#22 - Colin Connolly - Why Atlanta May Not Get a New Office Tower Until After 2030

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Hey guys, welcome back to the Sunbelt Developers Podcast.
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Uh my name is Tim Wright.
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I'm a broker at Cushman and Wakefield.
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Uh we have an awesome guest with us, Colin Conley.
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Um happy late birthday.
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A couple weeks ago.
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Had a big work uh birthday last week.
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I think we're gonna be a good one.
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Yeah, yeah.
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Throwing your curveball.
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I found that out this morning.
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I'm a senior citizen.
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Oh my gosh.
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50, 50 years old.
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Happy birthday.
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Yeah.
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Um Colin is the CEO of Cousins.
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Uh, they are a Sunbelt office investment REIT and are on a pretty good tear right now.
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Um, I think your job's gotten a lot easier in the last couple years after COVID.
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But we'll dive into a bunch of that and would love to get your take on where this goes and when we'll see a new office building, especially here in Atlanta and and all the above.
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But um can you just I guess tell the audience like a little bit of your background?
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You've been at Cousins a while, you're at Morgan Stanley before that, UVA and yeah, just yeah, the whole thing.
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Well, again, thank you for having me.
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Great to uh great to be here to spend time uh with you and applaud you for putting this podcast together.
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I've listened to a few of them, and it's uh I think it's a really great thing that uh for the city and um glad to be a part of it.
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Absolutely.
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Yeah, so I I've been with Cousins Properties now.
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This is my 15th year.
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Um this is my eighth year as the CEO.
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So I grew up kind of in the business, started um in 2011 as a senior vice president, and over time became the chief investment officer, the chief operating officer, and then ultimately the president and uh and CEO.
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So I've done a little bit of uh of everything at Cousins prior to that, uh, as you alluded to, I was with uh Morgan Stanley up in New York in their real estate uh private equity business, and and prior to that, uh did go to graduate school at the University of Virginia, an undergraduate um at Washington and Lee.
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The um, you know, being at Cousins the last 15 years has has been a lot of fun.
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Um but you know, I grew up in Atlanta, so so I'm uh as did my wife.
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And uh so 15 years ago when the call came from Cousins to to give us an opportunity to move home.
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Uh that was one we were we were pretty excited about.
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And uh, you know, I can tell you my wife is you know, the initial offer came and looked at me, said, Don't screw this up.
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If you're gonna move me again, we got we gotta go back home.
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And uh little did cousins know they had all the leverage in that in that negotiation.
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Wow.
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So it's like no brainer.
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No brainer.
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Yeah.
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Cool.
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Kids y'all have kids.
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I've got uh I've got two.
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My son is uh is 19, just finished his freshman year at Washington and Lee as well.
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Cool.
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And uh my daughter Bridget will be a rising uh junior in high school.
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Uh is just 16.
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Cool.
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Yeah is he eyeing real estate as well?
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Potentially.
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He is uh he he he seems to be interested in the the business world as as a whole and and I think intends on majoring in in the at the business school at at W Nell and ultimately where that takes him, I think seems to be somewhere finance, investment banking.
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He seems to have interest in moving to New York and uh we'll we'll see if the real estate bug catches him somewhere or somewhere along the way.
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Yeah, very cool.
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Well, I don't we can just dive in.
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I'd I'd love to get your take on where we're at in this kind of office recovery cycle.
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Um maybe what your your calls have sounded like versus what they were 36 months ago or how it was being the CEO of a a major office rate in the middle of COVID when office demand wasn't what it normally had been.
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And um we're just kind of I'd I'd love to just get your your take on the last five years of like how it's been.
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Yeah, well, there yeah, there there's it's there's been a lot uh over over the last five years.
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I guess I'll start with just saying I I do believe that that we're at an inflection point and the and the market is is I'd say rapidly improving uh for us.
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And that's just a function of demand is increasing and there's been virtually no new supply for for years.
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So as those forces play out, um you know, markets rebalance and and recover.
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And so we're we're certainly kind of well on our on our way there.
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We can kind of dive more into that and and market conditions, but but you alluded to you know really the the last five years and um maybe six years if if I think about it, and um been been a bit of a roller coaster.
