The New 9-to-5: Exploring Today’s Office Asset Class with Michael Dardick of Granite Properties

On this episode of Leaning In, Michael Dardick, Founder and CEO of Granite Properties, speaks with host Terry Montesi about the past, present and future of the office sector.

They explore the performance of office assets and their resilience in critical U.S. markets. Additionally, Michael sheds light on Granite’s work in flexible leasing and how his commercial real estate company remains dedicated to an employee-focused approach.

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⁠Granite Properties


Terry Montesi: Welcome to Leaning In, a commercial real estate podcast hosted by Trademark Property Company. Join me, Terry Montesi, CEO and founder of Trademark, and other Trademark leaders as we talk to industry experts about the future of retail, multifamily, and mixed-use real estate. Thanks for checking us out. And now it’s time to lean in.

Today it’s my pleasure to welcome Michael Dardick to our podcast. My friend Michael is the founding partner and CEO of Granite Properties, a privately held commercial real estate investment, development, and management company. Under Michael’s leadership, Granite has completed more than $8 billion worth of real estate transactions and more than 29 million square feet of real estate development and acquisitions primarily focused in the office sector. As a member of the Granite executive team, he focuses on the company’s overall strategy, growth, capital relationships, and culture. Today, Michael will talk about the stability of the office sector, its performance in key U.S. markets, and the shifts seen by this asset class in the post-pandemic era. We’ll also talk about Granite’s focus on its employees and Michael’s own focus on building successful community partnerships. All of that and much more with my friend Michael Dardick. Thanks for listening. Let’s lean in.

So, Michael, if we read your LinkedIn bio, it shows you went from college grad to real estate lending officer and then right into real estate development. I’m guessing the story behind that journey is a lot more complex. Tell us about your journey into the real estate industry and how Granite Properties came into existence.

Michael Dardick: Well Terry, first of all, thanks for having me. You know I’m a big fan of you and your firm and think you do a great job with these podcasts, so thanks for including me. Look, I was a finance guy coming out of college, and when you and I came out of college, we really didn’t learn anything about business. We just took finance classes. And so, I decided to go into banking to learn about business. And honestly, I grew up with a Depression-era father who was an entrepreneurial guy because he didn’t get to go to college. And so, I didn’t really think I’d be a big public company guy, but I was super excited about going to work at a bank and learning about business, three great foundational years, great long-term network of people that are still around the industry.

And then one of my clients called after three years and asked me to do what I wanted to do, which is to come over to them as a developer and be a finance guy. And it was kind of a funny conversation. These are always funny to think about in hindsight. I was like 24 or 25 and didn’t have a girlfriend, wasn’t married, lived in a cheap apartment. And they said, “Hey, we want you to come over and be our finance guy.” And I was super excited. And they’re like, “There’s only one issue.” And I said, “What?” And they’re like, “Well, we can’t pay you.” It was kind of a funny conversation because I didn’t freak out. What they said was, “Hey, we just cut this partnership deal with this California company that does auction marketing.” Now remember, this was ’86, ’87. The market was getting ready to get bad. And they said, “Why don’t you just kind of figure out that partnership and figure out how to pay for yourself, and we’ll get these developments going.” And I was like fine.

And turns out, of course, ’86, ’87, the developments never happened. But in hindsight, it was awesome. I learned how to deal with cold calling and selling, and it was a really, not what I would have gone over there for but a really great experience. So, same time, market crashing, some guys I had done banking with before were at another bank and they asked me to come over and start a foreclosed real estate department. That tells you what the times were like. And another awesome opportunity to start a group and I grew up our asset management and disposition. It was my first time, it was at Texas Commerce Bank which became Chemical, Chase, the whole J. P. Morgan, ultimately.

Anyway, I just learned about growing a business and hiring people and managing people. And then I got lucky. A high net worth family from out of town saw that ’91 was just a great opportunity to enter the real estate business. And so, we started the firm together, Granite. And honestly, it’s not too dissimilar from the times today, which I’m sure we’ll get into further.

Terry Montesi: Yeah. ’91, same year we started Trademark. Yeah, it was a good year. It’s been pretty good to both of us. So, the stability of the office sector in commercial real estate is one of the big overall stories this year. I read one headline this summer, commercial real estate will crash harder than during the Great Financial Crisis. Is the media getting this right on the office story? Or are they getting it wrong? Where do you see the office sector going the next, say, couple of years? And I know you are close to it because I’m hearing a lot in the capital markets about office. So, what are you hearing about the office sector and the capital markets? That’s a big question.

Michael Dardick: Yeah, a lot to unpack there. So, first of all, we do believe the media is directionally right. We think we’re headed for difficult times, but look, none of us know exactly how this thing is going to play off. What’s the old saying? History doesn’t repeat itself, but it rhymes. So, we’ve been through, Terry, this is your and mine fourth or fifth of these. So, there’s just several different things happening at the same time, which I think makes it a little confusing. So, I’m going to kind of jump through some points, and then hopefully we’ll get to an answer. But the most significant is just the Fed raising interest rates as quickly and as high as they have. I think it’s gone up 525 basis points over 18 months so it’s historically fast. So, cost of money going up is a big, big issue.

And then that’s intentionally caused credit availability to become scarce. And both these moves are by the Fed. They’re intended to reduce inflation by slowing the economy down. And it’s working. Inflation’s gone from nine to three or whatever it’s done. Whether that results in a recession is unknown, but we all know the desired result is a less robust economy. I mean, that’s the Fed’s goal. So, when you combine the cost of money going way up and reduced availability, it creates a big math problem for a capital-intensive real estate business.

