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Personalizing CRE: A Conversation with Mike Ablon of PegasusAblon (Part 2)

Listen to the second part of our conversation with Mike Ablon, Founding Partner of PegasusAblon, as he and Terry discuss the future of mixed-use and multifamily. Mike shares how the challenges of inflation and e-commerce can be met on the national level and how well Dallas will fare. The two also share their separate perspectives on how a prime mixed-use development is built… to stack or not to stack uses.

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Transcript

Terry Montesi: Today, I finish my conversation with Mike Ablon, founding partner of PegasusAblon, and he shares his thoughts on the future of multifamily and how we can meet the challenges of inflation and eCommerce. We also get some insight from Mike about his commitment to the city of Dallas and what he sees for the future of DFW and the economy.

Shifting to some current issues and getting your perspective on how to think about some of those, like inflation like we haven’t seen in decades, supply chain and it’s impacts on real estate and inflation and consumers, eCommerce which provided such headwinds and uncertainty in retail, but today we think we have a little more understanding of eCommerce long time, as you think about some of those, in what ways do you think the real estate industry needs to respond and innovate to meet some of those challenges? And how are those things impacting your thought process today?

Mike Ablon: I think I sat next to you at a couple lectures where people were talking about what they call disruptive or disruption, disruptive technology. And let’s kind of put a couple pieces on the table and then sort them out. One is evolution never stops. We hope it doesn’t because the day it stops, we’re in trouble. Modernity, modernism, technology, evolution, that is going to only change and morph and accelerate. So, whether it’s national or global, commerce direct to the consumer is an intersection of an age-old industry and modern technology, just like Uber is the intersection of transportation and new technology, short term rentals is the intersection between housing and technology.

Another way to kind of ask the question is at the intersection of a retailer and technology, what happens? That is a beautiful thing. It’s called modernity. It’s called evolution. It happens more in urban environments than it does in rural environments. And it will proliferate. That is a personal opinion. And I don’t think it’ll slow down.

So, the first thing about retail is I think it’s going to become more integral into the sharing economy. And a statistic to go with it by example is I’m going to pretend Terry has two cars at his house, and the average drive time of either of them is almost never more than 4%, which means 96% of the time, if Terry has a house and cars, assume he doesn’t have a lake house and no boats, but Terry has a house and cars, that’s his second largest investment, and it sits idle and it’s a depreciating asset for 96% of the time. That is a really bad use of money. But even that, it’s unsustainable. So, the sharing economy, how do we use resources so that instead of wasting 96% of that money, there’s another way where you pay somebody every time they pick you up, but in mass total, it’s probably 50% less expensive. So, you’re going to see retail join the sharing economy more and more, whatever that means.

And the second piece I think you kind of queried about was the state of the union, so to speak. Where are we at in the economic cycle, the market cycle, inflation, our money supply, printing of money? Our M3 is the greatest it’s ever been in our history relative to size. The hard part there is trying to figure out what’s temporary and what’s long term. Is it supply chain disruption exacerbating? And when that gets sorted out, do we kind of normalize back down? Or is this the brave new world? God, there’s indeterminate variables on that one. That’s a gambler’s bet. And so, I’ll leave that one for Sam Ware.

But I think the things that you and I watch, the things that you and I are dialed into, and we’re trying to figure it out, and our colleagues are doing the same thing and we’re trying to share with them and figure it out is where are we in the state of the union in terms of economics, inflation, supply chain? What is temporary? What does temporary mean? What is permanent? What does that mean? And how does that adjust, not just our customer, how does it adjust our financing? What we can build, how we finance infrastructure, who owns, what an investment in real estate’s supposed to look like. And again, the sharing economy, what is it people want? It’s always, Herb Weitzman always says over and over, it’s about the sales, it’s about the sales. Where is the market that people want and where is the market they need? And not just the perishable consumerables, but the rest of everything that makes up our life that we get through retail.

Montesi: In answer to my question, you raised about 20 other questions. You normally are not shy about opinions. I didn’t get hardly any opinions in that, so I’m deeply disappointed.

Ablon: Ask away; I’ll answer them.

Montesi: I’m deeply disappointed. Okay, so I’ll ask you. So, to follow up on that, what lessons from the past or opinions might you have as we think about what we ought to be doing, how we ought to be thinking about this moment in time from a real estate ownership, operation and investment perspective?

Ablon: Well, the number one lesson I think both of us has learned is no matter how much cash you have, you don’t have enough. Can we get an amen, brother on that one?

Montesi: Yes, amen brother. You can. So, liquidity is a good thing right now?

Ablon: Yes. And when you have a difficult time, the variables that turn bad compound upon each other. And so, when it’s good, it’s really good. When it’s bad, it’s really bad. I’m not saying I think it’s going to be really bad.

I think what’s going to be fun for us, for you and me, is historically, I’m going to use the word Wall Street as a broad bucket for money, Wall Street decides what it understands. In the nineties, Wall Street had a three-way agreement with retailers and developers. They all sat down at some mythological hotel at a bar, and they all decided that they had a formula for power centers. We’re going to put a book something, an electronic something, a pet something, a shoe something, a furniture something, what am I missing, Terry?

