Justin Kennedy, Sponsor Update | Ep.94


CrowdStreet’s Darren Powderly is joined by Justin Kennedy, Co-CEO and CIO of Grass River Property to discuss the state of the market in South Florida, addressing sustainability issues within real estate, and thoughts on how demand for real estate will change in the future.

Darren Powderly, Co-Founder & VP Capital Markets

Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.

Justin Kennedy, Co-CEO and CIO
Grass River Property

Justin Kennedy leads Grass River’s investment activities and strategic direction. Justin’s 29 years of experience span real estate finance, investment and development across US and international markets.

Justin received an AB in Economics from Stanford University and an MBA from UCLA.

- Hello everybody. This is Darren Powderly, welcome back to Street Beats. Today I'm joined with Justin Kennedy. He's the Co-CEO and Co-CIO of Grass River Property, in Coconut Grove, Florida right just South of Miami. Justin, welcome to Street Beats. It's great to be doing business with you. Would you please introduce yourself and tell us a little bit about yourself and the firm.

- Thanks Darren and it's great to be here. You know, I look at myself as being fundamentally a real estate guy. When I first got out of school was the only thing I wanted to do. I go back home to Old Sacramento firm. And got in the development business there. That was the land development business. Then, moved to get some commercial experience at a company down in the Bay area, Bedford Properties. And then after that, kind of considered myself really kind of a great real estate professional at the age of 26. And there's, I have to go out and, you know, was able to catch really that RTC, coming to the California market's red square and about the first year of doing that. And so, needed to find some new things to do, started actually looking at some RTC properties to acquire, ran into some pretty good opportunities in Colorado Springs. And that whole world brought me into contact with a new set of people. I met some guys, pretty good gentlemen. I'm very sure limit the Los Angeles office of Goldman Sachs. He introduced me to the guys on the trading desk in New York. I got hired and became part of that group, and really was there for the getting of the CMBS markets and became the trader dedicated to the product as it became more mainstream who wanted to be in walkable, transit served, green leafy first ring suburbs that we thought would be the kind of next step, particularly given some of the technology changes that were happening, and, you know, obviously what happened with pandemic, we could never have anticipated that. I think what happened to pandemic is really just an acceleration of a bunch of trends that were happening before a new mass adoption and network effects of technologies that were out there, like this one we're using right now but they just didn't have massive adoption. Now everybody's doing it, and it's vastly more powerful than it ever would have been without the events of the pandemic. For real estate, we see sustainability as being quite different than it is in sustainability for American airlines or GM or Apple or JP Morgan. I think that's a pretty good broad breadth of But these companies have global operations and have global concerns about, you know, how we gonna help make the environment and society better across those global enterprises. And real estate's very different. I mean, obviously as a real estate organization we have national operations, but as a property developer, when we're considering how does each property fit into its neighborhood, it's never gonna move from that neighborhood. It's never going to have impacts that are not in this its immediate submarket and as such that focusing on the needs that tenants, residents, visitors to that property perceived as the sustainability issues that are most relevant to that particular location, the submarket, the regional issues that they are faced, if this is the way that real estate tenants and visitors residents think about their daily life, that as such, those issues need to be the ones that are the first ones that are considered. So in Miami or Southeast Florida, generally, I would tell you the number one concern for people that live here is traffic.

- Okay.

- That the stalled cars create all kinds of carbon, the power here is actually doesn't come from carbon sources. There's two nuclear power plants on the North and South end of the Metro area.

- Right.

- And so that the carbon issue and the lifestyle issue in South Florida is traffic. How do we create places where people don't either need or want to use their cars is the number one sustainability issue for making life better in South Florida and making South Florida more, more livable today. The next question that comes up is sustainability regarding sea level rise and storm resilience in our local area. But this is a concern for this region, where are we gonna build, and where do we wanna put the density, and how do we protect the infrastructure is something that, you know, we both, we and Tara have tried to be vocal voices about, you know, earthly sustainability that are smart, and there are other places to build that are not, and there's ways to build that are responsive to the traffic and ways to build the or not. And, you know, if you are hyper-focused on what is it that people in this region want as opposed to getting into maybe some more than abstract views of things that are global problems that you can get tenants to pay up and help you create these solutions, because it solves local everyday problems. And so that's kind of been our focus and it's been pretty successful.

- Yeah, so Justin it seems like half the West coast, especially California is moving to Texas, Houston in particular. And it seems like half of the Northeast is moving to Florida and maybe South Florida in particular. Tell us what you see that, you know, that's really high level headline news. But what's really going on, and what is really driving demand for real estate? I know is some of the in migration, but can you speak to some of the other big trends that you see going on, again, toward the local market there in South Florida?

