Rethink Real Estate. For Good.

Equity

El Centro Home.

✅ Revitalization. Repurposing a vacant property into a school designed to enhance learning

✅ Minority project partner. Latino-owned firm providing development support

✅ Workforce training. A path to success for students disengaged from high school

✅ Community. 200 students yearly, the majority local residents

✅ Job creation. 50 construction jobs plus 20 permanent jobs

✅ Construction underway. Completion anticipated soon

These features are all packed into just one real estate project in Philadelphia – El Centro Home.  And the developers are looking for investors, small and big alike, on Smallchange.co.

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 El Centro Home

The Great Real Estate Reset.

Dr. Tracy Hadden Loh is a Fellow with the Anne T. and Robert M. Bass Center for Transformative Placemaking at Brookings Metro. Her research focuses on commercial real estate and how place-level assets interact and affect the prospects and resilience of the people and enterprises that call a place home in urban, suburban, and rural settings.

Tracy has recently written about the need for reform of the real estate sector, including who benefits from new development, and the governance challenges that exacerbate the extreme and growing spatialization of inequality in U.S. metropolitan regions.

Prior to joining Brookings, Tracy was senior data scientist at the Center for Real Estate & Urban Analysis at the George Washington University School of Business where she was the lead author of “Foot Traffic Ahead 2019.” This study ranked the 30 largest US metros based on percentage of office, retail, and rental multi-family space each area had in their walkable urban space. She also worked on the creation of a strategic plan to bring inclusive and equitable economic development to the area around the former Charity Hospital in New Orleans. In 2022, Tulane University announced plans to redevelop the building into a mixed use complex including research and educational facilities. Prior to her role at GWU, Tracy was the director of research at the Rails-to-Trails Conservancy.

Tracy is a graduate of DC public schools and holds a Ph.D. in city and regional planning from the University of North Carolina at Chapel Hill. In addition to her research interest in placemaking, Dr. Loh served two years representing Ward 1 on the Mount Rainier City Council in Prince George’s County, Md. She is currently a member of the board of directors of Greater Greater Washington.

Read the podcast transcript here

Eve Picker: [00:00:03] 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] As we embark on a new year, we’re all thinking about fixing things.  I bumped this podcast up on my list, because Tracy Hadden Loh has a much bigger and more inspiring fix list than most of us do. Tracy is bi-racial and has experienced inequity first hand.  Even as a young child she knew something was wrong.  Her career has been a purposeful exploration of how to fix things. As a Fellow with the Center for Transformative Placemaking at Brookings Metro, a branch within the Brookings institution, Tracy focuses on cities, downtown metropolitan areas, placemaking, diversity in cities and reinventing cities post-pandemic. And of course, fixing things. You’ll want to listen in to learn more!

Eve: [00:01:39] Hello Tracy, it’s really great to have you on my show.

Tracy Hadden Loh: [00:01:42] Hi Eve. Thank you so much. I’m thrilled to be here.

Eve: [00:01:45] So you’ve researched and written on so much that interests me. Like what’s next for downtowns? The devaluation of assets in black neighborhoods, diverse neighborhoods, the office re-imagined lots of stuff around cities that I think is really important. But can you tell me a little bit about your background and how you came to be researching these issues at the Brookings Institute?

Tracy: [00:02:08] Sure. Well, I was born and raised in Washington, D.C. I grew up in the city in the eighties, which was a time when the city’s population was still declining, and it was very segregated. I am biracial myself and I was raised by two working parents and my mom is an immigrant to the United States. So, when I was growing up in the eighties, I felt, even just as a child, I could sense how segregated everything was and that it wasn’t right. But I didn’t know why or what to do about it. And now, DC’s population is growing again, and the trajectory of the city is really different. But that raises a different set of questions about who is winning and losing when there’s change. So, that is that kind of big question about who’s winning and losing and who decides the rules by which that happens. That’s really sort of the motivating question of my life. And I went from being a D.C. public school student and living it as a child to wanting to work on it and help solve it as an adult.

Eve: [00:03:37] That’s a great goal. I love what you said, winning and losing. Who’s winning and losing? Because I think that’s a really big question. So, I’m really interested. You’ve done a lot of different things, but I’m really interested in your work around what you call the great real estate reset initiative. Can you tell me what that is, what that means?

