Focusing on the people

Tomasz Szpyt, ‘Eurobuild CEE’: Golub is well known for developing office towers. In the two decades you’ve been running the firm, have you seen any differences in the way skyscrapers are built?

Michael Newman, principal, president and CEO, Golub & Company: I can’t speak technically, but in terms of doing business what we have been seeing evolving is that people want to build tall because structural design now allows us to do this. We think that cities are interested in having more open space, and building tall gives us that bit more freedom of space at the ground level. I’m really talking about urban centres in developed cities like Chicago or Warsaw. We’re seeing a lot more interest in building tall and thinner versus shorter and bulkier, because tall buildings permit a lot more light to get through. Sometimes people look at tall buildings and have issues with them, because taller to some people is not always better. But it does allow a more open feel in comparison to the bigger, blockier, boxy buildings that had been built in previous cycles that weren’t tall because people didn’t want tall and so they ended up having a bigger mass. Streetscapes seem to have improved. We’re seeing a lot more retail on the ground levels, which adds some more vibrancy to the street life. In terms of skyscrapers, we are seeing many more taller, thinner buildings. But what we’re seeing is that there’s been such an influx back to the cities and to urban centres all around the country and across the world, where the younger or older populations that had been living in the suburbs or outside the city now want to come back to the vibrancy of such cities as Chicago, Warsaw and New York. But when it comes to skyscrapers in general, we’re seeing much more building going on in the cities. So for the last few decades we’ve been seeing more modern designs and more modern amenities as the phenomenon of people moving back into the city centres give added impetus to such an approach.

In my opinion the hottest markets are in Asia. Don’t you want to invest there?

It’s interesting that you say that. We are a Chicago-based company. We haven’t limited ourselves just to Chicago, but this has been very much on an opportunistic basis. Doing development is hard work. At Golub we do both development and we acquire existing assets and fix them up, so it’s not that everything we do is ground up. We went on our first trip to Central and Eastern Europe in 1989. We were in Berlin a few weeks after the Berlin Wall came down in the November of that year – but they were still chipping away at the wall we then went on that trip to Poland. We partnered with the Epstein studio, which is also Chicago-based but that has had a business in Poland and throughout Europe for many years. They thought there might be some opportunities in Poland to do real estate development, which had never actually been done in a Western way up to that point. We started our first building in 1991. One of the things that our chairman Eugene said was that if we were going to come here and figure out how to do it, we’d have to make a long term commitment to the region. Poland, well, Warsaw was our first market, but we certainly expanded later throughout the region. To make a commitment like that for a company like ours, even though we do bigger deals, you need a lot of capital and a lot of patience. But we’re an entrepreneurial real estate company, so we source the deals but need other people’s capital to invest the primary equity. For a company like ours to be spread so thin in different markets is very difficult. When we went to Poland initially, the worry was: where were the tenants, where was the equity, where was the debt, who were the contractors that architects could work with? Who actually were the Polish people? Where was the expertise in Poland? Because we couldn’t just bring American concepts over to Poland. We had to bring a combination of US and international style that fitted into the Polish market and culture – that blending was very important for us to do, even in the knowledge that it was going to be very different to what was already there. So that’s what we did.

Eugene and I visited Asia a couple of years ago, more to look at the real estate there rather that to do any deals. And we found that over the years, the time and the intensity and the capital needed to do development has become tremendous. If we were to go into new markets like Asia or South America, we’d have to be there for the long term and have the capital to be able to do it – and that takes years. When we work on a project in Chicago it takes years before we start seeing any kind of return. Most people don’t see all the years of upfront work that is necessary before the building starts getting built – and then it takes another two years before it’s finished. For our organisation it’s very difficult to do all that in multiple locations at multiple times. As interesting as Asia is from a long-term growth standpoint and from an evolving quality of product point of view, it hasn’t been something that we’ve pursued.

