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Foreign.
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Hi everyone, I'm Mark Savatelli, podcast host and president and CEO at nea. You're listening to the NEA podcast Inside cre, featuring interviews with commercial real estate leaders who share industry and career insights. Now, the Commercial Real Estate Development association is the development industry's leading source for education, advocacy and connections that drive your business forward. Today we're talking development strategy, market timing, and where smart capital is going in multifamily and mixed use. An extremely topical podcast. Today I'm real pleased to be joined by Carlton Reiser, who is the president of Transwestern. In his role there, he oversees development strategy across asset classes and has spent decades navigating complex projects and market shifts across the country. Carlton brings a capital allocators perspective that I think you will all really appreciate. Carlton, it's great to have you here. Thanks for joining me.
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Well, appreciate you inviting me. I look forward to the conversation.
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Well, fantastic. You know, I like to start this off particularly with folks like yourself that have been working in commercial real estate for a number of years. How did you get involved in this industry and what pulled you towards development?
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Well, candidly, I sort of stumbled into it coming out of business school back in the mid-90s. I had a number of friends who were working in the real estate sector and had some interviews and got interested in it and really got going in the business doing acquisitions with an Opportunity Fund sponsor. And then this was sort of the tail end of the cleanup of the rough go in the late 80s and early 90s and markets were stabilizing and I was looking for something that was a little bit different, a little less transactional and interviewed with Heinz and got a job there and that was, oh, I don't know, 30, 30 years ago almost. And the rest is history.
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Yeah, Indeed it is. 30 years and still in there. Although I'm still waiting for someone to give me an answer when I asked them what got you into commercial real estate where it doesn't begin? Well, it kind of backed into it, so it seems to be so common. But it's great. Shows the entrepreneurial nature of so many folks that do this for a living. Part of the thing that always, you know, when you're 30 years of experience, you've seen a few cycles at this point. Was there an early experience? And you just talked about the late 80s, early 90s and all the turmoil associated with that period, but was there an early experience or downturn that really shaped how you think today?
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Yeah, I'm not sure there's a specific experience or Downturn. I think when you've been in the business as long as I have, you are shaped by every change in the cycle. You learn a little something along the way or you probably don't survive. So I've seen lots of very, very different situations. I think every downturn that I've been through has been significantly different. Starting with the dot com bust in the late 90s, 2000 period. I was working in Austin at the time, focused on office. That market was really growing up and exploding based on the tech sector, heavy into dot coms and software developers that were focused on the same thing. And this new term called phantom absorption popped in there and, and the market really cratered overnight. And, and you know, the simple lesson learned from that is credit actually matters. You know, when, when people lease space but don't have the people to put in the space, maybe you need to be thinking more deeply about the market. So yeah, sort of something very different from, from other cycles. Obviously the great financial crisis was, you know, macroeconomic in nature, really having not, not driven by a real estate downturn. And I think the big lesson for, for us from that was that capitalization matters, having flexibility in your capitalization matters because when the tide goes out and there's no liquidity in the market, you need to make sure you've got some sort of staying power. So that was really I think formative for people and I think it was, I think it was formative for the real estate sector in general because it really pulled leverage levels back in which I think is a healthy thing in a capital intensive business. So certainly some lessons learned there. And then maybe sort of fast forward to the strangeness of COVID and what happened after Covid where you had this explosion in multifamily and industrial development. The markets got out over their skis, the inflation came in and then you know, an interest rate spike. And we've really from a development standpoint been in a, in a three year downturn as a result of that. Again, you know, going back to capitalization, people that were extremely aggressive about their capital stacks found themselves in a tough situation. So you know, a lesson learned from that. And really you can just never assume that any project is fail proof or that your business plan is bulletproof. You've got to sort of be paranoid in this business, I think to survive over the long term.
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Yeah, I hate to say it, but almost, you know, taking what you just concluded with there saying you almost have to be paranoid to a degree when the three downturns that you cited were all so drastically different from one another. And the lessons don't neatly, I think, transfer over to subsequent downturns.
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Yeah, that's why I say everything is different. You've got to take a little nuggets from all of your experiences and try to bring them together again to sort of. We think about being defensive in our capitalization, being defensive with our pro formas in the sense that the most important thing to first analyze is what does it take to get our money back out of a project. And after that you can think about the upside and different scenarios, but you just need to make sure that you've got a strategy that will carry you through the unknowns.
