to come to work for me full time. And Bill was terrific. He said, well, what time does your grandfather usually leave the office? And I said, around 3 or 3:30. He said, well, you're not going to have anything to do for the rest of the day. Why don't you come back to my office? And he said, you know, you can work till 7:30 or 8:00 clock at night, I'll pay you the same pay. And I said, wow, I'm going to make, you know, twice the salary I was making before. I think he was paying me like $200 a week. So here I was going to make $400 a week. It was, you know, I didn't know what to do with all that money. And then unfortunately, my grandfather passed away in July of 1981. And before he passed away, he introduced me to a guy who he had met who was in the supermarket business, but who was renovating walk ups in Hell's Kitchen. And while I was working for Bill, I knew that I wanted to start making investments as soon as possible. And so I investigated a number of neighborhoods. I spent a lot of time walking around Washington Heights and Inwood, Hell's Kitchen and Chelsea, and felt that because of the development of office buildings on sixth Avenue that it was inevitable that the office center of New York would move west and that the transit system was in a shambles. In 1980, if you can imagine, subways that had no air conditioned, that were not clean, that had, you know, were completely painted with graffiti.

It was dangerous. Even Times Square.

Yeah. And it was dangerous that to rely on transit, while so vital to New York, might be risky for, you know, my first investments. So within six months after my grandfather passed away, my. I identified some buildings in Hell's Kitchen and went to this person in the supermarket business my grandfather had introduced me to and said, lenny, I like what you're doing on 9th Avenue. Why don't we buy some walk ups together? And I bought my first two walk ups on West 47th Street.

What do those cost? Do you remember?

Yeah, I think we overpaid. I think we paid $200,000 for the two buildings.

For how many units that the retail.

Well, they were vacant. So the first job we did was a gut renovation.

And at this point, I mean, how many properties were in the portfolio? And you said it was mostly passive because it was land and triple net lease. So it was more of a holding company that you hadn't been actively acquiring up until then?

No, my grandfather hadn't acquired anything in years. He had been selling, he had sold some major properties.

Did you refinance some of the properties at that point?

Never financed anything. So because, you know, when you step into a situation where you're a fiduciary to your mom and your brother and sister. My father was in a completely different business and did well, but made a living. And my dad always said to me, if I had a choice to do it over again, I wouldn't go into the paper business, I'd go into the real estate business. So it meant a lot to have a father to give you the freedom to pursue what you're really interested in rather than have an expectation that, that you go into his business. Not a lot of fathers would do that.

Sure. And you're 21, 22 at the time?

Well, I just turned 23.

Right. And had you ever renovated a building before? I mean, did you know what you were getting yourself into?

No, not at all. But I had worked on. I had worked summers on construction jobs in different capacities. I did punch listing for an architectural firm On a very complex school and performing arts space on the west side. I worked for a contractor doing some supervision and management. Another summer in Long island, that must.

Have been hugely helpful. So you didn't feel like you were getting taken advantage for the first job or, or how did the renovation go?

I still feel that way. So the first job was very challenging because in 1981 on 47th street, there were a number of buildings between 9th and 10th Avenue being renovated, all non union. And in those days, the carpenter's union was quite corrupt. The head of the carpenter's union union was eventually, eventually disappeared. He was indicted and then he disappeared. And we're doing this, you know, these two buildings were each 20 by 40. So in total it was 40 by 40. We were, we built four apartments and an office for a union. And the. I won't mention the union, but the head of the union locals said to me, please don't tell anybody that I'm your tenant, because if the unions find out that I'm your tenant and you're doing this job as a non union, oh boy, you're doing a non union job. I'll be in trouble. So we were almost finished with the job and the carpenter's union marched down the street one day to a HUD job on 47th between 10th and 11th. And that job was almost complete and threw all of the sinks and toilets out the brand new windows. And the next thing I know, I'm getting phone calls from the FBI.

Today they just put a big inflatable rat in front of your building, Right, right.

