Rethink Real Estate. For Good.

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For the love of the building.

Growing up in a middle-class household in suburban New Jersey, Mark Winkelman decided at an early age, with the encouragement from his interior designer mother, to pursue architecture. To that end he attended and graduated from the Syracuse School of Architecture in 1978. Upon graduation he interned in Phillip Johnson’s highly acclaimed design firm in New York City. While in Johnson’s office he worked on a number of notable high rise office buildings including the gothic PPG Headquarters in Pittsburgh and the iconic postmodern AT&T headquarters in New York City.

After earning his New York State architectural license Mark and his then girlfriend (and now wife) traveled to and worked in Tokyo, Japan for two years. There he came to appreciate the refined visual aesthetic that is uniquely Japanese. The design lessons learned in Japan would deeply inform and influence Mark’s own design work. Perhaps the most important lesson was grasping the importance of putting new work in an historical context.

Upon returning to the States in 1984, Mark partnered with a Syracuse classmate and formed Downtown Design — a boutique architecture and interiors firm based in New York City. For the next 25 years Downtown Design grew and developed a number of specialties including the design of technical media facilities such as recording studios and video edit suites. The firm’s projects also included the restoration and adaptive reuse of historical loft buildings in the creative neighborhoods of Soho and Tribeca in Manhattan. Indeed, one of the loft projects was his family’s own home in a 1894 spice warehouse.

In 2007, Mark and Suzanne bought the complex of historic and vacant factory buildings in Williamsport, PA. According to Mark, the building and their potential was enough to bring him to Williamsport. The Winkelman’s have honored local history with the name “Pajama Factory” and the continuing restoration and preservation of the 100 (plus) year old buildings. According to local history, Weldon’s Pajama Factory was once the largest pajama factory in the world. The site was scouted and used as a model for the 1950’s Broadway play, later the movie, “The Pajama Game,” starring Doris Day and John Raitt. They pondered how to fill the 300,000 sq ft of floor area in a town that has been losing businesses and population for decades.

The Winkelmans opted for a plan much like the one highlighted in Richard Florida’s book “Rise of the Creative Class” that included a mixed-use complex with a 24/7 urban lifestyle which includes live / work lofts, work only studios, supporting retail shops, and community facility spaces. A haven for creative thinkers and incubator businesses was created. Performance and event spaces are available for music, political events, large meetings, tenant / community events. A community outreach, 501-c3, organization which has a well-equipped wood shop, clay studio, bicycle recycle shop, and photography dark room — all of which were brought into the mix by the Winkelmans and are open to the wider community.

Mark strives to maintain a high level of energy and optimism in order to build a Creative Community that will someday serve as a model for the Arts World and for energizing small cities and towns. The adaptive reuse of a building into a mixed-use facility is an established practice in big cities but it is not often seen in towns and smaller cities. The fact that the Pajama Factory located, as it is, in a small city, is beginning to have an outsized and positive effect on how the City of Williamsport perceives itself. Mark and Suzanne understand the importance of being a part of a community-based economy by providing spaces where locally owned small businesses can be developed and benefit from the “Buy Local” movement. The rents are kept incredibly affordable at about 1⁄2 the local rate and 1/10 the rate in New York City, for instance. In his spare time, Mark managed the restoration of his 1970 Triumph GT6 British sports car. He loves sailing, especially blue water cruising. Ceramics, primarily wheel work, is a passion. He also loves traveling with his family — as long as his daughter and son take care of all the arrangements.

Read the podcast transcript here

Eve Picker: [00:00:05] Hi there. Thanks for joining me on Rethink Real Estate. For Good. I’m Eve Picker and I’m on a mission to make real estate work for everyone. I love real estate. Real estate makes places good or bad, rich, or poor, beautiful, or not. In this show, I’m interviewing the disruptors, those creative thinkers and doers that are shrugging off the status quo in order to build better for everyone.

Eve: [00:00:41] After a successful career in architecture and design in New York City, Mark Winkelman purchased a 300,000 square foot historic pajama factory. Once the largest pajama factory in the world, the building sat vacant in a small town in central Pennsylvania with a population of just 114,000. The Winkelmans set about filling it one corner at a time with a vision for an affordable and thriving creative hub. 16 years later and 60% complete, the stunning buildings are coming back to life. But there is still more to do. What was Mark’s motivation and what was his thesis and how has it played out? Listen in to learn more.

Eve: [00:01:37] Hello, Mark. It’s great to have you on my show.

Mark: [00:01:39] Good to be here.

Eve: [00:01:40] So the pajama factory, once the largest pajama factory in the country, now belongs to the Winkelmans. You and your wife, Suzanne, which is really a very bold move. How did you stumble upon the pajama factory?

Mark: [00:01:56] I had a partner, I had a bar stool buddy of mine who was a fantastic, is a fantastic woodworker, and he got involved in some real estate in New York City, and I helped him out as an architect. So, we got to know each other and then he lost his interest in New York and moved out to a nearby town, Bloomsburg, with his woodshop and somehow discovered the building. And ultimately, he sold it to me. He knew I was interested in expanding my architectural practice, if you will, to really own and develop a building or a space or become a developer. So, anyway, he sold me the building, in a sense, and I mean, it’s crazy. It’s in the middle of Pennsylvania. I knew nothing about Pennsylvania. I got as far as the Delaware Water Gap, which is a nice place to canoe and hike on the Appalachian Trail but that’s about 200 yards into Pennsylvania. And Pennsylvania is a huge state. So anyway, we saw the building, found the building and the building, I mean, if it was in New York, it’s just…

[00:03:13] It would be worth a fortune. Yeah.

[00:03:15] Oh, yeah. And unattainable for me to work on. But here we bought it for nothing because nobody wanted it. I mean, literally a penny on the dollar compared to New York. It didn’t really know what to do with it, except that it had potential. It had all potential.

Eve: [00:03:31] The town it’s in is called Williamsport, right? Williamsport.

[00:03:34] That’s correct.

[00:03:34] And it’s pretty well Central PA. Central North?

Mark: [00:03:37] North Central PA. It’s an hour and a half from Harrisburg, the capital. The closest town is Elmira, New York. You know, it’s …

Eve: [00:03:49] So New York is about a three-hour drive. Pittsburgh’s a 3- or 4-hour drive. Toronto’s a three-hour drive. It’s kind of in the middle of, really in the middle.

Mark: [00:04:00] All the locals here say it’s in the middle, middle of the universe. And I actually call it the middle of nowhere because it’s quite removed and there’s no public transportation. There are challenges but the thing I ultimately like about Williamsport is the fact that it’s isolated. And because it’s isolated, everything is here. And my only experience in the past was suburbia in New Jersey, which is where I grew up, which was vacuous. And New York City, which is exciting. It has everything, but ultimately it becomes very inconvenient. Everything is so convenient in Williamsport. They have a steel industry down the street that produced the beams for the new Tappan Zee Bridge. Huge industry. Right up the street we have a precast, small precast company. And I literally had some pieces precast for the building and dragged them back here on a wagon. You can’t do that in New York, you know. That’s been a remarkable kind of revelation to me. I came here for the building. I came here for the challenge of restoring this historic building. I didn’t care about the town, but I’ve come to really appreciate the town and its surrounding. In fact, we moved out here. Suzy and I have moved out here. And our daughter’s moved out here.

Eve: [00:05:25] And I’ve been lucky enough to see it. It’s wonderful. How big is it?

Mark: [00:05:29] It’s 300,000ft², spread over eight buildings around a lovely little courtyard. It’s ridiculous, it’s so big.

Eve: [00:05:40] And it has a really rich history. I learned that not only was it the largest pajama factory, but Keds were invented there.

Mark: [00:05:48] That’s correct. Largest pajama factory in the world.

Eve: [00:05:52] In the world? Yes.

Mark: [00:05:53] Apparently, apparently. It was before China became a big manufacturer, obviously.

Eve: [00:05:58] And before people stopped wearing pajamas.

