Rethink Real Estate. For Good.

Gentrification

Challenges of natural affordable housing.

We all know that many areas in the US are suffering from an affordability crisis but what’s less known is the impact of broader economic influences on weak versus strong sub-markets within a single city or region. Housing affordability issues are incredibly complex, and they take different forms depending on how well the overall economy is performing. As always, however, it is those at the bottom of the economic pyramid who find themselves squeezed out of the housing market.

Weak markets versus strong markets

In this article, I examine one aspect of affordable housing; intra-city migration where residents are driven out of neighborhoods with affordable home values as higher income residents seek alternatives once their own first-choice neighborhoods become too expensive.

Infrastructure

Some weak housing markets such as Philadelphia on the Eastern Seaboard and Pittsburgh in the Rust Belt, were filled with a substantial amount of naturally occurring affordable housing in the early ‘90s. Unlike cities where space was at a premium, such as Manhattan or Miami’s South Beach, it was easy to find affordable housing in these weak housing markets. However, easy availability came at a price. It meant that most housing was under-invested in, not well maintained or in disrepair.

This underinvestment affected not just the individual homes, but also the infrastructure built-up around the homes and the neighborhoods they could be found in. We see examples of this in places like Flint, Michigan, with its failing water pipe infrastructure, as well as New Orleans, Louisiana, with its need for levee maintenance and storm protection issues.

Intra-city migration

As housing markets boom, previously affordable areas become more expensive and prices rise, forcing increasing swaths of the home-buying population to seek housing in areas initially less desirable to them, but more affordable. This affects home buyers at all levels of the economic spectrum, but most deleteriously those at the bottom who find that, as prices rise everywhere, they have nowhere to go because areas less expensive than their own used to be no longer exist.

Initially, there are advantages to this kind of migration process. New residents can help to widen the local tax base, which in turn helps pay for infrastructure repairs and maintenance, better schools and the like. And new residents tend to keep up with the upkeep of their homes more effectively than their new lower-income neighbors, because they can afford to.

This newfound economic diversity initially provides a much-needed fillip for these lower income areas, but soon cracks emerge. Rising property values and rising rents begin to drive out existing, lower income residents and businesses, who soon find themselves unable to afford their newly desirable neighborhood and who discover that there are few, if any, affordable options for them to move to.

Impact

One of the major disadvantages, therefore, of a booming economy is that as these lower income sub-markets grow stronger, displacement is a potentiality, if not a probability. The disappearance of naturally occurring affordable housing can become prevalent on a macro scale affecting entire cities and even entire regions, like the Bay Area.

However, although most developers, stakeholders, and neighborhood representatives are aware of the deleterious effects of a strengthening real estate market, we must realize that only creative solutions to providing naturally affordable housing will have an impact. Naturally affordable housing comes with its own set of problems especially when the entire housing stock is rising in value. These problems need to be addressed before those most harmed by booming economy can find quality, affordable housing.

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Naturally affordable housing may have been more prevalent in the early ‘90s, before the United States’ housing boom, but there are still many areas of the country, like Pittsburgh, or Philadelphia, that still possess significant affordable housing stock. Should developers choose to work in these areas, they should embrace strategies that reduce displacement. Some of these strategies may include offering reduced-rent housing to displaced residents through partnerships with local government, developing in ways that provide units that are affordable to residents without government intervention or choosing to develop in regions where displacement will have a less prominent effect on local populations.

Image of Bloomfield, Pittsburgh courtesy of Eve Picker.

How to leave places better than you find them.

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

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

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

Listen in to our fascinating conversation.

Insights and Inspirations

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

Information and Links

Read the podcast transcript here

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

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

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

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

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

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

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

Josh McManus: Doing great.

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

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

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

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

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

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

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

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

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

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

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

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

Eve Picker: It certainly is.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Eve Picker: That was a loaded question.

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

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

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

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

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

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

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

Eve Picker: Right.

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

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

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

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

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

Josh McManus: Yeah.

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

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

Eve Picker: Oh, that’d be fabulous.

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

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

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

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

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

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

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

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

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

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

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

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

Josh McManus: Yes.

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

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

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

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

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

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

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

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

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

Eve Picker: Oh, that’s huge.

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

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

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

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

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

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

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

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

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

Eve Picker: That’s true.

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

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

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

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

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

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

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

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

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

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

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

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

Eve Picker: Oh, that’s really cool.

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

Eve Picker: That’s really cool.

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

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

Josh McManus: Oh, yeah, he’s great.

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

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

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

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

Eve Picker: Yes, I remember that.

Josh McManus: Yeah, yeah [cross talk]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Detroit, image by Eve Picker

Securing housing.