Tracy: [00:03:59] Sure. So, during 2020, after COVID had arrived in the United States and then that summer, after George Floyd was murdered, I was really kind of feeling the moment and feeling like it was a good time to try to say something big and systemic about the way things work. And I was talking to a friend, his name’s Christopher Coes, and at that time, he ran an organization called Locus that is a group of smart growth real estate developers. He was like full time staff on that at Smart Growth America. And so Christopher and I were just kind of talking about the big picture and how to frame what’s going on and who’s needed to be part of the solution. And we really wanted to explain to a broad audience why government alone is not going to be able to address the way things work in the United States and the big trends that are shaping our society. It’s going to take every sector. But we wanted to write a piece that really kind of specifically highlighted the role of the private sector in driving how things work through the lens of real estate. So that’s what motivated us, this project was really a collaboration between myself and Christopher Coes and my colleague at Brookings, Jennifer Vey.

Eve: [00:05:49] So, but why is real estate so important?

Tracy: [00:05:52] Well, you know, the built environment determines so much of our lives. I think we hear people say all the time this phrase: place matters. So, digging in, what does that kind of little shortcut mean exactly? The physical condition and location of our neighborhoods is something that determines a lot of a child’s access to health, opportunity, their odds of being incarcerated, their earning potential. You know, the conditions of your neighborhood determine a lot about your life. It’s not just the conditions of your family and you as an individual. And so, we have to ask these questions about real estate and then just kind of looking at real estate as a sector. It’s a huge piece of the American economy. If we understand real estate as an asset class, these are not small potatoes. It’s not as big as the stock market. But it is, this is a huge asset class and it’s the second most common asset class that touches people’s lives. And, you know, the only thing more common than real estate is cash.

Eve: [00:07:09] How big is it?

Tracy: [00:07:25] Let’s see. I have an exact estimate for you. So, if you combine commercial and residential real estate, you’re going to be looking at about 45% of assets in the United States. And that makes it the single biggest asset class. If you separate commercial and residential, then of course it’s smaller, but on its own real estate is the single biggest investment asset class in the United States by far.

Eve: [00:07:40] I think I read in another article, and this is how I found you, that no one will be surprised by this, but a very small percentage of minorities actually own the commercial assets in this larger group of real estate assets, right?

Tracy: [00:07:57] Yeah, that’s right. With my collaborator Jonathan Rothwell and my colleague Andre Perry, we did an analysis of consumer finances and what the most recent version of that survey found is that only 3% of black households own any commercial real estate, and that’s compared to over 8% of white households. So, these are small percentages. Most people don’t own commercial real estate, but we can see that even within this sector, there’s tremendous inequity.

Eve: [00:08:27] A very big difference. Yeah. So, what else did you notice in your research?

Tracy: [00:08:32] With my most recent research project, what I was digging into is what’s going on with retail real estate right now, because I spent the first couple of years of the pandemic seeing these huge impacts to the leisure and hospitality sector and a really rapid evolution of retail business models and kind of the scale of the crisis and then the speed of adaptation. It’s been fascinating to watch, but the built environment itself doesn’t change like that. So, these are new retail business models that are still trying to locate themselves in the same old retail landscape. And I wanted to just kind of take a look at how that was playing out in terms of operating income and tax assessments for different jurisdictions. Because I know from my own service and local government in the past that commercial real estate is such an important part of a jurisdiction’s tax base. And so, the health of commercial real estate is something that we all have to be very concerned about.

Eve: [00:09:39] I’m fascinated by how it’s playing out physically, because recently I was somewhere in the suburbs, which is unusual for me, but still. I landed in this little medium sized strip mall, and I noticed there were many, many storefronts vacant. And at one end of it, I noticed that a storage facility was starting to occupy the storefronts. I mean, I’ve really never seen a storage facility like that. They had pods in the parking area and one storefront after the other was being converted into storage, which is at least a use, but it’s kind of a sad use.

Tracy: [00:10:16] It’s extremely marginal.

Eve: [00:10:34] Yes.

Tracy: [00:10:21] So, what I found in my most recent research project is that what’s happening with commercial real estate in the retail subsector of it is that even after controlling for every single variable that we could think of that is related to real estate valuation, we found that commercial real estate in zip codes that are majority black in terms of their residential population, we found that race explains an across the board 7% devaluation of that property. And so, and previous research found extensive, much bigger, like three times as big levels of devaluation of residential real estate in black neighborhoods. So, we had reason to suspect that we would find this on the commercial side, too, but I wanted to just estimate a parameter around it, try to get a sense of what the size of the devaluation effect was so that I could start exploring the implications to tax basis to neighborhoods and think through the dynamics of what devaluation on the commercial side means and what it does.

