Brad Wyant (00:00)
Good morning and welcome to the Management Under Construction podcast. I'm Brad Wyant.
Dee Davis (00:04)
And I'm Dee Davis, and we're here today with our guest, Jeff Grossman. Jeff is a good friend of mine. He's been a client, a colleague. We've worked together in almost every capacity. One can work together with somebody. We've had a long standing relationship of doing engineering and construction projects together. Jeff, can you please tell us a little bit about yourself and your background? Jeff is an expert in real estate development. Welcome, Jeff.
Jeff Grossman (00:34)
Thank you Brad and Dee. Good to see you guys. Thanks for having me. I grew up in a construction minded family. My dad had a prefabricated modular housing business. I used to work on his job sites and so sort of construction is in my my blood and I always knew that I was going to be doing something in it, but didn't want to actually do the construction labor myself so. Started out education and profession as an architect and from there finished a master's degree in real estate development.
So between the construction background, the architectural experience, and then real estate development, I guess I kind of look at myself as well rounded in most facets of the built environment. Now I'm with a pretty big company where I manage our larger capital projects and
have a sort of supporting role in managing our real estate portfolio across the Americas.
Dee Davis (01:22)
That's an impressive role and having worked with Jeff for so many years, I can tell you I have learned a ton about real estate development. Just as a general construction person, we don't really get involved usually on the very front end of things. Real estate development is something that happens way before the construction people show up. Site selection, dealing with zoning, locations, if you're an existing building, are you going to use an existing building? Are you going to buy a new
lot and develop that. Are you going to purchase? Are you going to lease? Going through all those negotiations, all those things that happened before the rest of us show up. There's some big companies out there that help owners find and negotiate just the right locations and terms and lots and lots of unexpected things can happen in that process. I had my very first job a few years ago that had a developer involved.
So that was my very first time working on a project where you had the person that was the owner who was actually working with a developer. were going to lease the developed property once it was developed. So in addition to the seller, you had this third party involved, which was very unique for me. And as it turned out, that entire project fell apart because it didn't work out. When you say that a big
Part of your job is portfolio management, Jeff. What exactly does that mean?
Jeff Grossman (02:51)
Well, it's looking across all of our sites on a regular basis and analyzing where we want to continue to grow, where we want to lease and where we want to own at a strategic level where it makes sense for us to exist and operate and grow and expand.
Brad Wyant (03:06)
So the objective of your role is not necessarily just about running financial models and working out whether the numbers are right. It's also about developing relationships with the business operations people within your organization to understand their needs and meet them on a qualitative basis.
Jeff Grossman (03:25)
That's right. And actually it's far less about running financial models when a business within our organization wants to expand. Or for instance, if we're going to acquire a new business, my organization within my company is tapped to then go either find a location that's suitable for us in that region where the acquisition may take place. Then we can look across in that region if there's properties that are available to be purchased versus properties that are on the market to lease.
You know, what does the market even look like in that region? All these things factor into our decision making.
Brad Wyant (03:58)
The reason I asked is that I just finished with that MBA program and a lot of emphasis was put on the financial aspects of real estate in some of the classes that were taught around that subject. And I was surprised to see that because I thought I hardly know anybody in real estate that spends all of their time doing the quant, getting in there like a Wall Street person would for a stock portfolio or something. It's great to hear that that's more in line with what the profession really sees.
Jeff Grossman (04:26)
Yeah, effectively at the end of the day, the business is responsible for justifying the investment. And the scenario that it's an acquisition, the financial modeling has already been done in the background to justify a certain budget for us to then play with in order to purchase a property that the payback will already be known. For instance, if I'm looking at a property that's going to cost $5 million and it has improvements to it, and then I will run some
construction cost estimate of what it's going to take to outfit it for that end user. And the total budget comes in at roughly 15 million. Well, the business already has a number that they've modeled in the background to know that if that's going to be a go or no-go decision.
Brad Wyant (05:10)
Way cool.
Dee Davis (05:11)
You mentioned deciding whether or not you're going to own or lease. So one of the things that's always puzzled me in my years of doing construction is how owners decide. Are you going to purchase a building or a piece of property? Are you going to lease it? I've seen some owners do a little bit of both. Jeff, what kind of factors play into those decisions based on what you've seen in the marketplace?
Jeff Grossman (05:38)
Well, there's a ton of factors as matter of to play into that. So to keep using the example of an acquisition. For one thing, we don't know if. The business is going to succeed, so you're kind of taking a leap when you acquire. Let's say it's a university research and development team that we're going to acquire and then fold them into our company and then look to produce either a product or or or additional R &D. You don't know if they're going to succeed.