Mark: [00:06:00] Well that too, yes, that’s another discussion. But yes, it was originally Lycoming Rubber Company and its history as being part of us rubber is what ultimately warranted listing on the National Register of Historic Places. But as a rubber company, they started in 1883, I think, and they made, basically they dipped wool socks in rubber and gave them to the lumber industry, and that’s what they used to climb around on the logs as they took them down the rivers. That was their start. But then it moved into athletic wear at the turn of the century, the turn of the last century. And they did invent and produce Keds sneakers here. And I think Keds sneakers was introduced in 1916. And the big buildings, we have three big buildings, all connected, which comprises two thirds of the whole 200,000ft² out of the 300,000. I think they were built by Keds, by the Keds business, because the timing was right. And Keds claims accurately that they were the first mass produced sneaker. Converse came out at the same time with their sneakers and, approximately the same time, and Converse claims that they are the first sneaker mass produced, as opposed to the first mass produced sneaker. In other words, Converse got up and going and produced their sneaker before Keds did. But Keds was introduced before Converse.

Mark: [00:07:41] Yeah, I know they’re all fighting. Yeah, it’s neat stuff. So, they were here for 15 years, I guess, and it was early in the depression that they consolidated their operations, their shoe making operations in Connecticut. And they continued to own this building for another 20 years but sublet it out to small shoe making companies and the garment world.

Eve: [00:08:11] So, light industrial. Yeah.

Mark: [00:08:12] Yes, yes. And Weldons, well done Pajamas is the company that grew and ultimately bought the building in 1950. And I will say that we’ve got some examples of their pajamas around. They’re very nice. I mean, not for me, but whatever, they’re very nice. They were well done. But their architectural work on the complex was not well done at all. It’s really terrible.

Eve: [00:08:40] So, now you have the building, right? And I’ve seen it and I know you preserve and honor that history. How did your vision evolve? What did you decide to do, and how long did it take to figure that out?

Mark: [00:08:54] I had a friend of mine in New York who was involved with us from the beginning. Another friend, not the one who introduced me to the building, but a really smart guy. He was in marketing and very thoughtful. And he and I were talking about this, and the original idea was that we would bring Philadelphia and New York artists out here. The property is cheap and inexpensive and it’s neat but that didn’t happen. That was our goal is to bring folks and my buddy, being smart the way he is, he says, you can’t, you need a there there. You need something to exist before you can attract folks. And you have a vision, but they’re not going to come for the vision, they’re going to come for the fact. So, we had a kind of a rough time like, well how’s this happen? The other thing you did that was critical was he and I developed the idea of building a community, and it was the community idea that is the value added for the building. He accurately suggested that if we just try to advertise space based on price, it’s a downward spiral. You got to have something else. And it was community. So, we start to nurture that idea and it’s taken time. It takes a lot of time.

Eve: [00:10:13] So how does your architectural background influence this project? I mean, you you’ve had a long career and probably learned some things in Tokyo where you spent some time.

Mark: [00:10:24] Oh my goodness, yes. Yeah. Well, what is it? I mean, first you need a love of the building and then have confidence that you’re not alone with that love and then respect that. And so, yeah…

Eve: [00:10:41] I want to chime in I saw that respect when I was there because you dismantled, you know, old bathrooms and have reused the beautiful slates as countertops. And I saw even, you know, the shower rods were old bits of metal pipe that had obviously come from somewhere in the building. So, to me, it looks like a building that’s being dismantled a little and sort of shoved back around like a jigsaw puzzle into something slightly different.

Mark: [00:11:10] Yeah, a little steampunk, a little recycle, little homegrown, all of that. We do it all in-house. I think that’s kind of key is that that we’ve developed an in-house team. You can’t specify recycle as an architect. You know, it’s, but if you got a pipe and you got a pipe threader, you can make something up as you go. And we’ve been doing a lot of that. And I like that. That’s part of what I enjoy doing. I’m a ceramist. I deal with little things, and I deal with big things, and I like craft and I want to put craft in building. I want the design to be crafted, but then I want the product to be crafted. The hand is important, so that’s been fun for me. I don’t know that it’s necessary to make the project successful, but…

Eve: [00:12:02] Right.

Mark: [00:12:02] Am I answering these questions? I don’t know.

Eve: [00:12:04] Oh yes, yes. I can hear Suzanne cooking in the background. And we’re not we’re not going to edit that out. Okay.

Mark: [00:12:14] No.

Eve: [00:12:15] So you’re nudging the building, all 300,000ft² of it, from almost vacant to a fully occupied creative hub. So how far along are you? Tell us about the activities and facilities already there.

Mark: [00:12:30] It’s amazing. I just had someone come in yesterday. And I’m so excited about this. He came in, he is a luthier, and I’ve talked to people about a luthier. No one knows what a luthier is.

Eve: [00:12:45] What is a luthier?

Mark: [00:12:47] Here we go. A luthier is someone who makes and repairs stringed instruments.

Eve: [00:12:54] That’s what I remembered, yes. So, we call them a violin maker. But there’s many more. Oh, yeah. No string instruments. String instruments. You got lutes and basses and all sorts of things. Yeah, OK.

[00:13:08] Yes. So anyway, he is in, he’s involved, he’s a co-president of an international luthier’s organization that meets once a year at Oberlin, in Ohio. And I guess there’s a big music program out there. And they’ve been very supportive of this organization, but they shut down for the pandemic because nobody could travel. And then Oberlin informed them that they can’t use the facilities that they’ve used for three decades now because it’s under construction. So, he’s scratching his head. Well, maybe we should do it in Williamsport. And he gave me a call and I showed him around. We have the wood shop so they can cut pieces of wood and work on their luthing? I don’t know, whatever they do. And we have the Clerestory event space, which he thinks is magnificent.

Eve: [00:14:00] It is gorgeous.

Mark: [00:14:01] They have 60 people that are going to come from around the world, and everybody from somebody who’s just entering the field for a couple of years in, to guys have been doing it for decades and get pushed around in a wheelchair, the whole spectrum from all over the world. 60 folks are going to come into town, I hope. And this fellow and the head of the wood shop got talking, and they immediately got down to what kind of hand plane they like and why, and what is the angle of the blade on that plane. And, you know, that’s the number three, not the number two from that manufacturer. And I’m like, oh my God, this is too good. I love that. And that’s you know, that’s what we’re, that’s what I’m trying to build here is this collaborative opportunity for folks. You know there’s no requirements. You can go be a hermit in your studio. So that’s neat. That’s what’s going on there. But we, I mean that’s one end of the spectrum, this really rarefied craft. And the other end of the spectrum is we have, tonight, we have a pro wrestling match in that room. I mean, you can’t make this up.

Eve: [00:15:15] You also have a volunteer bike recycling shop.

Mark: [00:15:21] Yes, we do.

Eve: [00:15:23] I don’t remember what else was there.

Mark: [00:15:25] Oh my. Okay. Well, we have a community wood shop, and we have a clay studio, which is open to the public. You take classes and become a member there. We have a dark room, old school dark room, mostly working on experimental systems, old ways to develop film and paper. And we have the coffee roaster and a, pasta maker, and…

Eve: [00:15:53] And the coffee roaster makes great pastries.

Mark: [00:15:56] Oh, yeah. Yeah. Very. Yes, yes. And then lots and lots of studio spaces with small businesses, marketing folks and artists and lots of photographers because the windows are massive and have a really interesting diffusing glass from the early days which creates great light in the spaces. So, we got lots of photographers.

Eve: [00:16:21] And residents. Right?

Mark: [00:16:22] Yes, we do. We have residents, maybe a dozen. We want to put in another 60 residents, low end, lower cost, basic, room with the toilet, if you will, for the cheap artist lofts.

Eve: [00:16:38] It’s a lot more than a room with a toilet. They’re really spectacular. Tall ceilings.

Mark: [00:16:43] Some of them can be. Yes, some of them can be. But I want to make some really inexpensive ones and attract the artists. And maybe they move up, maybe they don’t. Or maybe the folks that live in the nice spaces on the top floor buy the artwork from downstairs, I don’t know.

