Rethink Real Estate. For Good.

Crowdfunding

Greenfields are boring.

Adrian G. Washington is the founder and CEO of Neighborhood Development Company (NDC). Their mission is to develop exciting residential and commercial properties that cultivate vibrant communities. What does that mean? And how does a developer do that?

Well, that’s what Adrian and I talk about so listen in.

Adrian has over 30 years of experience in urban real estate development, construction and management. He founded NDC in 1999 and has served as President since then — except for a two year leave of absence from 2005 – 2007 when he left to lead the Anacostia Waterfront Corporation (AWC), the entity charged with leading a $10 billion, 20-year initiative to revitalize Washington, DC’s Anacostia Waterfront and surrounding communities. NDC has developed over 1,000,000 square feet of real estate, focusing on emerging urban neighborhoods while respecting the rich diversity of their existing fabric.

Adrian grew up in the city’s Anacostia neighborhood and is a lifelong resident of DC. He received his B.S. in Economics and Political Science from Stanford University and his M.B.A. in Marketing and Finance from the Harvard Business School. And he has received numerous individual awards reflecting his leadership in the development industry.

Insights and Inspirations

  • Why develop a green field when you can redevelop an existing neighborhood and help it to thrive?
  • See the people who are living there. They embody the neighborhood.
  • Mix it up. Build affordable housing right next to luxury housing.
  • Work with small businesses out of the community. They can become valuable tenants, not just for the developer but they bring value to the community as well.
  • There’s lots of opportunity in Opportunity Zones.

Information and Links

  • Adrian is excited to see NDC’s Benning Market built. It’s a food hall in River Terrace North East, and many of it’s investors came through a Small Change offering.
  • NDC supports DC Greens, a local non-profit dedicated to food justice and health equity in Washington, DC.
  • The project that Adrian is most proud of is the Residences of Georgia Avenue. This block buster project increased affordable housing options and healthy food options in a neighborhood considered a food desert. 
Read the podcast transcript here

Eve Picker: Hey, everyone, this is Eve Picker. If you listen to this podcast series, you’re going to learn how to make some change.

Eve Picker: Hi there. Thanks so much for joining me today for the latest episode of Impact Real Estate Investing. My guest today is Adrian Washington. Adrian is the founder and CEO of Neighborhood Development Company, a Washington, D.C. real estate company focused on rebuilding vibrant communities through their work. Adrian fell in love with this type of development work and decided to make a career out of it, much to the good fortune of the neighborhood he works in. For Adrian, greenfields are boring. Nothing gives him greater pleasure than digging into a forgotten and neglected site and turning it into a neighborhood asset. I’ve had the good fortune of working with Adrian at Small Change, helping to raise funds for some of these projects.

Eve Picker: Be sure to go to EvePicker.com to find out more about Adrian on the Shownotes page for this episode and be sure to sign up for my newsletter, so you can access information about impact real estate investing and get the latest news about the exciting projects on my crowdfunding platform, Small Change.

Eve Picker: Good morning, Adrian. Thank you very much for joining me.

Adrian Washington: Thank you, Eve. It’s a pleasure to be here.

Eve Picker: So you have a real estate company called Neighborhood Development Company, and we’ve been lucky enough at Small Change to help you raise funds for one of your projects. Your company is in Washington, D.C. I’m just wondering if you’d like to tell us how long you’ve had Neighborhood Development Company, or NDC, and have you lived in D.C. all of your life?

Adrian Washington: I’m a native Washingtonian. I’ve lived here most of my life. I went away and went to school down in California; lived out there for a while; lived in Boston, but, essentially, I’ve been in D.C. all of my professional … I grew up here, and I’ve lived here all my professional life. I’ve been involved in real estate, altogether now, going on over 30 years and formed Neighborhood Development Company a little over 20 years ago, back in 1999.

Eve Picker: That’s quite a stretch. NDC’s mission, in your words, is to develop exciting residential and commercial properties that cultivate vibrant communities. What does it mean to you to cultivate vibrant communities? How does a developer do that?

Adrian Washington: We’ve always operated in urban areas of primarily Washington, D.C. and really always neighborhoods that were emerging; that were maybe down and out at one time or were starting to turn around. What we found in these neighborhoods is that we don’t look at them just from a brick-and-mortar perspective. We see the people that are living there now. They want their neighborhoods improved, but they don’t want to be displaced. They want shops and things that serve them, but don’t serve just outsiders. They welcome newcomers, but they want to feel those newcomers respect the place that [inaudible]. We see our role as balancing those things of making a neighborhood better for people who are living there, attracting new residents who want to be part of those communities, attracting businesses that want to be part of those communities, but not to displace people and not to alter the fundamental character. As developers, I think it takes like a real balancing act that we work with on a day-to-day basis.

Eve Picker: I do think it is a real balancing act. How do you fend off displacement?

Adrian Washington: We do it in, I guess, a number of ways that I think are unique in some developers in that we do both very high-end market-rate developments, but we also do affordable housing. We do affordable housing in a number of ways. We do it in traditional ways that more traditional developers do it, using government subsidy and the many programs involved. We also do it in more creative ways. For instance, we’ve worked in the past with failing cooperatives, where a group of tenants own their building collectively, and it’s just not working out, either because of bad management, or whatever. We team with them to provide our services with them but do it in a way that allows them to stay in their homes. That’s one way we do it.

Adrian Washington: Another way we do it is we really, in our commercial work, really like to work with entrepreneurs. Your typical developer may want that credit tenant. They want that CVS, or that Walgreens, or someone national. We really- we don’t go that way. We go in the opposite direction. For instance, in one of our developments, we have a salsa teacher, and she was doing lessons- it was a nice young couple. They were doing lessons out of their basement in the neighborhood.

Adrian Washington: They were so successful, they wanted to have their first studio. They came to us, and we had a space in one of our buildings, so we worked with them on the design; we worked with them on getting government grants to help them build out. We helped them with the construction. We gave them a favorable lease that started out low, and it allowed them to develop the business.

Adrian Washington: It was just a great neighborhood success story, where they stayed in the neighborhood. They had a service that appealed to both the newcomers and people who were in the neighborhood. They successfully grew their business. They’re now opening a second location. I think it’s really about creativity; using the skills we have as developers and businesspeople and connecting with people who have hopes and dreams – maybe not the same skills – and working out win-win solutions.

Eve Picker: That’s a really lovely story. Other developers might say that’s taking a risk with a little startup business that you don’t necessarily need to take. You could go get a credit tenant. So, why do you take that risk?

Adrian Washington: Well, I think a couple of reasons. It is kind of, on paper, riskier. Although we see with all the changes in the retail economy, yeah, you could have some business like a Blockbuster – going back in time, when everyone thought it was really successful, and now it’s out of business [cross talk]

Eve Picker: Yeah, that’s true.

Adrian Washington: Or even something like a McDonald’s, where everyone thought McDonald’s used to be the gold standard. Even now, you see some of those stores shutting. There’s not ‘no risk’ in a credit tenant, but I agree that there’s more hand-holding; there’s more involvement. You’ve got to pick your entrepreneurs carefully. You’ve got to help nurture them. Typically, they’re people who are great enthusiasts about what they know – if it’s salsa dancing or handmade pottery – but they don’t know about marketing; they don’t know about financing. You’ve got to work with them more.

Adrian Washington: We just find that more rewarding. It’s just fun. It’s creative. We feel like we’re helping people. We feel that we’re seeing eye to eye, because even though we’ve been in business 20 years, we’re still thinking of ourselves as an entrepreneur. The neighborhoods love it, so I think it makes us more popular in the neighborhoods. We’ve found that the success rate that we’ve had with these businesses is really pretty high and that the occasional failure that comes along, we just kind of build that into our pro forma. We’ve found that we were able to replace people who don’t like it with other people. All in all, we just find it’s more socially rewarding, it’s financially fine, and it’s just a lot more fun.

Eve Picker: It adds to the economy of the neighborhood you’re in, which is really lovely. Developers do lots of different sorts of things, and I’m wondering how you ended up here. How did you …? There must have been a path that took you towards this type of development.

Adrian Washington: Eve, I think it’s like a lot of things in life. I don’t know, maybe there are people who have these- design these great plans at age 12 and follow them through. I really didn’t. I went to undergrad; I went and got an MBA. I worked for a national consulting firm, and I thought that was my path, but I really hated it. At the meantime, I had bought a house in an emerging neighborhood and fell in love with that culture. I think I was really ahead of my time. I saw the appeal of walkable, livable neighborhoods. I saw the appeal of eclectic neighborhoods that had different types of architecture, that had different types of people, different races, different income groups, that was close to urban centers. I just thought that was great. I loved being in that neighborhood. I loved the change that I saw was going on. I loved the physical aspect.

