Mike Balaban- Urban Development Impresario (#15)

"Buy good real estate and pay market rate for it with a differentiated plan to create value" Mike Balaban

Bio

Michael S. ("Mike") Balaban is a 40+ year real estate executive who has led several local enterprise initiatives as well as perhaps over 100 investment and/or development projects in his wide ranging career. Growing up in an ethnic neighborhood in Philadelphia, PA he gained perspective of a diverse urban environment early in life that influenced his outlook toward both urban design as an architect early in his career in Boston, MA and subsequently in both acquisitions and development since moving to the DC area in the mid 1980s. After a stint with WRIT (now Wash REIT) in acquisitions, he led the DC area office of Lowe Enterprises for almost 20 years, developing landmark projects including 601 New Jersey Ave. NW and City Vista. He subsequently advocated his "Urban Suites" concept through his venture with SB Urban (now Saul Urban) and later at J Street. Below are the Show Notes that cite links to his relationships and projects.

Show Notes

High Level Overview of Career

• 40 Yr. career- optimizing with skills to align with others (3:15)
• Architecture- Add Inc. (4:20)
  • New England Life as a Facilities Planner/Architect (4:30)
  • Co Headed a Development Services Consulting firm (5:00)
• After Wharton, worked for WRIT (WRE) (5:30)
• Acquired a property for WRIT that was redeveloped by Lowe Enterprises (6:20)
• Joined Lowe in 1994 and ran the office for almost 20 yrs. (6:45)
• Co Found SB Urban- Small unit furnished short term rental apts. (7:05)
• Condominium projects with J Street as a developer
• Continuing to develop those experiences

COVID 19 Reaction and "What's Next"

• Transition strategy emerging from coronavirus issues (9:30)
• Markets busted in several periods
  • Early 1990s (11:00)
  • 9/11 issues (11:45)
• No question that "economic and urban forces" will drive demand for Metro once again (13:20)
• Big picture- all resources that worked in the past, but will rebound profitably just as the "busted markets" in the past
• Wouldn't use the word "blip" in the market- thinks it is a glib expression (15:35)
  • This will be stronger, but the long term trendline will be recovered eventually (16:15)
• Two prior major "busts" were 1990-94 and 2007-12
  • 1990 crisis was driven by individuals who were hugely impacted by the markets (17:40)
  • 2008 crisis impacts "pools" of capital, not individuals as much.  More resilience in this crisis than in the early 90's (18:15)
  • Current crisis not driven by real estate or capital supply issues except for exogenous demand issues; however, the resilience of the market will reinforce the trends for urban development (20:30)
• Trend toward more flexible office uses and smaller amount of space per person will continue due to economic drivers as opposed to health concerns (22:30)
• The world will not go backwards (24:30)

Family and Educational Background

• Origins created his attitudes- Ethnic neighborhood in Philly (Jewish neighborhood) (25:30)
  • Neighborhood "vaguely" suburban, yet urban in character and "closed" (26:40)
  • Compartmentalized in the "Bustleton" neighborhood (27;20)
  • Diversity thinking derived from this environment (27:50)
• Father was a "controller" for a company that produced vinyl flooring (29:15)
  • Sandura Corp. (30:00)
  • Pilot flew in WW2 in B-17 dropping bombs and had nightmares from it (31:00)
• Two siblings who sought opportunities to break away
• Kenyon College- best college the furthest from home (graduated in 1970) (32:55)
  • History Major- Architectural History with Prof. Wolfe, who invited him to dinner and inspired him to go to architecture school (36:30)
• Harvard School of Design- How buildings fit into landscape
  • Professor Zolton- "Go from the general to the particular and from the particular to the general" (35:30)
  • Evolution to real estate (39:00)
• Wharton- learned about profit margin
  • Two "38s"- Was 38 years old and got into Wharton from 38th percentile on GMAT- he was very challenged there. (39:30)
  • Met future boss, Frank Kahn, CEO of WRIT, there through, Bill Zucker, a professor (41:15)
  • Taken by WRIT's approach (41:50)