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Um, I actually took this job as the CEO January 1st of 2019, and in that first year, uh we actually did a large corporate public-to-public merger with a company by the name of Tear Reet, uh multi-billion dollar uh acquisition of another public company.
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Uh it was largely uh the portfolio that we acquired was largely Texas, you know.
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So think Austin, uh a little bit of Dallas, and uh and a little bit of Houston.
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And the reason I bring that up is uh public-to-public mergers in themselves can be extraordinarily complicating, complicated, and um and and you know, a lot a lot of work as you think about putting together two companies and you know, all the the personnel side of that and the integration and kind of getting the company together and the culture right and moving forward.
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And so I I kind of recall um you know, after a long first year as the CEO, navigating through that, you know, December 31st, 2019, New Year's Eve, uh get home from you know, celebrating with friends.
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And and I remember looking at my my wife Amy and I said, Man, what a long year.
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Can't tell you how excited I am about 2020.
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And boy, uh it did did that play out a lot a lot different than than I thought.
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You know, just just two months later, effectively, the the world was uh was was shutting down.
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Yeah.
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And uh so it was an extraordinarily challenging time for for any leader across any business because these were uh circumstances, a global health crisis that you know that none of us had had lived through.
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You know, I'd say in addition to that, in our particular business, you know, COVID um you know actually represented a an existential threat to our business.
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Uh, you know, it wasn't very long in that you know, remote work was adopted and kind of the work from home trends took off.
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So really what you had was a truly a global experiment to evaluate whether the the underlying product that we sell at Cousins actually had any relevance going forward.
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And and so that you know that that added some some uh you know additional challenges um along the way.
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And I think, you know, for us, that forced us as a company to really step back and and really pressure test who we are and what we were doing and and ultimately have to make you know some some important strategic decisions.
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And I'll say the first thing that we did before we got to any of those decisions is, you know, in in a pandemic like that and and you know, really tough circumstances, we we kind of stepped back and thought about um you know how how are we going to what were the principles that we were going to navigate through this crisis, right?
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Because there's so many different things happening at the same time.
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It felt like we just needed to simplify and and narrow down into some some core principles and and really um you know what what we decided was that you know, first and foremost foremost, uh that ultimately the crisis would end.
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And at the end of that crisis, uh you know, people will remember how you behaved.
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And and so for us that meant um you know, continuing to do the right thing by all of our stakeholders.
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Um and and so I'd say the f the first thing that we did as a company in March of 2020 was, you know, I went to our board and said, we talk about the strength of cousins balance sheet, uh, really from a from a financial perspective, but you know, we've got a a team of uh of employees that are scared, their friends are getting laid off, their friends are getting laid off, uh concerned about our business.
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And so I went to the board and I said, I need your support to get on the next remote company-wide town hall and make a declaration that nobody at Cousins will be laid off or have a change in their compensation while the COVID pandemic was on was ongoing.
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And I felt like that would bring stability to our company and then allow us to go make some strategic uh decisions about the business.
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And so the our board was entirely supportive and and so for me to be able to go do that and tell our teammates that while you can't in the moment you really can't count on anything else, you can count on cousins.
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And and I think that um you know is who we are as a as a company, but but I think it it really solidified um the team and and then allowed us to kind of go make some of these really important strategic decisions that uh you know happy to happy to touch on.
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Yeah, please.
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I'm I'm curious what was what was on the table.
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Well, I mean so if you're an office business and a large publicly traded office business, you're looking forward and and ultimately trying to have a view on again the relevancy of our product uh and ultimately, you know, what's demand going to be, therefore, what what do you do with the pieces that you've got kind of on the chessboard?
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And and so we we did as a company did a lot of work and and ultimately you know, we had a decision to make.
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Do we continue to execute the strategic plan we had, or do you pivot?
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Um and and I think for for us, the strategic plan that we had developed many years ago was to go build the preeminent Sunbelt off the street.
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And and that the the the underlying uh thesis behind that strategy was um really driven by kind of two big trends.
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And and those trends were the migration of the sunbelt and the flight to quality.
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And so we in the midst of COVID kind of looked at what was happening and had to make a decision were those trends going to change or not.
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And if they were gonna change, then what would we do and how do we pivot?
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And and we made we made the decision that and and took a view that the the migration to the Sunbelt was only going to accelerate and that the flight to quality was going to be even more important.