Eve: [00:16:58] So Mark, most developers look for anchor tenants for very large projects like this because then that brings additional tenants along. What’s your approach to that?

Mark: [00:17:09] I have not found that to be useful at all, which has created a problem with the banks. I have found we have a couple of bigger, we have one bigger tenant. And he uses rent for his cash flow management, which is a problem. We have 160 spaces rented, all small, otherwise all small tenants. And I find security in having a lot of tenants, instead of giving power to a few tenants. So, you fight the financial system by not having an anchor tenant that basically can cover a good percentage of the rent, but in my case, with 300,000ft², what’s an anchor tenant? 100,000ft². You know?

Eve: [00:18:04] And anchor tenants tend to be not local too, right? So…

Mark: [00:18:07] Right.

Eve: [00:18:08] How many how many of your tenants would you say are local? You know,

Mark: [00:18:11] All of them.

Eve: [00:18:12] All of them.

Mark: [00:18:13] All of them.

Eve: [00:18:13] The retail tenants? Yeah.

Mark: [00:18:15] Yeah, all of them.

Eve: [00:18:17] So they’re very committed to the community and the town.

Mark: [00:18:21] And the factory, which is nice. Yeah, they’re committed to the project.

Eve: [00:18:25] What’s an attractive condominium price then? There.

Mark: [00:18:30] There’s no history out here. So, it remains to be seen. I’m hoping to produce finished lofts in the top floor for $200 a square foot.

Eve: [00:18:42] I mean that’s less than half what they are now in Pittsburgh, Pennsylvania. Can’t even guess what they are in New York or Philly.

Mark: [00:18:49] Oh, yeah, no it’s crazy. It’s ten times. I mean, in Manhattan, it’s pushing $2,000 a foot. And Philly I looked recently and Philly, I seem to find a lot of them around $300 a foot. So, I think we can, the question is, can we make it work? But I think we can because the acquisition costs of the property was so low.

Eve: [00:19:13] So you’ve got about 60% of the space full?

Mark: [00:19:16] Yeah.

Eve: [00:19:16] And you’re now on a path to build out the final 40%.

Mark: [00:19:22] In in phases, still.

Eve: [00:19:24] In phases. Okay. Cause that’s a lot of square footage, right?

Mark: [00:19:29] Yeah, it still is. That’s right.

Eve: [00:19:32] And so, like, about the creative facilities, what else is planned? You’ve got a luthier coming. I mean, in your vision what would be ideal?

Mark: [00:19:41] Well, we’ve got the clay studio, wood shop and bicycle recycle, and photography are all part of a non-profit umbrella organization called Factory Works. And I’d very much like to see Factory Works expand their offerings to include metalworking and printmaking and glasswork. I mean, we can keep going. Whatever, you know, have a maker space, get some digital fabrication going. So, to that end, I’m dedicating about 15,000ft² of space on the ground floor to consolidate and allow them to expand at the same time. So, I think that’s going to be key. What we really need to do is get the tenants to start to take control of their own futures here and allow me to step aside. That’s a challenge. I don’t know, I’m hoping the condo process will do that.

Eve: [00:20:41] Yeah, because you then can create a condominium association which has governance that isn’t just you making decisions, right?

Mark: [00:20:49] Exactly, exactly.

Eve: [00:20:51] And it’s yeah, it is challenging. So, what’s a typical day at the factory like for you since you live there?

Mark: [00:21:01] Yeah. Oh, you know, I’ll get a call when someone’s key breaks off in the lock and there’s a pipe that breaks somewhere because it froze in the winter because we can’t heat the whole place yet. What is my typical day? Yeah, I got a lot of balls in the air, but I try to keep focused. I’m trying, we went away, Suzy and I went away in a vacation for two weeks. I didn’t talk to anyone for two weeks. The place ran itself.

Eve: [00:21:29] That must be comforting.

Mark: [00:21:31] Well, it almost is. And I say almost because there isn’t really a number two person who would call me. if there’s an issue. There’s a bunch of number three and number four and number five people, but there’s no number two person. And so, I need, I kind of need that. And I need enough cash flow to be able to just pay someone to be number two. And then I’d be directing him instead of trying to direct everybody. So right now, we’ve got ten employees and I have to sort of stay on top of all ten of them. They’re all doing things that are different. Well, three of them are doing construction, so there’s a hierarchy there. We got one guy who’s in charge of construction and maintenance. But otherwise, everybody’s kind has an individual discipline, which is unnerving because you have one bookkeeper and then she’s out sick, you know. Yeah. What do you do?

[00:22:26] Yeah. There’s this is dilemma when you’re in the 10 to 20 people phase where you can’t really quite afford someone to supervise everyone for you. It’s tough.

Mark: [00:22:34] Yeah, yeah, that’s where we’re at. Again, the condo will have a board that takes care of this, which, but we’re a ways from that.

Eve: [00:22:45] Yes. What aspects of the project have been the most delightful and rewarding for you.

Mark: [00:22:51] Yeah, that’s a good question. It all, it’s, you know, what part of the spaghetti sauce is your favorite?

Eve: [00:22:57] Okay, I’ll move on. What’s been the most challenging then?

Mark: [00:23:03] Yeah. Fair. Money.

Eve: [00:23:07] Money.

Mark: [00:23:07] Money has been money has been the most challenging. And, I mean, coming from New York, money’s around. You have a viable project. You put something together, you can find money. At least that’s my understanding. But out here, we’re breaking all the rules, and it seems to stack up against any kind of conventional financing. I think the biggest problem with this small town that continues to lose population is that real estate values at best are stagnant.

Eve: [00:23:40] How does a bank assess the value, right? There’s just no like kind property at all.

Mark: [00:23:46] That’s another problem. But yes, there’s, so, you know, we have cash flow now. But why would a bank want to invest for 30 years in a dying town? Or 25 years, or 20 years. It’s a big burden. So, they’re very conservative about when they invest. So, they’re looking at 50 or 60% loan to value ratios instead of 80, 90%. And they put a very, the appraisers put a very conservative capitalization rate depending on whether you’re on the receiving or sending end there. But they use a cap rate of ten. So, you you’ve got these hurdles. You can’t get the cash flow at a cap rate ten to support significant debt.

Eve: [00:24:35] But you’ve done it, right?

[00:24:38] Well, yeah, I mean we had help when we bought it. We had help when we bought it. There was a very aggressive banker before the regulations changed before the financial crisis. We bought it just before the financial crisis in 07/08. And the regulations have hamstrung the bankers in many ways. But we bought it before that, so we got a loan before that. And they had a, the town had an economic development person on staff, and the banker worked with them and therefore the mayor at the time and we got a loan. It was a small amount ultimately, but it was enough for us to get involved. We got a $600,000 low interest loan from the state through the city. So that got us going, but we’ve had nothing since then.

Eve: [00:25:32] Oh, wow! You have gotten a grant from the from the state.

Mark: [00:25:37] The state? Yes. I know it’s interesting. The biggest challenge has been to convince the local administration folks, the local city government that we’re good guys, and it seems a natural to me, but it’s been very, very difficult. I think we’re coming around now because there’s enough of a chorus out there with all of our tenants and all the events that we have here. Enough of a chorus that’s very supportive that they, I think they’re beginning to come around.

Eve: [00:26:15] So do you think your project has influenced the perception of Williamsport? It’s a lot of square feet in a small town.

Mark: [00:26:25] It’s beginning to. There’s a number of tenants that have moved back to or stayed in Williamsport because of the pajama factory. And of course, they talk about that to others. So, yeah, I mean, that’s what’s most exciting, I think. That’s the part that I find most exciting and the part that’s most surprising when I bought the building. You know, it’s a bunch of bricks and windows. I’ll fix it up and we’ll get it occupied. But now we’re changing a town, and that’s very exciting.

Eve: [00:26:56] It’s economic development.

Mark: [00:26:57] Yeah. Yeah, absolutely.

