By Joseph Richter
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Don Peebles, Chairman & CEO of The Peebles Corporation, joined us for a wide ranging interview. We discussed the advantages of public-private partnerships, the shifting political climate, Affirmation Tower, and why he’s bullish on the hospitality sector.
Daily Beat: Can you please share your background with our readers?
Don Peebles: I was first exposed to real estate as a young child when I was eight years old. After my parents divorced in 1968, my mother got into real estate sales and built a brokerage business.
I initially anticipated going to medical school, but changed my mind when I was an undergraduate at Rutgers and left to work in real estate.
Daily Beat: I gather that you started on the residential side.
Don Peebles: Yes. I started my career trying to sell houses as a real estate agent in 1979. During that time, the industry faced a highly inflationary environment – eerily similar to where we are today. Interest rates were raised to try to control inflation and they ran all the way up to about 15%, which meant real interest rates were 18 to 20%. People wanted to buy, but could not qualify for a mortgage, so I got into appraising when I was 21.
I started as an appraiser apprentice and a few years later started my own appraisal firm. I grew up in Washington DC, so I’d known politics and government for awhile and was able to secure some contracts from HUD.
Daily Beat: What was your first experience with the government?
Don Peebles: My last two years of high school were spent as a Congressional Page on Capitol Hill. At that time, there was a school for us on the top floor of the Library of Congress. Our classes were from 6:00 AM to 10:30 AM, and then we walked across the street to the Capitol and we’d work from 11:00 AM until Congress went out of session.
Daily Beat: That sounds like a formative experience.
Don Peebles: I got a good crash course on politics and time management. We were able to grow the business from there and three years later in 1986, I found a development opportunity and built my first office building. The government pre-leased the property and was our sole office tenant, which made it easier to finance.
The real estate market had a good run in the 1980s after the recession, but we then faced the S&L crisis. During that period, our business focused heavily on consulting and property assessment appeals.
As we were going through this down cycle, we acquired some sites at heavily discounted prices and those became future development opportunities for us in the 1990s as the market recovered.
Daily Beat: How did you get active in Miami?
Don Peebles: I went on vacation in 1995 and loved it! By the following year, we had won the development rights to the Royal Palm hotel. The City of Miami beach redevelopment agency owned the site and was looking to develop more convention quality hotels. This created the primary focus of our business for many years, which was public-private partnerships. This was a great fit in terms of my skill set because I remained actively engaged in local and national politics as I built the business.
I was on Bill Clinton’s national finance committee when he first ran for president and was a corporate co-chair at his inauguration. I was very active in the political process. Between that activity and my real estate experience, Peebles Corporation developed an expertise in the public-private space.
Daily Beat: What are the advantages of public-private partnerships over standard development?
Don Peebles: Throughout our company’s history, we have done many private sector deals and in such cases the buyer is simply looking to maximize profit and high probability of execution. The seller rarely cares about how or what you build on it. They just want to maximize their price and move on.
The public sector is very different. These public-private deals are typically done with a local municipal government like Washington DC or Los Angeles, but occasionally the arrangement is with the state. Across the board, these government entities are primarily focused on ‘outcome’ when they sell.
Governments are not land speculators, they’re not land investors. The amount of money they’re going to get from selling a piece of property is almost meaningless in terms of their overall budget and spending capacity.
In some cases, they might want to increase affordable housing, while in others there might be a shortage of office space in a location. As an example, we recently won a few Requests for Proposals in Miami Beach to develop office space because they felt that based on migration patterns from the Northeast, the growing number of entrepreneurs would need offices close to where they lived.
Across the board, governments are focused on how you take into account the economic considerations of local residents and businesses.
Daily Beat: And in private development, the seller only cares about price.
Don Peebles: Correct. Unlike the private sector where the sole focus is price and the ability to execute, there’s a multitude of measuring and evaluation standards in the public-private process.
Financial capacity, offer, design, and use type. Moreover, the government receives all kinds of revenue that’s generated.