Homelessness and housing insecurity are among the greatest challenges facing our communities. The US Department of Housing and Urban Development, in their 2018 Annual Homeless Assessment, reported that there were more than 550,000 homeless men, women, and children in the United States. Numerous factors contribute to the growing homeless crisis. The primary drivers include the skyrocketing cost of homes, whether for sale or for rent, flat or low-growth nominal wages, and the scaling back of governmental social and housing assistance programs.

Developers and investors hold some of the blame for housing insecurity. In many of the hardest-hit cities, developers have prioritized constructing luxury buildings. This focus on the higher end of the market can be more profitable, but units in these developments are inaccessible to the vast majority of people affected by rising home prices. What can we, as socially conscious investors and entrepreneurs, do to help resolve this seemingly insurmountable issue?

Housing costs and homelessness

For many years now, even before the housing crisis in ’08, developers have shifted their focus toward luxury construction. There are a few reasons why most new construction is in the luxury space. As properties age, the physical structure that sits on the lot, the actual building, becomes less valuable. While many of the affordable units on the market today did not start life that way, they aged into being affordable. This is known as “filtering.”

In addition, much of the current affordable housing stock in this country was built at a time when regulations, permits, and environmental concerns relating to new construction were a significantly lower burden to developers and builders. Creating low, and even middle-income housing is simply not as profitable as it used to be.

A multifaceted approach

When setting out to solve a problem as complicated as homelessness, there is rarely a “silver bullet” solution. Instead of focusing on a single contributing factor, to make real progress, it is imperative that we employ a patchwork of strategies.

New construction technology

Developers can leverage new construction technologies to reduce the total cost per unit of new housing. New technologies that can help lower the cost of housing include drones to more effectively and cheaply survey lots, self-healing concrete to reduce foundation issues, or even the use of robotics during construction.

Partnering with cities to increase affordable housing stock

While many in the real estate industry take a cautious or even adversarial approach to local governments, they can be fantastic partners when it comes to getting affordable housing projects off the ground. Cities have a vested interest in creating sustainable neighborhoods and offer many tax breaks, land discounts on city-owned lots and other services and benefits to socially minded developers.

Work with social service providers

Social service nonprofits are on the frontline of the housing crisis. These groups step in when there is inadequate governmental or societal response to problems like homelessness. Many of these groups are shifting their focus from a reactive model to a proactive model. Instead of dealing with the consequences of homelessness, they are employing their resources to stop the cycle before it begins.

Investors and real estate professionals can work with these groups to help determine the needs of low-income residents and to find ways to build housing that stops the cycle of homelessness. The cherry on top is that through working with these groups, developers can build grassroots community support for their projects, which will make neighborhood and local stakeholder opposition less of a problem.

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Homelessness affects all of us in one way or another.  Socially minded developers can use their skills and capital to help end this problem and make all of our communities safer and more livable- and they can do so while still maintaining a healthy return on their capital and time investments.

Image Starter Home Two, courtesy of Office of Jonathan Tate

Is revitalization a dirty word?

Revitalization, gentrification, and displacement are now a mainstay in the heated national conversation about housing. For many years urban renewal and revival were sold as cure-alls for improving economically vulnerable neighborhoods in big cities from New York to Oakland. Unfortunately, the effort to bring new life to these areas was more successful than anyone predicted. In fact, it was so successful that it began to drive low and middle-income residents out of their homes as property values and the desirability of each neighborhood grew. And in the process revitalization went from a hopeful phrase to a coded word for displacement of minority and low-income residents.

This process started in the early 1990s in some high cost of living areas like San Francisco and Seattle and has substantially ramped up during the current real estate boom. Much of the issues arise from the Gen-X and millennial preference for smaller homes and their desire to have immediate access to urban life rather than schlepping in from the suburbs. As these young people flock to urban areas, existing residents are unable to keep up with rising rents, property taxes, and the general increase in expenses as their neighborhoods gentrify.

A silver lining

It is clear that gentrification is negatively affecting many Americans, with those most affected coming from low-income and minority groups. Some critics make no distinction between unmanaged market-driven gentrification, and the revitalization efforts happening in cities across the country. These revitalization efforts are having real, positive effects in some rust-belt states which are seeing incredible turnarounds, at least partially as a result of real estate revitalization.

Detroit as a model?

Detroit was, and continues to be, the poster-child for urban decay in America. The hollowing out of the American manufacturing base led to a situation where middle and upper-middle class residents fled to the suburbs, taking their tax dollars with them. Left behind were the poorest, many of whom came from minority communities. The city lurched from year to year in a state of disrepair until a few years after the 2008 financial crisis.

Over the past decade, real estate investors have helped develop millions of square feet of prime real estate in downtown Detroit. Areas that were once in significant decline, bordering on a demilitarized zone, became livable once again- and property values and the city’s economic picture rose with the real estate sector.