Adrian Washington: Back when I was younger, I did everything. I did carpentry; I did plumbing [inaudible]. I just loved that whole environment. I think I was always an entrepreneur at heart … I was going to a day job that I hated, and I had this hobby that I loved, so I said, “Well, why don’t I see if I can turn this hobby into a business?” That was 30 years ago. It hasn’t been a straight line. There were struggles; there were failures; there were just dumb-ass things that I did that didn’t work out, but I always came back the next day and tried to do it better, and I’m really glad I did.

Eve Picker: Be sure to go to EvePicker.com and sign up for my free educational newsletter about impact real estate investing. You’ll be among the first to hear about new projects you can invest in. That’s EvePicker.com. Thanks so much.

Eve Picker: That’s a great reason why. It’s pretty wonderful to be able to be doing something that you really love and that adds to communities everywhere. So, I’m going to move on now to a project that I know you’re working on, called 1100 Eastern Avenue, which is one of your latest projects. We’re fortunate enough, at Small Change, that we’re going to be helping you to raise a little money for this project. I wanted to talk a little bit about it. Can you just tell us a little about what the project is, how big it is, the uses, where it is?

Adrian Washington: Well, sure, Eve. I’m really excited, and our whole team’s excited about 1100 Eastern. It’s really a project that embodies our beliefs, and uses all of our skill sets, and is just very exciting. It’s a mixed-use projects. Ground floor is a retail component; not that large, about 4,000 square feet. I think one of the great things about it is that there were … The site is sort of a rundown former- like a strip shopping center. A couple of the tenants there were folks that, frankly, the neighborhood was happy to see leave. It was a liquor store and an old carry-out. Not to knock those people, but they weren’t really what the community wanted.

Adrian Washington: There were a couple of tenants the community really did like. It was a barbershop that had been there for really a couple of generations. The current owner’s father had founded it back 35 years ago. She was still running it, and it was really a neighborhood institution. Then there was a daycare center. One of the things that we’re doing is allowing those people to come back to the new development in brand-new facilities. We’re even able to offer them, starting out, kind of with our philosophy, at the same rents they were paying, which were far below market. It’ll allow them to build up the market over a number of years, so we’re very excited about that.

Adrian Washington: Now, on the floors above it, there are five stories above it. These will contain 65 units of mixed-income housing. There’s housing for very low-income people, who were formerly homeless, who will be able to get wraparound services to allow them to transition to a more normal life. Then there are other units that will be for people of moderate incomes; people anywhere from – these are technical terms – but from 40 percent to 65 percent of the area median income. These range from what we would call pretty subsidized housing to more workforce housing, so we’ll have a range of people there.

Adrian Washington: We’re also very proud of what we’re doing is that we’re giving a really big mix of unit types. Typically, in any kind of new construction development, you’re seeing just people were just building one- and two-bedrooms, or studios. What we’re able to do in this building is to provide one-bedrooms, two-bedrooms, three-bedrooms, even a few four-bedroom apartments. It really will serve a number of different types of people in the neighborhood – seniors, people with families, people with kids. It’s just a great project that will really help everyone in the neighborhood, so we’re very proud and excited about it.

Eve Picker: That sounds really, really wonderful. The four-bedroom units are so unusual nowadays, and extended families are important, so that’s pretty great. I understand it’s also an Opportunity Zone, which is, as we all know, a very hot topic right now. How will that impact the development?

Adrian Washington: Opportunity Zones are exactly what you said, Eve; it’s a very hot topic. People are still figuring it out. I think that, unfortunately, early on, a lot of the Opportunity Zone benefits are going to people who are creating projects that would have been created anyway. We’re very proud that we feel this project will fit in what the Opportunity Zone true mission is, which is to bring capital to underserved neighborhoods – as I said, our commercial businesses, our neighborhood-serving businesses that were going to be displaced and that people in the community wanted to stay.

Adrian Washington: What we’re doing is we’re using Opportunity Zone benefits to attract capital to help keep these businesses in. So, I think that’s important. But, also, I think one of the key things I feel that Opportunity Zones is that the projects have to make sense, even if they weren’t in Opportunity Zones. We are a business that prides itself on not just being do-gooders, but being solid businesspeople, so we’ve underwritten the project carefully. We understand the costs, and the risks, and all of the factors. We think this is a project that works, even if it wasn’t in an Opportunity Zone. But we’re very happy to allow people who are investors who want to get a good return on their money, but also to have a meaningful social impact, to have all that, plus the tax benefits of the Opportunity Zone.

Eve Picker: For listeners who don’t really understand Opportunity Zone funds, because they are very complicated … Took me a long time to understand. The fund, in this case, is actually the project. It’s just the entity that the project is using as a legal entity, the LLC, that will become a fund, right? If people invest-

Adrian Washington: Yes, that’s right.

Eve Picker: It’s a 100-percent Opportunity Zone fund because it’s just a single-use fund, just one project. So, if people invest in it, they’re investing actually into the project itself, not into a fund that then serves a whole series of projects. They can take a really close look at the underwriting and see if they like it. I would agree with you, at the moment, the Opportunity Zone fund benefits are kind of gravy. I have yet to see a project that is moving forward simply because of those benefits. They don’t seem to be enough to make a project happen, right?

Adrian Washington: Exactly. We’ve used that approach, not just in Opportunity Zones, but with our other investor- projects. What we found over the years is that people- they want to know what they’re investing in, both from a business standpoint … They want to kick the tires, see if they believe in the construction costs, and the neighborhood statistics, and the tenants that are being there. They want to understand that. They also want to understand the story behind it. What’s going into the neighborhood? How will my investment benefit [inaudible] neighborhood? They really want to touch, and feel, and see that. We’ve had a lot of success over the years in doing that. This project really works in the same manner, where people can really learn about it, learn about us, learn about the neighborhood, learn about the businesses, and say, “Yeah, I want to put my money here. I believe in it as a financial investment. I also believe in it, in terms of its social [mesh].

Eve Picker: I think what I’m most excited about for Small Change is the fact that we’re helping you raise money for this Opportunity Zone fund. We may very well be the first Opportunity Zone fund offering investments- very small investments to everyone over the age of 18, not just accredited investors. I think many of the funds that we see around the country have really big minimum investment amounts of $100,000 or $200,000, or $500,000. This is going to be much smaller for everyday people, which personally I find very exciting. It’s yet another way to make it accessible to your investors in your neighborhood, right, Adrian?

Adrian Washington: Right, and we’re excited, too. Eve, as you know, and the audience may not know, is that you guys raised money for us on another project, our Benning Market project – a neighborhood called River Terrace. It was a nice way to raise money, but I think more importantly, it helped build support and build involvement in the project. I have people in that neighborhood who told me, “Yeah, I saw … I’m an investor in your project, and …” [cross talk]

Eve Picker: That’s great. That’s really great, yeah.

Adrian Washington: -“… and I saw it because I lived down the street and I wanted to be a part of it. I just thought it was cool that you allowed us to participate in that.” I think it really does build more of a sense of community; it builds more of a sense of involvement; it invokes transparency, because, frankly, I think that, in these days, developers are viewed with a lot of distrust. I think that by allowing community members to invest at investment levels that they can afford really helps to break down those walls, and do that, and helps to increase visibility. We were really happy with the results we had with you on our first investment, which is literally breaking ground in a couple weeks, and we are very excited to work with you again on the Eastern Avenue Project.

Eve Picker: That’s great. You’re going to have to send me updates on the first one, because we’ll post them for our other investors. People like to see [cross talk].

Adrian Washington: We’ll send you groundbreaking pictures. How about that?

Eve Picker: That’d be fantastic, yeah. Talking about this little piece of community engagement – crowdfunding – community engagement has to play a big role in your projects. I’m wondering how you handle that. That can be tricky sometimes.

Adrian Washington: It can be tricky. Like I said, there’s just a lot of distrust around development, and in our political climate, I think there’s just [riding] distrust in everything, so I don’t take it personally. I think the key is you’ve got to be out there early and often. We’re working a different project, in a different part of the city, and we’re a couple years away from groundbreaking; really a year away from an actual serious design and engagement, but we’re already out there in the community, asking people what they want, telling them about ourselves, letting them see some of our other projects.