Montesi: Oh, some inexpensive value fashion something.

Ablon: Exactly. And they all agreed that if you-

Montesi: A home furnishing something.

Ablon: Perfect. Let’s go with that. Now we have our power center.

Montesi: That’s the power center. We just outlined one.

Ablon: Yeah. And Wall Street would finance it because the developer would build it because the retailers would rent it because everybody thought it worked. And once they all came to agreement, we stamped that out across this country like a machine. We had done the same thing with urban suburban malls in the eighties, and we’ve done the same thing with grocery stores in the seventies.

So the question I have for you, for me, and for all of us is what’s the – and I used the word agreement because there wasn’t an agreement, it just kind of works that way – in the 2020s, what is it that we all look at and we all go, ah yeah, that’s it, the customer wants it, the financial investors want it, the banks understand it and want to backstop it with their debt, and the developers want to take the risk to produce it? What is that common form?

And one of the great innovations of the last cycle was the common form was something called lifestyle. I watched you on some of your projects. The interesting thing about lifestyle is it’s actually not a plan. It’s a strategy. Whereas a grocery anchor was a plan. They all looked this same. You could draw the plan. Lifestyle was about customers that led to a lifestyle of living, not an exact plan like the old mall or the grocery anchor. The question is what is the abstract strategy or the plan that’s going to get agreed on? I don’t see it yet. And that’s kind of interesting, isn’t it?

Montesi: So, there you go answering my question with another question. You’re good at that. So how can I entertain an audience without actually taking much risk and answering any questions? All right, okay so I’m going to shift to Dallas, a place that I know you’re deeply committed to. In fact, you ran for mayor in 2020. So, I’ve got a couple of questions. First, to follow up on the macroeconomic cacophony of questions that we just had, not answers, assuming we both agree we’re likely to have a recession, neither of us know how deep it’ll be, but we’re likely to have a recession, how do you think Dallas will behave in this recession and why?

Ablon: Well, first of all, for all the listeners, it’s a lot more fun to answer a question that’s not asked and then not answer a question that is asked than to follow the leader. The first part of the answer to your question is it’s an interesting piece, and again, I’m talking about Dallas. If you take Dallas and you do a pie chart and you break it up by industry and you color code the wheel by industry, this is financial services, et cetera, et cetera, and then you overlay on top of that the same pie chart of the United States as a whole economy, you’ll find them fairly parallel, that they’re fairly diversified. So then one of the things that’s important for Dallas, it is highly diversified. Usually, an entire economy doesn’t go down. Oil and gas goes down or financial services, but it doesn’t usually have a cataclysmic collapse all at once. So, Dallas as an economy is going to be fairly insulated.

Another thought that’s rarely mentioned, Dallas has the youngest average age of any large city in the United States. When you have that, it tells you two things. First of all, talent migrates, and those without talent have a much harder time migrating. So, the high growth of Dallas leads to a much younger age, which means a diversity of talent. And that also means that they’re more fungible and flexible. So not only is Dallas, from a general economic standpoint, probably a little more fortified, but if it gets into it, it’s also flexible as a labor base.

So generically speaking, Dallas is as insulated as one might hope to be. You’re never outside of the world you live in, so you’re going to be affected. We saw that in some of the past recessions where Dallas was one of the last to go in and the first to come out. I know I’m from Dallas and I’m proud of it. But that is a mathematical fact that I do love bragging about.

Montesi: You do. And so, I’m going to stay on Dallas and then we’ll wrap up. And if you have any questions to ask me, I’ll give you that opportunity. Dallas, I know, like I said, you ran for mayor. You’re committed to Dallas. So, some of the big opportunities and sort of future bright spots you predict for Dallas and biggest challenges you see for Dallas.

Ablon: Well, first, thank you for asking me about Dallas. Bright spots: When you and I got out school – I assume we both finished school. I’ve never shown my diploma and I’ve not seen yours, but let’s just go with that for a second.

Montesi: That’s the story we both tell, Mike.

Ablon: It is, so let’s keep going then. If you wanted to get into acting, you went to LA. If you wanted to get into music, you went to Nashville. If you wanted to get into finance, you went to New York, or you went to the rust belt to go into industrial manufacturing. The world has shifted. Now, when talent comes out of school, they decide where they want to live, and then the jobs follow them. So, people don’t go to the jobs, the jobs go to the people.

So, the way you grow your economy is you build a really fantastically interesting city with a diversity of 31 flavors, so that everybody’s favorite flavor is there. And you build the infrastructure there, the connective tissue, whether that’s parks, trails, music scene, bar scene, whatever it is. And then the talent comes and then the jobs follow. Amazon HQ2, which everybody alive in America followed because they couldn’t get away from it for that relocation, that was never about incentives. It was never about money. Amazon was just looking at markets to see who had the best labor base for what they were looking for. The way you grow your economy is you create a really interesting place that’s affordable with a great future. That bodes well for Dallas. That bodes not as well for some older cities who are not as capable in the moment.

