What are the needed change agents in retail real estate and where should we go from here?
In part one of this two-part episode, Trademark CEO Terry Montesi talks with his good friend Jeffrey Bayer, CEO of Bayer Ventures and Founder of Bayer Properties, about his journey into real estate and founding Bayer Properties, as well as what he learned and what he would do different if he were restarting his career today. Jeffrey and Terry share what they see as current retail trends, the role of newer and growing suburbs in the future of retail real estate and how retail needs to evolve moving forward.
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TRANSCRIPT
Terry Montesi: On today’s episode, I speak with Jeffrey Bayer, CEO of Bayer ventures. He shares his business journey into real estate and the founding of Bayer Properties, as well as his recent decision to step away from focusing on the day-to-day operations at Bayer Properties to develop a business innovation center in Birmingham, Alabama. We discuss his thoughts on how retail and mixed-use have been impacted in the last year and how the retail industry needs to innovate to meet the challenges of ecommerce.
So, Jeffrey, good to see you, my friend.
Jeffrey Bayer: Nice to see you.
Terry: What a beautiful day it is here in Dallas and Fort Worth. And just really thrilled to get to visit with a friend of mine, Jeffrey Bayer, today, who was a perceived competitor, I guess, in some folks’ eyes for years, but he and I have, we converted that to a really good friendship. And so anyway, I’m thrilled to have my friend Jeffrey here and talk a little about what he’s learned and where he sees things going in the retail, mixed-use, and real estate business.
Jeffrey: Glad to be here.
Terry: Thanks. So, Jeffrey, why don’t you start by telling our audience about your background and how you got in real estate, your journey of founding Bayer properties and how you got into retail and then evolved into large mixed-use projects.
Jeffrey: I came into the real estate business, Terry, totally by accident. I graduated from the University of Alabama, went to Vermont, skied, was a ski bum for a while, came back, was hitchhiking back to Birmingham, stopped in Atlanta, borrowed a friend’s suit, went to the Hyatt hotel to interview. They were starting their first executive training program. They moved me to Texas. You probably know this – the hotel industry then, maybe still today-
Terry: And who was “they”?
Jeffrey: Hyatt hotels, notoriously poor pay. But I was meeting all these young 20-year-olds in Dallas and Houston and driving the nicest car, staying in the nicest apartments, and they were all in real estate. I said, man, I am in the wrong industry. So, I ended up, long story short, going back to Birmingham, working with what then was a large developer for a city of that size, fell in love with it, and that became my career. But all because of what I’d seen in Texas – as you well know, this attitude of we can do anything, we can do everything, there’s no such word as can’t. I loved it.
Terry: That’s great. So, when did you found Bayer Properties and why did you start it? What was your original thesis and how did it evolve into what you ended up doing?
Jeffrey: I came back to Birmingham and went to work for a predominantly office developer, spent 10 years with them, it became obvious that I needed to leave. Started Bayer properties with a gentleman from New York, but he was busy running companies, and I was there and started it out of the basement of our home – I might add the unfinished basement of my home – and started a brokerage company. But some friends from Atlanta, guys that founded the Shopping Center Group who I had met along the way, said, “You’re making a huge mistake. You need to get out of the office market. Go into retail. You’d love it.” And so again, by accident, I ended up doing that and became a tenant rep, opened up an office in Birmingham, was really the first retail tenant rep in Alabama, and it just developed from there.
Terry: And so, when did you start Bayer Properties?
Jeffrey: I think it was 1983, 84.
Terry: From tenant rep, you got into development of retail centers, I’m aware of, and then into retail anchored mixed-use projects. And anything to add about how you ended up migrating into those?
Jeffrey: Well, I always had this notion that I wanted to control inventory. If you were going to have any chance of perhaps accumulating some semblance of wealth, you needed to own real estate and not just be a fee-for-service broker. Although, I enjoyed that. So, I did my first 25, 20,000 square foot shopping center, neighborhood center, and then did a second one, and then did a third one. And then was doing work for Home Depot, and there was this great site—I thought it was a great site – but it was complicated, too big for them. And a fellow who became a dear friend with Home Depot said, “You need to go try to buy that site.” And so, we put it under contract, luckily, and that’s then what became a project called the Summit Birmingham. So, I had done three 20,000 square foot shopping centers-
Terry: Before you did the Summit?
Jeffrey: Before I did the Summit. And I can tell you most certainly I had no clue what I was doing, but it became a large outdoor, what was called, as you remember, lifestyle center and then some, and then, started really developing more and more.
Terry: Wow. So, when did you start working on the Summit?
Jeffrey: I believe it was ‘92/’91 and opened in ‘97. So, just a big project.
Terry: And continued to evolve.