Eve: [00:11:33] Okay so, I’m going to go back to something that you said which caught my attention and that the American real estate industry can create communities of opportunity or face a future, both figuratively and literally underwater. What do you mean by that?

Tracy: [00:11:49] So, climate change is another one of these really big generational trends that is going to totally reshape real estate in the United States. But we are really only just at the beginning of the days of seeing how and where that’s going to be priced in and how we’re going to respond. And so, for an industry that is hyper interested in trends, I think that real estate as a sector has been very, very slow to understand the implications of climate change and to figure out how to approach it. There should literally be a fire under the entire sectors butt about it. And so, I wanted to sound the alarm on the fact that right now the bulk of the real estate industry is still very busily building the wrong stuff in the wrong places.

Eve: [00:12:51] Yeah, I think you’re right. The world is moving very fast and real estate doesn’t. And much of the real estate that we have now will be 80% of the real estate that we have in 2040. So.

Tracy: [00:13:04] That’s right.

Eve: [00:13:04] It’s also about reconfiguring it, right?

Tracy: [00:12:54] Yeah.

Eve: [00:13:09] In that great real estate reset initiative, you focused on five key trends, which I found really interesting. The first was separate and unequal. The second was modernizing family. The third was risky housing business. The fourth was the office reimagined. And the fifth, as you’ve mentioned, the retail revolution. I’d really like to talk about each of them. Like, I suppose we’ve talked about the persistent segregation in the country. What about modernizing family? What does that mean?

Tracy: [00:13:41] So, this is another one of these big macro trends that’s going to change everything about real estate that it seems like we haven’t woken up to yet, which is that the types of households that young people in the US are forming today are radically different than what they were one generation ago. So, in that piece I present just a very simple analysis of the census. And what we found is that if you look at young adults, so Americans age 23 to 38. Right now, we would call those people millennials. But if we look at that same age bracket, but back in 1968, so this is my parents, at that time, almost 70% of young adults in that age bracket were married with at least one child. So, that’s pretty much just the vast bulk of people. We’re forming one type of household and there’s one type of housing that is highly desirable to accommodate that type of household. So, as far as housing goes, real estate was pretty simple back then in terms of what the demand was. But today, less than 30% of young adults are married with at least one child.

Eve: [00:15:03] That would be two of my children.

Tracy: [00:15:05] There we go.

Eve: [00:15:06] They fit right into that group.

Tracy: [00:15:08] And so, it’s less than 30%. And every other kind of household has increased in terms of how common it is. So that’s living alone, living with roommates, being a single parent. So having a child but no spouse or having a spouse but no child or still living with your parents. Right. Like all these things are more common now. And so, the issue is that we’ve gone from one kind of household that needs one kind of housing to many kinds of households that need many kinds of housing. And we don’t have that kind of flexibility in our housing inventory. If we look at housing inventory change since 1980, the only type of inventory that has grown in terms of its share of US housing inventory is houses with four or more bedrooms.

Eve: [00:16:00] Oh.

Tracy: [00:16:03] Which is literally the opposite of what’s happening demographically.

Eve: [00:16:09] So the rise of the ADU hasn’t been fast enough.

Tracy: [00:16:14] Not nearly fast enough.

Eve: [00:16:16] And that is because probably if zoning laws and…

Tracy: [00:16:19] That’s right.

Eve: [00:16:19] …financial restrictions, banks don’t really want to lend, all of those.

Tracy: [00:16:23] And builders don’t know how to build them and ADUs require subordinate electricity from a main house. Pretty much like most American houses would need a heavy up to support an ADU. There’s a billion barriers to ADU production.

Eve: [00:16:38] You know, we talked about retail and there’s also the office.

Tracy: [00:16:43] Yeah.

Eve: [00:16:44] The nature of office work is really shifting.

Tracy: [00:16:47] Yeah, that’s right.

Eve: [00:16:48] And I don’t know where the percentages lie right now, but I love the freedom of remote working. I mean, I’ve always worked that way, but the pandemic I think normalized.