Eve: [00:27:00] So you’ve also listed a raise, which was launched yesterday, on Smallchange.co to raise funds for this next building phase that you’re going through. Is this partly the reason why? It’s too hard to find, you know, I don’t even know what normal money is, I’m not sure I should say that, but it’s very difficult. I mean, I’ve worked with other developers who have similar problems. Anytime a project is out of the city and unusual, it is almost impossible to get institutional financing. So, you’re not alone. Although that doesn’t really make it better.

Mark: [00:27:39] What I’ve found is you can get institutional financing, maybe, for your facility, for your project as it sits. So, I got financing based on our new cash flow and new appraisal and they made sure that there was enough cash flow to pay for the financing. There was nothing for development. So that any development has to be, money, has to be obtained outside. And that’s where Small Change is going to help us. In the past, I’ve approached some friends and family and that’s gotten us going. But I love the way that Small Change works, and I think it’s going to do a lot to publicize what we’re doing here in town. And I’m looking forward to getting, I don’t know I’ll get so much money out of the town folks, but I think we’ll get a lot of positive PR and I’m going to push that. Yeah.

Eve: [00:28:46] Good. So, and what will this next round of funding build, you know, along with the, I know you have funds from the state as well, a grant. So, what are you planning?

Mark: [00:28:56] Yeah. So, uh, I hope to have about three mil to work with in total. And the state funding is going towards long deferred, too long deferred maintenance issues like roofing, parking lots, HVAC systems, the stuff that doesn’t pay rent. Every time, I mean, because we can only get money based on rent roll, every penny that I got from a bank or development went into developing rent roll. How? With the roof right now, I need rent roll. But now we’ve got some free money coming. Not free, it’s grant money. A lot of brain cells get expended when you work with these grants. But anyway, I’m going to use the grant money to, you know, secure the building at this point. That’s very exciting. But then there’s some more money left over, I hope and that’s going to go towards, well, my favorite project, and it’s probably for personal reasons, is our beer garden on the roof. I want to use…

[00:30:00] Now, is it the beer or the garden, Mark?

Mark: [00:30:03] It’s the beer, of course. Well, you know, it’s going to be what I can do in the afternoon when I can’t drink coffee. Time to go upstairs. The roof is amazing. It’s so beautiful up there. You’re in a valley, in a green valley and you’re above all the trees and all the other buildings you can see all the way downtown. The sunsets off to the west, right off the roof. And we’re putting a kind of a guest bar up there, and we’re going to use the beer garden to, I hope, attract, a craft brewer. And then the craft brewer’s going to move in downstairs. I’ve got 6000ft² of space dedicated to a brewery. And then I’m hoping that the activity with our new parking lot out front and the craft brewery downstairs. I hope that activity generates some interest for the restaurant. So, then we really start to have an ecosystem here that’s pretty complete. And I just need to do that before I’m in my walker, because I have to get this happening.

Eve: [00:31:12] I don’t think that’s ever going to happen, or not soon. So, what advice do you have for anyone contemplating a similar project?

[00:31:19] Call me. You have to be prepared for a lot of time. I did this in New York. We bought into a loft in downtown Manhattan in 1984 and paid almost nothing for it. It was a dump. It was truly a dump right over a disco. But I knew that there was a lot of space, and I was an architect. I was like, okay, I’ll work with the space, and we’ll see how it goes. And it went fantastic for us over time, it’s now worth a bloody fortune. And it allowed me to buy this building. So, I’m like, okay, let’s do it again. But it takes time. I mean, it was 30 years in New York to build the value.

Eve: [00:32:03] Yes, like, real estate is a long hold.

Mark: [00:32:07] It should be, and I think the way the development world works and money works, it demands a short-term return. And that is counter to building a quality, community-based structure, or institution. So, you got to go into it with your eyes wide open that it’s going to take a long time. Even longer than you think. As I said, this is a five-year project for me, and I’m on 16.

Eve: [00:32:39] So there’s no sequel planned for you, right? There’s not a pajama factory number two?

Mark: [00:32:45] No, there really isn’t. No, people have asked. No, this is plenty. And it’s, the other thing about it is it’s an endless project, which is fine. You know, I want to get it so it can support itself, but that doesn’t mean I can’t continue to contribute.

Eve: [00:32:59] So final question I want to ask is how does this project feed your soul?

Mark: [00:33:05] Oh, so many ways. As I said, I love the crafts. I was an architect, I decided to go to the dark side and become a developer. And then after many years, I finally decided I’m not really a developer, I’m a design builder. And I love that. I love getting my hands dirty, being right there with people, doing work, trying to figure out problems. I mean, that’s what I love to do. I also love people. I love to meet them. I love to introduce them. I love to find out what makes them tick. And I think the combination of the two has been essential for the success we’ve had to date.

Eve: [00:33:44] Well, Mark, it’s a pretty rare developer that puts so much soul into their project. As you know, our cities are filled with soulless buildings.

Mark: [00:33:55] All the more now.

Eve: [00:33:57] Yes. So, I really appreciate what you’re doing and thoroughly enjoyed talking to you. I hope the raise goes gangbusters.

Mark: [00:34:04] Yeah, Good. Yes, I do too. And I’ll be pushing it and rewarding everyone who helps.

Eve: [00:34:20] I hope you enjoyed today’s guest and our deep dive. You can find out more about this episode or others you might have missed on the show notes page at RethinkRealEstateforGood.co. There’s lots to listen to there. Please support this podcast and all the great work my guests do by sharing it with others, posting about it on social media, or leaving a rating and a review. To catch all the latest from me, you can follow me on LinkedIn. Even better, if you’re ready to dabble in some impact investing, head on over to smallchange.co where I spend most of my time. A special thanks to David Allardice for his excellent editing of this podcast and original music. And a big thanks to you for spending your time with me today. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Mark Winkelman

Office conversion.

According to CBRE the overall U.S. office vacancy rate hit a 30-year-high of 18.2% in mid-2023  That doesn’t sound so bad, but reality is just not so even-handed.

Only 10% of all U.S. office buildings account for 80% of the occupancy losses since the onset of Covid. I visited Atlanta in early October, 2023. My host told me vacancy in downtown Atlanta was at 80%. He was just waiting for the lease to expire to abandon their space as well.  Soon 80% might climb to 81%.

These are not just numbers. You can see the impact on every downtown street. Way less foot traffic and shuttered retail continue the downward trend. 

The fix is housing, say many.  Convert those offices to homes and convert downtowns to neighborhoods. Co-housing, affordable housing and luxury apartments.  We need them all.  But that, my friends, is much easier said than done.

In 2018 there was 97 billion square feet of office space in the US. Let’s assume that increased by a modest amount to 100 billion square feet today.  In good times, office vacancies might be 10 – 12%, so let’s assume that we need to figure out how to repurpose 8%, or 8 billion square feet. 

Now let’s assume that we’ll need an average of $500 per square foot to convert the 8 billion square feet to residential.  

Every real estate developer knows that what goes in must come out.  In other words, if you are going to spend $500 per s.f. + the original cost of the building, then you have to support that expense with sufficient rent or sales income … or you will have a sinking ship.

But not every building sits in a market that can support costs like these. Hot markets and high-end luxury units might work.  But what about everyone else.  Don’t we want middle-income and affordable housing?

Conversion will only work in these instances with an influx of funds that might never be paid back. We call this the funding gap.  It would be reasonable to assume that the funding gap spread across ALL of this office space might be 25%. That’s  $4 trillion, or 15% of the GDP.  

The $800 billion has to come from somewhere.  Is it worth it?  It won’t ever be paid back, but buildings will be put back into use,  real estate taxes will be paid and downtowns will be saved.

Anyone got some change?

Magic in the details.

Lorenzo Perez is co-founder and directing principal of Venue Projects, an inspired redevelopment practice based in Phoenix, Arizona. Advocates for LOCAL community, culture and commerce, Venue crafts one-of-a-kind environments and experiences throughout the Metro Phoenix market.

A native Phoenician, Lorenzo holds a bachelor’s degree in architecture from Arizona State University, an active Arizona real estate license, and has been working in the Valley real estate development industry for over 25 years. A nostalgic storyteller who finds magic in the details, Lorenzo likes to say he talks fast, plenty and daydreams often.