Again, Dallas is a hundred years old. It’s not two hundred, well, it’s older than a hundred, but really modern Dallas is a hundred years old. It isn’t as constrained as other cities. So, Dallas has a bigger opportunity. That’s a bright side. If you look at the not good, just factually, Dallas is a financially stratified city. Dallas is, just fact wise, a largely racially segregated city. I personally think both of those are places where you’ve got to focus. You’ve got to improve. You want to improve.

And I would like to see SMU expand and University of North Texas, and Texas A&M just opened a law school in Fort Worth. Highest education, one of the things you learn the most when you live in Boston and you go to school up there is there’s 27 universities, and a couple of those flags are top shelf in the world, and that is why their bio tech and that life sciences is explosive there right now. I think the statistic is there’s 30 million feet of life sciences under construction in Boston.

Higher education drives higher paying jobs, and higher paying jobs raise the average of the person, which means the net sum math of all of it is higher income to better tax flow, which means more services, more safety, and better cities. So, the more we build, Dallas and Fort Worth, all of us, universities and top education and research top education, like we have at UT Southwestern, the better our 20- and 50-year cycles are. And that’s really what you’re looking for. At least that’s what I’m focused on. I want to build for 20 and 50 years from now.

Montesi: Well, I want to commend you for giving answers to my questions just now and not answering my questions with questions. So, speaking of answering my questions with questions, Mike, I’m going to ask you a question. What question do you have for me, if any?

Ablon: Okay, this is going to be fun. First question: I have never heard you sit there that silent before. I was a little concerned about your health, but you’re still talking, so it’s okay. So, let me ask this question, which answer did I give to one of your questions or kind talk about that you see differently than I do?

Montesi: I’ll address one because we’re squarely in the mixed-use business. I believe more dense, walkable places as opposed to more spread-out apartments next to a shopping center, next to an office building with a parking lot. When I first started studying new urbanism, that guy drove me around, he was such an interesting guy. He drove me around. He said, “Let me show you the example of why we need new urbanism.” And Mike, he drove me over to a church with a big, huge parking lot, right next to an office building with a big, huge parking lot. On the other side of the church was a school with a big, huge parking lot. He’s like, “So Terry-” And to walk from the school past the church, past the office building, say to get an ice cream is a three-quarter mile walk, and the parking lots, two of the three of them were empty half the time.

If we had the ability as a society to say, okay, school and church, one’s empty when the other’s full, let’s share a parking lot and use less land and have less parking lots, it would be more sustainable, more environmentally sustainable. And it would be better because you’d have more density which created more walking and less need for cars, et cetera.

The uses next to uses thing, I tend to want to think so much about shared parking, less parking, and using that to create more walkability. And that does require sometimes stacking uses or at least sharing parking and having things be tighter together. And I think that is more of our future than the things next to things. So, we have a little bit of a friendly disagreement there, although you’ll probably say no, I really agree with you, so we really don’t disagree.

Ablon: I generally agree with you. I had to push the conversation a little bit away to kind of get to the point. But yes, you’re talking about vibrance here. Are you familiar with a gentleman named Jeff Speck? He wrote a book called Walkable City.

Montesi: I don’t know him, but yes.

Ablon: Yeah, he was a colleague of mine in school. And he wrote another one called Walkable City Rules. His name is Jeff Speck. So, for people listening, he’s got a couple good books out there that actually not only talk about it, but he diagrammatically kind of codified it. And again, that’s not saying do it like this, but it kind of gives a feel for what we’re really talking about. And I do respect your perspective on that very much.

I’ve watched people in Dallas build retail on the first floor and then office on floors six through twelve, and then put a hotel on top of that, and then put condos on top of that. And almost across the board, I’ve seen them struggle for trying to do too much. But yes, I applaud it. And the one thing we haven’t talked about that’s important to me right now, the single largest policy move that a city can make right now in terms of how it affects the built environment would be to completely remove-

Montesi: Parking requirements.

Ablon: Completely. And go to a parking by demand instead of parking by code. And I think it’s time proven, and here’s the proof: Montesi isn’t going to go build an office building without a parking lot because he can’t lease it. He wouldn’t even get that far because he can’t finance it. The market will self-govern, and it will reduce it to the right number.

And the only pushback you ever get is what about neighborhoods? And you can address commercial next to neighborhoods in a way that you don’t blow up the streets and street parking on those neighborhoods. And that will affect urban form more than any other policy change in the most productive, whether you talk about economics, ecological, the joy of life, the interest of cities, that is the big move right now in my mind that we’re not taking.

Montesi: I agree. Well, Mike, I appreciate your time greatly. That was a fun conversation. It’s always fun to talk to friends. Mike is actually on our advisory board, and I’m proud to be his friend and proud to have him give his observations relative to Trademark and how we can make sure we sustain our business. And he is certainly a challenger and agitator, and I love that about him and that makes him a great advisory board member as well. So, Mike have a great day. I’m very grateful to you for your time.

Ablon: Thanks for having me. Thanks for letting me be part of Trademark. Thanks for letting me not answer your questions. It’s always fun to be with you and not talk to you. And I look forward to doing or not doing this again in the future. This is fantastic.

Montesi: You got it. Thank you very much for your time. Have a great day and a great summer, Mike. I’ll see you soon. Cheers.

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