Rezoning Insights with Matthew Adell

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and Head of Avis and Young's Tri State Investment Sales Group. In this program you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host.

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Welcome to episode number 221 of the Insider's Edge to Real Estate Investing. This is your host, James Nelson. I'm Principal and Head of US Investment Sales for Avison Young. Thrilled to have with us today my friend Matthew Adell, who is founder and CEO of Adelco, a New York real estate company which covers the entire spectrum of developments, redevelopments, conversions. His portfolio encompasses 1.9 million square feet as well as having rezoned about 6 million square feet, a pretty tremendous feat. And we're going to begin our conversation talking about this stretch along 6th Avenue in Chelsea that used to be a manufacturing district that his company was able to transform to high density residential. I actually talk about this in the book the Insider's Edge to Real Estate Investing. Matthew has incredible perspective. He's going to talk about working with investment partners, following global trends and all the steps in the process that goes into not just rezonings but conversions and the considerations between conversions versus developments. As always, you can go to James Nelson.com that's where you can find the shownotes for this episode. That's where you can find links on how to connect with Matthew to view his company's new website and a lot of other helpful tips. While you're there. You can sign up for our monthly newsletter which aggregates all the content that we put out and to help you gain the insider's edge to real estate investing. So we're going to have a brief word from our sponsor. We'll get right into that interview with Matthew Adell.

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Welcome everyone. Today we have the pleasure of having Matthew Adele with us who is founder and CEO of Adelco. I've had the pleasure of knowing Matthew for at least over 20 years and have had the chance to also hear him recently at some of the top industry events. And so I know we're going to have a really exciting conversation today. So Matthew, welcome.

Thank you for having me.

Wonderful. So now I know big news that I think hopefully will help announce. You're going to have a new website that you're rolling out. So we'll make sure and link to that so people can see that. But for the benefit of the benefit of our audience, why don't if you could just start by giving us a little background on what Adelco is in the portfolio of companies.

Our core business is development, ground up and large scale conversions and adaptive reuses. We've led the market in any number of our projects where the market has seen the value of what we've done in developing in areas that were underserved by a particular type of product. And it is our mantra to continue to have that vision and continue to buy and develop and this being an outstanding time to do just that.

Wonderful. So I know that the previous website said that Adelco has been in business for at least 25 years. I'm sensing it's probably a little bit longer than that. So I'm sure that that might be updated on the next version. But give us a sense of the scale of the portfolio over the years, what that looks like and what those typical projects might include.

Well, We've developed over 2 million square feet of property and created literally billions of dollars of value over both our developments. And in particular, one of the initiatives I'm most proud of is the rezoning of 6th Avenue between 23rd and 31st street, which created 6 million developable square feet. And no matter how you run the number out in terms of what's the value of a finished product, but it's over 10 billion worth of value that we basically afforded the city to then tax and hopefully help city balance its budget. It was a long time in coming. We had to prove that this was an economically viable Rezoning. I wrote the zoning at the time, which was a contextual zone zoning and that hadn't really been used much in the city before. So it's the X C64X that's been mapped now in many other areas like the Chelsea rezoning plan. And our 6th Avenue rezoning really kicked off development in Chelsea all the way to the river. The upzoning of the avenues, the down zoning of mid blocks, the X zone, which was a contextual concept that was applied and it basically created this value in Nomad and both Flatiron as that concentric circle came back around to the center of all of this activity. Even today, which is the part of Chelsea that we rezone, this is a.

Wonderful place to start. And this story and what Matthew's talking about, I actually cover in my book. So you want to go and read the whole story and look, some of you might be listening now saying, well, this sounds amazing, but I don't think I'm ever going to have the ability to rezone an entire neighborhood and create billions of dollars of value. And one of the things that I mention in the book is for those who are following along, I mean there was a lot of beneficiaries in the process. Even if you weren't planning to build a 30, 40 story apartment building on the avenue, you might have been the owner in the Path of Progress. Or maybe it was someone who said, look, I see all this, these apartments are being built and I'd like to go in and buy some retail and benefit from it. So I think for all of you to understand this process, I know you're going to get a lot out of this discussion today. So Matthew, I have to ask, I mean this was very technical zoning. I mean, you said you literally ran wrote the code. I know you're a Wharton grad. What was that? Did you study urban planning? Was there? I mean, how did you even start by learning the code, let alone drafting it?

