GI109: Responsible Urban Development with Adrian Washington

Adrian Washington has over 30 years of experience in urban real estate development, construction, and management. Since founding NDC in 1999 he has led the development of over 1 million square feet of real estate with an active pipeline of another million.

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Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Adrian Washington. Adrian has over 30 years of experience in urban real estate development, construction and management. Since founding NDC in 1999 he has led the development of over 1 million square feet of real estate with an active pipeline of another million. . So thank you so much for being on the show, Adrian.

Adrian:
Thanks Charles. Great to be here.

Charles:
So can you tell us a little bit about yourself both personally and professionally before getting involved in real estate investing?

Adrian:
Well, sure. I grew up in Washington DC. I mean, actually I was born in France, but only spent three months there. So I can’t really count myself as a you know, as a French ex-pat, but so I grew up in Washington DC went to school out in California at Stanford university and worked out there three years in corporate America left that went back east to get my MBA from the Harvard business school and was up in Boston for two years. Great time up there came back to DC as a management consultant working, you know, at high values, strategic planning consulting for fortune 50 companies and did that for about three years. And so it was really early at age 30 before I launched my real estate career. Wow.

Charles:
And why did you choose real estate as your investment

Adrian:
Vehicle? Well, it’s classic thing for an entrepreneur is that I did it as a hobby and I liked it a lot better than the job I was doing and had the entrepreneurial bug and thought I could be successful in it. And so when looking around, I, I wanted to, you know, leave a bigger firm. I wanted to start my own thing and I was investing and renovating real estate on the side and say, this is what I love. And so I decided to make it a business. And that was 30 years. So

Charles:
What were your first real estate investments? What were you starting with? What type of properties?

Adrian:
Well, I guess the typical, you know, really the first one was actually in my own home. I when I moved back to DC I purchased a home in a, you know, kind of you know, rundown, but up and coming neighborhood and you know, started to really renovate that. And I had, you know, hired some contractors. They didn’t work out. I ended up, you know, literally doing a lot of work myself. I mean, literally Charles I was, you know, doing carpentry and sanding floors and plumbing and you know, I loved it. And I would do this after like a 12 hour day as a management consultant. I was at younger, had a lot more energy then. So you know, I loved it. So it was my own home. And what I saw was, you know, two things that continued to drive me.

Adrian:
One was the great returns. I mean, we, you know, we, we bought a property for X. We put in, you know, Y amount of capital on top of that into renovation. And while our, the value was much higher than, you know, expos wise, I saw the value in that. And then from a, you know, just a personal satisfaction point of view I liked the BDO transformation. I liked using my ingenuity and my creativity, my capital market skills everything to take something that was, you know, not really usable. It turns to something that was beautiful and usable and it could benefit myself. It could benefit the communities around me. And I just love that transformation that made me feel like I was really producing something. And so the ability to, you know, to drive excellent returns and ability to create were two things that just captivated me.

Charles:
Wow. Interesting. how did your, or what is your firm’s current investment strategy right now with what you guys are developing, what you guys are keeping, what you guys are selling?

Adrian:
Okay. So we are, we’re balanced in that regard. 80% of our development is in residential, about 20% is commercial. Within that product mix, we do a number of things. We do very mission driven projects. We do affordable housing that, you know, works for lower moderate income people. And we do very high end housing. So, I mean, in the same year, we, we did a project where, you know, the condos in itself were over a million dollars and we could do another project where the condos are selling for a hundred thousand. And, you know, the million dollar ones are, you know, nicer than the a hundred thousand other ones, but they’re not like night and day, a hundred thousand ones are still high-quality great places for people to live. It’s just that you financed them differently. But you know, Charles go back to your question. I’d say, you know, about, you know, 80% of the self we do, we end up exiting either say in the case of a condo, you’re selling them to the public. Obviously they’re buying units on a case of a rental building. You will exit that through either a refinancing to, you know, exit your investors or to a sale to a third party. So I’d say about, you know, 70, 80% of the stuff we exit upon development, and about 20 to 30%, we keep for longterm hope.

Charles:
So with everything, with affordable housing. Cause you said like it’s not night and day between these really nice properties and the ones that you’re building for a hundred thousand, how is the financing differ between it? Because I see with like where we are after COVID or at this part of COVID the increase in construction costs, you have labor sort of shortages. I mean, it’s, it’s very expensive to build. And how are you making that profitable for you and your investors with affordable housing, even though, I mean, it’s fantastic for your, your community. I’m aware of that, but just for you.