Adrian Washington: You’re never going to please 100 percent of the people in any community. What I’ve found over years is that what you can do is the best you can do, which is to be accessible, be transparent, to listen, to be honest. Sometimes, people want something, you’re like, “Yeah, we can do that.” Other times, people want something, and I’ve seen a lot of developers be vague and sort of say, “Oh, well, maybe we’ll look at that.” I try to be honest; I try to say that, “Sir, ma’am, we just can’t do that, and here’s the reason why. I know you won’t be happy about that,” but I think it’s more important to be honest than it is to try to gloss over a problem.

Adrian Washington: It really takes a lot of work. It’s changed over the years. 20 years ago, we didn’t have to do nearly this level of community involvement. I think, particularly in underserved neighborhoods, that people were happy that you were just there and building something; pretty much, you didn’t have to do more than that. Nowadays, it’s different. People realize that their neighborhoods are an asset, and that people want to develop there, and they are demanding to be heard and respected. If you’re not there, you don’t hear them, you don’t respect them, you’re gonna suffer for it.

Eve Picker: Yeah, I think that’s right. Moving on to more global themes, here, I’m just wondering what you think we all need to do to make our cities and neighborhoods better places for everyone, so that no one gets left out.

Adrian Washington: That’s a big question-

Eve Picker: It is a big question.

Adrian Washington: -I don’t know if we can solve that all in one podcast. I’ll focus on our roles as developers. Clearly, there is a need for more housing in our cities. There’s a need for housing that serves all different income levels and all different family types. It’s not the ’50s anymore. It’s not just mom and dad, and 2.3 kids, and a picket fence. There are all types of households.

Adrian Washington: The development process has gotten tougher. Besides the community involvement piece, the environmental and sustainability requirements are much higher, the zoning is trickier. It’s hard work. I think our job is to use the skills that we’ve developed over the years to work in partnership with communities, to let them see how they can help us, and, in turn, using our skills to help them work on win-win solutions; involve government, because, obviously, they’re important, and have patience, but have perseverance. Development is tough.

Adrian Washington: I think that to be successful, you’ve got to have a long-term view. You can’t feel like you’ve got to make a killing on every project. You’ve got to look at your entire body of work, so at the end of the day, at the end of your career that you’ve made a fair return on your investment, your time, and your risk, but you’ve also contributed to society. I think it’s possible, if you have those things in mind. Honestly, it’s more rewarding and it’s more successful, if you do it that way.

Eve Picker: Clearly, you think socially responsible real estate is necessary in today’s development world, and that’s the way you manage your business, but I’m wondering, are there enough developers out there thinking about impact and thinking in the way that you’re thinking? If not, how might we improve that? I still see a lot of greenfield developments that, quite frankly, shock me in this day and age; that that sort of work continues. I still see banks wanting to finance those models over and over again, because it’s easy to think about them. I’m wondering how we shift to a [kinder] development world.

Adrian Washington: I think it certainly is growing. I agree with you completely. I drive around, particularly when I’m not in D.C., and I see so many greenfield developments. Just to me, personally, it’s just kind of boring. I didn’t get into this just to make a ton of money. Like I said, I want to be fairly compensated for what I do, but it’s more about that.

Adrian Washington: To answer your question, I think I see more and more of it. I think, particularly the younger generation … I’m older. I’m not a millennial. I guess I’m a young baby boomer. But, particularly in the generation behind me, I see people who want to do that, and not just in real estate development, but in other fields in life. They want to do more than just do a job and make money. They want to make a meaningful impact on the world. They want to have that reward, which helps them feel better.

Adrian Washington: Also, what I’ve found in my business, is it helps to attract and retain young employees. They don’t want to just build some cookie-cutter, 200-unit apartment building in a greenfield, just like everybody else. They want to do projects that are creative, that involve different financing sources, that touch people’s lives, that take challenges [cross talk] and from a business standpoint. I think it’s a movement that is slow in coming, but I clearly see it’s building, and I think it’ll be more and more.

Eve Picker: Yeah, I think you’re probably right that it’s gradually building. Do you see any current trends in real estate that you’re fascinated by or you think are going to make a difference moving forward?

Adrian Washington: Yeah, I see … Clearly, the trend for co-living and coworking is the big trend. WeWork is obviously the big kind of corporate behemoth example of that, but there are a lot of other smaller, more entrepreneurial types of interests. I’ve see coworking spaces designed around women, or women with kids that have daycare centers, or people with social causes, like a nonprofit type of thing. I see that as a big trend.

Adrian Washington: I see co-living. I think that where people, either because of monetary reasons, or because of social reasons, don’t want that house by themselves, but want an opportunity where they can either live with roommates or live in a more communal environment, where things like kitchens and things are shared, and where there’s a social network in place that typically people who are new to an area- it’s a way for them to connect. I see a real sort of striving for more connectedness, as our world, in a way, becomes less connected. I think there are great opportunities to expand on that model. I’ve seen some very successful ones here in Washington, D.C., so it’s something I’m keeping my eye on.

Eve Picker: Yeah, I think a lot of people are. I’m going to ask you three signoff questions that I ask everyone. The first one is what is the key factor that makes a real estate project impactful to you?

Adrian Washington: I’d say the key factor is that it meets the needs of the community that it’s in. The only way you get that is to get out, and talk to the people there, and understand what they want. Some communities, they want more affordable housing. Some people, they want less. Some people want retail that’s a particular type; other people might want a retail that’s missing, like, say, a Fresh Grocer, which is like an example of another project that we did. We put in a Fresh Grocer where it’d been a food desert. It really involves talking to the community, understanding what they want, and then using your skills to develop- to deliver it.

Eve Picker: When it comes to crowdfunding, do you think there are other things that can help you as a developer, not just involving investors, but how might crowdfunding benefit your project, as a whole?

Adrian Washington: I think crowdfunding benefits us in a number of ways. The couple that most come to mind – and I [inaudible] an example earlier for one of our projects – is many people in the neighborhood become investors in the projects. They’re invested not just financially, but they’re invested emotionally. They tell their friends; they frequent there more often. I think the crowdfunding helps allow, particularly, local residents to be involved.

Adrian Washington: I think the second way that that’s really helped us and helped the project is that it’s a real brand builder. Eve, when we did the project with you guys, we got so many press kits about the project. We were [cross talk].

Eve Picker: That’s fabulous. That’s really fabulous.

Adrian Washington: I was interviewed a couple of times at the local news station, I was interviewed by national publications. People that I would- said “Hey, I heard about your project. What’s crowdfunding like, and how do you like it? It just really enhanced our company’s visibility, our project’s visibility; it was a real brand enhancer, and it’s something that I did not expect and something I was very pleased with.

Eve Picker: I’m grateful to hear that. That’s wonderful. Then, this is a really big one – if there were one thing that you could change about real estate development in the U.S. to make it better, what would that be?

Adrian Washington: I think that the thing that I would really change is not so much government policies. I understand the need for regulation around safety, and sustainability, and community impact, but I would change more the attitude of the people in government who do those. I think there is too much of a – particularly in inspections – ‘gotcha’ mentality, where, instead of working with us, and understanding that we’re doing the best we can … Yes, maybe this one particular light switch was two inches too high or too low-

Eve Picker: Oh …

Adrian Washington: Not just a ‘gotcha’ mentality, not just, “Okay, you messed up on that. Fix it, and we’ll come back when we’re ready and tell you whether you missed anything else,” more a partnership for governments to understand that we’re good guys. We’re doing the best we can; that we want a safe project, a sustainable project, and to work more cooperatively with us, and help us succeed as partners, and not to be adversaries.

Eve Picker: That’s a great way to end this interview. So, Adrian, thank you very much for your time. I really enjoyed talking with you, and I’m sure we’re going to be talking again.

Adrian Washington: Great, Eve. Thanks for having me.

Eve Picker: That was Adrian Washington. Adrian is not afraid of a challenge. His company focuses on challenging sites in challenging neighborhoods, always making sure that neighborhood folks are involved and that their neighborhood is improved by the final project. I love that Adrian finds greenfields boring. I love that he sees the people in a neighborhood first, and I love that he nurtures local businesses, bringing even more value to the projects he develops.

Eve Picker: You can find out more about impact real estate investing and access the Shownotes for today’s episode at my website, EvePicker.com. While you’re there, sign up for my newsletter to find out more about how to make money in real estate while building better cities. Thanks so much for spending your time with me today, and thank you, Adrian, for sharing your thoughts with me. We’ll talk again soon, but for now, this is Eve Picker signing off to go make some change.

Image courtesy of Neighborhood Development Company

Bite-sized investments.