The other thing I would say that is confusing, and I love this term, I didn’t make it up and you’ve probably heard about it, but we’re living in what’s been described as a VUCA world, V-U-C-A, which stands for volatile, uncertain, complex, and ambiguous. So, kind of when you look around the world, you go, okay, Russia-Ukraine war, China-U.S. relationship, immigration situation around the world, climate issues, AI disruption. I could go on and on and on. It feels very VUCA. It feels very volatile, uncertain, complex, and ambiguous. Businesspeople don’t like uncertainty. And it’s hard to believe us human beings get everything right in that kind of environment. And then the last piece I would throw out is that the other really difficult thing happening is directly related to officing and that’s kind of the pandemic changes to work habits.

So, in conclusion, media is directionally right. I think there’s going to be a lot of loss and pain in the real estate business. One thing I would say, I know we’re going to talk about office, but this isn’t just about office. I mean, multifamily has great demographic tailwinds but lots of deals were done at cap rates and return on costs that are significantly below floating interest rate debt and/or investment return. So this is a, and I think you started this question this way, it’s a commercial real estate problem more significant for office but broad.

So let me talk about office. See, I think you asked about the next 12 to 18 months or so, and I want to break it into two parts. It’s kind of the way we look at the business. Kind of what we call the space markets which are fundamentals and the capital markets. So, on the space market side, we think the next 12 to 18 months, it’s kind of a moderate leasing environment while continuing what we would call a slow recovery towards in the office, which I know we’ll get into more.

I would make one comment. When we step back about the in the office or out of the office, and this was within six months of COVID, this was our conversation here, if you act like an anthropologist, we just have felt the human animal is a social animal, and they like to be together, they’re more creative and more productive as a team. And so, it never really was in our worldview that we would end up in a fully remote workforce. We didn’t actually think it was the best solution for the company or the individual. So that’s just an aside I’m sure we’ll come back to. And I think what the media may be getting wrong on the space market side is we feel like they’re using one paintbrush to describe all office as doomed. And we think it’s a much more nuanced picture. There are really stark differences in product performance driven by location. When I say location, state, city, sub-market, micro-location, and quality of assets. So, we’re seeing a limited amount of best-in-class office that’s actually doing somewhere between well and very well on the leasing front.

And then at the other end of the spectrum, a lot of office may have a highest and best uses land value to be repurposed. So those are quite different pictures. And yet the media isn’t really differentiating. They’re just saying office is bad. I’ll throw out a provocative comment that I would love to get in the conversation with you if we have time. I think office may be going through its retail moment, which you’re quite familiar with. And I think when that was happening, it was also nuanced, but it wasn’t painted that way. As retail went through its metamorphosis, it was all bad, and yet you and I know there were pieces of real estate that did just, or retail that did just fine through that So then moving from space markets to capital markets, we’re going to go through a really difficult repricing that’s just math based on the Fed moves I mentioned earlier. The institutional capital markets are pretty much risk off for office right now, almost closed, and even the ones that you start to have a conversation, they don’t want to talk to their investors about office.

One of our key capital relationships stated to me very succinctly, no one wants to take an office deal on the investment committee. I mean, it was literally that simple. And remember, these guys, these institutions, they have large existing office portfolios that are worth a lot less than they were two years ago. I will say this, I’ll end on the capital markets around office, it does feel like contrarian, risk-oriented capital is getting ready to jump in. We’re seeing some green shoots in the private capital world that we think smells opportunity in all this disruption. That was a very long answer. Did I cover what you wanted to cover?

Terry Montesi: Yeah, we have time. Yeah, so stay on office, capital markets, investor views. The office asset class as a CRE investment class, where do you see it? Is it dead last? Is there any class below it? And from everything I hear, of the big asset classes, it seems like clearly the least attractive. Is that fair or unfair? And do you see, like you mentioned it being bifurcated, do you think at some point, we’ll be talking about A-plus office may be ahead of retail or some other one, but every other kind of office, B, C, and less, which is like land value, may have to be recategorized because that’s a really interesting thing that’s going on all the way around relative to office and the bifurcation. And like you said, retail was behind the other three big classes, seems to have jumped office for sure. But what are your thoughts?

Michael Dardick: 100% agree. I think it’s fair to say that institutional investors would rate office really low on their investment choice right now, and I would tell you, you can’t forget that it’s driven by three factors. One, certainly uncertainty about the office recovery, but also they got legacy office portfolio issues and higher interest rates in general have afforded really good returns on other product types. So, the pricing, we do have somewhat of a pricing issue, and once that gets solved, you’ll start to see flow and sellers capitulating, and we’ll find the right pricing, and that’s the start of the recovery. But right now, for sure, I think it’s very low on their list.

Terry Montesi: Yeah, and don’t you think that is in good part not just because of interest rates but because of what the pandemic has done and how they view the risk in that particular category? It seems like they just, there’s so much uncertainty around where does hybrid office end up stabilizing and then what is that going to mean to office demand, shrinking, work from home, hoteling. Give us your thoughts on that. It’s really risk profile of office. Has it changed in investors’ eyes?

Michael Dardick: Well, for sure, there’s still my first comment about why it’s low in their choice is uncertainty about the office recovery. And I think, like we talked about media, I think the general direction of that comment is accurate. I think it’s very accurate that we don’t have clarity. I would say this from our perspective. So yeah, some believe the future office is still uncertain, and so they can’t invest with confidence. And so, I wouldn’t argue that.