Well, certainly it's a team effort, just like everything we do today. As a developer, my job involves interfacing with professionals at almost every level of the business that we work with, whether it be finance, construction, asset management, suppliers and so on. At the beginning of the development, it's very much about land use and architecture. I had Casi Scandillas and Sandy Lindenbaum, may they both rest in peace. Two of the most prolific and wonderful people in our business passed many years ago. And with their input and their encyclopedic knowledge of the code and architecture, we were able to craft a zoning that we ended up writing that the city adopted as a contextual zone that again had been used. And even to this day, contextual zones are really the way the city wants to go. They don't like these plaza based setbacks. They feel it's more human to kind of relate to your streetscape with this type of development presentation.

So, I mean, this was a very dramatic and much needed shift for New York City. And for those of you who don't know Manhattan and this Sixth Avenue quarter in Chelsea, I mean, it is literally in the city center of Manhattan. It is so accessible by transportation and yet. And when I came to the city 25 plus years ago, it was a bunch of, you know, parking lots and flea markets up and down 6th Avenue, and you certainly remember that, and was largely a manufacturing district. So what gave you the conviction that because this is a really a radical, you know, change for the area to go from you know, open parking lots to 30, 40 story plus buildings. I'm sure it was a delicate process, negotiation, you know, getting the community engagement. What was, what was, how did you know you could accomplish this? And what were the kind of the steps to have this ultimately come into reality?

Well, what's interesting about that question is it's just as relevant today as it is then. So this is not just a historical repetition or rendition of, you know, how 6th Avenue came to be. It's vision, it's planning ahead. What we do for a living is looking at something today and thinking, where will we be two, three, maybe four, five years out, depending on the complexity and the size of the project. To that extent. I don't always just see what's there. I see what I believe could be. And in Sixth Avenue was very obvious that there was nothing there. I had a friend back in the day and he knew I had a lot of property on 6th Avenue and he gives me a call and he said, you know, Matt, I just drove up 6th Avenue and I know you have a lot of property there, but I didn't see anything. So. And it was that undeveloped and that kind of keyed into the reality that it was ripe for, for progress. And as you pointed out, it is literally the center of the city. I mean, it's almost the bullseye nucleus between 92nd, 96th street and Wall street and river to river. So its centrality had a lot to do with its value. It was also not so much a challenge, but it needed an identity because it really wasn't identified as anything marketable. Clearly the flower market clearly Flea markets. But I decided to call it Chelsea. So I had an opportunity to rename the neighborhood. Back then, maps were physical. I had to call folks like you and say, would you please update your map? Which was not an easy task because it wasn't an electronic transition. It was physical. But everybody did it because everybody like me wanted to stay in step with where the city was going. But the reason I say it's relevant, although today we see far less large sites available, and the process of assembling 20ft by 20ft and piecing together block fronts or critical mass is more challenging because the world is faster paced, money is more expensive, and it's very hard to do that in many cases and hold for many years. It still happens, but it's not as prevalent as it was then. However, if you take what we did then and you say, okay, I'm standing on XYZ corner now, where's the value? Where's it going? The city is attempting to enliven construction and conversion to create more housing, both market rate and affordable. So the idea that something like Midtown south, which is likely a rezoning, that's going to pass sometime this year, we'll see how it ends up. But if you believe it's going to pass, if you look in those neighborhoods and you say, what could this be? And you get ahead of the curve, that is how you make more money, you make a better investment because you have a lower basis and you're buying or building into a growth area.