So you don't know if you want to make a commitment to actually purchase something. That's one example. Another one is the marketplace. You know, what's available in that area? What if there isn't anything to buy? You know, in Southern California, there's the life sciences, real estate is such a hot market. Those developers pounce on that. Buy up things and then outfit them on speculation, ready for any sort of life sciences tenant to kind of come on and move in.
Well, if you want to purchase, you're really up against those big developers that have already more or less purchased all of the ideal properties. There's also financial aspects to it. In most scenarios with a company like mine, it makes the most sense to purchase similar to leasing or renting a home. What are the implications or restrictions in renting versus actually owning it yourself? owning a building enables you to do a lot more to it. Your tax
Modeling is completely different in it in an own versus least structure, so there's a lot of factors.
Brad Wyant (07:07)
Speaking of the probably the only person on this call who is still in the renting phase of I'm sure it has a lot to do with capital as well with your cost of capital. My cost of capital is a lot higher and the abundance of that capital is not sufficient to buy a home. I don't have the depth of savings yet. But I worked on a project very early in my career where the tenant gutted the entire interior of the building. They didn't hardly touch the structure, but they put in
an eight million dollar kitchen and they only had a seven year lease on the property, which was just like, I don't know, is this just crazy money? It was a very interesting experience for that to be my first.
Jeff Grossman (07:44)
You might just call that a company, a big company that is just an office, right? We've had projects up where they do the exact same thing, which is crazy because all they do is build offices. not building complex laboratories, right? So there people come into work every single day, and so they need to make sure that that space is a phenomenal place for their office folks to go work.
Brad Wyant (08:06)
There certain companies, for instance, that have, as part of their business plan, making the office so special, so unique and so beneficial to the employee that that is part of their compensation package. They'll put in a gin, kitchen where three meals are served a day. They'll put in massage chairs and all these other wonderful things. And for those companies, because of their cash positions, because of their inflow of capital, and because of the competition in the market for talent,
it still makes sense for them to lease that space, even though you're gutting the entire thing and making it very uniquely theirs to the extent that if somebody else were to come in, they would have to gut it all again. It's interesting how the different money factors that work into those models for those companies, I suppose.
Jeff Grossman (08:52)
Yeah, a lot of those companies that are strictly office functions last a number of years, but if for many reasons, if the talent isn't there or for any variety of reason need to leave, it's a lot easier to not have to deal with selling off a piece of property, writing off an asset, etc. And also oftentimes it is the case that a landlord offers a tenant improvement allowance in which the tenant then has sort of to spend that allowance how they see fit.
on things like furnishings and artistic installations and that sort of thing.
Brad Wyant (09:25)
It's also about the flexibility I'm hearing that. it's not just about the dollars and cents. It's about if we needed to, if we needed to change the way that we're positioned in this market, we could do so more quickly if we are leasing because going to sell a piece of property involves brokers, involves finding a buyer. It's a lot more drawn out of a process.
Jeff Grossman (09:44)
Exactly. And also in the tenants situation, you avoid holding agreements, which can have advantages and disadvantages, but in most cases, the landlord holds all the agreements. So the architect, the general contractor, the engineers, all your soft cost, the landlord holds all those agreements and the tenant doesn't have to deal with a lot of that.
Brad Wyant (10:02)
that's a huge benefit as well. had no idea about that. That's fascinating. So one of the things that has always interested me is how interest rates influence these kinds of decisions. We hear in the news, especially financial news about interest rates changing all the time when they do. We hear about the Fed changing their numbers. So what financial tools and resources do owners commonly use to fund land and buildings and how do interest rates at the federal or national level influence those rates in this market?
Jeff Grossman (10:31)
I'm not the profit center of my company. I'm the organization that gives them locations and builds out their spaces. We're essentially given a budget to work with and the decision making ultimately does have to go up to my executive management, but my organization has a budget that we can go purchase these things if it makes sense. And we've done a large deal of diligence and we've really spent the time and put in the work to.
the most sense to go purchase this building, then we have the budget effectively to be able to go do that. The business just has to then back it up with the return on their investment.
Dee Davis (11:07)
So is that to say that these large corporations are paying cash for these purchases and not financing them?
Jeff Grossman (11:16)
In my experience, we don't finance anything. So I guess as it pertains to Brad's original question about interest rates and obviously inflationary impacts are a thing, but interest rates aren't necessarily the forefront consideration when we're making these decisions.