Adrian:
Yeah, no, I mean, it’s interesting. I mean, one of, you know, my sort of thoughts when COVID happened was that construction prices would go down. I thought there’d be less demand that subcontracts will be hungry for work. And that didn’t happen at all. I think there was a little bit of low in the beginning when people started to figure it out, but since then prices have continued to increase. And also, as you probably know, particularly in the raw materials costs, wood and steel have gone up tremendously, especially recently because of supply chain challenges. And so that’s been a challenge as well. So going back to affordable housing, the way you make it work is essentially what the government’s money. There are numerous programs, both through the tax code and the tax credits. We can talk about that. There are, you know, low interest you know, subsidized debt on it.

Adrian:
There is what’s called gap financing. This can come from a local government from the federal government. And essentially what it’s done in this situation is that, you know, the governments want this as an important need, but they realize that developers are still taking risks and making effort. And so they allow us to either earn a profit charge fees, et cetera, and what our investors do is they share in that. So they may provide you know, initial seed capital to get the project running. And then when a government financing comes in, that’s taken out, there’s a profit allowed on that. Or there could be, you know, large development fees of developer earns. And to the extent that our investors invest in that, we’ll give them a share of that portion.

Charles:
That’s very interesting. And are those tax credits, you said a lot of local, is there a lot of federal programs like that as well? Or is it

Adrian:
There’s a federal tax code program? One of them is the biggest one probably is the local low income housing tax credit, or w or Lytec is the acronym that is typically syndicated through large money standard banks, but they’re also, you know, a lot of programs where these tax credits can be earned by, you know, individual, you know, high net worth investors. So for instance, the opportunity zone program, we’ve used that to finance some of our projects. And those are projects where we’ve been able to create, you know friends and family types of syndicates, where, you know, you might invest 50,000, a hundred thousand, one of our projects we’re able to pass on those opportunities, zone, tax credits to you. And, you know, there’s a lot of going on that program, but they provide very nice returns. And in addition to tax breaks, we’re able to provide a market rate return on your investment. So you get the double benefit of tax breaks and market rate returns.

Charles:
I’ve seen the light type properties be advertised from brokers before. And I had some partners before that would say they kind of like veered away from them. What, how does that differ? If you’re selling a property like that, the new owner that’s buying that property, what kind of, how does that, how does what they, what they can, and can’t do change after buying a property

Adrian:
With that? Well, it depends on the program. What we’ve seen a lot of times is that the original developer like ours, and maybe some, some partners we’d have, we’ll stay in a property to what’s called a compliance period. The typical compliance period, every program is different, but for Lytec typically there’s a 15 year compliance period through which you need to keep it properties affordable. After that, it starts to burn off. In some cases, it burns off right away. In other cases, it burns off over time. And at that point, these properties can be converted to market rate or they can be re syndicated that say the property needs a refresh, and you can go back into the tax credit program, use tax credits to do that and earn additional fees on that. So typically what we see is developers like ourselves will develop a property, bring it online, stabilize it, hold it through the bulk of that compliance period, and then do some type of exit, either an internal exit where we might shift it from one end of the, we own to another bringing a new investor, as long as the cash out, we’re actually selling it to a third party who can then reap the benefits of that end of the compliance period.

Charles:
It’s very interesting. So you’re having different investors that are interested in investing or financing, I guess you would say investing in different stages of the project, whether it’s the construction or whether it’s the longer term when it’s more of a stabilized asset. So that’s

Adrian:
Great. Exactly. So

Charles:
How has COVID impacted your business? We talked about, you know, labor, we talked about raw materials has demand changed where you are, has a, I mean, what else have you seen over the last 24 or 12 months?

Adrian:
Let’s yeah. Yeah. I mean, it depends on different sectors. I mean, we’re not really an office sector that I think that sector has been impacted tremendously, both by reduced demand for office space, as well as, you know, vacancies companies not being able to pay the bills. And it hasn’t really shown up so much currently. I think it will show up in a few years down the road when these leases start to roll over and tenants either vacate or, you know, really push for consensus. So, I mean, luckily for us, we’re not, we expose there, we have some exposure in retail. I think that’s also been challenged. I think it depends though on the type I think, you know, sort of what’s called neighborhood services. Retail is still continues to do strong. So you’ve gotten your your grocers, your convenience stores, you know, those have continued to do well.