What we do believe is we have enough of a sense of where it’s going to make intelligent investment choices. So, I think the real issue during this type of time is when, when do you get in? Is it too early, the whole falling knife thing? We don’t really know. I think I would deposit a couple things. One, I think we think when the Fed stops raising interest rates, which feels like maybe we’re close to that, I didn’t say give back interest rates, they stop rising, that’s probably peak pricing returns. That moment is probably peak pricing returns because if you believe they’re going to come down on the other side, then returns will come down with it. And so, look, we have a really tight filter of what we want to own going forward because of all the conversations we’re having.

And so, we’re kind of inclined to buy it when it’s available if we think the risk pricing’s reasonable. And our view is, and reasonable is in light of alternative investments. So, it’s got to have a return associated with it. But our view is real estate’s a long-term investment. So, we do not get caught up in trying to call the bottom exactly. So, if you go back to, will peak pricing be when the Fed stops raising interest rates? If that’s close to right, then we feel like we’re close to the time. And again, we have a really tight filter. So, if one of the things we really want to own comes available, because we don’t think it’s going to be easy to get those, we’re inclined to hit the bid if it makes sense. But institutional capital is not.

Terry Montesi: Yeah, you’re not far off the low price. I get it. I’m going to stay on that for now. I’m going to stay on that for now. So you’ve been in the business 35 years plus, seen a lot of changes in how office real estate is developed and operated. What do you see as the most dramatic shifts in the industry that you’ve seen? What role is technology playing and where do you see the next trends in office?

Michael Dardick: Yeah, it’s a little bit, at a high level, I’m going to say old is new, and I don’t mean age of product. I mean kind of what’s been changing. You know this, this really started years ago before the pandemic, and office went from just being a place you go to work to a company realizing, hey, this could be a critical tool in the employee attraction and retention engagement equation. And if you do a little math as a businessperson, usually on somebody’s P& L, the number one expense is people and real estate is like number three or four. It’s like 10 to 15% of the cost of people. So, it’s an intelligent business move that if I think I could spend a lot of money on something that’s 10 to 15% of the cost of my people, that’s real estate, and I could create a great place to work where people are excited, that makes economic sense if it moves the employee meter because it’s my number one cost. So that’s the old is new because that’s still going on.

This began with an amenities race, and it’s evolved to large open lobbies with great food and what I like to call a pedestrian experience. It has energy and excitement and options. Almost think of it as an urban street inside the building. People like being around other people.  This goes back to the anthropologist thing. And they like the smell of food and they like kind of some of the retail placemaking stuff you do. You add in upgraded workout options, golf . Youlators, outdoor working environments, wellness. It’s really just taking it to the next level. I’ll conclude with what you get out of that. But I would also say I think technology’s moved this to where it’s more towards convenience and services, kind of a hospitality mindset. So, anything we can do that makes your daily life easier that you can get in and around the office. This really gets to if the workplace can facilitate an easier, happier life than your home environment, well, that puts a leg up on companies having their employees feel flourishing when they’re at the office and they’re there because they can take care of a lot of things.

And so going back to kind of a silly one that I think’s not necessarily silly when you back away, a golf simulator. Well, you could say, well, that’s ridiculous. My people are going to go down to the golf simulator room and hit balls. Well, I would say, who cares if my greatest employees want to take a 45 minute break. In 45 minutes, they can play a whole course. They can feel great about the fact that they’re working on something they care about, their golf game. They get an emotional break. And they’re back at the boss’s immediately. They didn’t have to go anywhere to do that. I think that could be a win-win, even though at some level, it seems silly. It’s a golf simulator. So that gets to the services and conveniences, making my life easier and happier.

Terry Montesi: Granite focuses on doing business in just seven markets, Atlanta, Boston, Dallas, Denver, Houston, Nashville, and Southern California. What’s the strategy for focusing on these markets? And have you seen a difference in performance from region to region?

Michael Dardick: Yeah. So first of all, we’ve always believed the office building business is about, excuse my French, butts in seats. It’s about getting people in occupancy. So, we’ve always been hyper focused on population in job growth markets because that delivers people to offices. And as a result of that, and this has been the history of our company, we’ve chosen to focus on high growth Southern markets. The old lingo for that used to be smile states, Southern California down across the South over to Florida. Boston is an outlier for us, but we love the talent that MIT and Harvard create, and we also had a really large, unique opportunity.

So, as to the just seven markets comment, we’re super- we believe in focus in everything we do. And so, the number of markets we can be great in at any point is really just a choice. Like, how much can we do and be great? As to markets and differing performance, I would say Atlanta, Dallas, Denver, and Nashville have remained relatively strong, again, directly related population job growth. I think listeners on this may be surprised that Houston’s been very strong. And if you actually step away from the media noise about Houston and look at the population and job growth numbers, they’re still top five job growth in the country, as they always have been. Different conversation about the economics of that leasing, but there is demand there. We actually, our portfolio, we’ve leased over 450,000 feet in the first six months of this year. Really, really robust leasing. Again, difficult economic, but good demand.

SoCal has been just okay, not as strong, but leases happening. And then I would tell you Boston, man, it’s been really impacted by the tech pullback and not just office, life sciences too. It’ll come back. I think that’s a volatile industry. We’re already seeing tech come back a little bit, but it’s been really impacted in the short term.

Terry Montesi: Follow up on Southern California because there’s certainly a lot in the media about people leaving Southern California for the states that have friendlier taxes, really friendlier state governance. Do you see that? Do y’all- I’m guessing y’all may have discussed, do we really want to stay in SoCal when the there’s such an exodus to Texas? Have you seen, felt, heard, kind of learned anything around that?