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And so if we had been working to build the company around the intersection of those trends, that that we'd we needed to go to go faster.
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And you know, co COVID had a lot of 2020.
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It's like in the thick of our like Yeah, and they're gonna wonder like you know spring of 2020, we're we're doing a bunch of work and we're having to develop a view, and we've got a board, outside board, and um and that that's extremely supportive.
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But you know, there's an expectation we're public company and we're fiduciaries, and you can't just stand still.
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Um and and so we made the decision, okay, we're we we're we we need to go faster.
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And I gave our board a ton of credit because we we came up as a team with a plan to go sell a few assets and uh the lowest quality assets that we had.
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Kind of an odd time, late 2020, where you know, the world was virtual, no one was using our product being office, and uh because of the measures that were taken at the Fed and the in in Washington, the capital markets were wide open.
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Yeah.
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Yeah, 20 2020, you know, the the interest rates were low.
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Yeah, the market's wide open.
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So we we kind of d devised a plan to go sell a couple lower quality assets thinking, okay, this is we'll we'll we'll we'll try to move faster.
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And and we presented that to our board and and their feedback was we think we agree that that the pandemic at some point will end, the migration to Sundalt is gonna continue, but this flight to quality is gonna it's gonna perhaps be more than than we've even considered.
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So do more and do it even faster.
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And and so we did.
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And was that around when y'all bought 725?
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Yeah.
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That was a part of that.
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So kind of the second half of 2020 and 2021, we we sold the the the bottom effectively 20% of the company.
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We sold$1.3 billion of our lowest quality office assets and reinvested that$1.3 billion into new trophy assets like$725 pots.
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Um and uh and also invested in some new development.
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There's a project in Nashville in Nashville called Newhoff.
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We build a new project for Amazon out at the domain and Austin.
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But we made an intentional bet that we needed to transition out of anything that was low quality and make sure that 100% of the company was was really competing in that top 20% of the class A market.
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Hey guys, before we jump back into the episode, I just want to thank one of our main partners, Sanji High Roads.
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David Sanji was actually a guest in season one and has been a strong supporter of the podcast ever since.
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Sanji High Roads is a commercial real estate development company responsible for nearly three billion dollars in development projects.
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If you're here in Atlanta, you've probably seen some of their work already, including the high-centric buckhead, that's the hotel right behind Linux, and the new Howell apartments right on Howl Mill.
00:14:03.279 --> 00:14:07.279
One of their most exciting projects right now is the expansion of the Savannah Convention Center.
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It's a$400 million development that's been years in the making.
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If you're interested in development opportunities or want to learn more about their work, visit SanjiHighroads.com.
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Now back to the conversation.
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Was that so obviously you got gear to the ground on what's happening in the market, but I'm sure you probably noticed a leasing trend within your own buildings.
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Like the lowest performing were just taking a lot more, probably the same amount of administrative hassle, weren't yielding the same results.
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And I mean just the tenant demand was you probably see it in your own portfolio.
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It was like, why do we own these buildings?
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Like why do we can just get rid of them and put them somewhere else?
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That's right.
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And and I think that's where you know we we own 22 million square feet across the Sunbelt.
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And so you know, having a portfolio of that size, um, you know, what that scale provides is insight, real-time insight is to is to what's happening.
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And so we could see uh even in 2020 and 2021, in the midst of of the the pandemic, you know, leasing space at at 725 ponds, uh, you know, we we were still finding success.
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Whereas the the lower quality assets, it it it it really didn't even matter the economics that you offered.
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Uh there was just there's just no no interest.
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And I think that's one of the kind of the still lasting changes that has come out of of COVID is is I I would characterize the you know, call it the demarcation line uh of within the the overall inventory of properties that is attracting you know strong demand has has that has has narrowed so that there is today the percentage of the supply that's really gaining interest from the customer base is a lot smaller than it was in 2019.
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So I I would say that in in 2019, you know, some of our class A buildings, we might we might be competing against 50% of the inventory that's out there, meaning if the deal was right, you know, a a customer might move to a lower quality building.
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And in today's environment, I think we're competing against the top 20 percent.
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And if you're really not in the top 20 percent, um, you know, the economics, you know, really, like I said, they're they're not enough to to make up for the lack of quality.
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Right.
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You're just hoping people get priced out and come down to the the B plus, the B.