Jeffrey: We did it in phases, which was part of the plan.
Terry: Over decades.
Jeffrey: Yeah. Part of the plan. I didn’t know any better. I just assumed that why build something so large that you had to fill it up with a lot of people? If you could finance it in such a way that you can do it in phases and build into the momentum of the market, it made sense. It worked out that way.
Terry: And who owned that land?
Jeffrey: It was owned by three gentlemen. And they had had it for years-
Terry: A local group?
Jeffrey: A local group, a guy that owned a restaurant. Three Greek men, one was a lawyer- both were lawyers, and they were his advisors. And they didn’t know what to do with it, and I didn’t either, but somehow, we struck a relationship and we figured it out.
Terry: And how many acres?
Jeffrey: 165.
Terry: That’s a big deal. So, I know over the last couple of years, you stepped down from day-to-day leadership of Bayer properties, and you’ve been working on a number of things, including something in Dallas, but I know you also were working on a business innovation center in Birmingham. So, tell us why it was time to move on and do something different.
Jeffrey: Well, I had been doing it for 45 years, 35 years as Bayer Properties.
Terry: You started in the business when you were 11?
Jeffrey: I did, Well, actually I was 9.
Terry: A child prodigy, yeah, I’ve heard that.
Jeffrey: It had been 35 years as Bayer Properties, started with John, but he was in New York. And so, I was there. It was hard. Brokerage company, did a little development, tried to grow it, went through a lot of ups and downs in the market, jump forward to ‘08, ’09, a terrible time for all of us-
Terry: You and I have talked about it two dozen times.
Jeffrey: I spent four years, maybe, working through tens of millions of dollars of personal guarantees trying to save properties. It wears on you, as you know. The goals of partners change. I became older. My partner became older. We brought in another partner who had been with us for some 20 plus years. So, goals change. Built a business from zero square feet, to whether it was 10 or 12 or 15 million, depending – small for a lot of people, but it was big for us.
Terry: Big for you and me.
Jeffrey: Yeah, it was big. And then we went through about five or six years of not developing much at all as we worked through the Great Recession. And then, two projects presented themselves, large projects for us, one in Lexington, Kentucky, and a very large department store in downtown Birmingham that had been vacant for 25 years. So, two large mixed-use projects that were tough, very challenging, caused a lot of angst, at least to me. And my youngest daughter, who you know, Lindsey who was at Open Reality, for those who don’t know a very specialized tenant rep firm here in Dallas, loved the company, loved the people she worked with, but spent 11 years just constantly on the road. Lindsay came to me and said, “I really can’t do this anymore. I don’t have any private life. I’m constantly traveling. What about working with you?” I loved the idea. Not everybody at Bayer Properties loved the idea, but we jumped into the project. One of the great things that came out of it is that she and I had a terrific time working with each other. Towards the end of the project, she had met a man who worked for Herb Weitzman, was a very dear friend of his, and they wanted to start a company together. They married, wanted to have a family, and so she asked me if I would consider working with them. There was not a future for them at Bayer properties. I was close to 70 years of age, and I decided if I’m not going to do it now, when would I do it? And I loved working with her. So, it became obvious. It was the time to do it. And so, I’m not really working with them day to day, but I’m helping them. They call me their senior advisor, which you know, comes with old age. So, it’s been fun.
Terry: Great. So, I’m particularly interested in how you would summarize some of the key lessons you’ve learned from your last mixed-use, all your mixed-use projects, but certainly your most recent mixed-use projects. And if you were starting those today, what you might do differently?
Jeffrey: Well, I’ll answer you like this: In our industry, and I’m sure many other industries, I think we’re guilty of a new concept comes along, and it works, and then a second person does it. It started with the malls and then went to power centers, went to lifestyle centers, then became mixed-use. And one size – as you well know because that’s the business you’re in today, even more so than ever – one size really doesn’t fit all. But talent and money rushed to them. And then there’s this notion you can do it anywhere. So, what probably started in Boston or New York, where there’s the density, spread to Baton Rouge or Birmingham or Memphis.
Terry: Or Lexington, all those places.
Jeffrey: Lexington, wherever it might be. And what was an urban concept now becomes a suburban concept, and you don’t have the same density and risk increases. And one of the things that always did surprise me is that mixed-use becomes complicated. You’re stacking uses on top of uses. You’re building parking. It becomes very expensive, and with that expense then you have to generate high rents, and those high rents can’t be paid by everybody. So, then it becomes, to me, it’s become a concept – and I’d be interested in your take on this – it becomes a project for the affluent. And then everybody’s trying to create projects for the affluent, and we tend to leave others behind. So, I think a lesson for me, not specifically about Lexington, is that you just have to be so careful where you put these projects because they cannot go everywhere. So, I’d be interested in your thoughts on it.