Equity crowdfunding is changing the real estate development landscape. Importantly, beyond raising equity, crowdfunding can help build support within communities that may otherwise hold neutral or even hostile feelings towards the building of a new real estate project. Micro-investments via crowdfunding platforms give community residents and stakeholders the opportunity to participate in and take ownership of the development. And this means that everyone will have an interest in its success.

Developing in underserved neighborhoods is not easy

Since Franklin D. Roosevelt kicked off the New Deal Programs in 1933, federal, state and local governments have tried to find ways in which to deliver high-quality housing to all Americans, not just the privileged few. But while the numerous programs created that support housing have helped over the years, they have not solved the problem. Government-developed housing projects, low-income housing tax credits (LIHTC) and Opportunity Zones have not stemmed the tide of housing insecurity.

Many in the private sector only develop in these under-served communities due to the existence of such programs. This is due to the fact that risk-adjusted returns in many major metros are substantially lower than the return on investment an investor can anticipate from middle to high-end housing, like luxury condos or single-family homes. Making the numbers work is hard enough, and when slim margins are combined with vociferous opposition to a project, it can be hard to convince investors to get behind projects in the places that need them most.

Crowdfunding as a signal

Developers have a bad rap in communities. After years of dealing with bad-faith actors, and after suffering from the effects of gentrification and “revitalization” efforts, many in the communities that need housing the most are not inclined to work with them any longer. It is critical to send the right signals to community members in order to break through years of mistrust. One way is through crowdfunding. Instead of new projects only benefitting developers or investors, crowdfunding can allow those residents to have a direct financial interest in the success of the project.

Bite-size investments and the local community

The vast majority of real estate crowdfunding platforms require that users be accredited investors. In other words, they must be one of the 3% that have net worth of over one-million dollars or a salary of at least $200,000 per year. In 2016, in an effort to democratize investment, the Securities and Exchange Commission released Regulation Crowdfunding, a rule that permits anyone over the age of 18 to invest. Now there are some emerging crowdfunding platforms that employ this rule, like Small Change.

Most socially conscious real estate development projects take place in economically disadvantaged areas, as these are the neighborhoods that need the most help. If development projects are completed without concern for locals, they can end up hurting the people that the impact-investment was supposed to benefit.

Most residents in these areas probably can’t meet the $200k yearly income or one-million dollars net worth requirement for accredited investment. Small-dollar investment crowdfunding platforms allow developers to invite residents of the community they are building in to invest, and share returns with them, rather than faceless investors that live anywhere from San Francisco to Tokyo. Not to mention that crowdfunding provides developers more access to capital from sources other than traditional lenders.

Closing the gap

We all know that private developers cannot solve the housing crisis entirely on their own. There need to be significant structural and regulatory changes made in order to provide substantial decreases in housing insecurity, particularly in the very high cost of living areas on the coasts. However, private developers can make a dent in the housing affordability gap through projects that use local communities as a resource, rather than viewing them as an obstacle to be overcome.

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Small-dollar crowdfunding offers real estate developers a way to turn a group of potentially opposed stakeholders into firm allies with a direct financial interest in the project, in addition to their interest as residents of the local community. With so many obstacles to overcome when creating sustainable low and mixed-income housing, developers need all the help they can get. It’s a win win.

Image courtesy of Small Change

Striving for impact.

How can real estate developers and investors make substantial positive change in the places in which they build? It’s a vexing question that luckily has numerous answers. You just need to know where to look.

Be direct and honest

Let’s face it, you’re not going to be able to please all the people all the time. As an individual investor or developer, your project’s scope and scale is going to be limited, and while you can make an impact, there are limits to that ability. Your best path forward is to be accessible, transparent, and to listen to community concerns. Avoid falling into the trap of being too vague or using wishy-washy language. If you are unable to address people’s concerns, tell them, and tell them why. Be accessible, be transparent, listen to them, and give honest responses. You won’t be able to take everyone’s suggestions into account, but you can listen and sometimes that alone can bring value to a neighborhood.

Survey the locals

The primary factor in making a positive change is ensuring that the project meets the needs of the community it is located in. To do that, it is vital to get out and talk to people in the area and try to understand what they want. Some communities are in dire need of affordable housing. Other communities may need retail stores. Grocery stores, in particular, are needed in many communities. Urban areas throughout the United States exist in what are called “food deserts” where the only access to food is via unhealthy options like fast food, convenience stores, etc. When you know what that community needs, you can adjust your investment to be as impactful as possible.

Consider alternative funding sources

Traditional banks and lenders will, for the most part, only finance conventional forms of development: suburban tract houses, sprawling commercial districts, office parks with little connection to their surroundings. The democratization of real estate capital finance is upending their domination of the property and development markets. Options like real estate crowdfunding, hard money lenders, and Opportunity Zone funds are all excellent sources of financing for non-traditional, non-greenfield projects.

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The definition of “impactful” is different for everyone. But the opinions of future residents and current stakeholders should be a primary concern when gauging what will work best for a development in a community.

Finding financing, working with local authorities, and getting the community on board are all necessary steps to building for the maximum impact. With the right approach, and the right team, you’ll be right on target.  

Rendering of Benning Market courtesy of Neighborhood Development Company.

The balancing act.

Modern community development is a balancing act

For most of the history of urban development, community input was rare. Top down design and planning prescriptions, like those of “urban renewal” were how communities were made. These days, planners and developers need to be far more agile and responsive to create communities. Working in tandem with the local community is an absolute necessity.

What residents want

Gentrification has become a loaded term, and rightly so. But it is a common misconception that existing residents of gentrifying neighborhoods do not understand or want the myriad benefits that come with rising economic tides. They want their communities to grow, and flourish- but they want to be able to enjoy the benefits of that renaissance, and not be displaced. Most people welcome newcomers, but they want to feel that newcomers respect the area and that new commercial businesses and housing developments serve all the people in that community.

Adding balance

Developers need to balance the needs and wants of locals with the march of progress. They have a financial responsibility to attract new residents who wish to join those communities, but sustainable development means targeting more than one social and economic strata. Instead of markedly altering the character of the community, developers should work to integrate their projects into the fabric of that community on its terms.

Include treasured local businesses

A community’s character does not only come from residents. Commercial spaces and businesses like restaurants, barbershops, local watering holes, and many other establishments define an area just as much as the people that live in the neighborhood.

Developers should make efforts to ensure that treasured local businesses are allowed to continue operations. A popular option for this route is to offer them below-market rent for a specified period. This will keep the best features of the neighborhood in place, building a sense of community and goodwill between neighborhood anchors and new tenants and developments.

Mixed-income considerations

Studies have consistently shown that mixed-income neighborhoods offer a plethora of social, economic and educational benefits. But it takes work to maintain that mix. In certain communities, people live on fixed or limited incomes. If these residents are unable to share in the collective progress of the neighborhood, they will likely oppose any new development. One way to do well and do right is to set aside a certain percentage of units in up and coming neighborhoods for low-income residents, or to explore bottom-up financing options like equity crowdfunding, which allow residents to invest direct in community projects.  

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The choices developers make have a real impact on the daily lives of neighborhood residents. The most successful developers in the social impact space find a healthy balance between generating returns and ensuring that all residents benefit from a rising tide.

Image of building in River Terrace, DC, courtesy of Small Change.

How to leave places better than you find them.

Josh McManus is a problem-solver working in post-industrial cities with entrepreneurs, corporations, and foundations to help people positively transform the places that they love. Josh’s experience spans 20 years as a serial social and business entrepreneur. An innovator in entrepreneurial ecosystems, creative economic development and combating population loss, Josh is obsessed with place-based change. An autodidact learner on subjects ranging from invention laboratories to neuroscience to game theory, Josh designs and implements projects that aim to disrupt how people in places think of themselves and their community and maximize the potential of all citizens who reside there.

Previously, Josh worked with the Rock Ventures team in Detroit, helping to buy and renovate many millions of square feet of empty downtown space. Rock Ventures is the umbrella company that serves and connects Quicken Loans Founder and Cleveland Cavaliers Chairman Dan Gilbert’s portfolio of more than 100 companies. 

Nationally, Josh is a Marshall Memorial Fellow and a Next American Vanguard. Locally, he has helped found multiple organizations and has served on a variety of institutional boards in his collection of adopted hometowns including Chattanooga, Tennessee; Detroit; and Bar Harbor, Maine. His thoughts have been featured by Forbes, Fast Company, The Economist, Entrepreneur, GOOD, USA Today, The Huffington Post and Garden and Gun.

Listen in to our fascinating conversation.