- Well, I think our Mayor Francis Suarez, there has been a wonderful representative for us in Miami. Governor DeSantis, I think it's done a great job in terms of making, you know, Florida attractive place for people to bring their business and their families. I'll tell you what, you walk around on the street here, people are happy, people are smiling, like, you know, people are happy to be here. Florida is a really, it's a new place, maybe in many ways much more than other other places that you mentioned. I mean, I'm a fifth generation California. And so that people that are from California have a presence of, hey, I love American, but I'm from California. Texans, maybe even have that more than Californians. I think Ohio New Yorkers certainly have. Florida has never really had in my view that kind of presence in it's people's minds, because so many of them come from different places like me. And so from the first day we got here, this was the most welcoming place. And we heard, you know, people saying, hey, welcome to the neighborhood. Welcome to our business, you know, our business Community. Florida has shown itself to be incredibly welcoming to people coming now and has been a, you know, I think for the way we see our business happening, and whether, you know, it's homes in the first... I hear rumors that there is literally no inventory within, you know, gaps in certain areas of the market. I know that a bunch of the condo inventory that had been, you know, it was in the market prior to the onset of the pandemic that, you know, has at least in recent months seen record levels of singles. And so I think the most important thing is that the people that are coming in particular to Miami, in terms of the level of both finance and technology perhaps, are moving here in terms of their market presence, is a completely new thing. And that is, you know, as I said, I get great credit to, you know, the political leadership here, particularly, Francis, has been a great spokesman, for what is great about living here. And, you know, Miami is really the only city in the US that looks more outside of the US as to what its identity is than it looks into the units. But obviously there are other cosmopolitan international cities, but in the end New York is the world's financial capital, but it's a little bit more of the US financial capital. And San Fransicso is the tech capital. Houston is the energy capital. But they don't look out as much as Miami does. And obviously we have this incredibly, international diverse population here. And that is that is kind of a great, interesting thing about living here, you know the fact that you can spend, let's call it at least 10 months a year on the water. And some people would pick a 12 is a unique thing that exists here, but I don't know about in any other, you know, I learned to sail on San Francisco Bay and it's beautiful but it's not as inviting as the water here. There are wonderful, wonderful things that living here. And I think that the thing that's really happening more, at least that I've seen in recent months is this coalescing that Florida is more than it has been before. And it really is taking on this, you know, presence as a entity inside the United States more than it has before.

- Before we wrap up on time, you had mentioned something earlier that you wanted to come back to. And I know everyone is curious about, it is a bigger macrotrend, but, you know, there's so many things that are causing investors to scratch their heads right now. You know, obviously we had COVID of a recession, we've got a stock market that's already at all time highs, real estate that starting to come back kind of quickly, never really claps, like some people predicted it would and like, oh, just wait, there's gonna be, you know, lots of housing available for distress prices, just like the great recession that definitely did not happen. And I think that's surprising a lot of people. So, but you said something about this time is different. It has its own story. So don't compare it to last time. Take of your learnings from prior recessions as all good historians and investors do, but don't be fooled that it's a replay. This is a new experience. Tell us about your view on that.

- Okay, and that statement is made with full knowledge of the, you know, the most dangerous words or investment is that it's different this time. Usually that's in a bowl sense, and this is in a cautious sense.

- Yes.

- And the caution is that this was not a financial crisis rash, the banks and the financial world, while there was some kind of, you know, mid-March extreme volatility in the market. It's like greater than the volatility that occurred even on Lehman and AIG dates last time, right? That those were some pretty scary days that the fed rolled out the entire suite of GFC liquidity programs within about a month. As we bounced back, what obviously there were certain sectors and sub sectors that had variant performance. And so what we're saying, it's not volatility per se, it's variance. And the variance is particularly focused but at multiple levels in the market. So there's variance, as you mentioned between regions, that Florida has been a winner, Houston has been a winner, and other places have not done as well. It's interesting that you also pointed out that in the recovery, you know, the several year recovery from the GMC, right, that it was New York, San Francisco, Los Angeles, Houston, you know, the big six that had really the great run up in values, and the rest of the country was at a much more muted game. We think that it's that second tier market that is gonna have the great, at least here in the immediate future, an macro trend of the big six urban centers, interestingly Dallas and Houston are not in the official list of the big six. So the good things happening there weren't included. The secondarily that urban versus suburban, even within the both in New York, I mean, Greenwich has done much better in the pandemic, relatively better in the pandemic time than it was doing before. And demand for houses in that leafy, first ring suburb has gone through the roof, you know, the urban setting has suffered. Now, it will that continue, I don't think anybody really knows the answer to that. It's about societal tastes and preferences. And this is where the real, real estate level volatility comes in, right? That anybody that says that tastes and preferences haven't changed, and are not gonna stay changed through the at least the intermediate term, just isn't watching very carefully. It's this variance within subtypes, that, you know, these boutique office buildings here in the, you know, our first string suburbs of coconut Grove, are getting rents 20, 30% higher than proforma.