Real Estate Career Trajectory

• First job in DC- WRIT (now WashREIT) was the 2nd equity REIT started in the early 1960s (42:30)
  • Class B and C property portfolio acquired with the mission to buy "cheap" and below replacement cost and manage it aggressively (44:45)
  • Frank Kahn believed that "cheap basis" was the most important thing in owning real estate
  • Mike's view is that the most important thing is the best location with some difference from the current quality and the future quality of the property (45:40)
  • Disagree with the idea of making money on the buy…buy good real estate and pay market rate for it with a differentiated plan to create value (46;15)
  • Kahn saw that Mike had a view of value creation with good fundamental location bias (48:10)
  • Kahn's successors have trended toward minimizing the "cheap buy" thinking, but now look at value creation more (49:50)
  • Kahn was a "mean old SOB" but was an exception to the rule of "good people" in the DC real estate market (50:45)
    • Believed that buying cheap and "winning" from the seller (52:30)
    • WRE stock had grown 25% per yr. during Kahn's leadership over 25 yrs.  (52:50)
• Lowe Enterprise's philosophy completely different than Kahn- Quality of life oriented and good people (53:45)
  • Acquired Mont. Village S/C while at WRIT from Lowe and an institution and met Marc Dubick, then the project manager at Lowe and Jim DeFrancia (54:50)
  • Met Ted Leary of Lowe Enterprises Investment Management who hired him in 1994 (56:30)
  • Evolved to Lowe Enterprises Mid Atlantic together with Marc Dubick (57:15)
  • Eventually became a national operating platform (57:50)
  • Very profound change from WRIT to Lowe (58:30)
  • Began in acquisitions and then toward development (59;10)
  • Pension Fund clients- Lowe was service provider on behalf of funds for investment and then development (59:40)
    • Fairmont Bldg.- Old Georgetown Rd., Bethesda, MD- First deal was a 120,000 s.f. vacant building, which became a "redevelopment" and repositioning (Hickok Warner & Davis Construction).  Sold upon completion and lease up (1:00:45)
    • Air Rights Center- Bethesda, MD- Acquired in 1996 for repositioning from NY Life after it had been foreclosed upon in the early 1990s. $105MM in cash with pension client with no debt and invested $15MM in capex. Sold in 2002 for approx. $160MM. (1:05:40)
    • 601 New Jersey Ave.- Ground up office construction in 1999 brought by Jim Alexander in a "challenging" part of the city at that time.  Leased before delivered to Federal Trade Commission.  All of the mortar joints in brick masonry were defective- concrete was defective. Davis Construction stepped up and replaced it all for no additional costs (1:10:10)
    • Acquired Chevy Chase Pavilion
    • Phil Carr promoted "Wax Museum" site at 5th and K St. which Lowe pursued to build City Vista together with CIM as partner with Bozzuto leasing the apartments and McWilliams Ballard selling the condos.  (1:17:30)
      • DC was under construction with new Convention Center
      • CIM together with Lowe invested in pre-development costs with PPP leases and arrangements with the DC Gov. (1:24:00)
      • CIM had a high preferred return to overcome to achieve promotes for Lowe, which it did accomplish (1:24:30)
      • Project absorbed beyond expectations during the 2008-10 downcycle. (1:25:30)
      • $260MM project (1:26:25)
      • $140MM of loans arranged by Walker & Dunlop
      • Sold retail to Edens and Avant and apartments to Gables (1:27:30)
    • Washington Hilton Hotel with site for Hepburn Apartments in 2009 (1:28:25)
      • Venture with Lowe Hospitality, Canyon Johnson Funds (1:28:50)
      • Base building renovations to Hilton hotel
      • Hired Beyer, Blinder and Belle as architect
      • Residential development was focus for Mike's group locally
      • Hotel group managed hotel renovation
      • Canyon Johnson sold the pad for the Hepburn Apts. To a new JV with Lowe and another capital partner (1:33:00)
      • Hepburn has the highest rents/s.f. in the DC area (1:34:30)
  • While at Lowe, Mike devised the concept of a small unit furnished short term apartments (he calls it "Urban Suites"), but could not gain internal support to execute (1:35:00)
• Decided to leave Lowe in 2013 to join with Frank Saul to start SB Urban (1:39:40)
  • Acquired and redeveloped "The Ampeer" a retrofit of a former women's club on Dupont Circle- Mike started it, but was finished after he left (1:40:30)
  • Two other sites were acquired
• After leaving SB Urban, Mike pursued opportunities on his own and then joined J Street to develop two condominium projects

Current Opportunities

• Now looking at seeking office buildings that could be retrofit into residential uses that conform to his small unit short term furnished unit strategy (1:43:00)
• Pressure to accelerate the office market trend that with more people working at home (1:44:40)
• Buy good property with a great locations (infill settings) that has the potential to be a quality mixed use development project will produce superior returns and opportunities that may not be seen up front (1:47:00)
• Multi-disciplined well resourced agile view of the world supported by resilient fundamentals to make future investments (1:48:45)
• Potential that fewer people might be as attracted to high density locations due to health risks potentially.  Mike agrees that this is possible, but in the long run, he still believes that infill development will keep its value growth. (1:49:45)
• Secular changes in retail is evident.  Believes that excellent retail practitioners will prevail.  Cites that retail changes in the latter half of the 20th century were significant and that they have evolved since then primarily due to the internet. (1:52:30)
• Adam Ducker (RCLCO) introduced Mike to Chris Leinberger of GWU who reinforced Mike's view of infill development and density (1:55:50)
  • 2% of land mass of great metro areas is truly developed as "dense" areas (1:57:30)
  • Enormous opportunity to expand that land mass and create value (1:58:00)

His Advice

• Be grateful for the ability to contribute to the environment and meet with people and organizations (2:00:00)
• Gratitude is the driver for all his relationships and the opportunity to give back (2:00:32)
• The Golden Rule "prevails"- Treat people like you would like to be treated. (2:02:00)
• Sixth Grade Teacher told Mike to "Do the right thing because it's right" (2:03:50)

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