Dee Davis (11:31)
Okay. And I wonder how true that is across business really, how many of these businesses are paying cash for the real estate and their development versus how many are financing it? Because we do tend to see in the marketplace as a whole, a slowdown when the interest rates get high, like we've seen the last couple of years. There's definitely a slowdown now, whether that's the theoretical cost of money that we can sit there and calculate and say,
Well, if I spend the cash, then I don't have the cash available to go do these other things. Or is it that they're truly going out and financing these, these big mega companies, I assume are paying cash. I mean, why would you pay interest if you didn't have to? What would be the cause of the market slowing when the interest rates go high? If we have an awful lot of companies paying cash.
Jeff Grossman (12:22)
Well, I think that these are challenges that startup companies certainly face that need to go get financial sources outside of their own bank account, you will. Radham, what do you think?
Brad Wyant (12:33)
It's a good question. would think that some bigger companies where cash is restricted in its use by people from the financial office of the business. Probably don't see real estate as the best use of the company's cash. Let's, let's take the example of a car, a huge car guy. If Jeep is going to build a new plant in Ohio, they're not going to necessarily.
want to spend cash, their most certain asset on purchasing that land, because they might reserve that cash to pay starting bonuses for new employees and to spend on equipment to do R &D and to do the other things that that business is most focused on, which is trying to innovate to create the best new vehicles. They may seek to finance the real estate they buy.
because that way they can have that cash for the more important parts of the business. Love to know more certainty from people who work in different kinds of businesses, but it's great to hear your perspective from the sort of businesses you work with that cash makes sense for the operations you're involved with.
Jeff Grossman (13:45)
Yeah, I would challenge your example just a bit. I mean, one thing to keep in mind is that real estate is an investment and it's typically one of the safest investments, which is why people want to own even your own home. Right. So I think where in your cash out of the bank is better sitting in an investment like land and buildings. So outside of the, the, the cash it takes to run a company, the way that you invest in your manufacturing, there's also money to be made off of your real estate purchases.
Brad Wyant (14:15)
Well, sure, a great famous example of that is the McDonald's organization in its early days switched from financing the land it was buying to franchise its restaurants to owning the land and leasing it to the tenants, which became a whole investment vehicle for them that they had underutilized. So it makes a lot of sense. Yeah.
Jeff Grossman (14:36)
It's a great example
Dee Davis (14:38)
McDonald's very famously says we're not a hamburger company or a real estate company. They're right. They own more real estate than almost any corporation in America. They own so much real estate. I remember the first time I read that statement, I sat back and I really thought about it because you don't think of McDonald's as a real estate company. You think of them as people that sell hamburgers. Well, that's not really the business that they're in. Maybe it's the business they started in.
but it's not the business they ended up in because they saw the value of exactly what you're saying, Jeff. It's a great investment to own real estate. I've been in real estate investing since I was 20 years old. It's a fantastic way to make gains over time. The market, like any other market, goes up and down, but in the long run, you're gonna win.
What are the pluses and minuses in leasing versus owning a commercial site for an owner? And the reason that I ask this question is because in my limited experience of getting involved with things like that on the owner side, I'm seeing in many, many cases the tenants paying for what I consider capital improvements to the site that
you would really think that the landlord would be paying. So things like roof replacements, external utilities, landscape upgrades, regrading the site seems like things that would be on the landlord's side, and yet the tenant ends up footing the bill.
Jeff Grossman (16:06)
First of all, you're restricted to the terms and conditions of the lease. I'm gonna continue to use the example of an acquisition. If we acquire an organization and then bring them into the fold of our company and they're already in a leased facility, then we've essentially acquired their lease and we've inherited all the terms and conditions of their lease. In some scenarios, the lease stipulates that any capital improvement done to the facility has to be undone.
And the site has to be returned to its original state once you're at the end of your lease term and you vacate. So you're scrapping a ton of assets that you've just invested in and having to basically white box the space because that's what the landlord will require so that a tenant can kind of just come on and move in. And that's a disadvantage for sure. Oftentimes landlords know they've caught you where they want you financially. They want to own their
renting to you because it is their profit center and they don't want to sell to you. We attempt to buy facilities that we lease on a regular basis. Strategically, we want to own all of our facilities and we want to get out of leased facilities. But when a landlord knows that they're making a ton of money off you and they don't want to sell, they may entertain an offer to sell, but it's going to be 2.5 times market rate. And therefore, you
can't make that justification to spend that amount of money. Your business is doing very well in that location. So you kind of have to continue to renew the lease and you do your best every time you want to renew to renegotiate terms and conditions. But this is why landlords own buildings because they kind of control however they want to in order to make money.