The housing market in Detroit is incredibly large and complex, and there are success stories as well as the emergence of some of the more common issues with gentrification and displacement. Many of the people on the ground working to protect residents from the deleterious effects work in partnerships with local governments, nonprofits- and developers.

Riding the wave

Spider-Man once said, “With great power, comes great responsibility.” This truism can be applied to how we approach housing issues such as sustainability and affordability. When local stakeholders are not heeded, projects can have disastrous consequences- both from an investor and resident perspective. Many grassroots movements have sprung up across the country as a response to development growth, and what some locals see as the destruction of their communities.

As developers and investors, we have a surefire way to avoid conflict with locals- and that is to  build to benefit the community, rather than just to make a buck. Everyone has to eat, and there is nothing wrong with an honest buck- but finding the intersection between community-minded morals and market forces will help each party benefit- the developer, investors, and residents.

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Revitalization does not have to be a dirty word. In fact, it can be a net positive for all parties when implemented correctly.  Many cities and states throughout the country are taking steps to mitigate some of the worst problems arising from gentrification- and insightful investors have the chance to be on the ground floor of an entirely new development model- one where community and business interests are aligned, rather than at odds.

Image by Eve Picker

Embedded in community.

Brian Murray is the CEO and Founder of Shift Capital, a Certified B-­Corp impact real estate group headquartered in the Kensington neighborhood of Philadelphia, and focused on aligning capital and philanthropy with underserved communities.

Brian didn’t start his career in real estate. He started his career at Pricewaterhouse-Coopers as an auditor and quickly moved into the technology space where he helped found two start­ups. A stint in the Peace Corps, building community in Bulgaria, and an MBA from the Yale School of Management, followed.

While in graduate school Brian observed the growing interest in impact investing. At the same time he made his first real estate investment and discovered the importance of socially ­minded development. And with this his journey into real estate was complete. He fell in love with the process of developing real estate where it matters. All of these things come together in Brian, a man focused on doing well by doing good.

Together, on this podcast, Eve and Brian explore the challenge of developing real estate for purpose.

Insights and Inspirations

  • Brian proves that it’s possible to have a robust real estate business focussed on under-served neighborhoods.
  • Community engagement really means embedding yourself and becoming part of that community.
  • Finance is at the core of making change.  We need financial institutions and the philanthropic world to step up and make it possible to build much more real estate in neighborhoods that need the investment.

Information and Links

  • Shift’s latest inclusive project is Jumpstart Kensington a real estate accelerator for the Kensington community.
  • RevErie, staged by Shift, an event at the nexus of art, citizenry and community designed to uplift and inspire. 
  • The Reimagine Storefront Challenge is an inclusive development strategy to reactivate storefronts on Kensington Ave.
  • Urban Action: Kensington Gateway, a collaboration with UPenn, Penn Praxis, Olin, New Kensington CDC and Hinge Collective seeks to activate a severely challenged intersection with thoughtful, community-informed designs for public open space.
Read the podcast transcript here

Eve Picker: Hey, everyone, this is Eve Picker. If you listen to this podcast series, you’re going to learn how to make some change. Thanks so much for joining us on this podcast. I’m Eve Picker, and my life revolves around cities, real estate, crowdfunding, and change. In this podcast series, we’ll be digging deep to discover how we can build better cities by building better buildings.

Eve Picker: I’m excited to have Brian Murray as my guest today. Brian is the co-founder of Shift Capital, an urban real-estate group focused on mission-oriented projects in under-served Philadelphia communities.

Eve Picker: Brian didn’t start his career in real estate. He started traditionally at PricewaterhouseCoopers as an auditor, and then helped found two startups. The itch to do good was with him, so he joined the Peace Corps, and found himself in Bulgaria on the ground doing community development work.

Eve Picker: The journey into real estate was completed when, once back stateside, he invested in a real-estate project in Philly, and fell in love with the development process. All of these things come together in Brian, a man focused on doing well by doing good.

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

Eve Picker: Welcome, Brian and thank you very much for joining me. I wanted to start by just diving into your background a little. I know you have a company called Shift, and I’m really wondering what led you to this point in your life?

Brian Murray: Sure. First off, thanks for having me, and Shift on. We’re really excited to connect with you, and share more so. I guess, background, I started off as an accountant. I graduated college and went to work for PricewaterhouseCoopers. I left that very, very quickly, knowing that that’s definitely not what I wanted to do with my life, and went into the tech world.

Brian Murray: It was 1999, and 23 was a well-seasoned age to be in the tech world at that time. I had a venture that- my first venture went belly up, and I decided that I wanted more out of life, and didn’t want to be chasing- just to be chasing dollars. I joined the Peace Corps. I spent a few years in the Peace Corps in Eastern Europe, in Bulgaria, and got introduced to a few core concepts that have really underpinned where I am today.