Insights and Inspirations

  • Josh believes we are on the precipice of the democratization of finance
  • All segments of the real estate market are innovating and  transforming rapidly, right before our eyes.
  • Just as we’ve lived through a wave of green-washing, we are now in a wave of good-washing. 
  • The sharing economy is flexing its muscles in real estate – office sharing, AirBNB, revenue sharing in lieu of rent, co-housing – and there is more to come.
  • Real estate in the US would be radically improved through the rapid re-writing of zoning laws.

Information and Links

Read the podcast transcript here

Eve Picker: Hey, everyone, this is Eve Picker, and if you listen to this podcast series, you’re going to learn how to make some change.

Eve Picker: Thanks so much for joining us on this podcast. I’m Eve Picker, and my life revolves around cities, real estate, and crowdfunding. In this podcast series, we’ll be digging deep to discover how we can build better cities by building better buildings.

Eve Picker: My guest today is friend, and colleague, Josh McManus. Josh describes himself as a problem solver, strategy implementer, and idea activator, and I know all three to be true. He works in post-industrial cities with entrepreneurs, corporations, and foundations to help people positively transform the places that they love. He’s obsessed with place-based change. We have that in common.

Eve Picker: Previously, Josh worked with Rock Ventures’ team in Detroit, helping to buy and renovate hundreds of millions of square feet of empty space in downtown Detroit. Rock Ventures serves and connects Quicken Loans founder, and Cleveland Cavaliers Chairman Dan Gilbert’s portfolio of more than 100 companies.

Eve Picker: Nationally, Josh is a Marshall Memorial Fellow and a Next American Vanguard. Locally, he has helped found multiple organizations and has served on a variety of institutional boards in his collection of adopted hometowns, including Chattanooga, Tennessee, Detroit, Bar Harbor, and New Orleans. His thoughts have been featured by Forbes, Fast Company, The Economist, Entrepreneur, GOOD, USA Today, and The Huffington Post.

Eve Picker: If you want to know more about Josh after you’ve listened to this podcast, please visit EvePicker.com, where you’ll find links and other goodies on the show notes page and where you can subscribe to my newsletter on all things real estate impact.

Eve Picker: Hi, Josh. How are you this morning?

Josh McManus: Doing great.

Eve Picker: Thank you so much for joining me. I know quite a lot about you, but our listeners don’t. I know that you’re always moving, and I’m wondering what and where you’re working right now.

Josh McManus: I am in Dearborn, Michigan this morning. I’m fortunate to have spent a lot of time in Detroit, and Dearborn over the last 10 years. My work right now is mostly to support Ford Motor Company, as they transform from a past that has been just about cars to a future that’s about movement and mobility, overall.

Eve Picker: That’s pretty innovative stuff. Your background has been- you’ve been involved in a lot of real estate recently in under-served cities. Do you want to tell us a little bit about that?

Josh McManus: Sure. I actually realized recently that it goes back to my childhood. I grew up in the shadows of a Goodyear plant in Georgia, and the life and death of that little town came and went with what was going on in that factory, so I’ve spent the entirety of my career working in post-industrial places. One of the best tools for changing the trajectory of a place is re-imagining real estate. I’ve worked in Chattanooga, Cincinnati, Akron, and then spent a lot of time in Detroit. With each passing set of interventions, have moved up and up in the scope of ambition of the projects that I’ve worked on.

Josh McManus: In the last 10 years, I’ve been very fortunate to work on some really large-scale projects. I got to serve with the team at Rock Ventures, which has amassed over 14 million square feet of real estate in downtown Detroit – over 100 buildings – and I’ve been party to taking most of those buildings from low, or no occupancy to full, or near-full occupancy.

Josh McManus: In the recent work with Ford, I was also very fortunate to be party to helping make the announcement of Ford’s return into their home city of Detroit, with the acquisition of Michigan Central Station, which is really turning into a living laboratory for the future mobility. It was this iconic abandoned structure that’s now getting new life and will be online and operational in 2021, I believe.

Eve Picker: That’s pretty big and exciting stuff. What’s your background, and what path led you to what you’re working on now, and this real estate reinvention?

Josh McManus: Actually, I also had the revelation recently that I come into real estate rightly so. My paternal great grandfather, and paternal grandfather were in the real estate business in Georgia and had some commercial and residential transactions and holdings. Then I spent this blended upbringing, where my dad was a CEO, my mom’s an artist, and I was torn between those two polarities of doing beautiful and good things for the world and doing business things.

Josh McManus: I went on to get business degrees, both undergraduate, and graduate, but most of my work focused on how to leave places better than you found them. I eventually came up with this reconciliation, I call it, for purpose – instead of for profit, for purpose – which is attempting to work at the intersections of moral imperative, and market imperative.

Josh McManus: All of my work in real estate is very much in that direction, which is how do you make places both humane, and maximization machines for human potential, but how do you also make them fiscally feasible, so that you can do the projects again, and again, and at scale. It’s a fine line to walk, but it’s really where my interests are is how do we build for-purpose places that serve people well, serve communities well, and serve capital interests, to the extent that they have to?

Eve Picker: I love the idea of leaving places better than you found them. It sounds easy, but it’s- probably the most difficult thing about it is that people have different ideas about what ‘better’ is, don’t they?

Josh McManus: Yes, absolutely. Real estate redevelopment is a very loaded subject right now [cross talk]

Eve Picker: It certainly is.

Josh McManus: -national conversations on things like gentrification, which are understandable; while, at the same time, there’s national and global conversations about economic stagnation. People are very clear on things they don’t like – when people get pushed out, or when people can’t stay in a place, or can’t thrive in a place …

Josh McManus: That in-between space of how do you make places work for everybody is oft talked about, but very little delivered. I think that’s why I’ve had such a consistent interest in it – how do we build places that maximize the potential for all that are able to retain talent that already exist there, but to attract new talent at the same time? I feel like it’s one of the few things that could be a lifelong pursuit, because it’s complex enough, it’s going to evolve. I know you feel the same way. It’s the problem that I’ll never solve, but I think I’ll always love working on it.

Eve Picker: Be sure to go to EvePicker.com and sign up for my free educational newsletter about impact real estate investing. You’ll be among the first to hear about new projects you can invest in. That’s EvePicker.com. Thanks so much.

Eve Picker: Yeah, I think you’re right … The interesting thing about my interviewing, people I’ve interviewed so far, they’re all tackling the problem from a different angle. It’s absolutely fascinating. Their backgrounds have led them to a different place where they have different skills, and they may be able to help in a different way. I don’t know how you get them all together. It’s very difficult, and it is, as you said, very loaded. Developers are not very popular at the moment, although they may be the answer, in some ways, somehow.

Josh McManus: Actually, I think there’s a new- there’s an emergent field. This has been one of the hard things for me … Going back to when I think you and I met, probably a dozen years ago?

Eve Picker: Yeah, it was a long time ago.

Josh McManus: We met in sort of this ‘island of misfit toys’ faction – the old gatherings of CEOs for Cities. What was fascinating about that is that you had … I was an early social entrepreneur. You were doing both that place-based change, and development work. Then there was a mix of other people that really shouldn’t have intersected with each other.

Josh McManus: What I’ve felt since then is there is this emergent field. I guess my resume would say that I’ve been proxy to a lot of development. I, by no means, would consider myself a developer, and I don’t know that I ever will, but it feels like, to me, that there’s an emergent field that is something slightly different from developer that needs a name. It doesn’t have that name yet.

Eve Picker: Yeah, that’s interesting. Something to ponder. What is real estate impact investing, from your perspective?

Josh McManus: Overall, I think that we are on the precipice of democratization of finance in a way that’s really- that we’ve certainly not seen in our lifetimes. It may have happened in certain ways in the past, where you opened up finance to more people, but the impact falls in this overarching democratization of finance wave that is impending.

Josh McManus: What I mean by that is I’ve always … In some of the economic-theory stuff that I’ve read, there’s this notion of perfect capitalism. A lot people right now are talking about post-capitalism. I’m still talking about perfect capitalism. It would be where supply and demand met each other in real time and worked its way towards efficiencies.

Josh McManus: Impact real estate investing, to me, is just the opening of the capital markets for good projects to meet good capital at a cost that’s sustainable. This is being equipped and enabled by technology, by new modes of thinking, and by measurements that are no longer single bottom line, which I think is totally appropriate.

Josh McManus: The arms race we’ve had towards single bottom line returns, since Milton Friedman economics set in, is very problematic. This return to impact, to me, feels like a return to understanding our core biological instincts, which are self-preservation. Impact finance, to me, feels like a return to what’s right and the pursuit of more perfect capitalism.