Terry: Yeah, so regarding that, we’ve taken over some projects in smaller and mid-size markets that didn’t work for the original capital stat. You know some of them, you mentioned one of the towns earlier, Baton Rouge. And as we look at mixed-use going forward, two things: We are focused on larger markets, and we are focused on less retail. Many of the mixed-use projects we look at, the public spaces and all of the ground plane, not the retail and the ground plane, are as important as the actual retail on the ground plane and that the retail and the ground plane for the future mixed-use projects we’re contemplating will be much smaller. The public realm, sidewalks and public spaces, won’t necessarily be smaller, probably will be larger – larger outdoor seating, larger public spaces, but less retail. And so, retail as amenity in mixed-use projects; it may be not an economic driver. Whereas when you and I were active, developing these projects from, say, mid-2005 to 2015 or something like that, the retail was a significant economic driver, and many was the primary economic driver. And today that retail’s place has been taken by primarily multi-family.
Jeffrey: As we all know that are in our business, we are so over-stored in this country by five or six times what our closest competitor is. We’ve reached that day, except I do think there’s something potentially happening in the market that will bring greater stability, but we can talk about that in a minute, but I look at the mixed-use as becoming a product type for the, as I said a moment ago, the affluent consumer. You agree with that?
Terry: Not necessarily. I believe most everyone in this country, and probably other countries, I just am not as expert on other places, but I think most people in this country like walkable places, like think about great public spaces, great parks, great sidewalks, great play areas, adults and children. So, I don’t know. Certainly, more of the mixed-use projects built in the past have been in higher end areas. I see a Sprouts with multi-family on top of it as a very successful potential mixed-use project or an ATB store with multi-family on top of it. Those don’t have to be in real affluent areas. Now, they may not go in what might be called poor areas, but certainly where consumers have dollars to spend, including middle-class and upper middle class, not necessarily affluent areas. I think people still want walkability, they want amenities, they want public spaces. So, I think the idea of mixed-use will become a little less about lifestyle tenants, a little less about anything approaching luxury tenants, and more just about mixing uses in a way that improves people’s lives and includes public spaces and includes a place to go get their groceries, get their hair done, which people of all economic strata have to do.
Jeffrey: Yeah. Well, I agree with all that. As I think about when I use the term, it’s geared more towards the affluent sector of the population, is that to me, the residential becomes a little bit more expensive because it costs more to build. And not everyone in the middle class can afford what others can afford. So, it’s not just the retail. The office becomes expensive, so the rents push up. So, to me, it’s a very expensive product type that’s developed. And as I look at the ones that we were involved in, the rents for the residential were top of the market. They had to be; they had to be. So, you weren’t as broad in your appeal to a larger segment of the market.
Terry: Yeah, but I would also, I would say it completely differently – when the rents have to be higher, but the rents are justified to be higher because they’re more interesting, more convenient places to live that have more amenities, and they are more walkable to more things, so people are willing to pay higher prices, because you can’t simply raise your price because your cost was high, The market doesn’t necessarily, they don’t have to pay it.
Jeffrey: Doesn’t reward you for it, necessarily.
Terry: Now they pay it if it’s an interesting place to live, and it’s a convenient place to live, and it’s highly amenitized.
Jeffrey: To answer your question, perhaps, what would we have done differently, something that you’re now doing, as I understand that you and I talked about a month or two ago, is controlling the components of what goes in. In Lexington, we had a terrific multifamily developer that came in at the appropriate time after we had been through all the entitlement work and all the planning and made it easy, and they come in and built a nice product.
Terry: They probably made as much or more money as you did.
Jeffrey: And they exited very quickly, at a cap rate that was unheard of, and I’m happy for them, but there we sat. So, and the coordination of it, as you well know, because I know you’ve done it with other third-party developers-
Terry: It is extraordinarily difficult.
Jeffrey: So, why not control it? And as I understand it, that’s what you now have done.
Terry: Yeah. We’ve been in the multifamily business for a month.
Jeffrey: For a month? Mazeltov.
Terry: Yeah, thank you. We wish ourselves good luck. And we hired a young man named Chad Collie, who we’re very excited about and has hit the ground running. So, Jeffrey, do you have a perspective on how the retail and mixed-use business has been changed and will be changed by the pandemic and which aspects of those changes might survive longer-term?