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Well, you cited a moment ago, you know, we're in a little bit of an interesting time post pandemic. You know, we've seen a downturn that's carried on for a number of years now and something we've trying to emerge from that none of us are familiar with. With that as context, when you're thinking about where to put your development dollars today in industrial, multifamily or mixed use, what's carrying the most weight in your decisions right now?
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Well, it's, it's interesting. We have a very diversified business, both geographically and by product type, which I think has, has served us well through these different fluctuations in the market. And we're obviously a developer, and so we have to think about capital and our deals in two different ways. One is the front end pursuit costs, which is costs that we generally bear in full as the developer. And so when we're examining opportunities, we have to look at the timeframe in which we're gonna commit that capital and when we expect to either have to close on the land or break ground or what have you. And so evaluating the capital markets situation as it is today and in the current environment, really as we think it's going to be at the point in time in which we're going to bring in an institutional capital partner. So that's a really big part of our thinking today because the capital markets have been so disruptive, a lot of liquidity, especially on the development capital front, and you can go broke in a hurry if you're overly optimistic. And then the second part of it is thinking about the simple nuts and bolts, the fundamentals of the deal, because to some extent the two go hand in hand. We had a period there for a number of years where there was a, the, the, the wind was in everybody's sails. There was lots of institutional capital chasing development, chasing higher returns, a lot of marginal Projects got, got, projects got done. A lot of those marginal projects were ultimately successful. But as we go to the back end of it, you've got institutional investors licking their wounds from some of the deals they did. And there's a lack of liquidity out there. And so it's our perspective that as we sort of emerge from this trough, the better deals are the first deals to get done. The path of growth, the story deals are going to be very, very difficult for the foreseeable future. So, you know, we're sort of trying to thread the needle. We're committing capital to deals that we think are exceedingly fundamentally sound in great sub markets that have defensive underwriting characteristics. And then we have to make the bet again, if we're looking 9 12, sometimes 18 months out at where we think the capital markets environment is going to be at that point in time. So it's as hard a period as any I've experienced in my career because of the strange dynamics that we're in right now.
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Yeah. And it's a theme I hear over and over again is that, you know, look, every, like I said, everybody downturn is its own unique beast. This one is just, I think, has no real historical playbook for us to turn to and say, okay, this is how we did this in the past. And bit of a challenge.
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Yeah, that's for sure.
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Well, talking about deals, you know, one of the things that, you know, I'm hearing and we're seeing a lot across North America is that we're seeing developers re underwriting deals now in real time. What assumptions are you and your team most focused on pressure testing? Is it rents, exit caps, construction costs, capital markets, all the above? Well, I guess it's a little bit
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of all of the above, but I think it's really, it's more back to the simple nuts and bolts of rents and occupancy. We finally got into a period where construction costs have basically stabilized. I think there was an expectation on the part of some that we'd see a big decline in construction costs, but they tend to go up rapidly and they're very, very stubborn coming down. But at least we've got some stability so we can take that out of the equation for the most part. Cap rates again, I just, I don't see cap rates recompressing, if you will. Maybe when there's more liquidity in the market, we see a very, very modest change. But we're just working with market cap rates to the extent you can discern them today and not trying to project Anything there. So it really goes back to, to where are occupancies today? Where do we think the demand is going to take occupancies, which ultimately puts pressure on rents. So it's really just sort of simple real estate 101 when we're trying to pressure test deals. And it's really, it's more about pressure testing submarkets more than anything else and trying to sort of put a crystal ball in a forecast onto where we think that micro market or that competitive environment is going to be at the point in time which, when we have to shift from a pursuit to an actual construction project.
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So as I mentioned in the intro, Transwestern is involved in numerous asset classes. And your insights today are particularly valuable because it gives us an opportunity to talk with someone that's involved in two asset classes that there's really a lot of questions about right now. First being mixed use, the other being multifamily. So I'm going to take a little bit of a deep dive into those, if you don't mind. And let's start with mixed use. You know, look, it's arguably the most complicated form of development that's out there and there's a lot of good reasons for that. Early on in a project. What are the one or two decisions that you and your team look at to really determine whether a mixed use project is going to work long term?