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And that's I mean, we we've seen it.
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Every submarket here in Atlanta has that same story.
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You got the the five pack and any of them that are kind of the darling buildings, they've they've gotten every look, every every deal is looked at them.
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And now, I mean, y'all we we joke, y'all you cousins in Highwoods are the cartel of Buckhead.
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Like it's you either go to a cousins building or go to a Highwoods building, and now y'all are pretty full at this point.
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And um, I mean you'd probably argue not, you still have some vacancy, but you've been able to just run away with it.
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I mean, Buckhead Plaza.
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For the record, we would not uh consider ourselves as part of a cartel.
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Yeah, so any anybody on the public trade that we can um never use that term.
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No.
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Um but like an interesting stat that the if if you look at Buckhead as a as is just uh as a case study, yeah.
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There's probably, I don't know, Coastar might say there's 18 million square feet of Class A properties in in Buckhead.
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Uh JL just put out a study that that we've been kind of uh using a similar message, but as they as they looked at it uh from their perspective, really only about 7.7 million square feet of that is truly considered trophy Class A office.
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So you're talking about less than half of the Class A inventory is is really competitive.
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And out of that 7.7 million square feet, that consists of about 17 buildings.
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And of those 17 buildings, only two of them have a contiguous block of space greater than 50,000 square feet.
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Right.
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So what that means is that the market is is is rebalancing, it is tightening, and uh and that's gonna bring about some, I say, positive changes for for cousins.
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Right.
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So if you're JP Morgan out in the market trying to show that you can go somewhere, you don't have a lot of options.
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And you know, we're really now at a point in a market like Buckhead that if you're a hundred thousand square foot plus customer and you and you do truly care about being in a class A trophy building, your option is likely either to renew or to build new.
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And the the the price differential between the two is somewhere between thirty and forty dollars a square foot.
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What are you seeing now when you all get pricing back for like if you were to go shovels in the ground today, like what what kind of net rate?
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The overall price, kind of fully loaded price, TIs, land, et cetera, is is probably over$900 a square foot.
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And so, you know, your your net rents are going to have to be, you know, somewhere between$70 and$80.
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So add$15 of expenses to it, and you know, you're plus or minus$90 a square foot.
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And our top of our market, we've got Buckethead Pla.
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Have y'all gotten into the sevenshead plaza?
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Yes.
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We have.
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We have.
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That's unbelievable what's happened there.
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Y'all were, what, low 40s just a couple years ago?
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Yeah.
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It um you know, probably four or so years ago, um, you know, we again we we had a decision to make um mid-COVID.
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You know, I described that that we, you know, we took a view that we continue to believe in our strategy, had conviction in it, uh, but but moved more aggressively towards executing it.
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And and so I mentioned we we sold$1.3 billion um of our lowest quality product.
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We we actually did an evaluation across the entire portfolio and effectively said, hey, is this a property even mid-global pandemic that you still feel really good about and we're seeing leasing activity?
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Okay, great.
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Let's keep that, continue to do what we're doing.
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If it's in the is it in the bottom uh part of the equation that even with significant repositioning, it's just it's just never going to have the energy and the vibrancy that we need to be successful.
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So let's go sell that.
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The stuff in the middle, we said let's kind of use this opportunity to consider pretty significant renovations and repositionings to bring them to that first bucket, which is even mid-global health crisis, don't have a lot of concern about the leasing demand of that quite kind of property.
00:20:39.680 --> 00:20:56.400
And so um we sold a billion three, but but we also went and spent, you know, call it$250 million across the portfolio to to go effectively accelerate repositionings that we had planned for future years.
00:20:56.720 --> 00:21:10.799
I would include Buckhead Plaza in that list, 3350 Peachtree and Buckhead in that list, uh Promenade Tower, Promenade Central, um, you know, our most recent project is the Persinium in Midtown.
00:21:11.279 --> 00:21:21.839
And and the reason we made the decision to pull those forward was again, we we have the the the luxury of having a a a large uh balance sheet.
00:21:22.079 --> 00:21:29.359
And and so we made the decision that on the other side of COVID, one, we wanted those properties to to be done and and ready to lease.
00:21:29.680 --> 00:21:34.079
But you know, as we all know, construction is disruptive.
00:21:34.400 --> 00:21:40.079
And and so what better time to go execute a large construction project when no one's there?