Jeffrey: Well, I think you have to ask yourself – and look, you’re current in the business, I’m not – but you have to ask yourself, I think, what are the components going to be going forward, at least for the next, nothing’s forever, but what are the next couple years? I mean, how much office are you going to include? Where is the office market? What type? I was going to say, what shared office space user are you going to bring in? If any. What’s the hospitality sector going to look like? I know there are new uses coming in, but my question would be of someone that’s active day-to-day as you are, what are the components? Especially with retail being lesser square footage, shrinking. So, what do you do with them? If it’s a larger size piece of property, what do you do with it all, at least for the near term to maybe the intermediate term?
Terry: Yeah, Jeffrey, I’ll share with you our current thinking. As we look forward, and we’re working on several malls right now and several outdoor projects that need to have the retail rights sized or downsized, and we’ll have the type of locations that will benefit from adding other uses and have demand for the other uses. And so, I think one thing we’re thinking, for instance, like you mentioned office first, so we don’t think that we will do no office development, but we think it will be different. It’ll likely be shorter buildings, buildings where you can potentially walk to your office. When you design those buildings, you’ll have wide and maybe more staircases than normal. There won’t just be exit stairs. There’ll be entrance and exit stairs. It’s a very different design mentality, right? So, we think people will walk up to four levels, particularly if you have a really cool looking wide, safe, interesting stairwell. I think the demand for post-COVID wellness centric office, like I said, more walkable office, office that may have operable windows and let more fresh air in, I think that that type of office will be in very much demand because there’s not much of it out there. So, I think the office will be quite bifurcated. And in many markets, the multifamily is really the use that can drive the most value and, oftentimes, is the use that’s in the greatest demand in the sort of more retail locations. Industrial is another product type that is very in demand, but it rarely overlaps location-wise with retail. So multifamily, I believe, will be in demand and will make a lot of sense in a lot of places where there’s retail downsizing happening. And the retail that will either get built or will survive, and we’ll start with what’ll get built, is we think it will be primarily F and B grocery daily needs, boutique fitness, and very little fashion or retail new space. Now, there’ll be some for the cool kids that will want to be in these sort of mixed-use places, but that amount of retail compared to what it would have been back in the lifestyle center days, it may literally be 20,000 feet or 30,000 feet of retail as of retail, as opposed to there might’ve been 250-300,000 feet of fashion – a small fraction.
Jeffrey: Well, let me ask you a question again – you’re supposed to be asking me questions, but I’m asking you.
Terry: This is fun.
Jeffrey: Coming out of the pandemic, we have all been cooped up. I have this sense that I don’t know how many more months, weeks, or days women can continue to wear Athleta wear. We’ve taken-
Terry: Or Lulu Lemon, all that kind of stuff.
Jeffrey: Well, just as a generic clothing type. We’ve had no cultural events. We’ve been to no galas. We’ve done nothing.
Terry: You’ve got dust on all your sport coats, like I do, I’m sure.
Jeffrey: And as most of us age, we can’t continue to wear what we used to wear perhaps.
Terry: Not in your case because you’re an extraordinarily fit guy, but in most people’s case.
Jeffrey: And we know that women for years, fashion has changed. So, what’s the likelihood that we may see an explosion in women’s fashion?
Terry: I think women’s fashion, or all retail, etc., but fashion – women’s and men’s fashion, because nobody’s bought anything to speak of the last, what, 14 months or something like that, 13 months – I do expect that there’s going to be some pretty significant pent-up demand that is going to start showing up soon in markets as vaccines really get to a place where people start feeling more comfortable coming out of the house, places where the numbers are getting low and staying low. And in like Dallas Fort Worth, for instance, where we sit, the numbers have been getting low and staying low. Now they’re not getting lower. They’ve kind of flattened, but they’ve flattened at a low right now – you and I both want them to get lower before we want people out celebrating. But I do think there’s going to be some pretty significant pent-up demand. Now that’s not permanent though. So just like we’ve had this short term 14, 13 months, hopefully it doesn’t go very many more months, that was a short-term shutdown in demand for fashion. And I think that the resurgent explosion, that word you use in fashion, it won’t be sustainable. But we’ll probably have a very interesting Fall and holiday season this year. I do think it’s going to be a powerhouse year.
Jeffrey: We took things for granted. We had fallen into lifestyles, perhaps, where even though we weren’t doing what we used to do, I just have a sense that maybe some eyes perhaps have been opened and that fashion will become popular again, maybe not for a sustainable long-term, but perhaps longer than just the short term or that season. I mean, a lot of people have learned and seen what they truly miss. It may change.
Terry: Going to concerts, going to restaurants. I do think, for the most part, that people will go back to most of their habits. And most people that love live music, they’re going to be back in the live music business. They’re going back to concerts, to small venues. People that love going to the movies, they’re going to go back to the movies. So, I do think there’s going to be some strong pent-up demand out there, which we’re excited about.
Thanks for tuning into today’s episode.