Adrian:
Other types, like say for instance, clothing, I mean, you know, we’re sitting here are casual clothes, you know, in our, in our homes. And so no one’s like going out and buying a new suit. So clothing like that has been affected. But actually it’s part of a longer-term trend where you know, e-commerce is, can you do that? So again, it’s not a big part of our business, but we do have some assets there. And so we’ve had to face, you know restructure those and, and find ways to make those work. I think in a big part of though what we do, we’ve been very fortunate as to be well-positioned. So on our affordable housing portfolio has continued to be strong, even though our residents were affected by COVID in different ways than some of them were exposed to job losses, because these properties are so desirable because they are a high quality properties that someone at a lower moderate income can afford.

Adrian:
They really want to hold on to that. I mean, our waiting lists with these properties are years long. And so when someone is fortunate enough to get into one of them, they want to stay there. I mean, our, we have very low turnover. We have several buildings where tenants moved in on day one, and they’re still there, you know, 10, 15 years later. So those tenants were very motivated to stay in very motivated to stay current on their on, on their rent payments. The various stimulants stimulus check payments programs really helped in that regard. So our portfolio quotable portfolio, you know, did really well. I think another area where we are doing well and are going in and doing well are in our condominium for sale, but we have found that there has been a tremendous demand. One of the, you know, sort of post COVID investment thesis we see is that people be much more interested in their home environment.

Adrian:
You know, they’re not going to work from home, you know, five days a week, but they are much more inclined now, Hey, I’m going to work my home on Friday. I’m going to work at home on Monday, make it a three-day weekend, not do that commute. And so they’re, and also because they’re not spending on things like commuting, they’re not going to the movies as much. They have more disposable income. So we see demand for our for-sale product even stronger than before condo sales have. Certainly in our market areas have increased both in terms of volume and pricing. So again, I think that’s a great, we’re well positioned to take advantage of the COVID in post COVID environment.

Charles:
Yeah. I definitely agree with what you’re saying about office. I don’t know if people are going to get rid of their offices all together, but I feel that someone, when that renewal comes up, they might not be taking 30,000 square feet. They might take 10,000 square feet. Absolutely. And they might have people come in on Mondays and Thursdays and someone else on Monday and Wednesdays or whatever it might be. And I feel that’s kind of the new normal, but speaking about that, where we are in mid 20, 21, what do you see for the next 12 to 24 months in residential and commercial real estate? As people as, I guess we’re getting back to more normal, a little by little with the vaccines and everything else.

Adrian:
Well, no, I mean, again, our investment thesis is that people will a value their home environment more because they’re going to spending more time there. They’re going to want more privacy. So I think that you know, for sale, whether it’s a, you know, a single family home, a town home or condominium will become more valuable, people have more disposable income, they’re gonna spend more time. So it certainly says that that type of product residential, particularly for sale residential will do really well interest rates, even though they’ve tricked, ticked up a bit, you know, a few basis points over the last two months or so, there’s still, you know, compared to historical norms, you know, really low. And, you know, I think that the fed will, you know, you know, we’ll watch out and, and, you know, continue to monitor situation. But I think they’ve made a firm statement that they are committed to a low interest rate environment the next several years.

Adrian:
I think that will be a boost to home sales. And, you know, as we rotate out of other classes like office, there, there, there may be opportunities for office conversion. So I think there’s been a lot of interest, you know lately especially for older inefficient office buildings, say your class B and your class C properties that as construction costs continue to rise that we’re looking at buildings like these opportunities for conversion, from office to residential, the structures in place, the utility infrastructure is in place. So, and the value of the office building has gone down. And so from a economic perspective, the replacement cost is much lower there. And so I think you’ll start to see some of these, particularly as you pointed out, Gerald’s that, you know, these, these leases start the role and, and people are taking less in this space. And so building on map and say, Hey, you know, I don’t want to be only, you know, 60% occupied. I might as well just go ahead and, and let people go and be zero occupied and, and sell this asset to a residential developer. Interesting.

Charles:
Is there anything with, you know, we’ve seen, you know, the interest rates going down, we’ve seen so much money printing in the last 12 months. Are you worried about anything in the economy that might have an effect as well on real estate or anywhere parts of the economy? I mean, or is there anything that you’re watching that you think might come back?

Adrian:
Well, I mean, I’m not an economist and you can see it as sort of no crystal ball here. So, I mean, your guess is as good as mine, but I mean, you know, my prediction and, and what, you know, we are structuring our activities around is a continued relatively low interest rate environment, a maybe a bit of surge of inflation in 2021 to Q3 Q as all of that pent up, you know, capital comes back into play as people get vaccinated, get back out there and start going to restaurants again. So maybe a bit of inflation there. And I think we’ve seen some in fuel costs in certain commodities as more driven by, I think supply chain difficulties then, you know, then necessarily increased demand, but that, that will moderate over time. I mean, I think that we are in a secular low inflation environment.