Brian Murray: One is that the Peace Corps is one of the most incredible organizations at putting people on the ground in communities, embedded in communities, listening to communities. Really got a understanding of how trust needs to happen on the ground level.

Brian Murray: I also learned what does economic-development planning look like when it actually gets to the ground? That was a little eye-opening to see the disconnect between a lot of dollars flowing through the non-profit, and international-development space, and then what happens actually on the ground.

Brian Murray: The third piece, I was introduced to social enterprise. I was volunteering with an organization that launched the first social-enterprise program in Eastern Europe. I really fell in love with the idea of doing well, and doing good.

Brian Murray: Came back to the States; went back into the tech world for a few years before heading off to business school to try to marry my love for entrepreneurship, and my love for social change, and positive social change.

Brian Murray: I thought I was going to go into the impact-investing space, so I went to work for an organization called Acumen Fund, which is a non-profit venture-capital group that invests in businesses serving populations in India, Pakistan, East Africa. We invested in entrepreneurs that were providing solar-powered lights, clean water, healthcare.

Eve Picker: Was introduced to this growing world of impact investing, which is the dollars that want to make a return, but also to do good with that return. Exactly at that time – I’m originally from the Philadelphia area – when I was in business school, I was approached to invest in a small real-estate deal in Philadelphia, which I did as a side project.

Brian Murray: We invested in a neighborhood,  A lower-middle-class neighborhood in Philadelphia. We bought a note from a bank; a 30-unit building that was completely run into the ground by what I’ll call a classic slumlord … I apologize. You want me to restart there?

Eve Picker: No, no. I was going to interject, and say that was the beginning of the end, right?

Brian Murray: I fell in love with-.

Eve Picker: Yes! I knew that was coming.

Brian Murray: I fell in love with, and really understood the power of real estate in people’s lives. On one hand, I realized what kind of  capital usually flows through these neighborhoods, and realized that if I could wake up every day, and be a good landlord, I would be doing the world a good service. I jumped in with two feet, at that point.

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

Eve Picker: I’m not surprised. That’s a great story. That’s a pretty interesting road that got you there. I suppose the next really big question I have is do you think socially responsible real estate is necessary in today’s development landscape? What have you observed, overall, now that you are a developer, and a landlord?

Brian Murray: I would say that 95 percent of the capital that moves through the under-served communities that we work in is exploitative capital, and exploitative in a economic model that is slightly upside down, that does not incentivize even folks who probably want to do some good in the right ways.

Eve Picker: The importance of capital that is thinking about community, working with community, thinking about different ways in which capital can be layered to make it more effective, I think, is critical, in an age right now, where it feels a little bit like feast or famine; gentrification or poverty. There’s not a lot of discussion of anything in between. This is a role that I think this type of capital, and this type of impact developer needs to really …

Brian Murray: Not only do we need to bring it to the table, but we also need to raise/grow/nurture/support the next generation of real-estate developers, with a particular emphasis on, I think, developers of color, women developers, developers that are coming out of lower-income communities, because they are the ones that know their communities best, and are best suited to tackle needs, and challenges, and be aligned with communities.

Eve Picker: I’d love to drill down into that. Do you have an example of a good use of capital flowing through those communities, and maybe another example of a bad use? I’m sure you’ve thought about this, Brian.

Brian Murray: Yeah. Well, let’s talk about the bad first. In the neighborhood we work in, in Kensington, there was a portfolio of properties that blew up. These are housing – probably about 300 to 400 units – that were owned by someone who was literally called the slumlord millionaire.

Brian Murray: He was taking appraisals- creating fraudulent appraisals, and borrowing money, and then not putting it into the housing, and renting them out in their condition.

Eve Picker: Wow.

Brian Murray: This is a larger example, but there’s a lot of small examples of this on a daily basis. In neighborhoods, in Philadelphia, where we have the highest poverty- we’re the highest-poverty big city in the country, and we have housing where the comparable sales on a three-bedroom/one-bath is about $50,000. When you’re that low, it’s very difficult to renovate, and do the right thing, or to incentivize the capital markets to do the right thing in those neighborhoods.

Eve Picker: Yeah.

Brian Murray: On the good- on the right side, those who are investing the right way, and are renovating the right way are starting to see – again, in the neighborhoods we’re working in – that people are willing to pay more for a better house.

Brian Murray: Even though we’re talking about lower-income neighborhoods, and even though we’re talking about maybe 60 percent of adjusted median income, a hundred dollars more for home, in terms of rental, allows that landlord to get a lot more done; to add air conditioning, for example; add newer bathrooms, and kitchens.

