Speaking at the 2016 ULI Fall Meeting, John McNellis, a principal with McNellis Partners, a northern California–based developer, shared part of his perspective, as captured in his book, Making It in Real Estate.
For those looking to get into the real estate business, McNellis advised trying to take a 20-year approach to your career. “Do you want to work for the biggest company that’s constantly in the headlines, or do you want to focus on building economic independence? Are you doing the night classes and other hard work to get to where you want to be?”
McNellis, who was educated as an attorney, said one of the factors that led him to sell earlier in his career was to gain independence from his financial partners. “I’d rather control 100 percent of a $1 million deal than 1 percent of a $100 million deal,” he said.
Now, his company holds a portfolio of four or five key asset properties, with a line of credit against those holdings, and uses that line of credit to finance acquisitions and construction. “In the beginning, we sold two-thirds of everything we developed,” said McNellis. “We still often sell on Day 1 that the project is complete.” Of the properties they do hold, they are generally able to secure favorable financing after completion, thanks to long-term leases from tenants such as Safeway, Walmart, and Ross.
McNellis said that the characteristics that he looks for in a property are high yield, high barriers to entry for competitors, and desirable tenants or neighborhood characteristics. He cited a Walmart-anchored shopping center in Modesto, California, as an example of a property his firm has chosen to hold on to. “When you see a Leslie’s Pools [a pool supply company] in a residential area, that generally means there’s a lot of households with pools,” said McNellis. “And that usually leads to an area with disposable income.”
Another property his firm has held is a pharmacy-anchored shopping center in Healdsburg, California, where the community is generally opposed to significant new construction that could undermine the value of his center. “The internet isn’t much of a threat to grocery stores, pizza places, and nail salons.”
Timing the market has never been part of his firm’s strategy. “We view ourselves like farmers; we plant, sow, and harvest each year,” said McNellis.
McNellis outlined why his firm has always taken a “value add” approach, “buying junk and selling antiques,” rather than a merchant builder’s approach of selling fast at lower margins. But he also admitted, “We’ve lost money every which way you can.”