- Let's make sure I remember that office rents are up in coconut Grove.

- That's right.

- That's it.

- So playing itself out in office, play itself out in multi-family. And in multi-family right that, you think about that classy apartment building in New York that's close to kind of the financial offices and, you know, private equity firms, that office had a, that, excuse me, that apartment had a ton of utility to it's renters, because it was a five minute walk from the office, right. If people are going to the office, that is, you know, the utility of that apartment has gotten out. Now, it will probably recover. The question is how often are people going to be working from remote locations? I don't think we know the answer to that yet. You know, in a collaborative business where like, you know, that we're in, I think that people are going to largely return to the office, and maybe, you know, the fact that we're doing this right now, allows us to collaborate. Saying that demand is not gonna be changed, I think is an ostrich with its head in the sand moment, that when was the last time in economic history that there was some wildly productive, technological leap forward that caught on with a bunch of the population that actually was reversed? And as far as I know, the answer is never. And so that, you know, I think about my mom who's is 80 plus years old, and she does internet shopping. Without the pandemic, she would never have done internet shopping. The omni-channel thing that the change, winter of retailers have adopted, Target, Publix, you name that kind of change winter list. They absolutely have those retailers to deliver omni-channel at a location and to fulfill both delivery and return, from that location is actually become a critical factor in the value of the location. And that as technology has increased in terms of bringing my mom into buy her groceries via the web, that the real estate is actually gone down, as a percentage of the, let's call it all of the inputs to the production functions. Real estate has actually taken, then, you know, had to give up some of its room to add for the technology. And the fact that my mom is doing that, is I think indicative of a sea change in the way we need to think about making real estate successful, right? What are we going to have to add to make it work for the tenants, such that they can work for their customers, having flexibility and having the ability to put your hands on the real estate, which I think is really so impressive about your guys' list of customers, which I did a little bit of researching before we signed up.

- Of course.

- And it is dominated by companies that are high capability, experts in their product type, experts in their local communities. And, you know, their insists middle-sized, often, let's call it family owned company that's super experts in their arena with development skills, leasing skills, you know, property repositioning, all these kinds of different skill sets that are not just those of a financial nature, are what are gonna be required to... These are the things that are gonna be in demand, much more so than the finance, because you guys democratize words. And so...

- That's right.

- That the ability to bring capital to the table in different formats is much, much, I think underappreciated, in terms of the way it's going to change what skill sets are really the most important. Cause changing the real estate and adapting the real estate to an accelerated rate of change, is really the key factor that investors need to be focused on much less so than the ability to raise skill capital. Cause in an environment where there's like lots of variants property to property, region to region, sub market to sub market, doing big portfolio deals, that's not a rising tide floats all boats environment. That is a hyper-specific, very idiosyncratic type of investment profile, that if you don't have the boots on the ground skill set to do that, you know, you're operating at a significant disadvantage, because you've got to go and hire it, and bring the entrepreneurial and that's gonna be bad. You guys just change our ability to raise equity capital center.

- Yes, and it allows you, the entrepreneur, the expert, the real estate expert to pay more attention to, you know, the value, add value creation in this case of the brand new development, and, you know, because it's harder. It seems like it's harder with this variance and volatility. And so like, you know, to have, you know, real estate owner operators, developers and co-sponsors, being able to focus more of their attention on creation of idea of a business plan, therefore creating value and then executing on that. Designing a strategy, executing on that strategy, implementing that strategy and then going full cycle to sort of realize that on behalf of your investors and yourself, you know, that's a lot harder than it used to be given all of this change, you know, accelerated by 2020's shifts. But really this was accelerating anyhow, it's a great partnership for us. We need that. We need to find groups like you, you do so well. And hopefully our solution, our platform sort of take some of that burden of fundraising, managing investors, you know, it takes that up. That's what makes a great partnership, with growth brings something incredibly valuable to the table. With that Justin, it's been a great script, great interview, great conversation, really just learning from you and hearing your insights and your stories, so thanks.

- All right, thank you for having us. I have Leon and thank you for the great success.

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