00:21:40.160 --> 00:21:40.319
Yeah.
00:21:40.559 --> 00:21:44.319
And so in the case of Buckhead Plaza, you know, we started that four or five years ago.
00:21:44.400 --> 00:21:51.440
That property was 80% lease between the the two uh the two properties uh at the plaza.
00:21:51.680 --> 00:21:55.519
We were achieving forty dollars a square foot gross rental rates.
00:21:55.599 --> 00:21:57.519
And again, we had a decision to make.
00:21:58.559 --> 00:21:59.759
Our team will tell you, and they're right.
00:22:00.400 --> 00:22:04.720
That that I was actually trying to push that into the maybe we should sell this.
00:22:05.119 --> 00:22:05.680
No way.
00:22:07.759 --> 00:22:08.799
Intown hadn't signed yet.
00:22:09.039 --> 00:22:10.079
Intown hadn't signed yet.
00:22:10.160 --> 00:22:12.480
We had not done any of the renovation and the project.
00:22:12.559 --> 00:22:14.000
That was just on the drawing board.
00:22:14.079 --> 00:22:15.039
And I I had a view.
00:22:15.200 --> 00:22:19.680
This is kind of maybe we just leave this for for someone else.
00:22:20.000 --> 00:22:22.640
And uh that's obviously not the path we went.
00:22:22.720 --> 00:22:25.519
And that obviously would tell you who really runs things at Cousins.
00:22:25.839 --> 00:22:34.720
It's not apparently it's not me because we moved forward with a pretty significant renovation to the ground plane and the amenities.
00:22:34.880 --> 00:22:38.240
You know, we signed a great lease with with in town golf.
00:22:38.400 --> 00:22:52.720
Um and you know, the retail there has really thrived with CHOPS and UMI, and uh it's really now become its own ecosystem and destination for financial services and investment firms, family offices.
00:22:52.799 --> 00:22:59.200
Um today, those properties are, you know, I don't know, call it plus or minus 95% plus leased.
00:22:59.440 --> 00:23:05.279
And you know, proposals that that come out today from us on those buildings are now, you know, have a seven on it.
00:23:05.359 --> 00:23:07.759
They're they're over seventy dollars a a square foot.
00:23:07.920 --> 00:23:08.319
Yeah.
00:23:08.480 --> 00:23:11.680
Um so great a great case study.
00:23:12.000 --> 00:23:12.319
Yeah.
00:23:12.559 --> 00:23:13.680
Uh just market demand.
00:23:14.000 --> 00:23:15.039
And market demand.
00:23:15.279 --> 00:23:26.079
And uh as I said, it it's also a a I'm I'm very I feel very fortunate to have great teammates uh who collectively you know evaluated this.
00:23:26.640 --> 00:23:34.559
And um, you know, we've got very open dialogue and debate at at Free Flowing at Cousins, and and they they looked at me and said, you're wrong.
00:23:34.720 --> 00:23:41.920
Like we this is a project, this is what we do, this is what we're really good at, repositioning trophy assets and lease and space.
00:23:42.000 --> 00:23:43.599
This is a great location.
00:23:44.000 --> 00:23:47.519
And I looked at I said, I I you you're right.
00:23:47.759 --> 00:23:48.640
I think you're right.
00:23:48.880 --> 00:23:53.279
Uh and again, and it's they've proven out to be very right.
00:23:53.599 --> 00:23:54.400
Very, very right.
00:23:54.799 --> 00:23:57.039
I I had a deal in there in 2023.
00:23:57.279 --> 00:23:58.559
You can ask Jeff about this.
00:23:58.640 --> 00:24:00.559
He I think he lost some hair over this deal.
00:24:00.799 --> 00:24:05.839
But there was there's like four different tenants on I think it was on the 11th floor Buckhead Plaza.
00:24:05.920 --> 00:24:07.440
There was a law firm that I was working with.
00:24:07.519 --> 00:24:12.880
They had eight or nine thousand feet, and they were a sub sub tenant in the building.
00:24:13.039 --> 00:24:16.880
And I think it was like one guy working in this huge space.
00:24:17.039 --> 00:24:21.440
And I I think his remaining obligation was something close to like a million dollars.