Well, back then they were serious. Today they're not as serious. So I got a phone call from, from the FBI. Needless to say, I said to the FBI that I knew nothing about what was going on when in fact I had been called by the union to meet and I refused to meet with them. And when we finished our job, we got a present from the carpenter's union. We think it was from the carpenter's union because somehow somebody threw a Molotov cocktail on the roof of our completed building and fortunately didn't do a lot of damage, but we had to repair the roof.

Oh, my God.

Wow.

Wow. So that was, you know, for a first development project. I guess if you can get through that, you can get through anything. So at this point, do you start ramping up and are you starting to build a team to do these projects?

Well, my team was. I was very fortunate because I have a wonderful brother who is three years younger than I am and he graduated from College. And so he came to work with me and we hired a couple people. I needed a bookkeeper who could see.

Details, Right? Yes, right.

And started to build a team. And before I knew it, we were renovating a couple hundred units on the west side and we'd bought something like 25 buildings by 19 1985. And in 1985 my brother decided that the real estate business wasn't for him. Always said he was the smarter, better looking brother. And he went to business school and, you know, eventually went into the investment business and opened a very successful hedge fund. At that point I pivoted, went into the shopping center business and the industrial business in the suburbs.

So you've bought 25 buildings in the city and was there a rule of thumb what you were trying to solve for? I mean, these were all vacant rehabs. Did you know where you were?

They weren't all vacant, some were occupied. So you have to circle back to a time when, right after my grandfather passed away, which was in July of 84. That was when Paul Volcker was chair of the Federal Reserve and had publicly stated that inflation was a major issue with the US economy and was going to break the back of inflation and raise the prime rate to 21%.

And you were borrowing money at this time or you won't.

You couldn't borrow money at the. Well, first of all, nobody was going to give a 23 year old with no experience a loan unless I was prepared to sign for it. And three things that my grandfather said to me, he said, don't build on spec, don't subordinate and don't sign personally.

Does that advice stuck with you to today?

It stuck with me. Unfortunately I'm not smart enough to follow it in all situations. But we've always been focused first on risk and second on reward.

Right. So you go out to the suburbs, were you looking for yield at that point? Or what was. The city was overheated.

Yeah. What had happened was that Reagan passed tax reform and shortened the depreciation schedule from 39 years to 15 years. So, you know, that was in 1983. 84. And the tax syndication business came about where you could raise all sorts of money from investors and with 15 year depreciation you could provide them with 75% leverage, which is what the banks would give you to acquire property. 75 to 80% you could give an investor a 3 to 1 write off so that the economics of what they were buying made no difference. And it was at a time in New York City where rents rose, office rents out of the recession were six or eight dollars a foot. They went to $40 a foot. And same thing happened to retail rents and residential rents.

So you start raising money from other investors. You're still doing your own, your own deals.

I did my own deals. We had a couple of family partners that we did things with. There were a couple of people who I met who were incredibly helpful to me, who I felt I could learn from. So I would do joint ventures with them, particularly to build industrial and retail. And you know, my goal was to learn as much about how the business worked as much as it was twofold. It was to learn about how the business worked and to preserve our capital. Because the mandate was don't lose money. And when you're at a very early age, responsible for your family. That's a very real man.

Were there ever any bumps along the road or was it smooth sailing the whole time?

There were bumps every step of the way. But we have not done a deal all these years where we've lost money.

So you come back and you start focusing in some of the best locations here in New York, Boston, Philly. Again. At some point you said the shopping center business. Do you still have those holdings or did you decide?

We have a couple of shop legacy shopping centers left. We don't really have any industrial left, a couple of buildings. What I realized. So the city became, I felt too expensive. I couldn't make the kinds of returns and we were very spoiled. We were making 10, 12% returns when we started by buying things and fixing them up. And we could fix them up and make somewhere between 15 and 20%. When the syndicators started driving the pricing in the market, I felt that the risk was far greater than the reward and that we could build ground up industrial or buy retail centers. Our industrial buildings we could build to 15% returns and we could buy shopping centers at 10 to 12%, fix them up and get our returns up to 15%. That was sort of our hurdle free include. And the idea behind it was that you got your money back on a compounded basis within five years. So that if you made those kinds of high rates of return, it minimized your need to borrow money.