Brian Murray: People in these communities do still recognize value, and higher quality. Although it’s still significantly below 80 percent of AMI, for example, when you deliver a better product out into even lower-income communities, people really respond to that. We’ve seen that firsthand on a small level, and we’ve seen that firsthand in even the commercial world, as well. I think that’s a market opportunity.

Eve Picker: Yeah, I agree with you. 300 units that are being abused in a neighborhood is quite a large block of units, and can have a really terrible impact. I thought maybe you could tell us about a current project you’re working on that you’re excited about that moved the needle in the right direction? I gather you work solely in this one neighborhood in Philadelphia, is that true?

Brian Murray: We have a fund that we’ve invested in two neighborhoods in Philadelphia, both along public transportation. Everything we have acquired, and are developing are within a five-minute walk to one of five subway stops.

Brian Murray: We just closed on financing for the one project that I’m super-excited about. This was a building in the Kensington section of Philadelphia, near the Tioga Station, for those of your listeners who might be familiar.

Brian Murray: It’s a project called J Central. It’s a 140,000-square-foot building. It sits right on the main commercial quarter, called Kensington Avenue, which has had its challenges with the opioid crisis, in particular. We are creating the first multi-family in the neighborhood. It will end up being 130 units with a full first floor of retail on the bottom floor, and maker spaces.

Brian Murray: What’s exciting about this project is that our ambition is for this to be the most civically engaged building in the country. What that means is we are going to be providing any person who rents from us in this building with a rent rebate, for every four hours a month that they volunteer in the local community.

Brian Murray: We’re setting up a whole series of programming, and volunteer opportunities within probably about five or six organizations that are not only locally located, but also driven by local issues, and local challenges.

Brian Murray: On the front end, we’re definitely filtering folks who are going to come in this neighborhood who want to be a part of such a program. Then, this building, on a monthly basis, should be delivering hundreds of hours of volunteer hours into the neighborhood.

Brian Murray: Our goal with this, and this is on the residential; the commercial’s another piece … The residential, what’s exciting about this is one of the challenges of investing in lower-income communities is trying to responsibly create mixed-income communities.

Brian Murray: We do need people who have discretionary income to spend dollars with local businesses, so that we can support that type of work. At the same time, many neighborhoods have had the trouble of having a complete communication disconnect between what’s called the new, and the existing community.

Brian Murray: This is a fantastic way, we think, to break down those barriers on both sides, where people coming in now get to know their community better, and the community gets to know them better; hopefully building a level of trust on the residential side. On the commercial [cross talk] go ahead.

Eve Picker: I was going to say that on the residential side, we did an offering on Small Change in Chicago, with a group that- they created something called Innovation Houses – I think I need to introduce you to Jay – where they give neighborhood volunteers reduced rent in exchange for services in the neighborhood, but they’re also really trying to create sort of the next generation of leaders in that neighborhood, which is a pretty remarkable ideas. Thinking along the same lines, slightly differently.

Brian Murray: I love it. I would be happy to connect with them. The commercial side of this building will also house a Vietnamese coffee group that we’ve home grown in our other building, but also the IF Lab. It sounds like this is very similar to Chicago.

Brian Murray: This is an incubator, and a business-services space on the ground floor that is targeted on under-served businesses, and specifically trying to put that kind of incubator mentality … Instead of having it in Center City, have it in the neighborhood, as well.

Brian Murray: The group behind that has had- it’s an incredible multimedia agency here in Philadelphia that has, in the past, launched something called the Institute of Hip Hop Entrepreneurship, which was also a incubation-style programming. We’re going to try to bring that all into the community, as well.

Eve Picker: It sounds fabulous. I hope I get to see it when you’re finished. It sounds really great. Of course, this only is the tip of the iceberg, right? What would you hope that we trend towards in the next 10 to 20 years?

Eve Picker: We’ve seen gentrification take hold of neighborhoods really rapidly in many cities. San Francisco is having especially difficult issues right now with many people being priced out of housing. It seems almost too big to solve. I wonder if you have any thoughts about that?

Brian Murray: Yeah, we think about it every day. I’m not sure that we have full answers, but I think we do have a number of ideas behind that. I believe that the work that you’ve done, and what’s going on nationally with Opportunity Zones has made these discussions even more important.

Brian Murray: One, going back to what I said before, I think we really need to focus on developing bridges, and doors for developers of color, and women developers. I think that that’s absolutely critical to the future.

Brian Murray: I believe that we need to bring more powerful tools into communities, and financial tools, specifically. We are working here in Philadelphia on creating a Neighborhood Trust to go alongside our work, where we’ll start to also buy up properties that will allow some of this capital to not only stay in the neighborhood, but then be used to help the neighborhood.