00:24:21.759 --> 00:24:29.920
And because of the demand that was happening in the building, y'all had repay, which is uh another tenant, but they were their business took off, they needed a ton more space.
00:24:30.319 --> 00:24:39.279
Basically came in, we were trying to sublease, we had a s a sublease document out for signature, and I think Jeff called me and he was like, Do we have a group that's gonna take the whole the whole floor?
00:24:39.440 --> 00:24:43.519
And uh it was they just we were able to get out of that entire obligation.
00:24:43.680 --> 00:24:43.920
Yeah.
00:24:44.240 --> 00:24:48.400
Um that was when I was like, oh man, the the demand here is just overwhelming.
00:24:48.559 --> 00:24:52.400
And um maybe don't tell Jeff this, but maybe he'll hear this.
00:24:52.480 --> 00:24:56.240
My my theory is that's the first building that'll hit 100 in Atlanta.
00:24:56.400 --> 00:25:10.640
I don't know if you have a uh another bet or a different building, but just because of it's an existing product, you have way more tenants than like the size of that building, you normally would have probably what twenty-five or thirty tenants, but you have like seventy in that building.
00:25:10.880 --> 00:25:15.279
So it's just you don't have any dips or like real risk of vacancy.
00:25:15.440 --> 00:25:18.160
I know you all are trying to lease out what the top the top floor.
00:25:18.400 --> 00:25:24.079
Maybe you have somebody or hasn't I haven't been up there, but I hear it's like this open ceiling, yeah, like a really cool space up there.
00:25:24.400 --> 00:25:25.279
It's unique space.
00:25:25.680 --> 00:25:32.160
Um I'd say any space at Buckhead Plaza gar garners a good amount of uh interest in again.
00:25:32.240 --> 00:25:45.599
I it it for you know how we think about our our our real estate and what we want to invest in, um you know, as I mentioned, we're we're focused on class A trophy, newer vintage properties.
00:25:45.680 --> 00:26:06.720
And so those certainly have all the amenities that you would expect, a gym, conference center, you know, some uh F and B or coffee, you know, the the the usual suspects, but you know, the the number one amenity that we're focused on at Cousins isn't necessarily or it's not what's in the four corners of the building we own.
00:26:06.960 --> 00:26:11.759
It's what what is the experience like when our customers step out the front door?
00:26:12.160 --> 00:26:18.400
Is there energy, is there vibrancy, um are there places to go?
00:26:18.799 --> 00:26:20.640
And you know, is it exciting?
00:26:20.799 --> 00:26:25.279
And and so Buckhead Plaza today, you know, offers that in spades.
00:26:25.519 --> 00:26:33.119
You walk out the front door, you can go to Delbar, or you can go to in town golf, Umi, Chops, the St.
00:26:33.279 --> 00:26:37.920
Regis, walk across the street to you know, Buckhead Atlanta or Whole Foods.
00:26:38.079 --> 00:26:40.559
So it's it's just kind of all right there.
00:26:40.640 --> 00:26:53.519
And and then I'd say um what's been really interesting to watch at at Buckhead Plaza and really you know exciting to see is again, there there is an ecosystem there of all these different financial services and investment firms.
00:26:53.839 --> 00:26:58.319
And you know, they they enjoy being co-located in the same environment.
00:26:58.400 --> 00:27:07.599
So when they walk to go get coffee, they can run into a friend and you know, talk shop and kind of learn things as to what's going on in the market and the world.
00:27:07.839 --> 00:27:13.279
Um, and and so it's now become a destination type place for for many.
00:27:13.440 --> 00:27:17.039
And and I think that, again, will allow us to continue to drive demand.
00:27:17.359 --> 00:27:21.359
Hey guys, before we get back to the episode, I want to thank one of our partners, the Beck Group.
00:27:21.519 --> 00:27:28.480
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To learn more about their work and services, visit Beckgroup.com.
00:27:43.920 --> 00:27:44.799
Now back to the show.
00:27:45.200 --> 00:27:47.119
So don't take this bet.
00:27:47.359 --> 00:27:48.799
It was a great bet, by the way.
00:27:50.160 --> 00:27:50.559
Scary bet.
00:27:50.640 --> 00:27:51.119
I'm sure.
00:27:51.200 --> 00:27:55.599
Yeah, you were like, the world's still not in a great spot and we're we're gonna lean in.