A long-time member of the Urban Land Institute, a sincere believer in design and context sensitive development, Lorenzo is often invited to share his passionate perspective on Venue’s artistic approach to developing human centric places. Notable redevelopment projects include The Newton (formerly The Beefeater); The Orchard, The Windsor, The Alhambra (Mesa, AZ) and Arrive Hotel.

Read the podcast transcript here

Eve Picker: [00:00:05] Hi there. Thanks for joining me on Rethink Real Estate. For Good. I’m Eve Picker and I’m on a mission to make real estate work for everyone. I love real estate. Real estate makes places good or bad, rich or poor, beautiful or not. In this show, I’m interviewing the disruptors, those creative thinkers and doers that are shrugging off the status quo in order to build better for everyone.

Eve: [00:00:38] It’s been four years since I first interviewed Lorenzo Perez, and I love his work every bit as much as I did then. Lorenzo advocates for local community, culture and commerce in his real estate projects and for crafting artistic, one-of-a-kind environments and experiences. He and his company, Venue, put that passion to work throughout the metro Phoenix area. This approach helped them to weather the last four years, pandemic, and all. Lorenzo was about to open his first hotel project right after everyone was sent home. And yet, well, I’m not going to say more because that would make me a spoiler. You’ll have to listen in.

Eve: [00:01:27] Hello, Lorenzo. It’s totally wonderful to have you back on my show.

Lorenzo Perez: [00:01:32] Hi, Eve. Good to have you here. Thanks for giving me the opportunity to be back.

Eve: [00:01:37] Oh, yes. So, on your website: ‘Create, Inspire, Serve’. That’s what you and your company, Venue Projects aspire to do. And I just want you to tell me about that.

Lorenzo: [00:01:49] Sure. When we first started our company, my business partner said opportunities were going to be abundant but staying on track with our ‘why’ is super critical if we’re going to be successful. He had had other businesses that he had owned long term, and so we sort of settled, why are we doing this? And for us, we distilled it down to ‘Create, Inspire, Serve’. And both of us were just itching to do creative work and to do innovative work and to experiment with new ideas. The idea of creating beauty, creating value, creating goodwill, new models, new product, new services was just exhilarating. So that was our first item is we want to create. We’re both just natural creators. Inspire. We had done the corporate thing. Big company, grew it, you know, and it was just the higher up we got and the more we got into that world, the more soulless it was and the less inspired, you know, it became about managing departments and divisions and it was just transactional. So, I just wanted to, I’m like, man, if we’re going to work and life’s not promised, I want to spend my days doing stuff that fire me up. I wanted to be fired up with the work I was doing. I wanted to be inspired. I wanted to do work that raised my vibration, but also gave me the opportunity to raise other people’s vibration and do work that inspired others to do fun, creative work that made a difference. So meaningful work.

Lorenzo: [00:03:27] And so that sort of led to the third item is serve. You know, the motivation was to I my career was doing really exclusive, high end, unconventional projects in my former life. Like, real high-end homes for billionaire clients in California and Arizona and it was interesting for a while. But, you know, no one got to see the stuff we got to do. We were always tied to non-disclosures. We couldn’t take photos. Privacy was super big, and I just wanted to do something that was meaningful. I wanted to take what we learned, use our talent, and use our creativity to do stuff for everyday people. And so there was this service thing. I wanted to serve my community. I wanted to serve myself, my family, our team, our investors. I just was like, we wanted to do it not just for us, but for some, make, I guess, a greater impact beyond ourselves. So that’s where we settled on create, inspire, serve. And we use it as a metric in, underwrite all our projects, both quantitatively, so we do proformas and we look at that, but we also do it qualitatively and we try to balance, you know, okay this makes sense but then the qualitative piece is, you know, are we achieving our ‘Create, Inspire, Serve’ with this. You know and we number it 1 to 3 and we rank it. And sometimes we have competing projects that we’re excited about all of them. And we want to do all of them. But we can’t. Right? We only have so much capacity. We’re only a nine-person firm. So, we break out the create, inspire, serve 1 to 3. We each grade it, my business partner and I, and we see which ones stand out. And sometimes it’s incremental.

Eve: [00:05:21] Do you keep yourself honest, yeah?

Lorenzo: [00:05:23] Yeah. And you know I’ve had lenders and even investors say wow, you actually do ‘create, inspire, serve’ in your underwriting. I said yeah, and I go we also do this thing we call holistic ROI, which is one of our guiding principles with our projects is we’re always seeking holistic ROI, which is emotional, social, cultural, environmental, and economic return on investment. And so, we do the same with that. If we’re if we’re not getting, you know, emotional return on investment, if we’re not excited about it, it goes out the door. Social, you know, is this something we can do for the community? Is it going to be fun? Fun is huge for us, right? And then the other stuff cultural are we you know, we preserving old buildings? Are we, you know, helping to create culture in our city and our state? And the environmental piece is huge. You know, we’re big adaptive re users both with buildings but also the materials. We like to reuse materials creatively. And then obviously we’re in this to be for profit. A lot of people say, well, are you a nonprofit?

Eve: [00:06:32] That came at the bottom of your list, Lorenzo.

Lorenzo: [00:06:35] You know, it did. It did intentionally. I read a great book written by Danny Meyer called Setting the Table. He’s a super famous restaurateur and entrepreneur and he said something about his restaurants, that he made his economic return, sort of the last. And I loved the philosophy behind it because he said, if you have good people, you treat good people. You put out good experiences, good work, you know, it’s not verbatim, but that’s essentially his message. The money’s going to take care of itself. And that’s been our experience. If we do what we say we’re going to do, if we put out great projects and create places that human beings feel nurtured and excited to be in, then they’re going to want to rent from you. They’re going to want to visit, they’re going to want to patronize our businesses, and they’re going to be strong. Which is a great segue to Covid because, you know, want to talk about an opportunity to test that thesis. Covid was really eye-opening and validating for us in many ways.

Eve: [00:07:39] Right. Interesting. Yeah, you should tell us more about that. But I was going to ask you first. I was going to just say your work is really stunning, and I hope that everyone goes to your website, but you pick pretty abandoned and ugly buildings.

Lorenzo: [00:07:53] We do.

Eve: [00:07:55] That no one else seems to see value in and then transform them into these really stunning places.

Lorenzo: [00:08:03] Well thank you. Yeah, that’s intentionally intentional. We started our company in 2008 going right face-first into the deep recession in Phoenix, Arizona, of all places. We were like ground zero for the major implosion in real estate. And for many years we were on the blacklist, right? A lot of people couldn’t invest capital here and all kinds of stuff. So, the opportunity was great to buy distressed assets and to experiment. And Phoenix, you know, definitely has its share of architectural gems. We’re a young city in American standards. You know, we didn’t become a state till early 1900s, 1912.

Eve: [00:08:47] Very hot city.

Lorenzo: [00:08:49] And a very hot city, especially right now.

Eve: [00:08:51] Yeah. it’s bad.

Lorenzo: [00:08:51] You know, our building stock isn’t like the East Coast or the Midwest, you know. God, I’m always so jealous of the building stock from the 1800s and early 1900s. Our stuff is early 1900s. You know, occasionally we have some late 1800s that were old territorial buildings. But most of our stuff in Phoenix is mid-century. You know, we’re a 1950s, post-World War II city. And so that, in itself, is unique in America. And so we just decided, you know, let’s show value in what we got. We got to work with what we got. You know, we don’t have those other gems that the other coasts have. And let’s see what we can do with what we got.

Eve: [00:09:33] That’s liberating because you…

Lorenzo: [00:09:35] It was very liberating.

Eve: [00:09:36] You’re starting with something so awful that you can just go wild, right?