Michael Dardick: Well, first of all, I’ve been schizophrenic about Southern California for 20 years. So, this isn’t a new topic. Secondly, I think the media is right in saying lots of Californians move wherever, other places. What they don’t add to it is that California still has net in migration. So, it’s not as bad a story as the media would say. The first part’s accurate, they just leave out the second part.

SoCal is a big market. San Diego is really, really strong. You could look at the biotech industry, the defense industry, great quality of life, parts of Orange County like Newport Beach are really lifestyle. It’s where you’ve got the smaller individual owned company, high end housing. So, it’s really a mixed bag. If you go to downtown LA, by the way, Terry, we hated downtown LA eight years ago, so the pandemic didn’t change that. We never thought it was a good market. So, I’m schizophrenic about it. I could take the argument about why it’s going to fall into the ocean. I could take the argument about why it’s closest to Asia, got great state schools, great quality of life, blah, blah, blah. So, it’s a tough one. It’s not as easy as the other high growth Southern markets.

Terry Montesi: Even Southern California has, like you mentioned two of the more conservative parts. I mean, even Southern California has a lot of diversity within it.

Michael Dardick: Oh, it’s huge. One other comment I would make about markets that I think this has changed with pandemic changes to officing, we really think commute time has become an important component of office location. And we don’t mean- we mean that in a broad sense and a micro sense. We mean it in terms of city traffic patterns. We also mean it in terms of micro locations and submarkets. And so, we generally believe short commute markets are going to recover faster than long commute markets. And this gets back to the human animal and quality of life and combining life work balance, and it’s just all that stuff. I think it’s more to the forefront after the pandemic.

Terry Montesi: Michael, a lot of market experts point out the radical bifurcation of rents and asset valuations between the A plus office buildings or whatever you might call it. I’ve heard that sort of top tier called three or four different things. And then older, even older, more generic, what used to be A buildings, maybe they’re called B plus plus now, and then B and C office in a whole different category. Help us understand a little more about what you’re seeing in rents, valuations, financeability, marketability, et cetera, between this sort of super elite class of office buildings, new and like the Crescent is one that’s not new, but it seems to be holding its rents as if it were, and then virtually everything else.

Michael Dardick: Yeah, so this is directly the nuanced part I mentioned about the media using one paintbrush and this gets directly to it. So, at the end of the day, we think this simply comes down to customer choice and supply and demand. So, we’re seeing our largest customers, I’m going to say two floors and bigger, call it 50, 000 square feet and bigger, they’re really downsizing a fair amount. So that reduces demand. However, as we discussed earlier, I think those customers believe that the absolute best office will be an employee benefit. And so even though they’re shrinking, they’re moving in the best buildings and paying the highest rents ever, literally the highest rents ever. So that’s why in our view, the best in class buildings are just outperforming. And we’re seeing it in our portfolio. On a related note here, there’s been a lot of reporting around higher TI costs, which is really true in the largest, longest term leases.

So, what we’re seeing is in these great buildings where you’ve got a big customer and it’s going to be really high TI costs, they’re really coming to us and saying, hey, I’ll do a couple of things, I don’t really want to come out of pocket or come out of pocket as much. Give me more TI and I’ll give you a longer lease and I’ll give you higher rents to amortize it. And I would tell you in general, it’s pretty productive amortization for us. It’s not like it’s a negotiation. I don’t think the customers care as much about that rent increase as they do not spending the capital. So that’s the large customer side of the world. So big downsize, generally consolidating, moving to better buildings, happy to pay the highest rents possible.

Terry Montesi: We really don’t care much about the rent because it’s such a small part of their GNA compared to people cost.

Michael Dardick: You go back to if I’m trying to get my people back in the office because I think it helps us be a better business, I’m going to do everything I can on the real estate side, and if I overspend by 30%, it’s minimal compared to what my people costs are.

Now separately, if you go to our smaller customers, less than a floor, there’s been virtually no change in what they do. No change in configuration. They still have private offices. No change in the size of their space. In fact, I would tell you, we’ve probably seen more small expansions than we have downsize. I would also say that the smaller customers are much more likely to renew. We probably have our highest renewal probability in smaller customers the last two years. And I think a lot of that is they just don’t want to go through the cost of moving, the capital costs. Because there is a cost in moving.

So, what I’m about to say about the office building business is very illustrative. It’s not literal. So I’m going to come back to it, it’s just to be illustrative. We kind of think that the top 10 to 15% of the office stock is going to do fantastic. It’s going to have great demand and pricing power. Not it’s going to do okay. We think it’s going to do fantastic – good demand and pricing power.

We believe, and again, these percentages are illustrative, the bottom 50% of the office stock, I’d call this the C buildings and the poorly located lowest quality B buildings, I just think they’re going to need to be repurposed over time. I don’t think they serve a purpose. And then it’s what we call the messy middle one third that we’re kind of uncertain about. So, you’ve got the top 10 to 15, the bottom 50, I’m making these percentages up, and kind of the messy middle one third that nobody really knows about.

And our hunch is that the closer you are to the top 15% in location quality, call this what I would say was before COVID the A minus building in a great market, we think you have a decent chance of recovery. There’s lots of customers that cannot afford or don’t want to pay two times the rent they’re used to paying. But they still have a vibrant business and they need office space. So, I think if I step back, again, those percentages are all illustrative. I have no idea. You’re going to have a shrinking of demand. I think the high end is going to zap up a lot of that. Half the stock’s going to lose all of it. And so where does that other piece go of demand, even though it’s diminished? I mean, think about it. If you diminish the demand by 20%, but you take out 30% of the stock, that’s an okay math situation.