Adrian:
I mean, that’s sort of a whole different subject, but, you know, our belief is, you know, it has to do with, you know, kind of the demographic changes going on you know lower workforce, things like that. And so, you know, we don’t see any surgeon’s inflation. And so I think it’s really about, and then I guess another niche we talk about is kind of a lot of people don’t real estate is, is urban suburban kind of mix and how that will change. I think that the post COVID environment will be, you know, slightly advantageous for suburban versus urban. I think that you know, I think there was a big shift as, you know, two things, one from a health perspective is, you know, people began, you know, concerned about living in close quarters and particularly people who would rely on public transportation.

Adrian:
I think that, you know, that will be kind of slow to recover. And so I think that, you know, both suburban kind of satellite office spaces, as well as people saying, Hey, I don’t need to be as close into the city because I’m only going to commute in two or three times a week as opposed to, you know, five or six times a week. So I think there will be a slight advantage, but not necessarily to sort of the far out suburbs. I think that some of maybe the first ring suburbs that are away from downtown, but not so far away, did you can’t get in when you need to? I think there’s a lot of opportunity there. And so we see a lot of opportunity for conversion of places there. I think one particular thing we sort of see as sort of taking one disadvantage of one advantage is that a lot of the B with the retail compression, there are a lot of kind of aging, smaller shopping centers that are no longer economically viable, but great places to do mixed juice. Maybe, you know, low scale townhouse communities with like some convenient shopping. We see a lot of conversion opportunities there and enclosed close in suburbs. So that’s something that we’re taking a look at.

Charles:
It’s amazing. I mean, there’s a lot of this that was accelerated with COVID, but there’s been so many changes that have kind of started from this just to just a year ago. So what do you think are the main factors that have contributed to your success?

Adrian:
I think that well look, first of all, I’m I always like to be humble and to give credit I think we’ve been in some good situations at the right time, but besides that, I think development is, you know, it’s a great industry and that there’s so many different ways to do things. And I think it’s about picking a strategy, picking a niche and getting better at it. And so we have, we, you know, we, you know, felt early on that, you know, there was a, a, a urban strategy that really worked, that people were looking for places to live that were interesting, that were in walking distance that, you know, that had that dynamism of the city, but that had sort of private places where you could kind of go and decompress where you could only be there. So I think that was a good strategy for us.

Adrian:
We were there early and has served as well. And then just from a personal perspective you know, we get this all the time is development is, is, you know, being it’s perseverance is rolling with the punches. It’s reacting to, you know, unusual circumstances being quick to react to opportunities, sort of seeing those. And so it’s really like a, you know, it is, to me, kind of like the premier kind of entrepreneurial environment, even the biggest firms are real estate have entrepreneurial characteristics where they are opportunistic, where there are, you know, very few layers between the top and the bottom and where, you know, your gut instincts and your, you know, your, your Moxie are the keys to success. Interesting.

Charles:
Very interesting. So how can our listeners learn more about you and your business, Adrian?

Adrian:
Okay. We’ll go to our website, www.neighborhooddevelopment.com. They were development, all one word and there were links there to our various social media platforms, LinkedIn, Instagram, et cetera.

Charles:
Awesome. Well, great. I will put those links into the show notes. Thank you so much for coming on today and looking forward to connecting with you in the near future.

Adrian:
Okay. My pleasure, Charles.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

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Links and Contact Information Mentioned In The Episode:

Neighborhood Development Company

About Adrian Washington

Mr. Washington has over 30 years of experience in urban real estate development, construction and management. Since founding NDC in 1999 he has led the development of over 1 million square feet of real estate in the District with an active pipeline of another half-million. NDC is also a partner in the District’s City Center DC project and in Baltimore’s State Center project. From 2005 until early 2007 Mr. Washington took a leave of absence from NDC to serve as the President and CEO of the Anacostia Waterfront Corporation (AWC), the entity charged with leading the redevelopment of the city’s Southwest and Anacostia Waterfronts, including Nationals Stadium, the Yards, and the Wharf. Mr. Washington grew up in the city’s Anacostia neighborhood and is a lifelong resident of DC. He is a graduate of Stanford University and the Harvard Business School.

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