Brian Murray: I believe we need to be more aggressive in cities that are not San Francisco, or D.C., or New York in providing cities and public/private partnerships with more tools to aggressively buy up housing while we can. Those tools-

Brian Murray: The foundation world has been sitting on the sidelines. They have endowments, and they have lots of capital to bring to the table, so we’re very much pushing for trying to move the needle on trying to bring more financial tools, concessionary capital, other types of capital that can perform differently, and act differently than the marketplace.

Eve Picker: Personally, I also think that there’s some governmental work that has to happen. Often, gentrification is sort of the last step in numerous things that have happened over decades. Most cities are really not thinking about that, 20 years prior.

Eve Picker: Just one of the examples I think about often is the way that properties are taxed. Certainly, if you’re in a neighborhood – if you’re aging in a neighborhood – and that neighborhood suddenly has much more value, and the property values are being reassessed every year, or every two years, and all of a sudden you have a really hefty bill, that’s a problem for someone who wants to stay in place, or age in place, who’ve lived there for a long time.

Eve Picker: I think there are ways to think about that differently so those people can stay. It’s just one little tool, but I think there are other ways beyond finance that we could think about these problems before they happen. You’re right, maybe more aggressively in cities where it hasn’t happened yet.

Brian Murray: This is where the opportunity is, and you’re right, the public-policy side of it around protecting homeowners, providing homeowners with more micro-tools to renovate in place, I think, are all part of a more comprehensive strategy that … At this point [inaudible] the federal government here, it really needs to happen on local levels. H

How we go about- where that leadership comes from, it could come from the private sector. It could come from the community development sector, but it really should … A lot of this needs to be really spearheaded by the government sector; really, they’re the ones that should take that 10,000-foot view, and be looking at all pieces of it.

Eve Picker: Yeah, I think it’s very easy, at the end of the day, to say gentrification is the developers’ fault, but developers come in all shapes and sizes, like you, me, and other ones. Developers also have to take opportunities.

Eve Picker: I’ve seen this happen often. By the time developers step in unthinkingly into a neighborhood that is already transitioning up, it’s too late. They’re there because it’s already worth more. I just think we’ve got to step back decades to really understand what’s going on. Anyway, that’s my personal thought.

Brian Murray: Just to build on that, one of the things that we’re working on, and hoping to push out to the world is this idea of, okay, let’s talk about the adjacent neighborhood. We’re talking a lot about Opportunity Zones, and the opportunities to try to stem the gentrification in those neighborhoods, but, to your point, we need to start looking out 10-20 years in advance.

Brian Murray: Some of the tools that we need are for those neighborhoods that the typical developer is not looking at. I think the other thing that is really important to us is measuring impact, because we all … We’re guilty of it, and the community development community is guilty of this, and even the hardcore real-estate community is guilty of mislabeling what is gentrification.

Brian Murray: As a result, we have some communities that there’s a strong NIMBYism going on, and it’s a opportunity to educate, and think deeply about what change means, and who gets to participate. I think that measuring impact of change in neighborhoods, it’s critical to us to understand what’s going right when- on the economic-development front, on the wealth-building front, on the inclusion front. Then being honest about what is not going right. We paint a very broad brush when we just, “Oh, that neighborhood gentrified.”

Eve Picker: That’s right. I’m thinking of a couple of examples in a neighborhood I know well, where after a developer had- before a developer had built a new house in that neighborhood, the neighboring property was probably worth $20,000. The woman who’d lived there for decades, and had very little value in that asset, she really couldn’t- it really wasn’t worth putting a new roof on it.

Eve Picker: After the house was built on the vacant lot next door, it was worth- her asset was worth a lot more money, so that added value in the neighborhood; did something good for the person who’d been sort of struggling in this neighborhood that was basically disenfranchised. That’s the good side of- I wouldn’t even call that neighborhood gentrified, but the good side of increasing values in a neighborhood that we don’t talk about.

Brian Murray: That’s right. We did a study of thinking about the type of equity wealth-building that would happen in the neighborhoods we’re working in. There’s a home-ownership rate of – depending on the block – anywhere between 40 and 50 percent in these neighborhoods.

Brian Murray: To your point, the house that, on paper, is worth $20,000, well, if we do this work, and the neighborhood becomes safer; even if we see an increase of value in a typical row home, from $20-$30,000 to $100,000, homeowners in this neighborhood will be building $400 million of equity.

Brian Murray: Now, I think you pointed this out before, there needs to be real policy interventions when it comes to what does that mean for increase in property taxes, and other components that could be problematic?

Brian Murray: If we look at what happened, in particular, in the African-American community, it’s been pretty well-documented that the wealth-building opportunities that white America had, as it fled to the suburbs … I’m a family that benefited in this way. That was what got me to college, for example.

Brian Murray: Thinking about how we educate urban communities about building wealth, and what it means, and how does it work … Providing the opportunity for them to make the choices that make sense for them, I think, is just so critical to this conversation about gentrification.