So I really need to compliment you as it's. It's clear you're a lifelong learner. And, you know, just recently, now there's some new tax abatements that have been made available. And you said, james, I really want to study and learn these. So, again, you've been doing this for decades, and yet you said, this is important to understand all the opportunities that are available out there. So I just wanted to mention that. But I want to go back to the vision, and I would think one of the most exciting things about being a developer, and again, Adelico does a lot more than just developing, and we'll get into that. But your vision, right? So, yes, you need great professionals, whether they're architects, land use council, and maybe they're telling you what can or can't be done and how to get things approved.

But.

But the vision, when you, when you see something, I mean, is it. I have to think it's. It's a creative process. I mean, were you. Did you have a vision for what 6th Avenue would come to be or was it much more of a technical analysis, if that question makes sense.

It was vision. Yeah, this. There was very little there. There were flat lots, no real parking garages. They were utilized in a very underserved way in terms of what's the highest and best use. There'd been no light manufacturing in new starts in over 40 years. It was an M16 zone which allows for commercial use other than light manufacturing, showroom and such. There was almost no new activity. It was an area that was just crying for life. And it was residential life that it really wanted to be. Hence, look at the avenue now. I mean the population just up and down that portion of 6th Avenue is larger than most small cities in the United States. So it clearly was viable. We had to convince the city that it was viable. But the proof is in the pudding.

So I'd like to talk about how you go about executing on a large scale project. So I believe two of the towers on 6th Avenue, the Aston, 266 units, the Capitol 387 units. So again, for our listeners who might, you know, one day they, they might dream to build, you know, a 30 plus story tower of fully amenitized building, or it could be building a 10 or a 20 unit building. But the process of, I mean we've kind of talked about the approvals and, and getting the project designed. Okay, so now, now you, you have what is an as of right project. Where do you start going about capitalizing that and getting debt equity to buy into that?

It's many things at the same time, but clearly we're the engine. But the fuel is primarily equity and then debt. And I say that because equity is a more rare commodity than debt. I mean, markets move and at some points in time equity is flowing, at other points in time debt is flowing. But at the end of the day, if you don't start with an economically viable plan, something that you can articulate to whomever that this will make money. This is a business. We don't do this for glory. We do this to make money. And if you can articulate it based on not just your vision, but your experience and your ability to complete the project as well as just start the project, you will attract equity and debt. I find it necessary to understand that good equity doesn't necessarily know everything about every business. So we're always looking for people that understand our market, our New York market. Sometimes we're didactic and trying to explain it to folks. I mean, back in the day it was unusual to be a Institutional owner of rental property in Manhattan, or the boroughs for that matter, it was privately owned. And it changed. It changed slowly but surely because the institutional owner educated themselves as to our myriad of rent laws and the ins and outs and became comfortable with both the process and the risks as well as the benefits associated with it. And to that extent, I can recall years of explaining to any number of institutions why the rental market here was as de risked as any investment. It still is that way, in my opinion, in real estate in the entire country. To me it's like buying treasury bills, but it's, it's bricks. And when you have 400 residents paying rent all the time, and the idea that you're going to have a disastrous issue on income is very, very low because you know, our non payment bad debt on a multifamily building is usually under 1%. And if I were to apply 3% just as a factor, I'd be extremely safe. So when you think of the reliability of the income it de risks and the profit associated with it, I'll buy it lower than a higher risky product, probably outperforms and in many cases asset value increase, which is often cap rate driven. But you can time it because you have a sustainable income for as long as you want, as long as you run the property well. And you can time your exit if that's what you want, or your refinancing to the right moment, that is Lower interest rates. The multifamily side of the world can be extremely profitable, much more so than the going in numbers tend to indicate, because it's very hard. And I find the valuing risk is a challenge. It's very subjective. How much less return am I willing to take because it's so de risked as opposed to the number that jumps off the page and how much riskier is it? There's an empirical side to it, but at the end of the day it's an experienced feeling that gives you confidence that you can make the money you want in something like multifamily.