Brad Wyant (17:52)
It's interesting you say white boxing when you're talking about ending a lease. It makes me think of when you're moving out of an apartment, you have to patch all the holes in the walls for the nails to put. for real business with tons of sophisticated equipment and all sorts of custom alterations, that act, that work must be a lot more significant. I can't imagine some of the facilities I've seen that have been built in a really
specific way having to be quote unquote white box. That's to put it back to your example of owning versus renting. It makes so much more sense to own if you're going to make that space something that creates your work product as a business. But I just can't imagine from these question about a tenant ever paying to cover a roof. Going back to the apartment example, my hot water broke within a week of me moving into my new apartment here in California and texted landlord, Hey, bad news.
the problem that I'm not responsible for, you need to address. And that would be one of the huge benefits of renting to make the real estate problems somebody else's problem, just defer that risk essentially pay a premium to defend, defer that risk. Have you ever heard of that? Of a tenant fixing something big on a building like that? That's shocking.
Jeff Grossman (19:10)
It happens. I will say in more instances than not, it's the reverse. The landlord typically is responsible for that. And you know, there's the term CAM, common area maintenance. So if there's, you know, a multi-tenant situation, the CAM charges are basically funneled into your rent payment every month and they're on a pro rata sort of spread out across all of the tenants. So they're paying your utility bills, but you're paying it on a proportionate basis in your rent payment to them.
Most times the landlord is responsible for that sort of thing. But yeah, I mean, back to these example, there's there's certainly facilities that we have that, you know, again, we've inherited a lease or let's say our legal folks were engaged with their legal folks on the terms and conditions of the lease outside of us. And I brought in way too late. And in those scenarios, it's just unfortunate. And and you're.
capital cost of the project that you're investing, but you have to factor all of those unknowns somehow and they have to be included in your overall budget. My company's strategy is to own everything. We want to lease as little as possible. Like I said, there are scenarios in which the marketplace has limitations on things to buy and those scenarios we have to lease or continue a lease, even if we don't want to. The other thing is you have to follow the talent.
If we're acquiring a business and there is no purchase options in a certain region, but the talent is there, let's say like cities where there's major universities and R &D, etc. and they even have government funding. You want to stay in that location because that's where the talent is, but there's nothing to buy, so you have to lease. That's very strategic for real estate developers to go to those areas and buy a property because they know that folks are.
are going to need to lease there. If one of our businesses is expanding in a certain region, you're either inheriting a lease because we just bought this company and there's nothing to buy. Alternatively, purchasing a piece of land, whether we're going to do the improvements to it ourselves or if it comes with improvements already that we've got to modify, has a certain depreciable life as an asset that a lease doesn't. And so there's definitely financial benefit in owning.
I guess I could see the alternative, but I'm just speculating here in a lease everything sort of strategy. I think your your biggest advantage is your flexibility. You know you're able to early vacate if the lease allows for it or at the end of the lease. You can make the decision to go somewhere else. Say your business isn't doing very well and you don't want to continue to stay there. It's very easy to just up and leave and that's an area.
Brad Wyant (21:53)
Yeah, I can't imagine how many businesses really want that flex, but I'm up there. The business model I'm not thinking of where they have to be able to. Go to the next thing if that location isn't working out for them.
Jeff Grossman (22:06)
It's the challenge that startups have to face all the time.
Dee Davis (22:08)
In general, businesses had this question to answer, whether you're outside of real estate development, construction company, for example, has to answer the question, how are we going to operate? Are we going to buy and own and depreciate all of our assets? Or are we going to lease everything and essentially pay more? Because that's what ends up happening. If you're going to be utilizing any asset for any length of time, really, there's a tipping point where you're paying more.
Jeff Grossman (22:38)
Absolutely.
Dee Davis (22:38)
You're
going to pay more to lease something. So I'm just going to use a forklift as an example. If I choose that I'm going to lease my forklifts instead of buying my forklifts. That means that if I'm on a long job over time, I'm going to pay more for that forklift than I would have paid if I would have just bought the darn thing. But here's the thing. I don't have to maintain it.
If it breaks, if it leaks, if something goes wrong, I send it back, I get another one.
Jeff Grossman (23:09)
Back to Brad's scenario though, if you don't have the capital to purchase it upfront, you know, it's unfortunate that you're spending more money over time, but if you don't have the ability to purchase it upfront, then it is what it is.
Brad Wyant (23:21)
Back the equipment example, there was a company I was working with that was a heavy civil contractor that was just starting out. And they chose to lease a lot of equipment as opposed to owning some equipment because they had so much work available to do that they were able to go get more work by being able to have access to more pieces of equipment through leasing, as opposed to owning that equipment. And their long-term strategy was to level out and to own their equipment and to have a lower
base cost but at that time because there was so much work available they chose to put the pedal to the metal and take every financial mechanism they could to be able to do more work to make more profit.