Tracy: [00:16:58] Yeah. So, the big picture is that a majority of Americans don’t work in offices. So just slightly more than half of the United States is, they’re working in schools or hospitals or on the road or in a kitchen. They’re working somewhere that’s not an office. But in cities, in metro areas, it’s a majority of the workforce that does work in offices. And where we are right now is that at the beginning of the pandemic, the vast majority of office workers immediately pivoted to full time remote work. That has gradually decreased. And so, at this point, it’s only 25% of the office workforce that is fully remote. But that means that a lot of people are back, but back less than they were before. So, hybrid work is becoming the new normal for office workers. So, this has a bigger impact in cities because it’s in cities where a majority of the workforce is in office using occupations and it’s also in cities where you find central business districts that are heavily dominated by office real estate. And so, those labor markets and then these particular neighborhoods within those labor markets feel very different now than they did prior to the pandemic, because they’ve experienced a massive structural shift that’s now looking pretty sticky.

Eve: [00:18:34] Right. Yes, I live in downtown. It feels very different. It’s very emptied out. And there’s lots of adaptive reuse going on in office buildings.

Tracy: [00:18:46] Yeah, I think the right thing is for the owners of office real estate to conclude that this shift is permanent and to stop waiting for a time machine to take them back to February of 2019 and to instead adopt forward looking strategies that will lead to productive adaptation.

Eve: [00:19:11] I’m going to go back to something you said about the real estate industry moving very, very slowly, which is true. Part of that is because when you want to build a building, you have to design it and you have to get entitlements and permitting and a budget and build it. And by the time you’re done, if you’re in a market that’s shifting, if it’s a larger building, it’s three years later and it may no longer be completely relevant. How do we tackle all of this? How do we incentivize the right sort of practices?

Tracy: [00:19:40] The problem that real estate has right now is that, given how huge the sector is and how it touches all of us and is so important to everyone’s life and entire communities, there’s just a really astounding lack of dynamism in the sector. There’s a lack of innovation. There’s a lack of growth and productivity, a lack of change. And that is, I think, because of a complicated and toxic set of factors, but that we have the ability to do something about. So, first is that the sector is overregulated. And a really complex regulatory environment makes it higher, it slows things down and makes it more complex so, that favors established and big firms. This sort of classic like giant evil developer that seems to live rent free in a lot of people’s heads. So, I think there’s a lot that communities can do with the way that they regulate both zoning and building codes in order to streamline the kinds of development that they want to see. So, you mentioned ADUs earlier. There are multiple communities in the United States that have made it incredibly easy to build an ADU. Pre-approved floor plans and permits.

Eve: [00:21:09] Yeah, I know. Portland, Oregon.

Tracy: [00:21:11] Apply one day, have permission to build an ADU the next day. So, streamline and make super easy the kinds of buildings that you want to see. Which requires that first initial consensus building about what we want and what we need. But do that work, and then enact the necessary reforms. This is something that communities have been very slow to do. It is incredibly stimulating to the economy and to communities to promote the right kinds of dynamism in real estate, and ADUs is an example of that on the residential side. But the same thing applies on the commercial side, that we know that retail business models are rapidly evolving. And yet, we are expecting this retail vibrancy to figure out how to locate itself in yesterday’s retail building stock. So, I think it’s even more complicated on the commercial side than just the regulatory environment. I think what’s going on the commercial side is also that it’s very difficult to obtain financing and access capital to do commercial real estate projects. And banks want projects that feel familiar, that they understand. And the problem is that what’s familiar is obsolete.

Eve: [00:22:38] I’m so with you on that.

Tracy: [00:22:41] So, there is a huge opportunity to make a ton of money in commercial real estate by leaning in even just a little bit more to innovation and inclusion, because it’s a sector that’s desperately in need of new ideas. And so, that means that we need to see new faces.

Eve: [00:23:01] If you were a developer, what would you focus on first?

Tracy: [00:23:04] To be honest with you, I think that the lowest hanging fruit is still housing, just because there is so much pent up demand, we have under built for so long. It’s just not rocket science to make money building housing if you can find your submarket niche and if you have access to capital. So, I think that the low hanging fruit is in ADU and missing middle housing production in US cities of all sizes at this point.

Eve: [00:23:34] But that goes back to something you said before about the racial divide. So, who has access to capital, and will that capital be deployed in disinvested neighborhoods that need the housing the most? I mean, you know, we’re back into this whole cycle of what sort of housing gets built and who does it serve and who does it make money for.