Golub & Company is currently working on the conversion of Tribune Tower in Chicago into condominiums

What are the most important factors in the success of a real estate business?

The main thing about real estate is that it is a very people-oriented business. We’re in a sense manufacturing buildings, but each product and each deal is unique. We’re not building tables or chairs. We have to focus on the people side of things. Possibly for a lot of other sectors this is also very, very true. But for real estate it is especially so, from the financing of the projects and then designing and developing them, through to working with local residents and government officials. The capital needed is clearly very important, but before you can even get to that the question is, what is it that you’re building? What is it that you are bringing to the market? Where’s the need for it? Why are you doing it? Many people build apartments or offices. How can you differentiate what you are doing as a product? It’s very hard to do this, so we try really hard to look at what intuitively makes sense to us and whether can we do something that’s just a little bit different. We were one of the first to go into Central and Eastern Europe to develop Western-style buildings. It didn’t necessarily matter where the building was at the time. Now it matters more where the building is, the type of building and what you are bringing, as there’s more supply on the market and obviously things have evolved quite a bit over the last 25–30 years in Poland. Do we have some kind of vision for creating something in a new place? Or are we in a market that’s stabilised and become a mature market? So then the question becomes, can we do something that’s a little bit ahead of the curve?

The credit crunch in around 2008 is still fresh in our minds. But what stage of the cycle have we now reached? Are we back at five minutes to midnight?

We get asked about this a lot. Being real estate people we remain optimistic, but we’re also very cautious, because we work in a long-term business, so each product that we bring to market takes, as I said, years. I guess we have to say, by definition, we’re later in the cycle, because the cycle has been strong, particularly in the US. Since the last crisis ended there’s been nothing but an upward trend, although Europe has remained softer and weaker. Poland, as we know, is rather unique in Europe, due to its strong growth, which is a good thing; but when we talk about Europe in general a lot of people lump Poland together with the rest of it, which is a challenge for us. So I think we’re definitely later in the cycle, but even if there’s a slowdown we don’t think that the ramifications will be nearly as dramatic. When we got involved in Poland in 1989/91, one of the reasons was because things were very slow here. Certainly Central Europe wasn’t a market that people were even thinking about at the time. But that was one of the reasons we got excited about it, because perhaps we could do some development there when no development was happening back home.

So, in baseball terminology, we would probably be in the seventh or eighth inning, but maybe there’s another game to play. I think that the part of the cycle we’re in is going to be dictated by macro world events. There are certainly a lot of challenges out there. The uncertainty that Brexit is generating is not good, just like the uncertainty in the US and in Poland. This is probably one of the biggest difficulties when it comes to attracting capital to deals. The slowdown after 2008 in real estate was mainly due to the oversupply. Now we’re seeing a lot less leverage. The deals we’re doing now are not high leverage – and it was this that hurt a lot of people in previous crises. So the distress caused by a new slowdown shouldn’t be the same as far as the lenders are concerned. They’ll still be lending. At the moment the loan-to-value ratios is about 60–65 pct, which is by no means extreme, so there’s still a lot of equity in these deals – and much of that equity has become more patient, because of the lessons learned during the crisis. I was going to mention that we’ve already seen something of a slowdown in the States. We are seeing some yield differences and we’re not seeing investors going super-aggressively after the core properties. Certain ones are, but there’s still a lot of capital out there to do deals. This capital wants higher yields and it’s not necessarily as aggressive as it was two, three, four, five years ago when it comes to buying property. So with this slight slowdown in transactions, someone like us might sell for less than we had hoped or we’ll refinance. We’ve seen a lot of that in the last couple of years.

What are the rates right now?

Prime buildings could be in the range of 4.5–5 pct.

Like in Warsaw.

