Urban Real Estate Success_ Insights from Don Peebles

**SPEAKER_1** (0:00)
So, you made your career in DC, New York, Miami, urban areas, right? So, urban development.
So, what separates successful urban development from non-success? Because we see a lot, like LA is famous, this abandoned building. I think the guy was from China, but they have graffiti all over it. He never finished construction. So, and we hear about so many office buildings in New York City right now that's vacant. So, the urban landscape as far as real estate development is, I guess, you could win or lose, right? So, from your illustrious career, what separates the winners from the losers when it comes to urban real estate development?

**Don Peebles** (0:46)
Good question, by the way. So, first thing is, real estate is a very straightforward business. It's a supply and demand business.
If the supply is abundant, prices are down. If supply is tight, then prices are up, especially if demand is strong. And so, places like New York City are supply constrained. It's hard to build most of the land is developed on. If you look at a place like LA, there's a lot of open land to be developed, and it's hard to develop in LA in terms of getting approvals and going through their process. Also, LA is very spread out. So, it doesn't have kind of core employment centers or economic centers. And New York does, DC does.
You look at Charlotte, it does with Uptown. You look at Chicago, and you look at San Francisco. So, what's happened is LA, it's been hit like everyone else with, you know, a remote working and, you know, the other impacts of COVID. And the difference is, is that people don't even live near where they generally work in LA, and everything's stretched out. So, it's gonna be a bigger lift for LA to come back. New York, on the other hand, while office buildings, there's a hundred plus million square feet of office space that's empty. That's the size of the entire office market in Washington, DC. And however, while there's less demand for office space, there's significant demand for housing. And so converting those buildings or tearing them down and rebuilding with housing, so there's a use for the land and the product. And that's why we like urban development is because it's where large numbers of people live and large numbers of people work and their economic engines. And so even with an unprecedented hit.
So I think that one of the things that you want to focus on is investing in markets that are long term competitive, where there's significant supply constraint. My view is that New York City, America's largest city, financial capital of the country and of the world essentially, is going to bounce back. Washington DC, nation's capital of the most powerful nation in the world will bounce back.
San Francisco Tech and Innovation Center will bounce back. So those cities are the ones that have been hit the hardest. Then you have places like Dallas, Austin, Houston, and Texas, for example, where it's a very pro-business environment. You'll see growth there. No state income tax. Same thing with Nashville, no state income tax, pro-growth, you'll see more growth there. So you either want to invest in places where there's significant growth because of fundamentals, like tax policy and business policy, or sound, or that there's a opportunity to play a market cycle because they've been artificially depressed.

**SPEAKER_3** (3:44)
So does it feel like that's the solution, right? When you're talking about, we've highlighted it in the past, when you're talking about commercial real estate and how endangered that was, we spoke about that at Market Mondays Live at MSG.
Converting commercial into residential is a process though, right? There's zoning laws, there's permits. Talk about that because does it work in your favor? Obviously, because of your illustrious career, whereas a new developer or a new contractor, it wouldn't be as easy going forward with that, right? I would assume.

**Don Peebles** (4:17)
Well, yeah. I mean, not all buildings are ripe for conversion. I mean, we've been converting office buildings for two and a half decades into other uses. So we've got a lot more experience in doing that. And so that's going to help us identify the buildings that are actually economically efficient to actually convert.
And so that's one of the key things is not every building is ripe for conversion regardless of its location. They're just structurally not able to make that conversion. And one of the challenges that New York has is that the buildings are so big, they would be massive undertakings and that they would have too many units in one place. And so I think that's going to be some of the trouble. What is happening, though, is Chicago, DC, New York, San Francisco and other cities recognize the hit that they're taking in their marketplaces because workers are not coming back to many of these buildings and they're sitting empty. And so that means that the stores and the other businesses that benefit from the presence of these office buildings, those businesses are struggling or gone out of business, so they've got to incentivize new uses for those properties. And so they're giving tax policy and they're accelerating zoning changes and making zoning changes. Even Los Angeles, which is very difficult to build, has passed a zoning law that allows conversions for buildings that were built before 1975