Dee Davis (24:03)
it comes to equipment specifically, if you choose to own something, now you've got to maintain it and then you got to store it. The maintenance and the storage are the two things that tend to get most companies. So if you've got a forklift or a scissor lift or whatever it is, you've chose to buy this thing. Well, now you have to maintain it. And when the job's over between projects, now you have to store it. That is one of the things that I know gets a lot of companies is do I have enough shop space to do that?
Whether we're talking about big, big things or smaller things, we have the same question to answer is to what are the advantages and disadvantages? How can I make this make the most sense? If it's something relatively simple, the answer might be easier. remember I had two construction projects that were very close together. They were very big and long-term. I purchased two used golf carts for my foreman to go back and forth between the jobs.
I had supervisors that were on both projects and I did the math. sat there and I'm like, well, I could lease these golf carts. But the reality is, is I could buy them used far cheaper than I could lease them for. And I don't know what I'm going to do with them at the end. Maybe I'll have another job. Maybe I won't. Maybe I'll have to sell them. But I chose to buy them much to my equipment manager's dismay. And at the end of the day, I ended up selling them.
I bought one of them and I sold one of them to another foreman and I have one of them at my house right now.
Jeff Grossman (25:29)
when you're a tenant and you're about to lease a space that needs to be outfitted for your needs, avoiding having to hold all of the agreements is significant. Oftentimes companies may not have the legal depth to be able to negotiate contracts that they'll have to hold. And so the landlord in that scenario having their name and the contract with all of the folks involved that have to fit out the space, the tenant avoids a lot of that.
Dee Davis (25:55)
That's an excellent point. So in my own internal personal musings, I've considered investing in commercial real estate, but all that stuff that goes with it is stuff I'm not really set up for. So I've not done it yet, maybe someday. What are the craziest terms you've ever seen negotiated on a deal?
Jeff Grossman (26:14)
Well, I mentioned having to return the space to its original state. I mean, the implications of that, I'm not sure if you can really appreciate it. You can do, you and I are on a project together right now on the East Coast. We've invested a lot of money to outfit this leased facility and we've tried to purchase the landlord won't sell. So in that case, we have to continue to renew our lease as
far out as we possibly can, usually in 10 year increments, because we are investing so much money into this facility that if ultimately at the end of the day, we are never able to actually purchase it and we do have to return it to its original state is going to require a ton of work and a ton of written off assets that we've just completed. So there's that, that's really unfortunate that we.
we weren't able to change that where our strategy is to own as much as possible. But in the scenarios in which we do have to lease, we're a big enough corporation with a big enough legal department that negotiates lease terms and conditions and contracts on a regular basis that we try to standardize as much as possible all of the things that will be required to do or the stipulations of a lease across all of our facilities. So there's
There's honestly not too wild of a swing from one lease to the next. We try to make them as consistent as possible to the extent that we have control over that. But there are some pretty annoying nuances in some of them. As an example, we have to replace all the light bulbs in a facility when we leave, but we're not responsible for the housing itself. We have to broom sweep and clean the facility out when we're done with it, remove all of our signage and all that sort
Dee Davis (27:57)
And take all your equipment, I would imagine, right? Absolutely. You have to take all your assets and either relocate them to another site or sell them or store them or whatever it is that you have to do, right?
Jeff Grossman (28:06)
Exactly.
Brad Wyant (28:11)
What if you're doing that during the term of your lease? That's maybe months of time where you're both paying to be there and not making any money there because you're moving out. I did a project down in Colorado Springs once where we had to take a 20 something thousand pound press out of a space before we could even do the renovations that we needed to do. We had to hire millwrights. It's this whole thing. took days and nights, but
I can't imagine having dozens of those kinds of pieces of equipment the way that a car company might or other specialized stuff you're trying to move to somewhere else and reuse where you're paying double rent, trying to set the new facility up in this part of town and decommission on this side of town. I can see why in any business where you're manufacturing something on site, whatever that widget might be, if it's specialized enough that you can't just do it with two by fours and glue, you really don't want to.
lease that property.
Jeff Grossman (29:10)
doing a project right now that is literally the exact thing that you just described. We've been in a lease facility in this region on the East Coast, and we've been trying to get out of our lease for quite a while, but the business is doing great. So a few years ago, we went through all of the motions to purchase a property with improvements to it just about a mile down the road. So we're in the second phase right now of outfitting our owned facility, enabling us to be able to vacate the leased facility.