As to valuations, there’s no trading going on, Terry. So I think the markets are very uncertain about valuations. I was in a lunch today where a top broker in town asked us the question, how many Class A top buildings do you think are available in the entire southern United States? It was like seven states. And the answer was four. And the answer is because the great owners, they’re not selling today at whatever pricing because we’re still in this capitulation mode. I think you are seeing, like in Houston, we’ve seen some, I’m going to call them those near bottom 50% B buildings trading for just dollars on the- it’s kind of a penny stock, I’ll give you a 40 bucks because I can make something happen or I’m a user or whatever, but they’re really- transaction volumes are way down. So I don’t think we know valuations, Terry, other than going back to the feds moves and a math problem, it’s going to be ugly for a while.

Terry Montesi: Yeah, but weren’t the capital markets already troubled when you bought the Crescent building?

Michael Dardick: You mean McKinney & Olive?

Terry Montesi: Yeah, John Zogg’s building.

Michael Dardick: They were heading there and that building probably sold at 15% off what expectation was. And this gets to a perfect example of what I talked about, about when you get the building you want, if you can get a good investment and you don’t know the exact timing, you still do it. We literally talked about it and said, things are going to get worse before they get better. We love this real estate. We think the pricing’s fair. And even though, we talked to our capital, we said, this is going to be worth less a year from now than today, but three years from now, it’s going to be worth more than what we paid for it. It’s great real estate. And by the way, a hundred percent lease, weighted average term.

So all this noise in the market wasn’t impacting that building’s cashflow. By the way, since we bought it, we modeled taking rents from kind of mid thirties to kind of mid to upper forties. And we’ve now printed some high fifties in there. And that was less than a year ago.

Terry Montesi: Wow. So that’s another one of those examples, even though, like when did that building open? Was it five years ago?

Michael Dardick: It’s a pretty new building. Our buddy John Zogg built it.

Terry Montesi: Four or five years ago?

Michael Dardick: Maybe six. So new built, new stock, really well done. I call it- it’s one of those buildings, it’s one of the few buildings I’ve ever walked in the history of our company where I couldn’t find something I thought we could improve. It irritated me.

Terry Montesi: Did you tell John that?

Michael Dardick: It was just done so well. I told the Crescent team. It’s just done so well. They did a great job.

Terry Montesi: That’s a great story. Did y’all put- you bought that with Highwoods? Is that right?

Michael Dardick: We did and there was existing debt we assumed.

Terry Montesi: Oh, okay. So you assumed permanent debt?

Michael Dardick: It’s got rollover, but it wasn’t rolling immediately.

Terry Montesi: You had a little time.

Michael Dardick: And very under levered.

Terry Montesi: Okay, and you’re probably glad it’s not rolling yet.

Michael Dardick: Not yet.

Terry Montesi: Okay, but not too far off. I get it. Michael, have you seen any research or gotten feedback from clients regarding the difference in productivity between companies that are 100% in office and the remote work or the hybrid?

Michael Dardick: Well, first, I’d say like a lot of media, the information is all over the place on this topic. So, like our whole tribal world, you can get whatever you want to believe and read as much of it as you want. Stepping back, what I would say is this, about six months after COVID, a lot of the business world was still working from home, and their story was, man, this is working great. And I was kind of curious at the time about some of the forces, like, first of all, people were fearful for their jobs. So, I was pretty sure they were going to work hard. Because of the pandemic, they couldn’t go do anything else. So, they had nothing else to do. And revenues remained at least the same and costs were stable or down, like no travel and lots of costs that a business would normally have.

So, at the time when I would ask our customers, and I did this a lot, specifically about productivity, I would use that word, inevitably, the answer was around revenue, not productivity. It was always answered as, wow, revenues are great. And I always thought, well, that’s curious because I asked about productivity. And it made me believe, my hunch was, they don’t know. And I think as time has gone on, costs have gone up, interest rates, other inflationary pressures. I think people are now starting to question margins, which is code for productivity, and to your point, one of the large real estate brokerage houses recently put out a chart, and that chart was comparing productivity gains three years after a downturn. And they used the S&L crisis and looked three years later, what was productivity, they used the GFC, three years later and productivity, and they used COVID as the starting point for the current downturn and then three years later. The SNL crisis and the GFC, three years after, their productivity was up like 7 to 10%. Right now, three years after COVID, it’s flat.

Now that’s one study, doesn’t mean everything. I don’t know that there’s a lot of good information out here. I will tell you I do feel like from talking to our CEOs, our customers, I think they’re concerned about it. Now, whether they have data around it or not, I don’t know.

Terry Montesi: Yeah, it is, I guess, really too early, too early to tell. Along those lines, I know I’ve talked to you about this, but I think our listeners would be interested. What are you seeing as with the smaller companies, midsize and larger, where do you see the in office work, total remote or hybrid? Where do you see that settling out, and do you see it still evolving one direction or another?

Michael Dardick: Yeah, I mean, obviously nobody knows right now. We’re kind of in this continuum of where are we going. Again, the anthropologists in us would say that some combination of togetherness and then some alone focus is probably optimal for the individual and the firm. And so, we don’t have a crystal ball, but we think more about, do you think people need to be together more than apart? So that would be three days in, two days out at a minimum. Or do you think they’re better off more apart than together? Two days or less in. I think this gets back to, we just think we’re tribal individuals, and if you’re trying to associate with one another, build culture, it feels like you need a little more time together than apart. I mean, there’s no science in that. It’s just a viewpoint.