And did you ever sell along the way to 1031 into new properties?

In certain situations. The portfolio I inherited, we had vacancy, we had properties that we didn't feel would make sense to redevelop or develop. So we, you know, I would entitle, we had land in Florida that I got entitled and so sold to a major home builder. Some on Long island, some of the other vacant land positions we developed into industrial buildings. But by 1990, there was a pretty deep real estate recession. And I realized that the retail business and the industrial business was a commodity business with no pricing power, and that the retail that we owned by train stations in Brooklyn and Queens had real pricing power. We. We rarely had a vacancy. We had demand for space, and our rents continued to rise. And I began to think back to my early days of renovating buildings and really trying to understand why rents rose. And the conclusion I came to, which seems pretty simple and logical today, but was less so, you know, people were less focused on it back then, was that you had to be in places where they were places of opportunity, where people could get jobs and do better over time. And that when you looked at the country as a whole, and we were buying shopping centers in places like Georgia and Texas and North Carolina, that the middle class, even back then, with the onset of globalization, wasn't going to do well, that wages stagnated, there was automation, and that people were falling behind. And I felt that if I was going to remain a long term holder of real estate, which was my goal, that I had to own the kinds of real estate where there was pricing power and where rents would rise at a rate greater than the rate of inflation, which in those days was still running at three or three and a half percent. It had come down precipitously. So I spent a lot of time thinking about and doing the analysis, really looking at demographics, really looking at, trying to understand the factors of what drove rents in certain places, and, you know, came to the conclusion that to own real estate in places at the intersection of a lot of different activities, whether it was business or culture or places that people like to socialize in, or places of educational opportunities, opportunity, that those were, so to speak, different kinds of capital. And that that accrual of capital, that buildup of capital benefited the people who lived in those places. So the focus became going back to places like Hell's Kitchen. What I liked about Hell's Kitchen was that it was, so to speak, the breadbasket of New York. It had. The Piccinini was the top wholesale butcher in New York. They sold meat to all of the best steakhouses. There was Mazzela's, who was still there, who sold, you know, produce to a lot of the. To the. A lot of the restaurants. There was. There were great pasta shops and bakeries that line 9th Avenue. There was a reason to go there and shop. And the neighborhood had real scale to it, and that's why people moved back into it. And what we began to experience, particularly from the 90s on, was an exponential increase in rents.

And you've been, I mean, all these neighborhoods, locations, I mean, you've been such a pioneer even initially going to Hell's Kitchen. And you're right, I mean, the late 90s going into Philly, I'm sure you were early on to the Boston scene. That knack of finding these new locations before they become, I guess, in our business, institutionally recognized. It's just now, over the last couple years that I've been hearing a lot of our investors from New York are now looking at Philadelphia. I think a lot of our listeners are probably asking themselves right now, where do I pick? You hear a lot about Nashville and Austin. You're now investing in la. You could make the case that you're very late to the game in la, and that's a clearly an established market. Are there no cities that are yet to be discovered or curious what your thoughts are today?