I want to circle back to a question on that risk profile and how you were able to really quantify that. But just on the topic of raising equity, because in the show we've talked a lot about starting off with friends and family capital and yes, we've talked about raising institutional capital as well. And you certainly have plenty of institutional investors, but I believe you also have foreign investment, right? Family offices, multifamily offices. And so the question is, how do you go and find this, this equity that's out there? Especially if you're looking for global capital. One of the transactions, sales that we were happy to sell to you, the Hotel Wales on Madison Avenue, very significant project. And if I'm not mistaken, there was some, might have been some foreign investment in that. So how do you go about finding that capital?

Work hard. You have to cover the market. You have to stay up with where money is flowing from and why the world does turn. I mean, we've gone through cycles in New York City where we've had money from Japan, China, gcc, Middle East, Gulf region. And there are moments in time where that money for any number of reasons could be local issues, local tax code, just our robust market. But staying up with what could be the right source of capital is an ongoing job. You have to work at it. And of course you have to present yourself and your projects in a way where it garners confidence and reliability, viability and projects profit. That's achievable.

You have a lot going on here in New York, so I doubt you're flying around the world looking for capital, but how do you, I mean, do you typically find this foreign capital? I would imagine there's intermediaries and then they're interested in New York and connections are made. Or have you found yourself over the years having to travel to go meet with potential partners?

All of the above. I mean, I spend a fair amount of time on an airplane. You have to visit not just to introduce yourself to capital and attract capital, your projects, but you know, you have to be investor focused and you have to stay in touch with your investors. You know, if you're a retailer, you stay in touch with your customers. It's important. You want continuity, you want good communication that can be done in any number of ways, electronically, whether it's as old school as just a telephone call or new school as a podcast. But at the end of the day, it's personal and you need to be present.

That makes a ton of sense. So talking about the decision and you do both to go ground up as opposed to a conversion, right? Talking about trying to quantify the cost and as far as understanding you're not just making predictions on what things are going to cost, but ultimately what they're going to sell for. So how would you characterize in general doing a ground up as opposed to a conversion?

They're very different businesses, they have the same characteristics and we have the same disciplines that we have to go through to go from start to finish. But the difference is dramatic in that ground up in effect is easier. You never Know what's in the ground. No matter how many borings you do, you can have surprises, whether it be rock or water or something else. But then after that, it's largely air. Besides stabilizing adjacent properties, conversions are a constant existing condition field exercise. For all the probing we do, there's always things that come up in the field at some point that you have to reevaluate. So it's a much more difficult process. And you know, I would say that a company that only does ground up, it's a learning curve to do conversions and vice versa. It turns out we do both and we've done a lot of both, and I want to continue to do that. But the fundamental decision comes down to the characteristics of the property that we're considering either demolishing or converting. And as I'm sure many have read or heard, because this topic is, you know, definitely a headline right now. You know, floor plates, ceiling heights. How do you create layouts within a certain envelope? To what extent is the envelope not attractive, let alone laid out in such a way where you can create the homes that the market wants? And that dictates to some extent, should we redistribute bulk from, let's say, the rear of a building to the top? That brings up, can you support it structurally, or should we demolish? Or in some ways should we raise floors within the building to create ceiling height? To the extent that you can. And at some point we make a decision that we're doing so much to make this building work, we should demolish it, or at least that should be our business plan in other cases that you keep it. The whales that you mentioned, thank you very much, very proud of that in that we did a lot of what I just discussed. We raised floors there to create ceiling heights. Window placements are your constraint. Typically. It's just a very high level engineering construction job to do that. Structural demolition is effectively the same as superstructure because you're demolishing something while you're supporting it and then you're installing all the new structure. It's very detailed, step by step process. But if you're careful with the right team, it works. So we were able to create some ceiling heights there that we could couldn't otherwise. And there were other things we did there, such as fill in light wells to regain square footage that we could reuse, because that building was unusually not overbuilt, whereas many of the buildings we see today are in fact overbuilt. And part of that is that building was built in 1910, 1. A lot of the buildings that we're looking at and I think the market is seeing in other parts of the city were probably built more in the 20s. And at that point, for whatever reason, zoning was more robust. And compared to today's zoning, they're often somewhat overbuilt. Usually that's a grandfathered condition. So you can take advantage of that. It's not like you have to lose square footage.