Tracy: [00:23:55] Yeah, and the money to build real estate largely comes from banks. People typically don’t have huge amounts of personal wealth. The people who do have that kind of money aren’t doing neighborhood real estate. So, I think that there is a systematic problem with the kinds of projects that it’s easy to get a loan for and with who can get them. And, I wrote the great real estate reset, wanting to connect with lenders and with lending institutions. It’s been a tough row to hoe. It’s an insular world, and I am not an economist. And so, I think that there’s a need right now for thought leaders with a lot of credibility in the sector to start talking about these ideas. I earlier this year did a fireside chat with the folks at Capital One. It was so wonderful to be invited to do that and to be able to share these ideas in that kind of space. And I think that I plan to just keep knocking on every door and window and trying to have these conversations, because I think it’s clear that capital flows, that’s something that has to change. If we want to start responding in a way that’s smarter, that’s more dynamic to things like these demographic trends, to climate change, to the persistence of white supremacy in the United States.

Eve: [00:25:27] You could also talk about incentivizing innovative projects through city government. I mean, if, as you said, if you take the pain out of building ADUS or you take the pain out of taking an empty strip mall and converting it to housing, that’s a way to provide a very powerful incentive to make things happen.

Tracy: [00:25:49] Yes, I definitely think that there’s a huge role for government in streamlining, making the right thing easy, legal and easy. And then there’s also a role for philanthropy, right? Philanthropy is a huge sector in the United States that in addition to the dollars that they’re legally obligated to spend, there is a huge opportunity for impact investing with their seed corn. Philanthropy has been very hesitant to embrace the opportunity that American real estate presents for impact investing. I don’t know why. This is another one of these conversations I want to have, like, why not? And what would it take to make it happen?

Eve: [00:26:35] Oh, can I join you on that one? So, do you have any examples of people doing some things that you think are great and moving in the right direction?

Tracy: [00:26:45] Oh, sure there are. So first off, Eve, you are an incredibly inspirational innovator in real estate, and you embody the exact opposite of the problems that I’m talking about. You are real. And I just want to validate the incredible work that you do. And Small Change as a platform also is lifting up so many other innovators in real estate. I mean, if someone wants to just like browse, what are the fresh ideas in real estate right now? They can just go to your website and look at so many projects that have been made possible through your platform. So, I think that you are a repository for those examples. But yes, there’s also I think that.

Eve: [00:27:32] But let me tell you where the problem lies for me. Okay. We’ll go back to the systemic problem. So, VCs have on average invested 2 to 3% of their funds in women. So, I am a woman founder of a company, which makes it incredibly difficult for me to raise money and grow. And as well as that, those holders of money are looking for rapid growth and an exit. And when you build something that’s really going to build change over a long time, you have to expect it to take a long time. So, now we’re talking about a whole system of making money on companies that expects immediate gratification. And I know as a developer working in disinvested neighborhoods, that’s not how it works. It’s not Sesame Street. It’s a long hold. You’ve got to be patient and building towards something. We don’t seem to have enough people that understand that.

Tracy: [00:28:38] Yeah. And I think that you will not find that from institutional capital and that we should save our breath from trying to find it. I think that the most innovative projects that I’ve seen that that have been able to do big things, they have a source of patient capital, whether that is like a single extraordinary high net worth individual or whether it’s a foundation or whether it’s a public institution. So, you start with a source of patient capital like that, and then you build a capital stack on top of that. That does include, frankly, it could be majority conventional debt. But you need that patient, you need that big fat patient slice at the bottom to be the foundation of your stack. So, you’re right that the types of projects that we’re talking about, especially at scale, they’re not going to happen without this patient capital piece. And so, that is the piece that I am most focused on motivating, educating, finding and turning out.

Eve: [00:29:49] Sorry I stopped your other train of thought. What were the other great things you’ve seen happen? You said you had other.

Tracy: [00:29:57] Yeah. So, I did a set of six case studies a couple of years ago. This is right before the pandemic on what myself and my collaborator Chris Leinberger call catalytic development projects.

Eve: [00:30:10] Chris, well, he’s the patient capital man.

Tracy: [00:30:13] A lot of what I know about real estate, I learned from that guy.

Eve: [00:30:17] I’ve watched him for years, yes.

Tracy: [00:30:19] I read “The Option of Urbanism” years ago. It’s a life changing kind of book. And then I was incredibly lucky and privileged to have the opportunity to work for Chris for a few years. And we did a paper together where we looked at six case studies from across the US, each with a different source of patient capital and a different source of fairly large parcel assemblies, something between 20 and 100 acres. And in all six of these case studies, we found that they were able to build really enormous at scale transformative neighborhoods that were also, by the way, like extremely financially successful. Very, very financial, very lucrative for their investors. The keys were not just access to patient capital, but that employers were a part, were either the source of the patient capital or part of it from the get-go. These are actually residentially driven projects, although they include a lot of residential. It has to start with something that’s tenant driven in terms of commercial real estate.