00:27:56.079 --> 00:27:57.519
Turned out to be a great bet.
00:27:57.680 --> 00:28:01.440
Now you're here just cruising, maybe not cruising.
00:28:01.599 --> 00:28:01.839
Yeah, probably.
00:28:02.480 --> 00:28:05.039
Cruising, I I would never use the word cruising in any environment.
00:28:05.440 --> 00:28:09.039
I keep hearing these sorts, like the Oracle lease, y'all just got signed in Nashville.
00:28:09.359 --> 00:28:15.119
Y'all have a ton of stuff happening in Texas, and I just a lot of buildings are doing well here in Atlanta across your portfolio.
00:28:15.359 --> 00:28:19.519
Like where do you like what what's on on the table right now?
00:28:19.759 --> 00:28:21.599
Like I would say, what's keeping you up at night?
00:28:21.680 --> 00:28:25.519
What are the what are the problems you're trying to solve for and what do you see over the next five years?
00:28:25.759 --> 00:28:25.839
Yeah.
00:28:28.000 --> 00:28:28.160
Yeah.
00:28:28.480 --> 00:28:37.440
I mean again, it it's it's definitely um the the market is is definitely healing itself and rebalancing itself.
00:28:37.599 --> 00:28:40.079
And you know, again, we did we did make some big bets.
00:28:40.160 --> 00:28:42.960
Uh we've made some big bets over the last 18 months.
00:28:43.119 --> 00:28:55.599
Um, we we we've probably bought over a billion dollars of of trophy assets in Austin and Charlotte um in in in yeah, really the the last 18 months.
00:28:55.759 --> 00:29:00.160
And and all of those bets are they we're certainly not cruising through them.
00:29:00.240 --> 00:29:14.319
They they are scary, uh, because you're you're large dollars, you know, it's in a very public context, and um and and ultimately we have a scorecard every day that's kind of judging how you do, I mean, you know, our our stock price.
00:29:14.559 --> 00:29:14.720
Yeah.
00:29:14.960 --> 00:29:47.200
Um and but I will say I remember you know some years ago telling you know my my wife, my kind of indicator for you know, perhaps when maybe maybe the market is is starting to improve and and we're kinda you know reaching some escape velocity from COVID was when um you know back back in the pandemic, you know, you'd you know you'd go to a dinner uh and you'd meet somebody new and and they'd they'd ask what you'd do, and I'd say, well, you know, my name's Colin.
00:29:47.359 --> 00:29:48.640
I I work at Cousins Properties.
00:29:48.720 --> 00:29:49.759
Well, what do what does cousins do?
00:29:49.839 --> 00:29:53.519
Well, we're an office company, and you'd kind of get a win-oh, like I got that.
00:29:53.599 --> 00:29:53.759
Yeah.
00:29:54.000 --> 00:29:54.960
They're like, oh, I'm sorry.
00:29:55.200 --> 00:29:55.599
I'm really sorry.
00:29:56.160 --> 00:29:57.039
You must be really hurting.
00:29:57.440 --> 00:29:58.079
That's terrible.
00:29:58.559 --> 00:30:08.480
And uh and and so I remember telling my wife, when I when I kind of go to a cocktail party and meet somebody new and introduce what what I you know and what I do, um and and they don't wince, right?
00:30:08.640 --> 00:30:10.720
We've kind of we've kind of We're in the clear.
00:30:10.880 --> 00:30:11.759
We we're in the clear.
00:30:12.000 --> 00:30:18.160
And and I and I I feel like over the last you know kind of six to twelve months, we've uh I don't I don't get the look.
00:30:18.400 --> 00:30:18.559
Okay.
00:30:18.960 --> 00:30:20.079
The ostracized look.
00:30:21.359 --> 00:30:21.759
So sorry.
00:30:22.240 --> 00:30:22.559
Yeah.
00:30:22.960 --> 00:30:23.200
Yeah.
00:30:23.519 --> 00:30:25.759
It uh and so that's been that's been exciting.
00:30:25.839 --> 00:30:39.920
But I but I think again, where where we are and where we go from here, um you know again, there there's been there there's a lot of macro uncertainties, um a lot of financial uncertainties, interest rates, wars.
00:30:40.079 --> 00:30:48.240
I mean, there's a lot going on that you know that we're constantly trying to to evaluate and interpret and the the impact on our business.