Eve Picker: I agree with you on that, but I have to wonder whether it’s really working that way yet. At the moment, I feel that impact investors are seeking the good, as well as the return. We know what it looks like to put together an impactful project in a soft market. The returns are never going to be that great. If you offer bigger returns to investors, that works its way down to the occupant of the building, who might be an affordable-housing tenant. I don’t know. Do you agree that, somehow, this great divide between the haves and have-nots is not just about the money they have, but also the expectations for the money they have? I’m not sure I’m describing that-

Josh McManus: No, no, I follow. I think there’s a couple of forces in play. One is, just as we saw a wave of green-washing over the last 10-15 years – where now everything is organic, and you can’t tell whether organic is good or not – we’re in a great period of good-washing right now. It seems that every way I turn right now, everybody’s an impact investor, because that is fashionable.

Josh McManus: But, then, if you look at the core of some of these folks’ beliefs and return expectations, they truly are willing to receive returns that are multiple bottom lines. Then there are some people who have just good-washed and expect the same arbitrary financial returns that they saw under other boom times that have advantaged capital over everything else. I think that’s an issue.

Josh McManus: I also think that we are, like you say, on the precipice, but not there yet with truly unlocking all capital with all risk orientations. The work that you’ve been doing on Reg-CF, with Small Change, is absolutely fascinating to me, because bringing folks who are holding capital that they’ve only been able to see microscopic returns on, for any sort of lower-risk opportunities – people that have only been able to see a money market account or CDs, these things that have been low, low single-digit returns – allowing those folks to bring capital on that they will now, all of a sudden … Six-percent returns, to them, looks really good compared to what they’ve seen in the past.

Josh McManus: I just think we’ve still got a lot of capital that’s yet to be unlocked that has a different return prospectuses on it. I think we’ve got to be patient in getting all capital onto the playing field and then getting it liquid enough that it can move in the directions of projects where those folks are going to see a proper risk-adjusted return.

Josh McManus: I think, in you guys’ shoes, over in what you’re doing with Small Change, what’s got to be tough is it’s a little bit Wild West, right now, so you can’t tell … It’s hard to tell the difference between who’s good and who’s good-washing, and it may take a period of time before that sorts itself out.

Eve Picker: No, I think it is going to take some time, for sure. How much, I’m not sure [cross talk] but we’ll try to be patient. When you look at cities – you travel a lot; you go to a lot of cities – do you think socially responsible real estate is necessary in today’s development landscape?

Josh McManus: Yeah, I think socially responsible everything is necessary in every landscape [cross talk].

Eve Picker: That was a loaded question.

Josh McManus: -throughout time. I am an avid consumer of a lot of historical information. The times when we put our self in great peril is when we are socially irresponsible. My dad, the CEO, raised me as a capitalist with one caveat. Every time he would remind me that I was a capitalist, he would also remind me that unbridled greed is the Achilles heel of capitalism. Unbridled greed is not socially responsible. It’s also not sustainable. We have to have a system that can allow returns on capital, but can allow returns on … I call them the other ROIs – the returns on individuals. Can individuals maximize their potential? In addition to return on investment, return on individuals.

Josh McManus: Then, also, ROIs in return on ideas. Are we rewarding and testing new ideas? This is especially problematic in the real estate business, because things all too often get too formulaic, too templatized. You and I share a friend in Jonathan Tate, who’s looked at the structure and form of multi-family housing units. There is a big problem there, in that it becomes templatized. The capital gets comfortable with that template, but then that template stops serving people in the way that needs to be. I spend a lot of time [cross talk]

Eve Picker: -that, to me, I think is the crux of it all. We need innovation in cities and innovation in place-making, and our financial institutions are not built to be innovators. They [cross talk] looking at real estate development that perpetuates the same, just in the way you said. It’s a very difficult cycle to break out of. Yet, I see so many creative developers coming to me with the most amazing ideas. How can we unleash them all and finance them all? I think we would have better cities, right?

Josh McManus: Right. The marketplace has to be there, and then we’ve got get … In all of this post-industrial city work I’ve done, I’ve worked a lot with large and small foundations, some national, some place-based. Foundation capital is interesting to me, because I think it can and should be the most risk-oriented capital in the whole world.

Josh McManus: An evergreen foundation that throws off five percent of its corpus every year, and that annualized return rates are adjusted over time, that means that that corpus is evergreen. We allow that in the tax code, because we see a benefit; that there should be a benefit to humanity and the society. That most risk-oriented money should be going into a lot of these real estate projects, especially for model-testing purposes, and that’s not totally the case right now. We’ve started to see some of that happen with some foundations, but they …

Josh McManus: The weird thing that happened, where foundations would get hit up for a lot of capital campaigns; so, then they categorically said, “We’re not going to be in the real estate business anymore.” I completely understand not building another wing on to a museum or building another dorm room at a college or university, but we need to go back and revisit that amongst the philanthropy crowd to say we probably shouldn’t be in the rote real estate business, but we should be in the real estate innovation business. The foundation capital being the most risk-oriented should be the ones that are trying the highest likelihood of transformation efforts on affordable housing.

Josh McManus: It was interesting to me to see the announcement … I don’t know if you saw it or not, from Google, last week. They said they’re going to put a billion dollars into affordable housing in the Bay Area. There’s a crazy statistic out there; I think it’s in the last 10 years, for every 12 new jobs that have been created, only one unit of housing has been created at the same time. You have these incredible pressures … You see Google putting a billion into that, and that’s a survival metric for them. They’re not going to be able to retain and attract talent, if people can afford to live.

Eve Picker: Right.

Josh McManus: I think that philanthropic money should be thinking the same way. If you’ve got a broken real estate market in a community, you may be the intervention of last resort, and you’ve got to fix that positively or negatively. I’ll just give you one example of how we thought about that.

Josh McManus: The work that I did with Rock Ventures is now carried on by a team that’s led by a lady named Laura Grannemann. They have gone very, very deep in working to figure out how to stop the blight machine that exists in the Detroit city limits. That has required not just investments in blight reduction, but significant investment in education of homeowners, so that the foreclosure process is slowed and eventually stopped. It’s required investments in rehabbing some houses for stabilization purposes – full neighborhood-sized interventions.

Josh McManus: I think that’s a good example of the level that philanthropy will have to intervene at to get markets back to operational. Once that happens, maybe they can move on, or maybe they can move to commercial, but we need risk-oriented money in the mix, for sure.

Eve Picker: Yeah. Foundations can invest in lots of other ways that aren’t necessarily bricks and mortar but end up being place-making. There are many zoning codes that need to be looked at, for an example, and changed to permit density in a way that they’re not written.

Eve Picker: One example that I’ve watched with interest is in the city of Melbourne, in Australia, where, maybe it might be as long as 10 years ago now, but a few years back, they introduced density zoning overlay along all the major corridors in the city, because those are transit corridors. They were trying to really implement density without the need for adding more cars. It’s been really interesting watching that emerge. It’s an interesting thesis that’s a little tinker with the zoning code to really make development happen in a different way. I’m fascinated by that.

Josh McManus: Yeah.

Eve Picker: In Pittsburgh,  I had a little non-profit, and built a tiny house, which in itself, was plenty of work and interesting, but the most interesting outcome, to me, was that several years later, just last year, the City of Pittsburgh actually created an overlay district for that little under-served neighborhood, so that they could build an experiment with ADUs, and tiny houses, which are really not part of the zoning code. To me, that was an absolutely wonderful outcome of this little $200,000 project. There’s ways to experiment and innovate, I think, that go beyond just building something.

Josh McManus: You’re bringing attention to something … One of the things that I’ve wanted to see created or to help create that I haven’t had time is what I describe as this [inaudible] from municipal policy innovation.

Eve Picker: Oh, that’d be fabulous.

Josh McManus: It’s under the realization that … It’s funny, because I watched a little bit of the Democratic debate last night, just to see what’s going on in that world. I had the realization, studying American history, there was a time when federal policy was the be-all-end-all for impacting local life in America. When we were debating major social, major fiscal policies, then the federal policy was where it’s at. The debates that we have on federal policies right now do have local impact, but they don’t have the local impact that they did all the way through the 1800s.

Josh McManus: At some point, the game really moved to the states, and state policy started to have a large impact on whether you have state income tax or not, or how you fund education, how you think about crime. During that period, governors were where it was that for impacting day-to-day life at a neighborhood level.

Josh McManus: Today, it’s really down to a place where I think your mayor matters a lot more than your president. That throws a lot of people off, because of the drama that’s happening on our national policy stage right now. The truth is, I travel so much, and the quality of life at the neighborhood level is much more greatly impacted by the policy choices of a city’s mayor than by the president, nor Congress.