Eve Picker: It’s a very complicated conversation, and I think, too often, it’s just painted with one immediate response, which isn’t always accurate. Very, very difficult. You also talked about community engagement tools that you learned early on, when you were in the Peace Corps. Community engagement’s really tough, and I’m wondering how you go about it for your projects, and what you think works?

Brian Murray: I guess what we’ve done, and tried to do is to build engagement up and down our entire ecosystem. We do our own property management. We do our own development. We do some of our own construction. We have hired local. We talk about engagement with everyone from the guy we send out to fix the toilet to the guy, or woman running our construction team.

Brian Murray: The opportunities for engagement are as simple as being in the street, listening; learning and understanding what are some of the daily problems of the community, inasmuch as it is, in a more traditional real-estate way, when we engage the community on a variance we need when it comes to a project, and what that might mean, and the input that we need …

Brian Murray: Those are just some of the basic underpinning philosophies of Shift, but beyond that, then we really try to put it all to the test, in reality. In the last probably 24 months, I can share with you probably four or five different projects; I’ll just name one or two.

Brian Murray: One most recent is that we engaged the local charter school to actually … As part of their curriculum, they are doing art projects on plywood that we’re using to board up vacant housing in the neighborhood. They’ve used it to tell their own stories about the trauma that vacancy has brought into their neighborhood. It’s just been absolutely eye-opening.

Brian Murray: We also launched a program called Jumpstart Kensington. Jumpstart Kensington is a real-estate accelerator for people in the community. The argument, or the challenge that I keep going back to is who gets a chance to participate in the upside of a neighborhood? When a community understands that their neighborhood is changing, do they have the tools, the access to capital, the knowledge to go out, and start perhaps buying, renovating, renting, building equity in their own way?

Brian Murray: We created a program; it’s a real-estate accelerator, where we provide a series of workshops, mentorship, and now, with the help of our nonprofit partner, and J.P. Morgan, we have funding available. We’ve brought 65 people through our program to date, of which probably about 90 percent are a person of color, and a woman.

Eve Picker: That’s a pretty fabulous. That’s a really great outcome. Have any of them had success with real-estate projects in the neighborhood, or are they coming from other neighborhoods, or are they solely from the ones you’re working in?

Brian Murray: Just like life, it’s a [inaudible] everything. It’s a little bit more complicated to paint a broad stroke, but what I can say is that yes, yes, and yes-

Eve Picker: Okay, very good.

Brian Murray: There’s some who come from other neighborhoods. There’s some that are just getting some properties up and going now. We’re trying to figure out the right cadence to help support them.

Eve Picker: That’s great. The other thing you talked about was wealth-building in the neighborhoods. I’m wondering if you think that equity crowdfunding can play any sort of role in building communities for everyone?

Brian Murray: Absolutely. I think there are real opportunities within almost any neighborhood project, and it could be small; it could be large, and meaningful, but I think that the-

Eve Picker: Hold on a second, small can be meaningful, Brian!

Brian Murray: Oh, absolutely … I meant … Sorry, thank you for correcting me there.

Eve Picker: Don’t apologize.

Brian Murray: I would say financially meaningful for the project.

Eve Picker: Yes, that’s correct.

Brian Murray: Both of them have roles. I was going to argue that especially the small amounts are educational opportunities. They might not necessarily always be wealth-building opportunities for the community, but they’re certainly an exciting way in which to bring people into the process; understand the process; understand what happens behind the scenes in a real-estate project. Then, of course, have some pride, and ownership over their own community.

Brian Murray: Whether it’s really truly, again, financially rewarding work with the psychological side of it, I think both of them have an unbelievable power when it comes to the type of work that you’re doing, obviously, and we’re doing, too.

Eve Picker: Then, the next question is where do you think the future of real-estate impacting … Impacted … Sorry, I’ve got to say that again.

Brian Murray: Sure.

Eve Picker: Where do you think the future of real-estate impact investing lies? I’m asking this because I hear- my personal experience is that I hear a lot of people … Perhaps pretty startling statistics, like 85 percent of people who have managed portfolios are now looking for some sort of impact, or social responsibility in their portfolio. That’s a really big number, but I am still to be convinced that impact investors will actually accept a lower return.

Eve Picker: That really complicates things, in my mind, for neighborhoods like the ones you’re working in, and, actually, most Opportunity Zones, where it is really difficult to find – if it’s really, truly an under-served neighborhood, which was the intent of that legislation. It’s very difficult to find a project that can really return to a bigger-pocket investor the sorts of returns they typically expect.

Brian Murray: I deeply- I don’t want to say troubled, but I think you’re right. My experience has been that even among the “impact-investing group” there is not yet a strong desire to increase risk at potentially decreasing returns slightly.