Lorenzo: [00:09:40] Totally. Yeah. And, you know, we have a lot of masonry boxes here and wood frame boxes and, you know, boxes are the easiest thing to manipulate. And so, you know, I studied architecture too and went to architecture school. So, it’s, I’ve designed my company around being basically an active architectural studio where we figure out, okay, we have a building, it’s our project. And then it’s like, what do we do with this? People always say, well, what kind of developer are you? And I’m like, you know, we’re just entrepreneurial and opportunistic and we’re not pigeonholed into any sector. We’re not a retail. We’re not a hospitality. We’re not multifamily or office. We look at projects, we evaluate the neighborhood and the context, and then we try to bring something that adds value to that neighborhood. And it’s a very liberating designer approach to development. And it’s just kind of what we’ve done. And it’s been fun. It’s our philosophy is create, don’t compete, right? And a close second is, deliver the unexpected, right? So, let’s take something that has been an eyesore or a problem in a community, and let’s turn this thing inside out and let it become an asset. Let’s transform it into something that adds value, but also becomes a catalyst for reinvestment and redevelopment. And that’s been our model since 2008, and it continues to be a driving force in our company.

Eve: [00:11:02] So talk us through some of your favorite projects and why they’re your favorite.

Lorenzo: [00:11:06] Oh man, they are all…

Eve: [00:11:09] They’re all your babies, right?

Lorenzo: [00:11:11] They are. You know, God I look back on them and you mentioned our website. We’re going to go through an overhaul because we’ve got probably 3 or 4 projects that aren’t even on our website that are really strong candidates for my favorite. But, you know, it’s like you build on each one. Our very first one. I loved them all for very different reasons. Our first one is like our first-born child, you know, it just was so exciting, so challenging, so rewarding. It’s been the best returning in the history of all the projects we’ve done. But man, let me think about that. I just love them all for different reasons. What I loved about all of them is that they educated us and opened our eyes and tested us, and I think every other project that followed, we were able to apply those lessons learned, and I think it continues to do so.

Eve: [00:12:04] Tell me about the one you know that I was worried about all through Covid because you opened a hotel. Actually, you were still finishing it when Covid hit.

Lorenzo: [00:12:12] Yeah, yeah.

[00:12:13] That was your first hotel project, right?

Lorenzo: [00:12:16] First hotel project. I had worked on hotels in my former life as purely a general contractor, where we did an adaptive, pretty deep adaptive renovation of a mid-century hotel here in Scottsdale called Hotel Valley Ho. So very kind of similar, but this was my first one where we were principals, and we were the developer. We were leading the charge.

Eve: [00:12:41] You had a lot to lose.

Lorenzo: [00:12:42] Yeah, we had a lot to lose. And we were co-developing this with a joint venture partner, much bigger developer, much stronger balance sheet, thank God. We had their savvy and talk about, you know, those project opportunities really throw you in the test. And you test people’s values and how they lead through problems. And we have great partners. I mean, we knew we were with true battle-hardened veterans. They just didn’t even bat an eye, you know, and they were a calming force. And we’re like, hey, we’ll get through this. Been through all kinds of stuff. We got to just figure it out. So, um, yeah, the hotel, my gosh, we started it in 2018, in a very hot hospitality market here in Phoenix. Man, bookings ramping up for all kinds of events. And I remember being excited and literally in early February of 2020 going, oh my God, we’ve never timed a project so well in a market cycle. Not… Lesson learned. Don’t ever get ahead of yourself.

Eve: [00:13:53] Four weeks later, right?

Lorenzo: [00:13:55] Literally, literally four weeks later, the world completely changed. I mean, we were on track to open April of 2020 to a really strong, you know, we had our, we were bringing on people. We were starting to work through our punch list and, but our hotel operator is out of LA and Palm Springs. At the time that co-developed the hotel with us, they had East Coast hotels, and they also were monitoring hospitality, and they started raising the flag. Hey, there’s some serious stuff going on in Asia and Europe right now that, you know, if it does get to the States, it’s going to be real interesting. And that sort of was presented to us towards the end of February and man, talk about. But you know, by May, was it March 16th I think, remember?

Eve: [00:14:53] Oh, March 15th, I came down with Covid.

Lorenzo: [00:14:56] Yeah, March 15th. I mean, I want to say it was the weekend before that they called us and said, we’re shutting down all our East Coast hotels. It’s going to happen in California. It’s going to happen. This is going to happen. And we were like, wow, really? We think we were kind of in shock and kind of like, what do we do? We have a hotel that’s about to be finished and opened. And we had people being trained. We were hiring. We’re making contractual agreements, big time financial decisions. And it was stressful. It was stressful, you know, and I think that month, March, and April were pretty crazy. We had to figure out, how are we going to finish this? Are we going to be shut down? You know, we’re almost to the finish line. God, where we could see the light at the end of the tunnel. After a really long, complicated, intense buildout. We were all exhausted and here we were going into, we thought we were going to get into revenue and change the the energy from pouring money out of our pockets into pouring money into our pockets. And it was a scary time. It was it was crazy. But I would say that project, we called it Arrive Hotel at the time we’ve since rebranded, which is another part of the Covid story we can talk about. But yeah, what a what a deal. We actually had to sit on an empty hotel, fully finished for an entire summer.

Lorenzo: [00:16:25] And you know, we’re burning overhead dollars like you couldn’t imagine. Utilities, we had to have everything, air conditioning through the summer. We had to have people living on property. So, it wasn’t vandalized because, you know, we fenced it. We had security, we just were, you know, the streets were empty here, too. Everything was on shut down lockdown and only essential workers, and Arizona was one of the states that allowed construction projects to continue. But we also dealt with a lot of the early breakouts. I got Covid in June of 20. I was a asymptomatic carrier. I had no idea I had it but brought it home to my wife and she was on total lockdown as the only way she got it. And it was just crazy. You know, we had the entire crew, crews, we had to do the whole early quarantining where we had to shut the entire job site down, so it was just, it was chaotic at best. But on top of that, you know we have a lot of restaurant-anchored retail properties that were operating assets. And so simultaneously I’m dealing with the hotel, but I’m having to speak with five different lenders because all our government shut down restaurants. So, I’m sitting there going, oh my God, you know, if they can’t open, they can’t pay rent.

Eve: [00:17:41] That must have felt really surreal.

Lorenzo: [00:17:43] It was crazy. It was really surreal. And I remember having, talk about sleepless nights, sitting there, really having to kind of just breathe, stop, and breathe and just go, okay, this is so out of your control, so don’t make yourself sick over it, right? Like it’s important you stay healthy right now and not stress out so that you’re, you know, I’m thinking about what’s in the air, you know, is this something that’s going to kill me? Is the whole company going to implode? I mean, it’s the world falling apart. What’s going on here? Is this going to financially just be a disaster?

Eve: [00:18:15] I was negotiating rent abatements with all my tenants while I had Covid, with a fever of over 100. I don’t even know what I said to them.

Lorenzo: [00:18:27] Oh, God. What an experience, right? I mean, I just sat there some days and laughed and said, what? This is one heck of an adventure. I mean, who could have ever saw this coming. It was an interesting experience. I mean, I’ll tell you what.

Eve: [00:18:44] I don’t want to have it again. Put it that way.

Lorenzo: [00:18:46] Me either. But I’ll tell you, it was the most diverse mix of emotions, from extreme fear, nervousness to, elated gratitude for just the, the little things, you know. Banks working with you, reassuring you that, hey, we’re in it together. You’re good. You know, we have a great relationship. We value relationship. Do what you got to do, you know, just keep us posted. And I was just like, God, I’m so grateful for the choices and the decisions we made with our partners, with our lenders, with our tenants. Top to bottom, grateful for the neighborhood relationships we had, our staff, our team. Grateful for the US government throwing us PPP and an EIDL loan so could keep our team employed and keep us functioning. I mean, in many cases, it was extremely just so devastatingly sad and scary. But in many cases, it was just a wonderful experience in terms of just seeing how people can put aside differences to come together and make things happen. So, I’m with you, I don’t ever want to go through that again. But I’m grateful that I did and I’m grateful that I survived it. You know, we knew people who didn’t survive illness. And a lot of companies didn’t survive financially. Some people were devastated by bankruptcies and foreclosures. And I’m just so grateful, you know, it was one heck of an experience.

Eve: [00:20:25] So what happened with the hotel? How what, like, where is it now?