Josh McManus: Now, if you follow Twitter all the time and watch TV all the time, you might think otherwise, but the actuality of it, of what your access to transportation is, what your access to parks and public places are, what the quality of your local education offerings are … The folks that have their hands in that are local politicians, much, much, much moreso than national, or state politicians.

Josh McManus: I think this game of sitting around saying, “Well, when is the state or the feds going to help us fix this stuff?” is completely wrong-headed, and the game is really transforming at a local level, in a lot of cities. My time in Detroit … I think my biggest fear for Detroit, right now, is that they went unregulated during the bankruptcy period. There was very low regulation on a lot of development activities and other things.

Josh McManus: Now, they’re turning back on the development regime that’s really dated circa 1950. I think  there’s folks that are working hard to try to update some of that, but these communities that have these leftover enforcement regimes that are from times that are no longer here and didn’t really deliver results that were optimal for all people, this is highly problematic [cross talk]

Josh McManus: -we need to be scrubbing local zoning issues. The way that you’re zoned, from a density standpoint, has a very fast waterfall effect to what’s going to happen with education, and transportation. I think a lot of the citizens don’t realize that, and they fall into a default NIMBY setting, which is ill-advised, because it means that you make decisions that don’t impact your kids, your surrounding neighborhood, your surrounding businesses.

Eve Picker: Right. Well, if you start your school, count me in, because I think [cross talk] I’m always astonished at how much power politicians have and how little they know about urban design, planning, architecture, and the impact that it can have on place, so I think that’s really important. Do you think there are any current trends in real estate development that are really important for the future of our cities?

Josh McManus: Oh, yeah. My observation is that we’re seeing the radical transformation of the three primary forms of real estate right before our very eyes. These are things that have, at least in the US, have held true almost since our foundation. I’ll unpack that a little bit.

Josh McManus: On commercial real estate, we’ve existed off of a owner-broker model that was predicated on square feet, and years. If I wanted to lease office space for my commercial offices, then I went and met with a broker who represented a property owner, and we had a debate and discussion about how many years and how many square feet I needed for my offices.

Josh McManus: Due to the demands of the property owner and also to the inertia of the whole situation, we typically had a very long-term discussion. The property owner, and the broker really wanted to get me into five years, and they wanted to get me into as much square footage as possible, at as high a leasehold rate as they could get their hands on [cross talk]-

Eve Picker: Both for different reasons, right? One, because the broker is incentivized to do the biggest deal possible, because the way the broker gets paid is on a percentage-commission basis, right?

Josh McManus: Yes.

Eve Picker: Which is also a really broken piece of this all.

Josh McManus: Yeah. What I see happening right now – again, with technology democratization, and ability to understand real-time supply and demand – is almost this continuously variable financing of real estate. You see it manifest the best in things like WeWork, because whereas the CBREs of the world are still out there going, “Well, how many how many square feet and how many years do you want this for?” WeWork is saying, “How many desks do you want, and how many days do you want them for?”

Josh McManus: That’s the transformation of the pro forma, because at CB Richard Ellis, they wanted me to rent that space, and they wanted me to put one person per every 300 square feet, or 350 square feet – as much room as I would sign up for, that’s what they wanted to get me to. By changing the pro forma around and by aligning the interests of the broker-owner – now that’s kind of collapsing into the same thing, sometimes – WeWork says desk and days, and what they don’t talk about as much is square feet, because now, if you go into a WeWork office, there’s one desk per every 75 square feet.

Josh McManus: What’s fascinating about that is that it’s a healthier performing pro forma; it’s also more environmentally sustainable, because you’re conditioning less space. It has a higher energy level to it, so people who work in those spaces feel a different level of energy. You can also shift the pro forma to have more amenities, because you’re spending less money on just bare space and conditioning of that bare space [cross talk].

Eve Picker: -it really supports startup, and small businesses who can’t really find the time to put all the necessary utilities, and the managers together for themselves, so there’s an added bonus, right?

Josh McManus: Well, it also allows them … It’s continuously variable, if it’s priced based upon risk. I may price your desk rate higher, if you’re a more risky client, or if you want more flexibility. Essentially, what you’re paying for is optionality. It also allows you, if you’re a startup, to be like, “Well, this month, I have 12 employees, and next month, I have 17. Then we went through a down cycle, and I’m at 11.”

Josh McManus: It’s more pay-to-play than this encumbrance that so many companies have been so scared of, which is this five-year lease with these ridiculous guarantees, and [cross talk] I think it actually accelerates the economy, because it gives people more options to play the way they want to, when they want to [cross talk] for the landlord and the broker, because they’re pricing risk into it. Their margin is still there-

Eve Picker: Josh, early on in my real estate career, I was known as the only developer in Pittsburgh who would actually lease out space for a year at a time. I have some buildings that have smaller office spaces, and I would find these startup tenants, and I would take a risk. They’d stay for a year, and then, they’d stay for another. Some of them ended up staying for 20, maybe because I understood who they were, because I was like that myself. I couldn’t find anyone to help me find tenants, because it wasn’t worth their while. I love that the internet is producing new models and helping make that happen [cross talk]

Josh McManus: That’s commercial, and then what you’ve got happening on retail-

Eve Picker: Oh, that’s huge.

Josh McManus: -is similar. I mean retail, both in the displacement of some retail to online, but the retail that’s persisting is highly experiential. I think that you’re seeing a lot more revenue-share rents at the ground level. It’s aligning the interest of the landlord and the lessee.

Josh McManus: You’re also seeing a lot of things like food halls. The way those are working out is the landlord, the broker, and the lessee are sharing costs differently. If I’m in a food hall, the property owner, or the property manager may be the one who’s buying some of that back-of-house equipment and carrying the debt, or the cost of that equipment. What that does is create lower barrier to entry for more localized, more authentic offerings to going to place. Then, when that those offerings perform very well, both the landlord and the lessee are sharing in those outcomes [inaudible]

Eve Picker: -co-working for food, right?

Josh McManus: Yeah, totally. The final transformation that I’m watching in real estate is the residential side of it. If you look backwards, if I need to stay a night – I’m in a Marriott, right now. If I needed to stay a night, I would go to a hotel. If I needed to stay for a week, I’d stay for an extended stay. If I needed to stay for three months, then I would go to some corporate housing that had furniture in it. If I needed to stay for longer than that, I could stay for 12 months, or 24 months, but it had to be a fixed increment.

Josh McManus: Now, that’s all collapsing. I moved my family down to New Orleans over the winter, and we actually went on Airbnb, and did a long-term rental … Longer-term rental, so it was more like a 90-day. The algorithm there brokered some adjustments to say, “Hey, you’re staying for a longer time. That’s good for you; that’s good for the landlord. Let’s get the economics of this right.”.

Josh McManus: This foreshadows, for me, that you’re going to have this optionality in the future on a small number of platforms – whether I need to stay one night, one week, or six months – that I’ll be able to do that, and the data will help you understand what the right pricing is for both parties. It’s democratizing that, and de-risking it. I’m extremely excited, because I think what you’re seeing is this melt into something where supply and demand can meet each other in much greater fashion, faster fashion, with more transparency and more benefit in both directions.

Eve Picker: That plays into financing these things, which are all new, and innovative, and financial institutions often don’t understand. I have a building that is now a co-working building. I moved from traditional office spaces to getting rent, as the building owner, from desks. I have an operator who manages the building, much like a hotel operator.

Eve Picker: I’ve been paying my mortgage on time on that building at least 13 years, never missing a payment, and went to them for a credit line to make some improvements, and couldn’t get it financed, because they just didn’t understand where the income was coming from. We’re back to the first issue we talked about, which is the financial institutions really, for whatever reason … It may not be their fault. They have all their regulations to deal with … They’re squashing the innovation out of the cities. These innovations are happening regardless, and there’s going to have to be different financing tools [cross talk] banker is listening here.

Josh McManus: I couldn’t agree more, but I don’t- I think that wishing for bankers to figure it out … Bankers always follow the lowest common denominator [inaudible] path. I did have some insight in working for Rock Ventures. That’s the holding company that sits next to Quicken Loans. Quicken Loans, in some ways, is in that traditional banking category, but in most ways is not. What I learned in that world is that a lot of people look at that as fin-tech rather than finance-

Eve Picker: That’s true.

Josh McManus: I think that there is a major opportunity in the way that this is likely going to get handled at scale, as you’re going to see the development of a capital class that’s called REfin-tech, real estate fin-tech. I think that’s the exact money that is financing things like WeWork, right now. If you look at WeWork, it’s not your traditional- it’s more your soft banks. It’s your folks that understand that data has value; that technology has inherent value, but that you also need to finance large amounts of physical property. It’s a blended- it’s not just tech. It’s physical property and tech living together side by side.