Eve Picker: Yes.

Brian Murray: I believe that- I think that there are a few reasons for that, and part of that’s my own experience here. People who traditionally had- people who are real-estate investors – I’m painting a really broad stroke here, but it’s not that far off – have typically been real-estate investors in the past. Either their family has been; they were in the business; they know the business very well.

Brian Murray: Impact investors don’t know real estate well. They are just starting to dip their toes in on platforms like your own, and it’s hard to discern what is risk in real estate, and what is risk …

Brian Murray: There’s lots of levels of risk in real estate, as we all know but now we are adding an additional risk here, which, I’ll be frank, having now been doing what we’re doing, I think that there’s more risk, as a real-estate investor, investing in Center City, downtown high-end rental markets than there is in working in lower-income communities, where demand drivers are just absolutely enormous-

Eve Picker: I agree with you. I agree with you.

Brian Murray: It’ll just take some time, I think, for us, and I mean that in this very collective ‘us’ of, as you know, lots of really great, fantastic groups doing this work on the ground to continue to educate, to do what you’re doing, by providing this access to these incredible projects, and really continuing to push that education process.

Brian Murray: Also, growing these type of value-driven developers, and making sure that we’re continuing to prop them up, give them- make sure that the light is getting shined on their work – good and bad. Sometimes, it might not always work out, but I think we all have that duty to do that. That’s where I think we all need to go as a group.

Eve Picker: I agree with you. I’m going to end this conversation with three sign-off questions that sort of, I suppose, summarize what we’ve been talking about. The first one is what do you believe is the key factor that makes a real-estate project impactful?

Brian Murray: A project that the community has a real say in; that the community has access to the process, and, in the best-case scenario, where the community has a benefit from that project, as well.

Eve Picker: The second question is, other than just raising money, how do you think involving investors in crowdfunding might benefit impact real-estate developers? Can the crowd do more than just raised money for projects?

Brian Murray: Wow, that’s a fantastic question, and I would turn that back to you. I think you’re … I don’t have an immediate reaction on that, except for, yes, I believe that there are probably ways that investors can play a … Investors connecting to projects through crowdfunded sourcing can probably crowdsource other resources that could help developers, and specifically their projects. I think it’s a great idea.

Eve Picker: One think I think about, just as an engagement tool for someone like you, if you crowdfunded a small portion of a project in your neighborhood to the people in the neighborhood, now you have a pool of people who are really standing behind you, and what you’re doing.

Brian Murray: That’s right.

Eve Picker: Maybe that helps at a zoning hearing, or maybe it helps in some other way that we haven’t thought about. I think that was my idealistic goal in Small Change is that … You and I have seen, in cities like Pittsburgh, and Philadelphia, how much people want to be involved in the place they live in, so this was a way to give them access beyond just talking about it. I don’t know. I’m sure there’s more that I hadn’t thought about but-

Brian Murray: No, I think that’s great.

Eve Picker: Yeah, and then, finally, and this is the really big question, which you probably have thought about, is how do you think real-estate development in the United States should be improved?

Brian Murray: We need to work with the banks to mandate, and improve ways in which real-estate financing happens, so that it’s not just the usual incumbents that have access to the type of capital that these projects need.

Brian Murray: Singlehandedly. I think there’s a systematic problem with access to financial markets, to the networks that create opportunities to raise equity. That circle is very small, and it’s very difficult for new developers, new entrepreneurs, to access- to break in. It’s just too high of a barrier of entry.

Eve Picker: I totally agree with you, and that, again, is why I’m doing what I’m doing. I hope there’s a friendly Philadelphia banker out there listening to this, who might start some process that helps the developers your training. In any case. I really enjoyed this conversation, and thank you so much. I’m sure we’re going to talk again soon.

Brian Murray: Thank you, Eve. It was great. I love what you’re doing. I love what it represents for the industry, and I just want you to keep doing what you’re doing.

Eve Picker: Okay, thank you, bye. That was Brian Murray. I hope you enjoyed listening to him as much as I enjoyed talking to him. Brian gave me three great takeaways. First, it’s possible to have a robust real-estate business focused on under-served neighborhoods. Second, community engagement really means embedding yourself, and becoming part of that community. Third, finance is at the core of making change. We need financial institutions, and the philanthropic world to step up, and make it possible to build much more real estate in neighborhoods that need the investment. What did you learn?

Eve Picker: You can read more about Brian on the show notes page for this podcast at EvePicker.com. While you’re there, please consider signing up for my newsletter to find out more about how to make money in real estate, while making some change.

Eve Picker: Thank you so much for spending your time with Brian, and I, today. We’ll talk again soon, but for now, this is Eve Picker signing off to go make some change.

Image courtesy of Brian Murray, Shift Capital