So the Hotel Wells project was a really interesting one in that you had a operating hotel, right, which had some residents who I believe lived there as well. And somehow you were able to, you know, make. I mean, maybe behind the scenes it wasn't smooth, but it was. It seemed very. You know, it all worked out. As far as with making that conversion from a hotel to residential. I don't know if those tenants ultimately were relocated or if they stayed. But, you know, it would seem to me that if you're doing a conversion, sometimes it is contending with, you know, who's there and, you know, working through. So how. What advice would you give in that regard to deal with those kind of situations?

I start with respecting not just people, which I do, but you have to respect their rights. You can't go in deciding that what you want, you're going to get. You have to work with what someone has a right to do, which in some cases is not leave. And then this falls in the category of I can tell you how I walk, but you'll never walk like me, just like I'll never take steps like you. Our bodies are different, our cadence is different, and so on and so forth. So there is a bit of an art to establishing enough of a trusting relationship and also an economic presentation where someone would consider doing something that they don't have to do. They have to decide to want to do it. Sometimes it's a question of money. It's always a question to that extent of some amount of money. But sometimes it's a question of what the relocation is and how fast is it. Is it in the same neighborhood? Because people get used to their own home. It's not always about offering something better. Where you say to yourself, gee, it's so much better. Why wouldn't anybody take it? Well, there's a lot of reasons why, because sometimes people just don't want to, or they're just comfortable. It's work to move, even if you do everything for them. So you really have to be very sensitive to the. The human side and to the. To the person you're speaking with or persons you're speaking with.

Well, I really appreciate your sharing that and that's, I can see why it was such a smooth process there. That's definitely the right approach. Matthew, how much as a developer do you need to be essentially forecasting what's going to take place in the future? So you're buying a site, right. And you have your underwriting assuming what it's going to cost to build. And we're taping this show right now. We're in the middle of April 2025. So tariffs were introduced, they were paused for 90 days. Well, you know, maybe by the time you're listening to this, maybe it will be resolved, but we don't know. But you're bidding actively in the market, right? So how are you forecasting? Because imagine if you, if you sign a contract today, you might not have a bid set of plans for what, six months or so when you would actually be taking a project out to bid. So how do you manage that risk and try to forecast what a project's ultimately going to cost?

Bear in mind what we do, and we're using this microcosm. It's a big microcosm of New York. There's other markets in the city that I'm somewhat active in as well, but this is our main activity. It's very different than a lot of businesses that are of the moment very affected by what's going on in the world. Tariffs in particular. We're speaking about. If you think of New York City as too big to fail, you think of New York City as a destination forever. I believe in that. The city's always growing in its own way. It finds its way through its ups and downs. It's here to stay and it's very dynamic to that extent. I know that if I build the right product for the market that I identify and capture that market correctly, then I know that I'll have, whether it be condominium buyers or multi residential rental tenants. So I'm not that concerned about the moment of tariffs right now as it relates to my business. Projecting what the rent or the sellout will be is an exercise that you have to be sober about. I do a lot of research on comps, but I know the market very, very well. So I think a lot of the times comps reinforce what I believe is the case anyway. But it's important to do your research because you learn something from it. Even if you think you know everything, reality is you don't. There's always something to learn when it comes to projecting the cost of the project or even the time frame. One could argue that today's tariffs are affecting the cost of materials to the extent that they're imported or for whatever reason they're constrained, even delivery constrained. But in the overall picture, as a rule, that is not necessarily going to change the magnitude or the metrics of penciling out a conversion or development being profitable. And to some extent the flip side of this is all these unsettled issues are such that they're likely, at least for a very short period of time, going to be less activity than more activity. So that offsets to some extent construction costs where companies are needing to be more active, notwithstanding that pricing might have gone up for some of their supply components and such. So I look at it seriously. I mean, when we went through Covid, it was a major issue for a period of time. We couldn't get things. I couldn't get refrigerators for a year. We scoured the country for refrigerators and showrooms that happened to be the spec that we wanted. And we would truck them to our site just to, you know, finish apartments. I mean, it was a challenging moment and you know, it did increase costs. But at the end of the day, what we're dealing with today, when I do run those numbers out, I don't think they're going to change much because of today's tariffs. I think the fundamental way of approaching the development is similar. We have a long view. We build by countercyclically. I always want to develop my projects into the curve, not at the top of the curve, and certainly not as the curve is coming down, because we have a gestation period between pre development and actual development and delivery of product that is a combination of all those time frames of no less than two years. It could be three to five years depending on the complexity and size of the product. So the best way for us to develop is to buy low and sell high. And that means that you do so when the curve is down. This is a outstanding buy moment for what I do for a living in terms of New York and other markets in the country right now, given where prices are depressed.