Josh McManus: I think this is going to come off of a completely new capital class, and that, as you start to see exits, it’s going to be really interesting to see what happens with the IPO of WeWork. If that goes well, that probably forms the foundation of this REfin-tech capital class that will subvert the banks. Once, it subverts the banks, then the banks will try to figure out how to get in that game.

Eve Picker: Yeah, I think that’s right. I’m going to shift gears a little bit, because we’ve been talking a long time, but I want to know the answer to this. You started your- well, I don’t know if it was the beginning, but when I first met you, you were doing quite a lot of community engagement work. I’m wondering what community-engagement tools that you’ve seen or used that you really believe work?

Josh McManus: Around the time- well, probably around the time that we met was the time that I got involved in conceiving and driving what we thought, and what we still think is the world’s largest community visioning process. We got over 26,000 people to participate in Ideas for the Future of Chattanooga Tennessee.

Josh McManus: That was fascinating for me, because all the assumptions were totally wrong. We thought it would happen mostly online. It happened 80 percent on paper. We thought that folks would be single-issue voters, and they turned out to be very dynamic in what their interests were in the community. We thought that when you were faced with the issue of vision that people would have really, really wild ideas, and really, en masse, the community had incremental ideas. If you’re looking for breakthrough ideas, I learned that big survey processes were not the way to go for it [cross talk]

Josh McManus: After all this time of doing it … I did that, and then I’ve done a lot of other approaches. I believe in what I call humanity-centered design. I’ve got a process that I’ve developed for it. What it says is don’t build nor design things for what you believe is a community, build and design things for what you know is a community.

Josh McManus: Any intervention you build should be with the deep observation of the issues that you’re trying to understand and intervene on. What I mean by that is if you want to intervene on affordable housing and you don’t have a lot of people involved, who have lived in, are living in, and are currently pursuing affordable housing, then it’s going to be really hard to get it right..

Josh McManus: Just as human-centered design has put people in hospital beds, when you’re trying to innovate in hospitals, this humanity-centered design says I’ve got to take it more than just innovation on behalf of the patient. I’ve got to find innovation on behalf of the entire patient base. I believe in this humanity-centered design. I believe in feedback from the people. I believe in that in two different ways. I think if you need to understand what consensus is, then you mass survey, and representative sample. If you need to look for innovation, you actually have to do constrained dreaming.

Josh McManus: What I mean by that is we did the world’s largest community-visioning process, and people wanted a little cleaner, a little less traffic, a little better amenities. Then we did this other process that was called City R&D, where we said, “We’ve got downtown, we’ve got the mall area, and we’ve got the new giant auto factory – we need to connect these three together. What are your wildest ideas for connecting these things together?”.

Josh McManus: When you constrain the problem like that, the imagination became really much more bold. People had public art ribbons, and rubber-tired trolleys, and all these different ways that you could connect these assets together that they didn’t come up with, when they were just asked to imagine a better community and describe it. I think that community process has to be selective around are you trying to figure out what consensus is, or are you trying to figure out what innovation is?

Josh McManus: The last thing I want to mention is my friend, Mark Wallace, who runs the Detroit River Conservancy, I feel like he really stumbled into, or intentionally drove into new territory from a community-input standpoint with the new park that they just announced on the Detroit riverfront.

Josh McManus: What he did was actually go get a representative sampling. I think it was 21 folks, real people from neighborhoods – mom and her kid, a set of retirees – and these are people that were not your usual suspects in public participation. Then what he did is put them on a plane, and they went to the best parks in the country-

Eve Picker: Oh, that’s really cool.

Josh McManus: Yeah. They experienced those parks, and then they came back and worked with the designers to say what they wanted in their park. Instead of [cross talk]

Eve Picker: That’s really cool.

Josh McManus: -surveying, he found his representative sampling of the community; made sure that they were unbiased, because they weren’t the usual suspects and participants, like people that are in the know. Used their input to come up with a plan that I’m super-super-excited about. I think that may be a next practice, too.

Eve Picker: That’s pretty cool. I’m gonna have to interview Mark-

Josh McManus: Oh, yeah, he’s great.

Eve Picker: One last question – where do you think the future of real estate impact investing lies, in summary?

Josh McManus: In summary, I think that all of us that care about real estate impact investing have to continue to drive for policies, tools, and patrons, for that matter, who are committed to the democratization of finance. When the controls are in the hands of the commons, instead of in the hands of a small few who may make choices that were based on that unbridled greed that is this Achilles heel of capitalism, that is problematic. Anything that we can build, that we can do, that we can advocate for, that allows finance to further democratize to allow all people to participate in it, and to participate in ways that are fair and just, I think that’s what the future looks like.

Eve Picker: Okay, that’s great. I do have three sign-off questions that I’m asking everyone because I’d like to tabulate the answers in the end. The first question is what’s the key factor that makes a real estate project impactful to you?

Josh McManus: I’ll tell you a quick story. There was a time when everybody was talking about Denver. They’re like, “Denver’s changing. Denver’s changing. You gotta go see Denver! Denver is changing!” Then you went to Denver, and it was three blocks-.

Eve Picker: Yes, I remember that.

Josh McManus: Yeah, yeah [cross talk]

Eve Picker: -you could say the same about Corktown. You know that, right?

Josh McManus: Yeah, yeah, totally, totally. Absolutely.

Eve Picker: Where is Corktown? Oh, it’s this block …

Josh McManus: Yeah, that’s … my friends, the Cooleys, and they started with the BBQ shop. That does get to how I measure these things. A project that is so impactful that people start to talk about a place, because that one project … It’s happened with a place called The Flying Squirrel in Chattanooga; incredibly designed; really smart bar that really accelerated the south side of the city. That’s what I’m looking for in transforming real estate.

Josh McManus: Does the project have the ability to play above its fighting weight, because it becomes contagious? Does it cause adjacent development? Does it get written up because it has particular aspects of it, like Jonathan Tate’s odd-lot work that he’s done down in New Orleans? Does it set precedent? Does it challenge people? Does it change the status quo? Do you come back to it in 10, 15, 20 years and all sorts of other stuff has happened around it, because it was that compelling unto itself?

Eve Picker: Yes, okay. Then, other than by raising money, how do you think involving investors through crowdfunding could benefit the impact real estate developer?

Josh McManus: When I speak of the democratization of finance, the disassociation of capital and community that happened since the 1950s is very problematic. What has the potential to happen now … Before we got on the line, I was working through a small investment in a place-based development out of my IRA- a self-directed IRA investment that’s in my neighborhood in New Orleans. What that does is reconnect me, my capital, and my community together. I think that’s what’s to come for the investor is to no longer be a spreadsheet jockey who is just sitting there looking for returns, but to actually participate in the true active community, by the utilization of your capital, to deliver things that include returns for you, but include a lot more.

Eve Picker: Right. Okay, if you could think of one thing that would improve real estate development in the US, what would it be?

Josh McManus: One thing that would improve real estate development in the US would be a rapid evolution of understanding of zoning, because I feel like this is … The municipal boundaries of most communities were formed at a time of horse and carriage. Most of our zoning requirements still date back to times when heavy industry and light industry were really different from each other. Heavy industry had machines that could suck people into them, and cause major problems, and had major health concerns.

Josh McManus: I look at additive manufacturing, experiential retail, multi-family affordable residential, and I know, in the future, we’re going to have to have all of those on the same block with each other. Accelerating to standards that allow for that to happen seems really important to me.

Eve Picker: Yeah? Okay. Josh, it’s been really lovely talking to you. I thoroughly enjoyed it. I can’t wait to hear about what you’re next working on. Thank you so much for your time.

Josh McManus: Thank you. I enjoyed the conversation, Eve.

Eve Picker: That was Josh McManus. I hope you enjoyed listening to him as much as I enjoyed talking to him. Josh gave me three great takeaways. First, he believes we are on the precipice of the democratization of finance. Second, all segments of the real estate market are innovating and transforming rapidly right before our eyes. Third, just as we lived through a wave of green-washing, we are now in a wave of good-washing. We need to be patient for investors to catch up. What did you learn?

Eve Picker: You can read more about Josh on the show notes page for this podcast at EvePicker.com. While you’re there, please consider signing up for my newsletter to find out more about how to make money in real estate while making some change. Thank you so much for spending your time with Josh, and I, today. We’ll talk again soon, but for now, this is Eve Picker signing off to go make some change.

Detroit, image by Eve Picker