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Well, I think fundamentally you've got to have a location that supports each of the uses that you are contemplating in a standalone situation. Right. If you've got a site that's going to have multifamily and retail and office, that location needs to support each of those product types independent of your mixed use project. I think it can be a fatal flaw trying to assume that you can take a location that might not otherwise be attractive for one of those. And somehow because you've got the combination, it's going to fundamentally change the nature of the demand for that product type. So I think that's where we start. And then after that it's thinking about flexibility. Especially if you've got a larger site that might involve multiple phases, inevitably the environment is going to change on you at some point in time. And so when you sit down and start conceiving of a master plan, it's really, really important to build flexibility into that plan so that if one, one part of it maybe, maybe the demand equation improved, maybe the demand equation declines or evaporates. And so you've got to make sure you don't have to Go completely back to the drawing board from the design standpoint, if your vision somehow is taken off course by events beyond your control. And so that's a really, really big deal for us when we're looking at this. And again, it's, you know, back to that first question. It's very, very difficult to find sites that ultimately are super compelling.
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Yeah.
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For a variety of different uses. And so when we think about mixed use project, it's more about a site telling us what's possible as opposed for us trying to sort of force feed a vision onto a location.
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Yeah. And you know, it's interesting how, particularly with the bigger project, as you mentioned, that all comes together. I mean, that in and of itself presents its own challenges just from actually developing the project. But mixed use also comes with another complication, and that's the capital side of things. And you may have competing interests on that capital. Where the retail side might look great, the office or multifamily side, not so much. How do you evaluate that risk? Are there certain signals that you and your team are looking or that you trust when you decide to move forward?
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Well, I think it's not so much signals. It's a matter of coming up with a plan that allows you to again, have a flexible capitalization strategy. You know, these mixed use projects, especially urban mixed use projects, they tend to be large in scale, which limits the number of investors who can participate. And investors these days tend to be siloed by product type. Even if it's a big investor that does several different asset classes. The source of capital, whether it's a fund or a pension fund client or something like that, they tend to be focused on one asset class or another. And so what we look at is the ability to capitalize the individual components separately so that we can get the right source of capital for that part of the project. And then you're back to the timing situation. Right. It's how can we bring all of this together at the same time? Because these mixed use projects, you know, if you have what we describe as broken teeth, basically a component of your project that doesn't exist, it really can send your mixed use plan sideways. Because the complementary nature of the different product types working together doesn't exist for some period of time, which can be fatal to the first phase.
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Well, every developer likes to talk about a project, and I want to talk about one that you have going on right now, the road down in Houston. Construction is underway on that. But how does that project reflect how you're thinking about mixed use today? And, and giving the challenges in today's market. What made this the right time to move forward with that?
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Yeah, well, we bought the land a number of years ago during a little cyclical downturn in the city of Houston. So we had a great land basis. Back to the capital comment that I was making earlier, we had a relatively conservative capital strategy, so we've had some staying power. Our vision for the site was ambitious and so we've been able to be patient. But this was, you know, we bought the land pre Covid, so we saw the COVID disruption then we've seen the interest rates spike and a subsequent disruption from that. So really some of the things that I talked about earlier with regard to flexibility and the site planning allowed us to modify the scale and the structure of certain components of the project. And then as we fast forward to today, we really, we were able to get ourselves into a situation where several different product types were compat. So that project in phase one alone has an office building which is nearing completion. It's 100% leased. That started as a multi tenant spec building which was shelved in the fall of 2022. Our lead tenant was, was, was excited about the proposition. So we converted that to a build to suit which made, gave us the ability to capitalize that. We've got a multifamily high rise tower. Houston has been a relatively stable market in a multi family context. Didn't have as much construction as some other cities did. And certainly the, the infill area in Houston's performing well. We have international capital that we brought to the table to get that component done. We have a hotel condo component to that project, which is something somewhat unique to us. But this is our hometown, our backyard, frankly, my neighborhood. So we, we had enough conviction there to think that we could figure that out. In that case, it's a $400 million plus component by itself and it is 100% private capital. There's no institutional money in that, which you can imagine is a pretty heavy lift. And we've got a debt fund providing the debt, but we kept the leverage levels very modest. And then we've got a retail component which, which owns all of the retail, even the retail that is under the office building and under the multifamily building is owned in a condominium regime by again, a private investment group. And that, that aspect of the project was really important to us because we wanted to ensure that the retail plan, it could be leased and merchandised as a, as a whole, given the impact that it has on the place making and the value creation for some of these other components. And we wanted to make sure that we had a longer term strategy to see that through and do what was right as a value creation component of the overall master plan.
