For aspiring developers, panelists agreed that choosing a sector—whether it be residential, office, industrial, or something else—does not particularly matter, but that you have to start somewhere, start small, and specialize within whatever sector you do choose.
“All happy real estate deals are alike—they start with a motivated seller,” said John E. McNellis of McNellis Partners, who has 35 years of experience in shopping center development in northern California.
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“If you buy a 100 percent net-leased property, AAA [rated] assets in core locations, [what] you’ve bought is an expensive insurance policy against downside risk,” he said. “I’m going to suggest that you can get the same protection from downside loss, but you can also get upside if you do value-adds,” referring to improvements that add value. “Buy ugly buildings,” said McNellis, adding that developers need to fall in love with the numbers in the deal rather than the views or other features of the property.
Sometimes, the worst purchase contracts have the best deals, said McNellis, noting that distressed properties often have the most complicated arrangements, which is why they are a great buy.
But McNellis also said that he would avoid markets where populations are shrinking, and that acting as your own broker is a mistake, since you will never see the best deals.
Robert E. Hughes Jr., of Hughes Development, said the first motivation for him is serving one’s community. “But you aren’t going to be back to do it again if you don’t make any money,” said Hughes, who is based in Greenville, South Carolina.
“There’s nothing wrong with being known as a tough trader or a hard negotiator. But there is something terribly wrong with being known as a crook, and you are not going to be able to get in the door to get this done,” Hughes said. “A thing well bought is half sold.
“If you pay too much, you are working for the seller,” said Hughes, echoing McNellis.
“You need to get to ‘no,’ ” Hughes said. “The seller’s broker doesn’t know what the seller is really motivated to do. . . . I’ve never met [anyone] who just got to have that piece of land. . . . It’s not the land, it’s that their daddy told them never to sell it, it’s their college education [fund], it’s their retirement fund, it’s something else to them. And you need to find out from the seller what that something else is, and then you go about rewarding that something else.”
“We joke, ‘I’ve made more money finding a Coming Soon sign than a For-Sale sign,’ ” said Hughes, since businesses often fail quickly and need a buyer.
“There’s something the seller values more than just the obligation to pay property taxes,” said Hughes in closing, with both Hughes and McNellis saying that their approaches are still fairly low-tech. McNellis said that his firm does not believe in traditional marketing, but they have created a website that gets some traffic. Hughes agreed, saying his first web page—for a ULI event where he was speaking—was a Microsoft Word document on a web server that said, “Please enter password” but that did nothing, which they have kept to this day.