Terry Montesi: Yeah. Doesn’t it depend on what you do though? Because what we do on the underwriting new developments and designing new developments and ideating for mixed use projects and new developments, it feels like we need to be together much more than a coder. That’d be two very different sort of examples, but it seems like it’s highly impacted by what you do.

Michael Dardick: I think it’s absolutely part of the calculus, but I’m going to answer that this way because I had this conversation with our head of accounting. I said, hey, if your people don’t want to be here because they think they can do accounting sitting at their desk at home as well, business one on one would tell me that’s called outsourcing. Find the cheapest source of that product because there is no connectivity to the firm. It’s just a product, something. And if we were going to do that, we’d go to Malaysia or India or someplace and we’d outsource accounting.

And I said to her, I actually think our accountants are better and they help us solve problems when they’re sitting next to property management and they’re sitting next to leasing and we have an issue or we have an investor that needs something. I actually think our accountants add value because they’re in the office, they know our business, they know people. But if your people don’t think they add value, that’s called a commodity. And so, I don’t know, Terry. I know that coders is the classic thing. A lot of those have a personality type where they like to be in a dark room with screens and they’re not connected.

So I don’t know. I’m really big on, and we may get to this or not, like you are, culture. I think culture affects strategy, affects performance, it affects individual’s happiness. There’s no question about it, we all like to be part of a team. And so, by the way, I’m not being an office homer. This is my view of what’s good for the human and what’s good for the company. I actually think hybrid working is good. So I’m not-

Terry Montesi: Aren’t y’all three and two?

Michael Dardick: We’re four and one.

Terry Montesi: Okay. You used to be three and two. So we’re four and one now too. So, we both believe, at least for now, an experiment of giving people the ability to work at home 20% of the time, we believe that’s at least a valid temporary solution.

Michael Dardick: Well, I’ll bet you were like this. Before COVID, we had flex hours. You could start at 9:30 and work till 6, I’m making this up, 6:30. You could start at 6:30 and work to 3. We were trying to accommodate life while, and I tell people this all the time, we’re not running a playground, we’re running a business and profits are oxygen to a business. And so again, I think there’s a middle ground that’s valuable. I don’t think we know the answer to this. I think we do know the answer that very few people’s are going to be fully remote companies. I’m not going to say very few will be fully in the office, but less will be fully in office. I think the big part of the snake will be hybrid, and everybody’s going to have different ways they do that. And we’re all experimenting with how it works. And by the way, it also gets confused, if you’re in the middle of a recession or if you’re in rock and roll times, those environments for how CFOs and HR work are always different. And so, there’s always going to be a little bit of noise in that.

By the way, one other point about that coder, we don’t have coders. There’s actually been a study done on this, and I won’t get the facts right, but the general direction’s right. People that work from home are less satisfied, that fully work from home. By the way, people that work full time in the office are less satisfied. Hybrid are the most satisfied employees. Which would tell you they value some time together, and yet value the flexibility to run their lives, which is a little bit of a duh. But I can think about the single person, the widowed person, that being home alone is not necessarily great for their mental health.

Terry Montesi: I’ve heard that from some of our people. So to finish up on that topic, if you had a crystal ball five years from now, ten years from now, where do you think it shakes out?

Michael Dardick: Man, I don’t know. That’s a tough question. You tell me how AI is going to affect the world. There’s a lot of things we don’t know. In general- 

Terry Montesi: I’m formulating my response. I don’t yet have it. So I can’t give it to you today.

Michael Dardick: In general, I run into that belief that it’s going to be three plus days in, two plus days out. I’ll tell you what we’re seeing on our utilization studies. Tuesday, Wednesday, Thursday are very full. Monday’s kind of full. And Fridays have become a day that nobody works in the office.

Terry Montesi: Yeah. Well, we give people- Do you tell people we’re closed on Friday or is it an elective remote day?

Michael Dardick: It’s an elective remote day. They work it out with their manager. We cannot close on Friday. We have customers. We can’t close on Friday.

Terry Montesi: Yeah. So that’s what we do. It’s interesting. We are Monday, Thursday corporate days in Fort Worth. We have a Dallas office I’ve told you about over at I call it New Parkland in the IBC Bank building that we’d all love to own. And what ends up happening is Mondays and Thursdays are the days I enjoy. And then Friday’s dead. I come to the office, but it’s so low energy. And then Tuesday, Wednesday are much lower energy than I wish they were because we have about probably 40% of our deal team is in Dallas. And that’s the people that I get stimulated being around and interacting with and ideating with.

Michael Dardick: Well, I think what you just described is why more leaders of companies are creating forced you need to be in the office this amount of days is because what you just said, which is people show up on a Thursday because they’re excited to go to the office. And if other people aren’t there, that’s the reason for being there. It’s the whole culture of collaboration, productivity, friendship. And so, if you dictate you’re either going to be here these days. And by the way, most of the really big companies are dictating Tuesday through Thursday. Yeah, they are. But your point is exactly right. People want to be around people. So the idea is not just to be at the office. It’s to be around people at the office.

Terry Montesi: So, Michael, have you heard or seen any differences generationally of the cohorts from Baby Boomers down to Gen Y and how they are reacting to hybrid versus remote versus in office?