For example, in a place like Washington, DC, where there are city, state, and county functions, they all receive tax revenues. Hotels are very attractive to them because of all the different tax sources and jobs that are generated. The public sector looks for job generating activities and economic stimulus.
Governments will also look to support investments that they’ve already made like a convention center and request that hotels are developed nearby. They’ll evaluate based on those criteria and price will have some relevance, but rarely will you see price being more than a third of the evaluation criteria.
Daily Beat: This presents some excellent opportunities for developers like you.
Don Peebles: Overall, we like this approach because it gives us the opportunity to be competitive without having to pay the most money. Structurally and fundamentally from a real estate investor perspective, if you can buy assets at below market prices by providing other types of benefits that are not necessarily costly to you as a developer, that’s much more attractive.
The private sector is looking for very quick execution on the purchase, while the public sector generally does not allow a developer to close on the acquisition until you’re ready to commence construction. If you don’t ever get to that point as a developer, they’ll take the property back and go through the process again.
While that presents a risk, we see that as an opportunity because then we don’t take entitlement and land carry risk. We like the public-private process because we don’t close until we’re ready to dig a hole in the ground.
Granted, we risk a smaller sum up front, but that is offset by the fact that we don’t have to pay to carry the property and the land arbitrage we get on the price.
Daily Beat: A misleading report from city Comptroller Brad Lander’s office unfortunately helped shape the media narrative surrounding 421-a in New York City. It claims that the city will lose $1.77 billion in tax revenue from the program in 2022. The reality is that without the tax abatement, developers would not build these housing units in the first place. Can you please discuss these political headwinds? How do we combat this?
Don Peebles: This has been a two-to-three decade process.
Developers were initially perceived entrepreneurs and innovators who were improving communities by building urban infrastructure and developing suburban markets.
However, as the process of relocating back into urban cities and the progressive nature of politics, there became this view that developers were gentrifying communities and pushing people out. The narrative started becoming more negative.
To combat this, I encourage a greater focus on economic inclusion because development stimulates economic activity. If we could have a broader lens of who we give opportunities to and make it more reflective of the population, demographics that we are building, then we’d be perceived as job generators. Jobs were being generated from outside the communities and this created this narrative of an anti-development approach.
Politics has unfortunately always been about misinformation. How you take a fact and spin it. That’s why they’re called the spin doctors and the messengers because they take a basic fact and mislead the voters with it.
Daily Beat: Who can forget about Amazon in Long Island City.
Yes. There was a false narrative that the deal was going to cost the government $8 billion. In reality, Amazon was going to provide New York with $30 billion and would get a rebate of that $8 billion to make the economics work. Now, we’re sitting here with zero revenue.
The same thing is true with 421-a. The government incentivizes certain uses; namely, affordable housing. In markets like Los Angeles and New York where construction workers are heavily unionized and land is expensive, the cost to produce housing is higher than other states and developers are forced to build higher revenue generating products.
Providing property tax incentives to developers to build affordable housing helps close the tremendous gap between revenue versus cost.
Bricks and mortar will cost the same overall – whether you build luxury or you build affordable housing – it’ll just be some of the finishes that’ll change the price perspective. The government needs to look at that more closely. Now they’ve eliminated 421-a in New York State, that’ll have a chilling effect on the development of affordable housing.
There’s minimal profit for a developer in affordable housing because there’s no upside of owning the real estate. Most developers look to use that as a stepping stone. This is a sector of the market that is going to need greater incentives. Unfortunately we’re in a political narrative where there’s an anti-development and anti-wealth environment. I think that the Comptroller is making a mistake.
It’s a false narrative that any kind of tax abatement for affordable housing has been costly to the government because the alternative would be that the government builds this housing and they wouldn’t do it.
Daily Beat: We wrote in our publication that more than half a dozen affordable housing projects in California are costing more than $1 million per apartment to build. Developers must be part of the solution. Tenants could be getting very nice houses for that amount!
Don Peebles: Yes, I saw it. We’d be better served by allowing people to go out and buy private housing on the market.
Daily Beat: Are these migration patterns to nicer climate and Sunbelt sustainable?