We actually took a trip last year to Nashville and decided not to invest in Nashville. Nashville has second highest job growth of any city in the the country, next to Austin. By all accounts, it's extraordinarily healthy, but it's a service economy. There are meds and EDs in Nashville, but for the most part, the companies that are locating there are locating their back offices. There is no transit infrastructure. So it is already a very, very difficult to get around Nashville because your only option is by car. They have very limited bus system. They have no rail whatsoever. And so we feel that Nashville is very constrained because of its lack of infrastructure. And we also think that those kinds of service jobs in the economy that we are in today, which is really a disruptive economy based on artificial intelligence robotics, that those kinds of jobs will be outsourced and eliminated over time, so that the ability for workers to drive wage increases will be limited in those job categories. And that we don't see. We don't think you'll see the income growth that you really need in Nashville to drive residential rents and retail rents, which is our focus. It could be a terrible mistake, but there's a lot of capital flowing into Nashville, which is depressing returns. And we just think that there's too much risk going into a place like Nashville. Louisiana is one of the strongest real estate markets in the country. We've been opportunistic and very fortunate to identify and purchase a few assets. But LA is spending $50 billion on their rail infrastructure. And we're focused on finding sites in and around major, what we think will be major transportation hubs. The rail ridership has actually declined in the last year because Uber is incredibly cheap in la and people will still default to taking Uber. And if you take the train in la, it's either broken down or it's late and it doesn't move very fast or go very far. But if you look out a short period of time, that's going to change dramatically because of the amount of capital that's being invested. And when you understand the job patterns in la, a mismatch of population, where the job centers are, the traffic is unbearable. And so we think that by investing in sort of the historic center of LA in some of those neighborhoods where there is transit being developed and redeveloped, that there'll be migration back into those, into those neighborhoods.

It's very insightful and I think very helpful for our listeners as they're thinking where to begin building out their portfolios. So we only have a couple minutes left, so I want to take a look at your guiding principles that I see here on your website. I want to talk about what lessons and advice that you would give to our listeners. But you say at Midwood, best in class is not measured by square feet or the number of properties we own. It means constantly evolving and adapting to change and being driven by innovation, quality and integrity. So those three words, what advice is that? The advice that you would give to our listeners. And to be successful in this business, what has been your key?

My grandfather said to me at a very early age that the only thing that I would ever have of value is my reputation. So your reputation is paramount. You have to keep your word. There are always conflicts in business. There are always diverse points of view, and you really have to be open to, to hearing what other people have to say and you have to be intellectually curious. It's a fascinating, wonderful business. And I think the mistake that most people make is that they approach it really from sort of a qualitative point of view. They're looking at the numbers. And most of the deals that we've done in the last 20 to 30 years were deals that we purchased at rates of return that were well below the market at the time because we were not focused on just strictly the numbers. We were focused on the sense of place, the, the what was happening in these neighborhoods, what we thought the outcome would be, and whether our investments would be secure.

That is a fantastic way to end and really appreciate your sharing your story and your company's response. Remarkable today, 132 properties, 3.2 million square feet over 10 states and you know, amazing to hear how you got there. So thank you again for stopping by today and being with us.

Thank you for inviting me.

Stick around for a quick break and we will be right back.

When it comes to business, you'll find the experts here. Voice America Business Network.

Hi, I'm Mark.

Rose, Global CEO of Avis and Young, the world's fastest growing real estate services firm. And we are proud supporters of Voice America. With over 5,000 professionals in 120 offices in 20 countries, Avis and Young delivers local expertise in partnership with global reach. Because we are principally owned, Avis and Young prioritizes client success over shareholder profits through our open architecture. Our firm's experts provide value added client centric investment, sales, leasing, advisory management and financing services to clients across the office, retail, industrial, multifamily and hospitality sectors. Our culture is the bedrock for collaboration that enables each assignment to benefit from the collective intelligence garnered from a company wide database partnership performance. Learn how we deliver different@avisonyoung.com to learn more.

We're with you wherever Alexa and Google are at home in the car on your smart TV and your connected devices.

Hey Alexa.

Hey Google.

Play my favorite Voice America podcast on TuneIn.

It's just that easy. But don't forget to make sure you actually mention the name of the podcast show to make it work. Become our friend on Facebook.

Post your thoughts about our shows and network on our timeline. Visit facebook.com voiceamerica.

When it comes to business, you'll find the experts here.

Voice America Business Network.