And everything in that own facility at the end of the construction project itself has to be prepped and ready to receive all of our equipment. Even though it's just a mile down the road, there's about a three month overlap between business operations has to go down at the lease facilities and the new space has to be completely set up and that move process happens and then business operations start back up again. And what's interesting in that scenario is that the building that we purchased came with tenants
So we inherited three tenants in that facility and as part of our strategy of owning everything, we're not in the real estate business, not like McDonald's. So we don't want tenants. We don't want to manage tenants. We want them out of our building, quite honestly. And first of all, that enables us to expand and occupy the entire footprint of the facility. But also we don't want the burden of managing those tenants. And again, in that scenario, we inherited their leases.
So now they have to adhere to the terms and conditions of a lease that we didn't set up and negotiate upfront. So these are just all the interesting challenges in the lease versus own real estate portfolio.
Brad Wyant (30:44)
And I'm sure that having an immediate deep understanding of how the construction business works and being able to apply that understanding in meetings as brainstorming happens is a huge benefit that you bring to the table.
Jeff Grossman (30:57)
Absolutely. I'd be honest, I'd amazing project teams to help, as Dee can attest to.
Brad Wyant (31:04)
Absolutely, so can I. So when an owner is considering a new site, when they're looking at where to go, what are the factors they need to consider as it pertains to their business, their people, the public authorities having jurisdiction, the city, the township? What are some great ways to in a blue sky environment, think about that kind of a decision in your mindset?
Jeff Grossman (31:26)
Yeah, there are tons and we partner with some of the best and biggest brokers out there. Of course, our brokers will support us in pooling all of the regional data, your proximity to the airport, talent, schools, all of that sort of stuff. We will. We have the workforce interest. To come to this area. If this is where we want to go, of course the cost for outskirts of a major city. That's typically where where my company infest.
We don't go to major city centers, usually infrastructure. What does the land itself have available to it? All of the available utilities, et cetera.
Dee Davis (32:02)
I know water and electricity availability has been a factor in some of the projects that I've worked on. You go to these new areas and maybe it's a little less developed, like you're saying, outskirts or smaller town. And is the power available? What's the power like there? What is the permitting process like there? There's some towns and jurisdictions that have crazy long and complicated and strict permitting processes.
And there's areas that very much want new businesses there and they will heavily incentivize a business to come to that location.
Jeff Grossman (32:36)
Incentives is a great point. We look to negotiate incentives with states all the time and kind of pit them against one another to see who will give us the best incentives. I will say that my executives have a common phrase of ABC, which is anywhere but California because of the process to develop in California is so incredibly arduous, time consuming and costly and government red tape. And it's just a huge challenge. It's just funny because so many
Companies are founded in Silicon Valley, but our strategy is to get away from California, quite honestly, because of that exact reason.
Brad Wyant (33:11)
All the talent, none of the benefits to owner to make real estate happen here. It's certainly much more challenging. get that. It was interesting to me when I, when I interviewed for a couple of different internships for my first internship out of MBA, I was looking at Caterpillar and Caterpillar had recently moved from Illinois to Texas. And I was talking to people, I was like, what's going on? Caterpillar has been in Illinois with their headquarters forever. That's where the company was found is where so many of people that
work for the company live. How could you guys move to Texas? What's, what's that all about? And they were like, well, you know, we think it's a positive environment. We think it's better to be in a warmer condition. And I read online, it's like taxes. was all about the taxes. They're shocking me that during those conversations between people holding MBAs, they didn't want to just say, yeah, it was a tax decision. But when there's emotion associated with leaving a place, I'm sure that there's, there's tough.
conversations and I guess optics that the caterpillar wants to hold around why they made a big decision to leave a state that they had had such a unique agreement with. you talk about getting states to bid against one another, I'm sure that that can be a tough conversation if you get two states right down to the end and this one just squeaked out, but we want to maintain a relationship with you. When we go back to the market, that state might be like, yeah, well, because you guys didn't pick us last time, we really don't want to
go down this road again. Same thing with bidding subcontractors or any other circumstance where you're dealing with ongoing partnerships. Do you have to develop relationships with the Chamber of Commerce for such and such city or township or state in your job?
Jeff Grossman (34:48)
yeah, even just simple things like getting building signage approved. There's been scenarios where I've had to go present to the local community because they are so keen on assuring what the town looks like basically and what the outside of your building looks like because it's in their town and they have to approve it. Yeah, it's a great point. So much of this is about relationships.
Back to this point about infrastructure, you can find these areas where it's cheap to invest and the cost of land is cheap and the cost of construction and labor, etc. And for all those factors, it's an ideal place. But there's no water and you've got to buy into rights or shares into a watershed that is incredibly costly and the cost of which goes up every single year. That really kind of offsets how inexpensive it is to build there.