Don Peebles: We’re going through a very transitional period in this country in terms of how Americans are going to work. That was all accelerated as a result of COVID and the whole country working remotely and learning how to do that more efficiently.
Obviously that’s going to have an impact on office demand and shift where people work. It’s also going to change what amenities are going to be available in apartment buildings and condos. Amenities like business centers with office, conference, and video conferencing capabilities are also going to be attractive. The speed and reliability of the internet is going to be very important.
Daily Beat: The fact multi-family deals in certain markets are trading at 3 caps has concerned us for the past few months. How do you see things shaking out with the rise in interest rates?
Don Peebles: We’ve operated from the perspective that cap rates have been too low on rental apartments for a long term hold. Interest rates have been so low for the past few years and the only place they could have possibly gone was up. We always thought that’s a risk in multi-family and it’s now coming to bear.
This will result in more development because you could still develop in the Sunbelt in places like Miami at 6 to 7% cap rates, which gives you a nice arbitrage and cushion. I think cap rates will go up.
But since rents in the Sunbelt are rapidly going up, I think values – despite the move in cap rates – will be relatively preserved. This is because the cost of housing is so expensive and there’s not been a lot of new inventory. With mortgage rates doubling in a very short window of time, that has priced a lot of people out of buying, which leads to more renters.
The mindset of the housing consumer has changed with a different generation.
Daily Beat: Lumber is already down 55% from its January high. Where do these costs for materials stabilize? When projecting hard costs for your development pipeline in the next few years, how do your numbers compare to before the pandemic?
Don Peebles: I think it will settle down to a rea- sonable price increase based on where we were in 2019. We’re building a lot in 2023-2024, and we think prices will level off by then.
Daily Beat: Do you raise individual funds or is it open ended. What’s the typical deal structure?
Don Peebles: Our typical structure has been one off fundraising. We retain our earnings and self-fund all of our pre-development work. We create a lot of value in that process and then bring on institutional partners.
We’re now in the process of beginning to do a private placement around our public-private business, because the scale of our business has gone up. We’ve got seven plus billion dollars in the pipeline and want to add to it because there’s tremendous opportunities for us, so we’re adding more structure now to our GP fundraising.
We also have some strategic partners that we’ve worked with in the past on the LP capital and plan to continue working within that pool of institutional investors on a one-off basis.
Daily Beat: Favorite REIT?
Don Peebles: Park Hotels & Resorts. The hotel sector was beaten up and luxury travel is back in a very big way. I anticipate corporate travel for meetings and business conferences to join in the recovery.
The pandemic has led to the closure of unproductive and marginally profitable hotels, which has led to a much stronger hotel base. Rates continue to increase.
I like Park Hotels & Resorts because they have a combination of conference hotels like the New York Hilton, but also like the Royal Palm in South Beach, which I developed.
I’d short and have shorted office built office REITs. I did that before the pandemic and was focused on New York office REITs because fundamentals were going the wrong way.
Daily Beat: Can you please share an update on Affirmation Tower and Site K?
Don Peebles: The Empire State Development Corporation owns the site and they issued a request for proposals.
We looked at answering the two moments that the country was really dealing; namely, COVID and the unprecedented protesting around the nation surrounding racial, economic, and criminal justice. We wanted to build a development that would address those two moments.
I partnered with McKissack, a black-woman-owned and run construction company and paired them up with our friend John Fish at Suffolk who is our contractor there. We wanted diversity and the tower will be 80% African American owned.
I then brought in my friend, Steve Witkoff who has extensive experience on super tall buildngs. The idea is to build something very unique – it would be the tallest building in the Western Hemisphere Two hotels, offices, an observation deck.
We are close to working out an agreement to house a civil rights museum. It would be a transformative project. The state and Governor Hochul are the decision makers and I anticipate that getting addressed this fall.
Daily Beat: Does this need to go through ULURP?
Don Peebles: No. Because it’s a state project, the governor could have a general plan and we’re planning for something that’s allowed within the current zoning. This should allow it to move forward expeditiously.
Credit: Daily Beat