Lorenzo: [00:20:29] Oh my God. So, the hotel is doing really well right now. Thank you. And and I’m so grateful. And surprisingly, we started pretty dang strong. That hotel project was going to be the death of me, though. My God, we hit every frickin’ curveball obstacle that you can imagine.

Eve: [00:20:50] I shouldn’t be laughing.

Lorenzo: [00:20:52] Oh my God, no, but it’s just, you know, I look back now and I’m just like, how the heck did we survive that? We were a year late. We were $4 million over budget. We went through a pandemic. We had a really tough experience with a general contractor. We went through five superintendents. We were in the early stages of serious market escalation. Phoenix is a hot market still. I mean, it was hot through the pandemic. It was hot before the pandemic. We have so much going on here in construction, semiconductor industry, a lot of infrastructure, work, office, industrial, logistics, just name it. And so the demands on our workforce and resource spaces, concrete, stuff like that, I mean, we just, we hit it all. We also went through two of the wettest El Nino years during construction. And of course, it’s when we were doing site excavation and grading and underground utilities and foundation work. So, we literally had to shut our site down like 4 to 6 weeks sometimes because we were so saturated. And, you know, this desert soil doesn’t absorb like, it’s just so hard. So, we get runoff and it just takes forever for sites to dry out. And then the dry heat comes. It didn’t help that we were actually kind of humid during that time. So, it was very just uncharacteristic experience for Phoenix.

Lorenzo: [00:22:25] And then we get open, finally get open in the late summer, just out of necessity. I think we opened half the property in August of 2020 and to our surprise, booked, like crazy because people wanted, we had a lot of people coming from California escaping the lockdowns there. We were pretty open in Arizona, so people were literally coming for getaways to Phoenix, and they were staying at our hotel. A lot of people were kind of living there, renewing, coming back every other weekend. We had a lot of staycationers, people that were locked up in small apartments or whatever, they wanted to be… If you haven’t seen our hotel and it’s not on our website yet, but you can look it up. It’s been rebranded as Rise Uptown, in Phoenix, Arizona, and it’s a boutique hotel. We took two 1950s office buildings and created a boutique hotel out of it, and it’s very indoor/outdoor oriented. So, we actually had, I forget the hotel group, Conde Nast did a write up with Arrive Hotels, and we had some other group come out and interview us, but they actually walked through the property late 2020 and was like, oh my God, this is a poster child of a post-pandemic hotel because it was so indoor/outdoor oriented. It was basically like a 50s hotel, like you didn’t have to go in any corridors to get to your room. You could walk upstairs or take an elevator. You had choices. And out of 79 rooms, 59 of them have private, dedicated outdoor space.

Eve Picker: [00:24:07] Oh, perfect.

Lorenzo: [00:24:07] Very roomy balconies with views and private courtyards on the ground level rooms. And so, people could socially distance, easy at our hotel. So, I mean, our appraiser actually did a post certificate of occupancy walk with me. And he was very critical. He used to drive me nuts actually and this was very rewarding and validating because I got the last laugh. But he was very kind of critical about the hotel. He just couldn’t see the vision for it because it was just such an old beat-up building. And he saw the pre-construction estimate. He did a mid-construction estimate, and then he came and did the final appraisal. And when I walked up to him, he’s just snapping photos like crazy on his phone, and he’s just got the biggest grin on his face. And I walk up to him and I said, hey, how are you? And he goes, oh my God. He goes, I am just speechless. I cannot believe what you guys pulled off here. The transformation was just incredible to him. And he said the same thing. He goes, man, I thought you would be at a disadvantage having to get to your rooms in outdoor corridors and walk upstairs or take an elevator like you were so outdoor oriented, it just seemed like it was going to be a disadvantage to you. But he goes, I actually think this is going to be such a differentiating element to you, and it’s such a differentiator in the market, and it really proved that. It does to this day, we are a very hot location for not only out-of-town visitors, but a lot of inner-city interstate staycationers. We offer day passes at our pool, and that’s become just such a huge revenue driver for us, for people who want to come to a cool hotel and hang out. And so, it’s just, it was such a tough journey but man, I’m so grateful to say.

Eve: [00:26:00] That’s really good to get at the end of it.

Lorenzo: [00:26:02] Yeah, we’re doing really well.

Eve: [00:26:04] So I wonder if, you know, if you’ve been thinking about like, a world full of other viruses and climate change and how does that impact the way you think about design, or do your designs fit right in, you know/

Lorenzo: [00:26:19] So our properties, if you look across our portfolio and I’ve had lenders and appraisers say this, I’ve had brokers say this, they’re like, man, your properties were so resilient during Covid because we always approached our projects with a balance of indoor/outdoor. You know, people always characterize Phoenix as hot, but nine out of the 12 year, nine out of the 12 months here, I mean, we live indoor/outdoor all year long. It’s just really that. And even in the summer, I’d say we’re outdoors a lot because it’s a dry heat. And then when the sun’s down, or if you’re in shade and you get some air movement and a little bit of moisture or humidity, it’s actually somewhat tolerable. But I would say 8 to 9 months out of the year, people want to be outdoors. And the most successful retail and now residential now hospitality environments offer an indoor/outdoor experience. So, in Covid, our projects were really pretty resilient. Our retail restaurant, because we have expansive patios and outdoor space, so that really proved to be, I mean, some of our restaurant tenants had multiple locations, and the only ones they kept open were on our properties.

Eve: [00:27:37] That’s interesting.

Lorenzo: [00:27:38] Because they just were set up for takeout and outdoor lingering. And so that was just really validating for us. And our lenders actually were like, God, you know, they’re asking their other developers these questions, how are you designing to be more resilient in an environment where we may need to be more indoor/outdoor? And our buildings also open up, they breathe. So, we have a lot of multi-slide doors, flip up windows. They become basically pavilions in spring and fall. And so, a lot of the buildings were able to just open up and people felt safer in them. And so, our restaurants, all with the exception of one, are pre-pandemic. They’re killing it. They’re doing really well. They’re struggling because the lack of workforce in the back of house and kitchen. But we’re seeing that in any industry, we just we don’t have the workforce that we used to, but revenue wise they’re doing really well. We have one restaurant on a property that just hasn’t made it back. They’re more of a fine dining concept, and it just didn’t lend itself well to take out, and it didn’t lend itself well in a post-Covid world. It’s more expensive, it’s labour intensive, and they’ve decided that they are going to concentrate on a smaller restaurant and put all their energy. They’re going to close their second one in the spring.

Eve Picker: [00:29:08] Interesting.

Lorenzo: [00:29:08] We’re helping them with that transition. And, but we’ve got a lot of suitors for that space because they saw how resilient it was. And so, we’re grateful that we’ll hopefully be able to transition into a new operator here soon.

Eve: [00:29:23] So after all of this, what’s next for you?

Lorenzo: [00:29:27] We’re in transition. We’re in our 15th year of business. I’ve got a business partner who turned 75 earlier this year, and he’s starting to eye working less, grinding less and traveling with his wife and want to go spend some time with their grandkids up in Oregon. So, we are thinking about, you know, a strategic transition plan where they’re working themselves. Both of them, him and his wife fill very big roles here. He pretty much watches over our construction field guys and execution of projects because we’re a design build, develop, own, and operate practice. And his wife is my right-hand person. All things in the business, HR, risk management, finances, managing our accountants and entity management for our partnerships. So, we’re working through succession. We’re also trying to think about, we’ve sold off some stuff to just make us a little more liquid in that transition. And, but we acquired a bunch of properties during the days when we could find distressed assets here. And so, they’ve been sort of just income properties for us. But now we’re in entitlement on many of them. We’ve decided a few years ago to shy away.