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Yeah, and hats off by the way, 100% leased office building. That's just great news to hear. We need more stories like that. That's, that's great for you and the team.
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People keep telling us it's a great looking building here as it, as it delivers. And my comment back to them always is the best looking building is a leased building. So it's a good way to start. And an office these days it's very difficult to get anything done. So that project would not have occurred but for the build to suit nature of it.
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Yeah, well, interesting to hear that. A little bit of insight on the office side too. A lot of that's been in the news. In terms of the office. I want to switch a little bit and talk about multifamily. This has been something that again coming out of the pandemic, we saw it perform and perform well. A lot of shovels went into the ground to build this and now we're trying to find a little bit of terra firma on this. How has your thinking evolved in terms of multifamily on things like unit mix, amenities, place making when residential is a part of that larger mixed use environment that we were talking about?
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Well, I mean I think we, we start certainly in that case with what, what is set aside our mixed use plan. Where, where's, where's the strongest demand in the market? Where can we achieve the highest rents as part of our pro forma? So we really start there as opposed to letting whatever we're doing with the mixed use plan drive that. So let's assess the market, let's understand where the demand is, let's understand the demographic profile of our target renter and let's design to that. And then when we think about bringing the placemaking aspects of the mixed use component to it, it's really about what can we do from a merchandising plan with the retail that is most compelling for the other aspects of our master plan, while also ensuring that from a fundamental standpoint for the retail investment that that still makes sense. And so for multifamily it's really about a retailer profile that is suitable to the demographic that we are chasing from the resident profile. And then what is something that is appealing to those people on a day in, day out or week in, week out basis and that really takes you towards, towards restaurants and other sorts of retail items that people use on a regular basis as opposed to, you know, perhaps, you know, luxury retailer or something like that, which may fit demographically but isn't necessarily a motivating thing for someone to want to live next to. So our retail plan in this case, we've got about 80,000 square feet of retail. We think we'll end up with six, maybe even seven food and beverage options. And that really is a differentiator, especially in our market, which is sort of a typical Sun Belt market, very car centric, not a lot of walkable alternatives out there. And so we think we're going to create an environment that's very, very unique. And so when we take that back to our multifamily pro forma, we don't necessarily have that dialed in, but we've done the research, we know that if executed properly, a mixed use project, especially in a Sun Belt market, will drive superior occupancy levels and superior rental rates if that retail offering and that placemaking aspect, if the environment is compelling for those renters as a differentiator versus their alternatives.
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So again, looking at the multifamily side on the capital, specifically whether it's partnerships, capital stacks, phasing, what's different today about that in the multifamily side of things?
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You know, I don't know that it's, it's, it's really different than it was before. It's just that capital is very scarce. Yeah, you know, we, we had a trend that really started in, in sort of 1516, where core funds had allocations for development that a lot of them had not had before that point in time. Those allocations from a percentage wise basis of their portfolio tended to be relatively small, maybe 10, 15%. But given the scale of a lot of the big core funds that had a really big influence on the cost of capital and the availability of capital for development. And those core funds by and large are still on the sidelines from a multifamily capitalization perspective. So it narrows the field. You've got some opportunistic investors looking at development, you've got some foreign investors looking at development, and you've got a few, you know, pension funds and insurance companies that were, you know, could define themselves as core investors who are still playing. But it's really, it's just a general lack of availability of capital. And so when we are looking at deals to pursue and sites to put under contract, we're thinking about differentiation. And certainly in the case of the multifamily at our row mixed use project, something very, very different for investors to look at it. So if, you know, if they've got 20 or 30 or 40 opportunities in front of them and they really only want to do two or three, you've got to figure out how to stand out from the crowd and how to create some investment appeal that really is distinctive. And so if you take this back to mixed use, we've got another project in Fort Worth which is smaller scale, a little bit of a different configuration. But we had significant capital interest on that deal and that mixed use aspect of that project was a really big key to most investors looking at it as distinctive, Both both a defensive investment and an offensive investment. Because of that mixed use profile, are
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you structuring the deals any different to get these projects financed and delivered right now? Because it is a bit more of a challenging environment.