Brad Wyant (35:37)
big challenges no matter what you look at. Wow. I can't imagine that for a business.
Dee Davis (35:41)
If your business is something around manufacturing of any kind, not only are you looking at the utilities that are available because it's going to require larger amounts of water, power, things like that, that you need for your infrastructure, but there's also those relationships like you're talking about with the fire marshal, with the town, with the community, with your neighbors, wherever your potential neighbors would be for when you're building. So one project recently, we had
to go to the neighbors and get them to sign off and say that it was okay that we were doing what we're doing in the facility that we were already in because we were changing something.
This stuff can get really, really complicated and steps that you may not even realize can happen and can impact your ability to move forward in construction. It can impact your schedule, your budget. Sometimes you have to take out ads and advertise about a town meeting that you have to do. And then you have to wait and somebody has to go be the spokesperson and talk to them and answer their questions.
You know, all this stuff is going on in the background that construction people very rarely are even aware is happening that makes these projects that we do possible. I've learned so much over the years since I put my owner's rep hat on and had to get more involved in so many of the facets that just, I had no idea. It's been fascinating.
Jeff Grossman (37:11)
And as long as I've been doing this, you can have all the experience in the world, but every single project there's going to be something that is going to be new and that you didn't expect. That's true by a jurisdictional requirement or something else.
Brad Wyant (37:23)
sort of a fun piece from the news. We're all love Colorado or have lived there for a while. Real estate developer trying to put in some new housing in the form of condos that are mostly going to be owned in Breckenridge had some kind of agreement sign with the neighbors, but now the neighbors are changing their mind about how they feel about that development. And it's going back into a will they get the permit or not.
situation, just the difficulties of dealing with construction in some of those mountain towns is what's preventing a lot of expansion in those areas that we all love to go skiing, which we find are more crowded year after year. But it becomes more more difficult to develop in those areas as well.
Dee Davis (38:07)
So if I'm a business owner and I'm going to go try to find a building to move to, to lease, to own, to whatever, how do I know when it's time to engage a professional to help me? And where do I start looking for that kind of professional? Smaller businesses don't have a Jeff Grossman to go do all this for them. Where do they start looking?
Jeff Grossman (38:29)
Great question. would say literally as soon as possible, as soon as you have any inclination that a business about to be one of your businesses is about to expand or you're you have the need to grow your footprint and you're highly confident that it is going to happen. Literally as soon as possible is the best time to engage an external professional to help.
The selection process, of course, and then all the things that factor into due diligence, but even the things that we've just been saying. What is the local jurisdiction like? Your external professionals help with all of those kinds of things. Infrastructure, et cetera.
The where question is a little more challenging. I think that comes with honestly just having years of experience and having built relationships with external clients that are trusted partners that I know I can go to. I've sort of inherited some of those relationships with past job experiences.
Dee Davis (39:21)
They just go in and Google real estate development and some of those big companies will come up.
Jeff Grossman (39:29)
think your brokers are number one. The brokers oftentimes can then recommend you to someone that they know they can help with all of your third party construction management, subject matter experts, et cetera, in the industry.
Dee Davis (39:42)
The commercial real estate brokers is who they should be looking for. And the reason that I'm posing this question is I actually got an interesting call last year from a big, small organization. What it was, was a union local. They contacted me because I've had relationships with this union for many, many years and with their labor leaders. And they said, Hey, we want to get out of the space that we're in and we want to purchase one. Can you help us with this? And I said, well,
I can help you once you've done all that, you've figured out where you're going and you know, I can help you with some of the questions that you need to answer now. Like are you going to own or lease? Are you financing it? What part of town do you want to be in? You need to get with a real estate broker and they're going to have this list of questions for you. So as soon as you can have answers to those questions, you know, here's a list of people that you can contact and they can help you figure that out. Once you've figured it out, once you've selected your site,
That's when you call me and I can help you get the design team together, get the construction team together, get the RFPs out and start the construction process. I've never gotten a call like that before. It was, like I said, a big, small organization. Unions are big, but this particular local, they have never done this before and they didn't know where to start. I was able to at least make that connection for them.
That reminds me, I need to check in with them and see how that's going. I don't know if they purchased a location or not. I'm not sure how feasible it was at that moment in time.