And I want to come back to that because it's a really important point, but just on the theme of forecasting and getting comfortable with the demand for your future condos apartments. So you look at the existing comparables that are in the market, but I would imagine you're also tracking the future supply. And again, this isn't just for ground up development. Some of you listening, maybe you see these growth markets like Austin, Texas for example, I mean, for a while, the word was that there's tremendous demand for apartments in Austin. And then lo and behold, here we are five years after Covid, and there's a 20% vacancy rate. I know some of you who are listening from Austin, you're gonna say, james, that's not fair. I know there's pockets in Austin that are performing very well. But clearly when you're delivering product to a market or just buying existing multifamily to hold, you have to be cognizant also about future competition. So how are you trying to figure out if you're delivering a luxury condo on the Upper east side, that there's not, you know, five or 10 other projects that are going to directly compete with it in the future?

That's very good question. I mean, demand and supply go hand in hand, and they support or contradict each other. It's just market knowledge. I mean, we're always looking at what's available. So I believe I'm on the cutting edge of what sites or acquisitions are in the market. We cover the market as thoroughly as we can with many, many people like yourselves and young. So if I feel there's a tremendous amount of supply that is going to be coming into the market, I will be more concerned. Absorption is a critical decision in projecting your economic profitability on any project. Rental or condominium for that matter. Office as well. It doesn't matter what it is. You know it. We don't sell 100 apartments every week. We could rent 100 apartments maybe every two weeks if the market's robust enough. So you have to really plan out your absorption schedule, because time is probably the biggest enemy of any project in terms of delaying it to be presented to the market. But more so on condominiums, because the rule for a condominium project is get in and out as quickly as possible. Rental projects have a long life because you have sustainable income, so you have a little bit more flexibility to. To catch back up if something delays a project? Covid was the perfect example of delays. Covid, post Covid supply chain and such. So that plays into the supply side. But, for example, I mean, I believe rental housing in the city is so undersupplied, both market and affordable housing, that even with the new programs that I hope create much more supply on both those categories, I'm leaving aside super luxury for the moment. I don't believe there'll be an oversupply, however, if you open up against two other projects that are a couple of blocks away, that would give your project, some pause. So you really have to be specific to the corner you're standing on. But overall, I don't see the rental housing market at a macro level being oversupplied. I think condominiums are more susceptible to oversupply in certain submarkets. And bear in mind, even though to some extent the renter might more easily go to different neighborhoods, a condominium buyer is a little bit more particular to the zip code they want to live in. Uptown, downtown, east, west, and the submarket in particular. So if you're opening up against two or three projects as a condominium in your sub market, again that could give your economics pause. But the macro side is I don't think we're going to have a prolific oversupply of condominiums. But for everybody out there, it's all about your corner of the world. It's a sub market specific real estate is a two feet on the ground business. It's never changed. And it's not about the generality of Manhattan or Brooklyn or the boroughs. It's very specific to exactly where you're investing.

I fully agree with that. And that's a lot of great insight and thinking about whether you're developing a project converting existing.