Tracy: [00:31:32] And then the final key being that all of these places, the impetus to assemble the capital, to assemble the parcels, it all comes from some kind of crisis. This kind of innovation and real estate doesn’t happen when things feel okay and and things are going well. And that sense of crisis has to be felt outside of the disinvested neighborhoods that are held in an artificial state of crisis all the time. It has to become something that’s felt more citywide, and then these kinds of transformations start to be possible.

Eve: [00:32:07] So, like Pittsburgh losing more than half of its population, that was a crisis.

Tracy: [00:32:11] Yes.

Eve: [00:32:26] And I think the Urban Redevelopment Authority in Pittsburgh really kind of found a whole, I mean, I really admire what they did. They found a whole range of tools to deal with it, as did Mayor Tom Murphy. He really kind of stepped up to fill that patient money gap, right?

Tracy: [00:32:29] Yes. So, I think Pittsburgh is the OG like citywide case study of this. And then Steve Leeper left Pittsburgh and went to Cincinnati and did it again. And that, it’s another incredible story, but this is the model.

Eve: [00:32:48] Yes.

Tracy: [00:32:51] That’s 3CDC in Cincinnati. And I think that the crisis in Cincinnati was multiple days of riots that happened in 2001 after a black teenager was shot and killed by Cincinnati police. And people understood that things needed to change after that tragedy. And, you know, from that moment of crisis, 3CDC was born. And that’s what motivated the private sector in Cincinnati to capitalize 3CDC to the tune of $50 million.

Eve: [00:33:28] Okay. So, I’m sort of speechless. It’s a really big hairy problem, isn’t it?

Tracy: [00:33:39] It’s a big, hairy problem, but it is solvable. To me, the biggest challenge is getting all of the sectoral players to agree that there is a problem and to agree and co-invest in a solution. In places where whatever crisis has provided the extra motivation for that to happen, I have seen extraordinary transformations. The question is just, how can we learn how to do this without the crisis? Because climate change is more like the frog in a bucket of water that’s gradually getting warmer and warmer. It doesn’t create that day-to-day sense of crisis in the same way.

Eve: [00:34:33] No. Yeah. But the pandemic did.

Tracy: [00:34:39] Yeah.

Eve: [00:34:40] The Black Lives Matter.

Tracy: [00:34:42] That’s right. And so, I hope that we can learn the lesson of the pandemic. And it is hard after a time of isolation and great division to emerge and come together, around solutions, but that’s what we need to do right now.

Eve: [00:35:04] So, what excites you most about the work you’re doing?

Tracy: [00:35:10] You know, real estate is fascinating because it affects all our lives. And what excites me most about it is the transformative potential for the fruits of growth to benefit everybody. I envision a world where there are just more great places that work for more people, and I’ve seen it happen many times, so I know that it’s possible and I just wish it at scale for everyone.

Eve: [00:35:42] Yes. And what keeps you up at night?

Tracy: [00:35:48] Segregation. Right. The same thing, and I don’t just mean racial segregation. I mean that kind of these same, like silos between sectors, between jurisdictions. We are right now in our country at every spatial scale, like nationally and in each of our neighborhoods, we are more divided than ever. But we have to build unity in order to confront these big problems like demographic change, climate change, the structural changes that are happening to our economy. It can’t just be everyone for themselves. You know, I am a fundamentally prosocial person that wants to get all hands on deck. I’m not in a particularly extraordinary position of power, but I hope that if I speak this truth that some powerful people might hear.

Eve: [00:36:47] Well, I’ve really enjoyed talking to you, and I would love to stay in touch and learn more about what you’re researching, because it’s fascinating and incredibly important, I think. I’ve learned a lot. So, thank you very much.

Tracy: [00:37:00] Eve I’d love to stay in touch. You’re a personal hero. And you’ve had so many people on your podcast that have, like, greatly shaped my thinking around these things.

Eve: [00:37:10] Well, that’s great. That’s really great to hear. We really, I try to pull together people who I consider, I suppose, instigators. People are thinking a little bit out of the box and pushing the edges of that very traditional.

Eve: [00:37:23] That’s exactly what you do.

Eve: [00:37:25] Yeah. Thank you very much.

Tracy: [00:37:29] Let’s stay in touch.

Eve: [00:37:36] 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 Tracy Hadden Loh

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

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