Jeff Grossman (41:17)
I get that not every company has a Jeff Grossman, but even internally, I can't be tapped too soon, basically, to help start with this process internally, because there are so many instances in which by the time I'm engaged, there have been decisions made, budgets put together, timelines put together, regions analyzed, that I'm inheriting a lot of that, that had you engaged me sooner,
I would have been able to flesh out a bunch of reasons as to why this doesn't make sense or why this area over here does make more sense, provide you a far stronger rough water magnitude of a cost even at the very earliest stage of whatever it is that they're considering building. For a company that doesn't have a me internally, I would look to UD and I would, if I was one of these companies, I would tap you as soon as possible, even while they're just exploring all of these various different options before any decisions are made.
Brad Wyant (42:06)
Well, to end our conversation, I'd like to look a little bit at the future. Jeff, what do you make of this transition to remote and hybrid work and its impact on commercial real estate? Do you think this is a swing of a pendulum where we're going to return to work as an industry, as a culture, as an American workforce? Or do you think that we're going to stay in this hybrid phase and that we're going to see a permanent shrinkage in commercial real estate demand for office buildings?
Jeff Grossman (42:34)
That's a question, and this is certainly not my expertise, but I have opinions on it. I will say first of all, you know what's interesting is that the. Freeing up of a ton of office space really what that does is it enables. Companies like mine to utilize that space to do things that make money rather than just house folks that kind of maybe support a laboratory or something. So that's that's a positive. I'm permanently work from home, which I.
value, but I certainly get cabin fever and I just go work at a coffee shop every other day for half a day because I'm so sick of being in my house. I think that people do honestly want to go back to the office, but I don't think that they want to go back to the office 100 % full time. And that is certainly going to have a huge ripple on the commercial real estate. I think San Diego is certainly seeing that right now. I think there's a lot of R &D specialist sort of stuff in the, in the Colorado region as well, Denver and Boulder. And then of course on the East coast.
I think it is absolutely having an effect on commercial real estate. I don't yet know if it's positive or negative, but it is creating work and it is making for interesting projects.
Brad Wyant (43:38)
Never the same day, from day to day.
Dee Davis (43:41)
Yeah. I can say from the people that I've talked to across industries, there's a lot of people that want to return some of the time. There's very few people that want to return full time. Back to your reference to ABC. We're definitely seeing a movement from California. There's several companies that have removed their headquarters from California. There are a number of companies that are disinvesting.
especially in manufacturing from California to other states. I know one that just moved all of their manufacturing from California to Arizona. Right before COVID happened, I inherited a project that was a office densification project. It was a large facility that had manufacturing in office. I was there to do the manufacturing part, but then I inherited the office part of it.
Densification means they're putting more people in less space, more desks, right? Well, then COVID happened. We had 800 desk spots that now were completely empty. And on top of it, this poor company, just horrible timing, bought another facility right nearby. They were going to make a new office HQ. And that whole thing.
fell apart and you know, so there's, there's a lot of companies that are still feeling the pain of some of that bad timing. Office densification was a real thing before COVID. People were open offices, putting more people in these spaces. Companies invested a ton of money into doing that kind of stuff, you know, 20, $30 million sometimes at OAC, just to get rid of the space or underutilize the space. It's going to be really interesting to see what happens in the next.
five, 10 years with the return to work. I know lots of people are quitting because they don't want to.
Jeff Grossman (45:33)
Right? For sure. We're seeing that as well. That's exactly what I was just going to build on that point is that you have to incentivize people. I'm in the life sciences business in real estate and biotech. The office function, or the office program of a sample project for one of my facilities is probably maybe 15 % of the total program square footage. So it's not a ton, but I will say that in order to get people to go back to work, you have to amenitize the space and send them to come back.
So gyms, nice cafes in areas where there's not a lot of food options. We have to bring in either food trucks or something to get them to come back. So those office spaces that we are building now, while it is the smaller program element of one of our spaces, we have to make them very, very nice. Obviously all of the natural lighting, your higher end fixtures and that sort of thing. We have to make it a nice place for them to be.
Dee Davis (46:26)
to make it worth it to leave home and drive to the facility wherever that is, right?
Jeff Grossman (46:30)
Right, well, I sit here and watch traffic build up every morning in front of my house and thankfully I don't have to do that, but it is nice to get out sometimes.
Dee Davis (46:40)
Jeff, how can people get in touch with you if they have questions about commercial real estate development?
Jeff Grossman (46:44)
I think the best thing is probably LinkedIn. I try to keep it update as much as I can.
Dee Davis (46:49)
We will make sure we get your LinkedIn profile link in the show notes. Thank you so much for joining us today, Jeff. It's been a fantastic episode.
Brad Wyant (46:58)
Yes, thanks so much for your time on Sunday.
Jeff Grossman (47:01)
Thank you guys very much for having me. It was a lot of fun.