Welcome back everyone. This is James Nelson, your host of Real estate investing live from New York. And it's time for our panel of experts. And back with us again today is our experts in architecture, design and construction. We have Gene Kaufman who is founder of his architecture firm with over 30 years in the business along with GSKA, has received new numerous awards, 100 design awards including the industry's highest the AIA firm award. We have Kirsten Beck from Avis Young, our principal and Vice president who is head of project management with over 20 years experience in the New York metro area doing renovations, tenant rep, almost 3 million square feet of work. And last but not least, Mike Santora from SBNC Architecture, an expert in building codes, zoning and the inner workings of municipal agencies. And an all around great guy and also a teacher at rebny, NYU and Fordham. So thank you. Welcome back everyone. We had a really great conversation before about considerations when you go in to Renovate an existing building. So let's talk about now. At what point does it take to consider demolishing a building? Building ground up? Gene, what do you. I mean, I guess zoning is probably the first thing you look at is what is the development potential. If you have a building that's an existing 50,000ft, you can add another 10 or 20,000ft. Does it make sense? At what line do you decide whether or not you're building or you're converting?

Well, the highest and best value often comes with when you're able to build the maximum square footage, almost always because you're able to amortize your land cost over a larger number. And so the idea is to try to figure out how can I maximize? If you have an existing building that's a small fraction of what's permitted. The idea of taking it down and building new has to be checked. But it's really not that hard to come to that point of view. Where it becomes more complicated is if you have a building of some size, maybe 5, 6, 8, 10 stories, and you can build 12 or 14 or 15 or 20, and those become much more complicated. People have the idea that fixing up an old building maybe saves money versus building new, but frequently that's not the case and that really complicates the whole equation.

And I think a great example of this was Park Avenue here in New York. So for a long time, I think the average age of the building and that Corridor is over 75 years old. But the zoning was basically what you had there. So I mean, you had these tenanted buildings that had enormous value. And to take down those buildings, if you could only replicate what was there, it didn't make a lot of sense. Now they've created a whole new zoning district, transfer right for air rights. And now you see JP Morgan, among others, building a 70 story tower. So I know zoning is a big driver for this. Mike, as far as your analysis and making that determination, I don't know if you want to add to what Gene just said or what are some of the other considerations that our listeners should be thinking about.

I agree with Gene. I think that people have this inherent feeling that saving what's there because land values are so expensive, especially in major cities, somehow they've, they've paid for the built area as well as the land and as well as the air rights. And they're somehow making the project more expensive for themselves by demolishing something and not saving what's there. But you know, I've, I've done probably an equal amount of renovations as I have new buildings. And I have to say that aside from small renovations, substantial renovations are always more complicated and always end up being more expensive than you expect as opposed to new buildings. You know, when we, when we look at a vacant site or a demo site and we propose a new building and we bring in a construction manager or something like Pearson early on, the pricing that they anticipate is always pretty close to what it ends up being when we build, as long as the design that we originally contemplated stays consistent. But in these renovations, there's so many unknowns. You know, I've got buildings that are over 100 years old that we've peeled back walls and found out that all of the electrical needs to go. You move one stove in a 500 unit apartment building and find out that the entire gas riser won't hold pressure and it needs to be removed and abated. And then there's asbestos on that gas pipe and it just snowballs from there. So, you know, I think that people try to find the cheapest way to renovate a building and don't necessarily realize the domino effect they might create, create by those renovations, which really, really drive the cost up. And then, you know, once you're in, you're in.

Kirsten, I know both Gene and Mike have talked about the advantages of maybe taking down a building, but are there considerations when you'd want to keep a building?

There are several. And I'm actually thinking of a specific example where we are renovating a 260,000 square foot building and we are replacing all of the infrastructure. So we've already accounted for that. And the building isn't landmarked, but it does have significant value to the client and they want to keep the building. It's also very far downtown. So the ground and the groundwater is such a huge issue. So you do have to think a little bit about the environmental impacts when you actually start over from scratch. Because if you already have a foundation and it's in the ground, you don't have to figure out how to get rid of that dirt. If the dirt, dirt is clean. You can spend millions of dollars getting rid of dirt, literally. And I've done it.

Wow.