Like in Warsaw, so Warsaw is unique, as I was going to say. In Warsaw we’ve sold buildings that are the equivalent of the top buildings in the States. And I think people in Poland and in particular in Warsaw understand there’s long-term continued growth potential, which is very strong. There could be political changes, but Poland has a certain stability that’s been attractive to us for a long time, and it has a high quality, young population. Our entire office there is entirely Polish – an entire team of phenomenally talented people

Can you reveal some of your future plans for Poland?

We’ll continue to look at office product, as this has been our basic business from the beginning. But for some time now I’ve been wanting to bring high quality private rental sector style family projects to Poland and to Warsaw. Now we are finally starting to look at doing this. But it’s been difficult to gain general market acceptance for such projects. People were actually shocked by the first Western-style buildings that we developed in Poland, such as the Warsaw Corporate Center and the Warsaw Financial Center. It was almost as if they were too high quality was. The question was, could they be embraced by the local tenant market? A lot of the early deals we made were with Western tenants, but eventually many Polish companies wanted to take up space in the building.

They are still good buildings now.

Yes, they have stood the test of time and we’re proud of the fact that they are still regarded as quality buildings and market changers. I want to do the same for residential and multi-family residential, for rental and for the very concept of rental. There are only a few buildings in Poland like this. To us it’s so strange that in Poland so many people rent but generally from individual owners. But I could point out from my window in Chicago dozens of residential buildings that are rented out. The market in Poland will change. Just like the office market did. In Poland we brought the first Western-style property management to office buildings to service their tenants. We are going to do the same for rental. We’re working on student housing as well. If you’re a student there’s no reason why you shouldn’t live in a community with other students who share your interests, in an environment that’s fun to live in, as well as with the comfort of being there with no stress or hassle. That’s our goal for the multi-family rental and for the student housing markets.

Is technological change difficult for a developer to keep up with?

In some cases, yes. You really need a whole different kind of expertise to be able to figure out how to proceed. The first stage of this evolution involved the amenities. Typically these were business centres, gyms, maybe a pool. And that kept evolving. We called this the ‘amenity wars’. Each new building had to have more than the next. Now we’ve tried to shift the focus onto creating more of a community – the spirit within these buildings, so that if you’re in it you’re there by choice. You can buy a condo or rent an apartment, and in both cases you are renting by choice. So how do you get people to engage in this kind of way? Well, most of them do actually want to be engaged. We’ve talked about the changes in skyscrapers over the years, but when it comes to residential buildings, one of the major changes is that most of the units have become smaller. You’re living in a smaller unit because it costs less money. You’re renting less space, since it’s getting more expensive to rent and so developers have been shrinking the units. But the tenants are fine with this. Why? It’s not just that it costs less money, but they also have the amenities. You’ve got a fitness club in your building. You’ve got activities you can do and not just by yourself – they can also involve socialising with other residents. And they have dog runs. I don’t know what the statistics are in Poland, but it’s almost like every young person in the States has got a dog.

What do you think will be the main direction real estate takes in the next few years?

We are going to see the service side evolving, which has generally been the best developed in the hotel segment. In every category of hotel, from three-star to five-star, all you generally have to do is walk in through the front door to the person at the front desk, go to your room, stay there a night or two, and then you leave – all the services you need for this are provided. We’ve also seen that level of services evolve over the last ten years with residential – and condominiums in particular. And that phenomenon of bringing hotel-standard services to rental is something we are now seeing happening with offices, where yoga rooms and gyms have also been appearing.

Twenty years at the top

Michael Newman has served as Golub & Company’s chief executive through two decades of significant growth in the US and abroad. He has played a leadership role in multiple significant development, acquisition and financing transactions during his more than 35 years in the real estate business. He personally oversees, initiates and manages the firm’s relationships with its many institutional and private capital partners, lenders and joint venture partners. Michael’s straightforward approach has influenced every facet of Golub & Company’s business and shaped its success. He continues to guide the company as he and the other principals welcome a third generation of family members into the business, while continuing to expand the firm’s development and investment platforms. Michael joined the company in 1984 and also serves as the managing broker for Golub & Company LLC.