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Yeah, we're really not. We're trying to stay away from preferred equity and mezzanine debt structures. Again, sometimes it's difficult to be choosy, but at the end of the day, we talked earlier about experiences gained from prior downturns. And even the most well conceived, well executed project can run into trouble because the cycle changes or there's a big macroeconomic event or something like that. And the more leverage, the more pressure you've got on your capital stack, the less staying power you have in the event of a market sea change. And so I think by and large we would generally rather sit on the sidelines and wait for the market to come to us versus trying to force force things. So by and large, we're sticking with our relationship, commercial construction lenders for the debt. I will say that part of the equation has become much more beneficial over the past sort of 12 to 15 months. So the construction debt's available. It's available at slightly higher leverage levels. Again, we're not doing high leverage deals and a lot of principal recourse, but so that's available. It's really the challenge on the LP side. And so that's where you've got to have a project that again stands above, above the crowd. And we're really looking forward. I mean, I think we, we have a relatively optimistic view about where the multifamily markets are headed. We're really primarily Sunbelt focused. Some of these markets, we think there's a rationale to build today. Some of them it's more towards the end of 26, some of those it's more towards 27. But we've seen a Lot of robust absorption in those markets. There is zero or not zero, but very little getting built. And so we think those. Those markets will become more sound, and we're going to see more LP capital come back into the space as that evolves.
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So you're talking 26, 27. Let's take it out even a little bit further. 28 to 30 here. We're looking out into that time frame. Where do you see the biggest opportunity for multifamily within mixed use? Is it urban infill, suburban town centers somewhere else?
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Well, I think it's a little of both. And we've tended to be a little more focused on urban infill projects, but again, it's all about trying to create that differentiation. And if you can find a site, whether it's suburban or infill, that has those characteristics that I described earlier, I think you can make something work. We tend to be more focused on the multifamily aspect versus the retail aspect. I think the more suburban you get in nature, the more these projects tend to be retail first, and then they have residential or office or hospitality as a complimentary component. So in that case, it really drives us towards more of a mindset of trying to find a partner who is a retail expert who can really bring that experience and those relationships to the team table. And then when we get into more of an urban setting where perhaps the retail component itself is compelling, but maybe more complementary from a master plan standpoint, that's a space we're more comfortable in doing that on our own.
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Well, it sounds like at least in the Houston market, which has got a whole lot of both there, there's a lot for you all to evaluate.
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Well, it's the. Those projects are extremely complicated, and. And you've got to have a lot of patience and a lot of willpower to see them through, that's for sure.
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All right, well, to close this out, then, it's a good way to kind of move into. My last question I have for you today. Looking to see this out. What do you think is one strategic move developers and investors should be making now to position themselves for the next upcycle?
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Well, there's a lot to unpack in that question.
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Easy question to send us out.
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Yeah. Well, I think it's, you know, for. For developers, it's all about land control. Right. And so we. We have lots of internal debates about the prospect of taking land down in advance, of having it capitalized versus spending money to perhaps give ourselves a little bit more time to see the market through. So I think, you know, that that's really the most complicated question for a developer, regardless of how well capitalized they are, is the prospect of buying land not knowing exactly where the capital markets are headed. And we also live in a world where the black swans don't tend to be as black as they used to be. You know, we open the paper every day and we see, you know, you know, geopolitical things and such coming in, coming into the fore. And so I think it's really, it's, it's, it's a land control issue, by and large. And then, and it's, it's a projection issue, you know, it's, it's. None of us has a perfect crystal ball, but we are spending considerably more time these days trying to forecast out to, you know, early 27, early 28 and try to get comfortable that when we are putting capital at risk right now that we're going to be rewarded in the future. But it's a very tricky environment for sure.
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B
Yeah. Like I said, I love to save the simple ones for last. So, Carlton, I really appreciate you taking such a heavy question, not only at the end, but I appreciate as well all the insights today. Thanks for joining us and sharing those insights. I hope to have the opportunity to speak with you again soon. Thanks again.
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My pleasure.
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Take care. Thanks for listening to Inside CRE with your host, Mark Silvitellen. If you enjoyed this episode and you'd like to help support the podcast, please please share it with others and be sure to subscribe. To learn more about NAOP and to join a network of over 21,000 commercial real estate professionals, visit NAOP.org.
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Sam.