So you do have to think about those things and you have to weigh them in. And frankly, the budget on this project is about the same as it would be if we just took it down and built a new building. But we're trying, you know, they want to, the client wants to retain the building, and so they understand the impact of that.

And what about the timing, perspective? Because, because. Is it, is it, Are they staying in the building while this is happening?

Completely vacated. They took 900 people out of the building for five years so that we could complete this project.

Okay.

It's a major commitment on their part.

Okay, but do you think the renovation is going to be faster than if it was a ground up or. Hard to say.

I don't. I don't necessarily think so, to be honest. There are efficiency in both situations. It's also tight downtown, you know, we don't have a lot of room to swing cranes around and things like that. We're replacing the facade. We're really changing the whole building. And so there have been a lot of meetings and conversations about, you know, do we want to recommend to the client that they just take this building down and start over. But they really don't want to, so.

Makes sense. So Gene, talk about the advantage advancements today of building new. Because if you're working with 100-year-old building and you know, sometimes these buildings were built, some of these old printing houses, they've got incredible floor loads, but you know, for all intents and purposes you've got a shell. But I have to imagine today with modern technology, there's so much more that you can accomplish in a new building. So what, what are the advantages with that respect?

There are actually many. That being said, I think it's notable that there aren't as many as there are in other fields. I mean, we still do a lot of things by hand and that really comes down to not only the time that it takes, but also the chance for human error. That being said, there are a lot of things that we've been incorporating into buildings. For instance, you can panelize the facade of a building, you build it in a factory, and you deliver it in two and three story high segments and put it into place with a crane. And a lot of that work happens off site while other things are happening. The same thing is true with other building components. And even things like air conditioning systems have now changed a great deal. And so I think that people are able to take advantage of the latest technology, whereas you're keeping an existing building unless you're literally gutting out everything, including the systems. You're trying to marry the old and the new and that doesn't always go so well.

Mike, do you want to add anything to that about what other advancements you've seen today? And Gene alluded to modular and I always, you know, you look at these time lapse Videos and you think, why isn't everyone doing this?

Yeah. Modular has a lot of challenges. I don't know if I want to dive into that. But the advantages that I see are in the environmental efficiency. So as you know, in addition to our practice, we also develop affordable housing and our affordable housing developments have green standards that they need to meet and they're also, there's also a lot of grants available when you go above and beyond. So our buildings have all been passive house and we've been using because we're mid rise building, ICF construction, which is insulated concrete formwork. So we're forming our concrete with two pieces of rigid insulation that stay in place rather than wood that you would throw out after. And that creates a really, really efficient wall envelope. And you know, a two bedroom apartment in one of these buildings has an average projected utility bill of about 15 to $16 a month. Which means that the air conditioning systems and the heating systems that we're putting in are substantially smaller than what they would be in an older build with a less efficient envelope for the same size unit.

Yeah. And there's massive savings. And as well, not only are you doing good for the environment, but when you look at the efficiency of these buildings and how what that does for your heating and air conditioning cost, it's pretty remarkable.

Yeah. And we have to look at it in a long term perspective. So it is an increase in cost upfront versus a less expensive like a block and plank type of construction. But if it's a long term hold for you or you're designing for someone who's going to hold it long term, the operating expenses more than make up for it down the line.

Kirsten, do you want to talk about maybe some of the decision making when it goes into what kind of materials to use? So you hear, well, if it's outside the city, it could be stick construction. Is it concrete, is it steel? So how do you decide what materials you're going to use?

Yeah, I mean that's really a decision that's made by the design team and a lot of it has to with do do especially now with, with energy efficiency, especially again in New York and a whole nother rabbit hole we don't want to go down, which is Local Law 97, which you and I talk about often. But you really have to, it's almost led by that. What do you have to accomplish and what materials will accomplish, where you have to be at the end and how. I mean that's amazing. $15 a month, that's great. I'd love to see an electric bill of $15 a month, but you know, you really have to kind of start with where you need to end. And we do that in a lot of different ways. In a project, if you have a lease expiration, we're often backing into, you know, a date or a requirement or some other factor. So it's often we start at the end and work our way backwards. And then, you know, we've done, we work. And I'm sure both of you do this as well. We'll bring in an engineer and do an energy model. We actually did that for this other project to talk about what kind of facades to use. And we had them model different options so that we could come up with something that is the most energy efficient.