Michael Dardick: Yeah, I think it’s been pretty interesting. I actually I think that it’s a little different than most people expected, including me. So I would have expected that the millennials didn’t come into the office, that they would do their own thing and be wherever, and that 40 year olds and up would all be in the office, and particularly the Boomers because that’s just how they grew up, put on your suit and go to the office. And it was almost opposite. What happened is the millennials were craving mentorship, learning, being around people. You remember lots of them live in small apartments and it’s not the greatest environment.

Terry Montesi: And I want to clarify, you mean millennials and younger, including gen Y?

Michael Dardick:  Millennials and younger. Thank you. The zero to five year workforce that’s still in those formative years of learning business and learning your business and really, really high learning orientation. But to learn, you need the older people in to teach them. And surprisingly, a lot of the older people were like, eh, I know what I’m doing. I don’t really need to talk to anybody. I don’t really need socialization. I’ve got my lifestyle, whatever. So, it was completely opposite from what I would have expected. And so, what you’re seeing, the reason a lot of these big companies are dictating days is they’re like, hey managers, you need to be in because the young people need to be trained and coached and mentored. And so, it’s just kind of an interesting dynamic.

Terry Montesi: Yeah. I’ve heard some of that too.

Michael Dardick: I’ve seen that here. Our young deal people, they’re almost here five days a week. They want to be here. By the way, this is gets into the whole what’s the purpose of the office. They don’t mind all the free food and free snacks and all the stuff, the golf simulator and all the stuff we have around.

Terry Montesi: So, Michael, explain Granite’s Evolve program and your opinion of the importance of having flexible leasing solutions in this post pandemic era.

Michael Dardick: Sure. Thanks for asking about that, Terry. As we were beginning to live with the aftermath of the pandemic, we were really concerned about our customers’ needs. We really saw confusion and we wanted to help them. And we were meeting with them, and they just had a lot of uncertainty about what to do relative to their offices and people. Remember, we were still dealing with health issues. Six or nine months after the pandemic, there wasn’t certainty. And so one of the market responses to their uncertainty was to provide more flexibility and convenience around leases. And so we decided to experiment to see if we could help our customers have choices.

So, we did two things in our experiment, two different tracks. One, we partnered with co-working companies on having their product available in our buildings. And we specifically worked with three different companies, with three different deal structures, so we could learn. And then the second thing we did is what you asked about, we developed our own flexible offering called Evolve.

And Evolve, simplistically, was a menu of fully built out space with varying short term leases, fully furnished or not, tech enabled, and we really learned a lot. And we successfully still utilize versions of that original offering, but not all of it because our customers really told us what they valued. Which just as an aside, we were surprised, but they really didn’t care about furnishing. We thought it would make it a lot easier on their life. And most of them decided they didn’t want furnishing. We also thought they would like that we were effectively financing it, because we were just adding it to their lease. But it wasn’t something they liked. As terms of lease term, it was actually interesting, all over the place from one year, three year, five year.

What I will say we’ve learned is there’s absolutely a place for flexible leasing both for that customer new to the market who doesn’t know how big their business is going to be, the division that’s coming here but they are going to do a long term lease and they just need to get into the market, maybe somebody who’s got a longer term lease and isn’t sure how much they want to grow, so they just want to add some flexible lease. There’s all kinds of reasons and there’s a place for flexible leasing. But the vast majority of our customers still prefer a traditional lease arrangement that’s five years plus. So, we think there’s a place, but I don’t- The whole idea that your whole building was going to be flexible leases doesn’t appear to be moving that way.

Terry Montesi: So around 10 or 11 years ago, you wrote a piece in D Magazine. You talked about unique opportunities that may arise through real estate debt coming due, which is happening again. And you said, quote unquote, amidst all the uncertainty, we’re certain we should all continue to work harder, smarter and more diligently and to take appropriate risks for which we can be rewarded during this time of lack of clarity, which you and I discussed that we now are upon another one. Have we come full circle? And is this another one of those times that lack clarity? And if so, how might that lead us to invest here in the next couple of years?

Michael Dardick: Yeah. Since you and I’ve been in the business for a long time, I would say the current sentiment around office is very, maybe overly, negative, and that extreme feeling or viewpoint attracts private capital. And we’re starting to see them come up the sidelines, as I talked about earlier. And I think it may be as simple as Warren Buffett’s saying, when people are greedy, be fearful, and when people are fearful, be greedy. Institutions are fearful right now around office. And it’s starting to feel a little overly negative.

As I mentioned earlier about this, because you talked about when do you take investment risk, look, is there a risk in the future of office? For sure. But as we’ve talked about, I think we have enough of a sense of where it’s going. And so, we just think there’s going to be- this is that moment where there’s going to be opportunity. You’re going to have to be courageous because it’s not clear. You’re going to have to make choices about are the returns sufficient for that lack of clarity. I still think it’s early. Don’t get me wrong. I think it’s early. But again, I think you’ve got two things. I think, one, you’ve got the fed stopping their exercise where you can start to have a little more clarity on how investors are going to price office. And then I think we’re starting to see it, I think you’re starting to- the market is starting to talk about that bifurcation and willing to talk about great office actually doing well. So, I think we’re at the early innings of people being willing to step back in the water.

Terry Montesi: Yeah, and it’s interesting you say we’re early because you truly never know because I’ve thought in the past, I can remember the one of the last cycles where my folks and I were talking about it’s a little too early, it’s a little too early, and then it was over. And so, you have a period of zero liquidity in the office business, and you mentioned, well, there’s almost no- Well, yeah, for illustrative purposes, there is no liquidity. Are there going to be a few deals that get financed or sold? Sure. But generally, the markets shut down, so there’s no liquidity. And so then you have to ask yourself, how much worse can it get? All that can really happen is it can stay this bad for longer. And as the pain- the longer it stays this way, the pain gets deeper and prices could go down. That’s really all that happens because the capital environment can’t really get any worse than completely frozen. You know what I mean?