Lorenzo: [00:30:41] Actually, we decided pre-pandemic to shy away from a lot of the restaurant anchored retail, just because there’s a lot of players in that space now. And we wanted to really get back into innovative housing and experiment there and different concepts we have in mind. So, we’re working on that. There’s a need for housing big time in Phoenix, a diversity of product. So, we’re shifting our attention into some really interesting housing projects, multifamily rentals, some infill pocket community stuff. And we’ve loved the hospitality. I mean, the hotel, as difficult as it was, it’s, you know, hospitality is weaving its way into every sector, you know, I mean, every sector. Medical, office, I’d even say industrial, like, you know, wherever humans are, there’s a hospitality bent. So, we love playing in that space. We’re still focusing on urban infill and adaptive reuse as a core business. However, most of our housing projects are going to be new construction because they’re on big lots with vacant, small vacant buildings that really didn’t lend themselves to be repurposed. And so, we’re getting into that space. We’re venturing into more joint ventures.

Eve: [00:31:58] This doesn’t sound like winding down, Lorenzo.

Lorenzo: [00:32:02] Well, it’s not winding down.

Eve: [00:32:04] It’s moving on to the next thing.

Lorenzo: [00:32:06] It’s moving on. Well, it is. This has been the delicate dance in our evolution as a company. We’ve got a really young team that’s just inspired and fired up to keep doing what we do. And so, in one hand, I’m looking forward to working with this just energetic bunch of just talent that we’ve been able to groom and cultivate over the years and find a stable financial future and fun future for them in their career development. On the other hand, I’m trying to manage this transition with my partners. So, they’re just very supportive. And I think they are thinking, yeah, we want to help you get to the future, but how do we do that? So, they have less risk, but they also get to play a role in continuing to co-invest alongside us and stuff. So, it’s been exciting.

Lorenzo: [00:32:56] The last few years, I’d say the last 3 to 5 years, we’ve done more joint venture work with other, bigger developers where they’ve had stronger balance sheets or more experience, but they’ve been attracted to working with us for our creativity. And, you know, we came from big, corporate, very disciplined companies so we’re sort of an outlier in the sense that we’re small, but we’re very disciplined and we’re extremely dreamy and creative, but we’re very, we’re counterbalanced in reality. And, you know, we’ve always had to bank and underwrite our projects, and none of us want to lose everything we worked so hard to create. So, we’re kind of this interesting piece that can plug into a bigger company, into a bigger development arm and play with a bigger canvas, I’ll say. So, I see more of that kind of work in the future. We’re working on a great project right now I told you about. It’s a public/private partnership with the city of Tempe. We were invited by the city to take a look at their five-acre site. It’s an old historic flour mill that sits right in the middle of Mill Avenue.

Eve: [00:34:06] Oh, fabulous.

Lorenzo: [00:34:07] It’s tied to the founding of the city. It’s on light rail. It’s serviced by, it’s in a walkable, dense urban area. But it’s an industrial eyesore, but it’s right in the middle of the best location. And so, we’re excited to do it. We’ve never done a public/private partnership, but we’ve partnered with probably one of the largest local developers, if not the largest local developers in Arizona. He’s very accomplished. He’s been a mentor of mine, and we never thought we’d find an opportunity to work together. But when he heard, he actually threw my name out there and said, these guys got to do this project, they’re perfect for it. When I turned him down and said, I would love it, I’m not even scared to tackle it, but I know nothing about public/private partnerships, or it has to be on a land lease structure. I don’t even know how you would capitalize it. It’s so unconventional and that’s what this guy excels at. He’s a land lease expert. He’s done tons of PPPs, he’s a finance genius. And he says, hey, why don’t we team up? Let me take that piece, and you do what you do. And together we actually might get this thing done. I think there’s been 7 or 8 attempts by other developers over decades to try and redo this site. It’s very nuanced, it’s t’s very complicated. It’s a culturally and historically significant site for Arizona tribal communities. It’s a tough site. It’s a hillside. Geotechnically it’s tough. It’s historically protected. It’s just got a lot going on and a lot of political and civic emotion behind it. So, it’s, we’re in the fishbowl. It’s going to be one heck of a challenge.

Eve: [00:35:46] When you get a little further on with that one, I’d love to talk to you about that again.

Lorenzo: [00:35:49] Absolutely.

Eve: [00:35:50] And I’m going to threaten what I’ve been threatening a lot of people. I just have to come and look at all your buildings.

Lorenzo: [00:35:56] Oh, you’ve got to come out.

Eve: [00:35:57] Not in the Summer. Not in the summer.

Lorenzo: [00:35:58] No, come in the spring or fall, and we’ll put you up in our hotel and we’ll have a fun time. We’ll take you out to some fun restaurants.

Eve: [00:36:05] I was planning to do that in 2020.

Lorenzo: [00:36:09] Well, you’re going to need to unplug in late 23 or early 24, so give me a ring.

Eve: [00:36:16] This is fabulous, Lorenzo. It’s really exciting to hear about your work and…

Lorenzo: [00:36:21] Thank you.

Eve: [00:36:21] … I’m just hoping it gets better for you. Better and better and better.

Lorenzo: [00:36:24] Thank you. So do we.

Eve: [00:36:26] Okay.

Eve: [00:36:41] I hope you enjoyed today’s guest and our deep dive. You can find out more about this episode or others you might have missed on the show notes page at RethinkRealEstateforGood.co. There’s lots to listen to there. Please support this podcast and all the great work my guests do by sharing it with others, posting about it on social media, or leaving a rating and a review. To catch all the latest from me, you can follow me on LinkedIn. Even better, if you’re ready to dabble in some impact investing, head on over to smallchange.co where I spend most of my time. A special thanks to David Allardice for his excellent editing of this podcast and original music. And a big thanks to you for spending your time with me today. We’ll talk again soon. But for now, this is Eve Picker signing off to go make some change.

Image courtesy of Lorenzo Perez

The Aux Evanston

There’s a real estate project underway in Evanston, Illinois, and it’s called The Aux. Led by a diverse team, it represents much more than just the revamping of a 16,500 square foot vacant factory building. It represents the aspirational hope of a community.

Not only does the community plan to fully renovate the building into a wellness hub, they plan to populate the space with local, black-owned businesses including an award-winning chef, a laundry cafe, private offices and co-working space to name a few. Space is also planned for pop-up businesses coupled with entrepreneurial training programs in order to provide accessible marketplace options for growing new businesses.

The instigator, a non-profit, assembled a co-developer team of local leaders. They’ve decided to take on an even bigger challenge than this renovation.  They are planning real community ownership. Every investor will become an owner with voting rights.  

If you’re interested in supporting real estate projects that make a difference, look no further than Small Change, where The Aux is raising funds through a crowdfunded community round. Anyone who is 18 years old or older can invest here.

This is not a solicitation of an offer to buy or sell any securities. All investing is risky and involves the risk of total loss as well as liquidity risk. Past returns do not guarantee future returns. If you are interested in investing, please visit Small Change to obtain the relevant offering documents.

Image courtesy of The Aux Evanston

The King Henry

When developers recognize the value of place, exciting projects emerge. One such project is The King Henry in Alexandria, Virginia. 

Historic Alexandria in Virginia is just five miles south of Washington DC, a water taxi ride away from the National Harbor and a bike ride from Mount Vernon. The city is nationally recognized for its rich history and beautifully preserved 18th- and 19th-century architecture. Voted one of Travel + Leisure’s best places to travel in 2021 and a Condé Nast Traveler top five best small city in the US, 2022, Alexandria has a cosmopolitan feel and a walkable lifestyle. On Old Town Alexandria’s King Street mile you’ll find more than 200 independent restaurants and boutiques, intimate historic museums and new happenings at the waterfront.

Joel Miller realized  that surface parking was not the highest and best for the surface parking lots on King Street, and set about designing a more appropriate plan.  Four distinct buildings are planned to be built on two sites, replacing the surface parking with a brand new  parking deck and automated parking system, and adding 52 residential units to the dense and desirable neighborhood.

Joel’s taking it one step further.  He’s opened up a community raise on Small Change, inviting anyone who is at least 18 years old to invest. You can view the listing here. It’s open for investment right now.

This is not a solicitation of an offer to buy or sell any securities. All investing is risky and involves the risk of total loss as well as liquidity risk. Past returns do not guarantee future returns. If you are interested in investing, please visit Small Change to obtain the relevant offering documents.

Image courtesy of The King Henry