I want to ask the question in a different way. So does it start with, I guess, is it form, function or design? I mean, the idea meaning do you want to see what type of program you want to deliver first, what the space is going to look like and then figure out how you're going to design and engineer it or do you know, going into a project. Yep, this is going to be concrete and steel. I mean, how do you tell us the sequence?

Well, I think you build on a cumulative experience. And I think that the same way once upon a time people try to figure out what kind of fuel they're going to use to heat their house. When we come to evaluating like steel or concrete or other kinds of construction types, you know, we're basing it upon a lot of other things that are happening external to the project and that helps us inform what's going to happen. For instance, the concrete slab in a new building is going to be a lot thinner than the total composite steel construction. So if you have, let's say, a heightened setback issue, that steel is going to get you into trouble for a multi story building. So all of those things go into even the first formulation of what's going to happen. It's not just a question of construction costs, it's what suits you better. The steel on the other hand, will give you a much bigger bays. So if your column free space is important, or if let's say you have a gymnasium on the ground floor and you have apartments up above and you have a long span structure that's picking it up, that changes the dynamic as well. So I think you need that sort of technical knowledge to make the proper upfront analysis.

So Mike, how do you get involved up front in the design to figure out what is the best approach and how to build the space. Are you working hand in hand with the engineer from the start?

Well, we're usually before the engineers, so we're looking at the program and coming up with a space plan. And to Gene's point, we always look to precedents. We look at other projects we've done. So an architect can get to a certain point without any engineers based on an understanding of previous projects. So we could make reasonable assumptions. What we don't want to do is hand a design off to an engineer. Once we get 20, 30% into schematic design and say, here, start working on this. And their initial analysis shows them dropping columns where we don't want them or not having enough ceiling height for ductwork or things like that. So there's a responsibility for us to know what, and anticipate what the engineers are going to need to do to make the building function and let that drive the initial design so that they're not coming in and making us have to reverse all of our progress to a couple, accommodate what needs to happen.

Perfect. And Kirsten, I think you got the last question on our last panel, so I'll let you take us out again. No pressure. Once you have the plans and know what you want to build, how do you figure out? Because now you're interviewing, you have a bid set and you're going out to contractors. How do you find out who you want to work with and what the bid should cost?

There's a couple of things. First of all, I very much think of what we do, as you use the term quarterback, which I like that, but it is a whole team and everybody has input on that. So it's often the collective team talking through who are the right partners for this. And again, I'm literally going through this right now. But we've often done, especially on a big project, we'll do a pre qualification package for all the GCs before we even have drawings. We want to know what projects of similar, similar types they've done in very recent years. So that they're also, you know, to Mike's point about precedent, they've done. They've done this, they've done it repeatedly. We want to know how much business they're doing and how much business they have already. So do they actually have the capacity to take on a project of that size? And then it's, you know, there is a bidding process. We're always estimating throughout the design process, whether we're doing it in house or we're using a GC partner to help us. So we have an idea of where the numbers should be anyway, so we shouldn't be getting any surprises. And if we do, then we know that there's something, you know, not quite right there. But it's definitely a long process. And it's also meeting the team. You're going to spend on a project of that size a year, 18 months, you know, in the, in the, you know, fight together. So you have to have people that you can communicate with that understand what you're trying to achieve and what the client is trying to achieve so that when questions and issues come up, they know what the end goal is.

Well said. Well, thank you all for coming back again. Really informative discussion and hope to have you all back on the show soon.

Thank you.

Thanks, James.

Thank you.

Thank you for tuning in this week to real estate investing live from New York. Please join your host, James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business channel. All shows are rebroadcast Wednesday mornings at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on demand. We'll talk again next week.

Sam.