Michael Dardick: I think it’s all about pricing. That’s why I say I think private capital is hanging out because they see this extreme negativity. They see what the fed’s done. And I think at some point, the Fed’s going to stop, and at some point after that, they’re going to reduce interest rates. That activity in its own will reduce required rates of return. So I think private capital is starting to think about, well, my god, if returns are just really, really high, yes, there’s risk, but to your point, if I wait until interest rates come down, does the return criteria change for the pricing.

And look, none of us know. This is not- This is more art than science and I’m not saying it’s the time to get in. I’m saying I think it’s the time for us. We know what we want to own. We feel confident that that will perform. We don’t know the pricing. We’re all over transactions trying to understand it and talking to capital. But there will become a time, not too long, where we’ll start to have little data points. And by the way, there’ll be different. I think there’s some risk, Terry, that the first thing that’s going to happen is the really bad stuff is going to go back to banks or have short sales, the really bad stuff. And it’s going to print horrible prices and really high returns. It’s going to print $30 prices.

Terry Montesi: And that’s really not started generally much yet?

Michael Dardick: No, but it’s about to. And I think that may be caught in the media of, oh, pricing’s down 80%. And I’d say, yeah, for that. I don’t know what- pricing’s down for the great stuff. I just don’t know how much. But I think there’ll be a psychological period where the bad stuff being priced will affect the good stuff psychologically for a while.

Terry Montesi: NAIOP selected Granite Properties as the ’22 Developer of the Year, the highest honor they give. You were touted for your employee focused efforts. Tell us more about those efforts, including your lead program, your leading edge committee, and your DEI council and why they’re important.

Michael Dardick: So first of all, I’m super proud of our team. That recognition was holistic. It was not just how many deals have you done, but it was kind of that 360 stakeholder view that is what was most satisfying to me about our team and how they delivered. You and I participated in the conscious capitalism movement for a long time, and I would simplistically say that that’s building your business around a stakeholder model with care. It means you care about your employees, care about your customers, care about your environment, care about your community. And you and I both believe that all starts and ends with people.

So that’s where the whole employee focus efforts for us intersect. It’s all about the human to make our company better. So specific to lead and leading edge committee, we’ve always believed it’s our responsibility to grow people’s business and leadership skills. And it provides them meaning and opportunity and provides them a career path. And it also fills a critical growth and succession need for the firm. And then relative to DEI, our purpose is inspiring people to flourish through the places we create, inspiring people to flourish through the places we create. It doesn’t say inspiring some people. And so, for us, it’s really just living out our purpose to care about everybody regardless of their difference.

Terry Montesi: I agree with that. Michael, you spent a great deal of time and energy giving back to our community through your work in children’s healthcare. Tell us about your volunteer efforts and some of the successful community partnerships you’ve worked on with Dallas area hospitals and about your work with the Community Foundation of Texas.

Michael Dardick: Yeah, Terry, I’ve been really lucky. I’ve been asked to serve on some different community initiatives, and Children’s Medical Center is certainly one of the important ones for me, had the pleasure of hanging out around it for a couple decades and seen a lot of change in healthcare.

I would point out that some of the fun things is we were able to bring a community hospital to Plano to serve the burgeoning growth in children in our northern community. And we’re in the middle right now of growing that through expansion to a very large hospital where we’ll have more specialty services closest to home to help the family function better because they don’t have to go downtown. We’re in the midst that Children’s have opened up a medical home for kids in southern Dallas with an expansion to Redbird mall, so we’ll have all the primary care services as well as behavioral health. And that’s a family initiative. Like if a kid has asthma and they’ve got to take a day out of school and the parents have to take two buses to get them to that, that disrupts everything, whereas if they can go around the corner and get an inhaler and go back to school, I mean, so it’s a big deal, really excited about it.

We’ve also decided to lean into mental health and embarked on a really cool long-term mission to train every single pediatrician in North Texas on basic care for mental health issues. Somewhere around 85% of all mental health issues can be handled pretty easily if they’re diagnosed and treated early. So really excited about that.

Relative to Communities Foundation of Texas, another cool opportunity I was given, I don’t think most people even know what a community foundation is. Most big cities across the country have them. And I really think about it as just a philanthropic bank where citizens make deposits, and they direct how the money goes into the community. What’s unique and great for Dallas Fort Worth about CFT is that instead of just being a pass through entity, where you make your deposit in the bank, and then you tell us where to put it, we’ve got this phenomenal team of community experts that really lean into surfacing what are the community needs and then being a catalyst for bringing the community together to solve it. So, it’s a really neat model.

You didn’t exactly ask this, but relative to business involvement, why do we do these things? There’s a little bit of to whom much is given, much is expected. And we just believe it’s the right thing to do. Why wouldn’t you want to improve your community where you make your living.

 Terry Montesi: Absolutely. Well, we believe that you and I and our businesses have always been aligned around that. And I just want to say I’ve enjoyed hanging out with you, I always do, learning more about your company, your projects, your passions, and your purpose. Anything else on your mind before we wrap?

Michael Dardick: You’re the best. Thanks for including me. I miss seeing you all the way over into Fort Worth.

Terry Montesi: Yeah. Well, let’s get together soon, pal. I love you.

Michael Dardick: Okay, buddy. Take care.

Terry Montesi: Bye.

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