00:30:48.480 --> 00:30:54.000
But ultimately, the thing that we pay the most attention to is our customer.
00:30:54.240 --> 00:30:56.880
Um And I like that y'all you don't call them tenants.
00:30:57.119 --> 00:30:59.759
It's a lingo thing for cousins specifically.
00:30:59.920 --> 00:31:01.920
Like it's I just I like how you'll do that.
00:31:02.240 --> 00:31:02.640
Yeah, yeah.
00:31:02.720 --> 00:31:07.119
We try we try to take a partnership mentality with with our customers.
00:31:07.440 --> 00:31:15.759
You know, tenant des implies a a less personal relationship than it is, and we we intend for this relationship to be very personal.
00:31:16.079 --> 00:31:32.640
Um and and so you know when we when we look at kind of what the customer's been doing and behaving, um, you know, again, Larin, the the context of the last 12 months of a lot of angst and concern about AI and and what's that impact going to be on demand?
00:31:32.799 --> 00:31:34.480
And are we all gonna be out of jobs?
00:31:34.640 --> 00:31:47.359
And um and so a lot of noise about that, and you see some pretty significant fluctuations in the public equity markets around some of these concerns, which I again, it's new technology, it's understandable.
00:31:47.839 --> 00:31:56.240
Um we try to look through that and say, okay, well, then how are how are our customers behaving around that?
00:31:56.400 --> 00:31:59.680
And and do we see any changes in that?
00:31:59.839 --> 00:32:01.200
Are we seeing less demand?
00:32:01.359 --> 00:32:02.480
Are we seeing layoffs?
00:32:02.640 --> 00:32:08.880
And again, we have visibility into 22 million square feet of the best customers.
00:32:09.279 --> 00:32:14.400
You mentioned an Oracle, uh, Google, Amazon, these are all large customers, major financial institutions.
00:32:14.640 --> 00:32:31.359
And so what we've seen over the last 12 to 18 months is you know, our customers, again, I think positive for all of us in Atlanta, continuing to, you know, we're seeing a re-acceleration in the migration of the Sunbelt that is significantly picked up.
00:32:31.599 --> 00:32:46.079
And and we're seeing very healthy demand really across all industries, and have not seen any sign of um our customers downsizing, um, reducing their headcounts significantly.
00:32:46.160 --> 00:32:58.240
We all see different headlines, but you know, again, uh the when when a company is planning a a major layoff or re-org, uh one of the first people they call is their landlord.
00:32:58.319 --> 00:33:03.759
Um talk about space or to talk about security for that particular day.
00:33:04.240 --> 00:33:10.880
Um and so we we see you know uh oftentimes you know things earlier than others.
00:33:10.960 --> 00:33:21.519
And and so today, um, you know, demand is uh you know is exceptionally strong, certainly here in Atlanta, but but across the entirety of the Sunbelt.
00:33:21.920 --> 00:33:36.240
We you know, we're down into the second quarter, our our first quarter uh results, which you know we announced in in late April, uh across the company we leased approximately 930,000 square feet.
00:33:36.400 --> 00:33:41.440
That's the third highest leasing volume quarter in the history of the company.
00:33:41.839 --> 00:33:44.079
And we've been around since 1958.
00:33:44.400 --> 00:33:54.160
Um and and as we publicly acknowledge as we were working into the second quarter, our pipeline of leases that are you know in documentation is well over a million square feet.
00:33:54.319 --> 00:33:57.279
And so we kind of, you know, so what does that tell us?
00:33:57.519 --> 00:34:00.960
It tells us that that again companies are continuing to move in the sunbelt.
00:34:01.039 --> 00:34:17.039
It tells us they're continuing to prioritize high-quality space, and it tells us that they're looking forward and viewing AI as a tool to enhance productivity, not necessarily to automate jobs away.
00:34:17.440 --> 00:34:29.039
Um and you know, sometimes when I kind of share that anecdote, people will say, well, what about kind of that's here and now, but but in two or three years, uh it'll be different.
00:34:29.199 --> 00:34:35.760
And it's it's hard to uh kind of prove an unknown or dispute an unknown.
00:34:36.079 --> 00:35:01.039
But I think that whether it's AI or just to understand the underlying health of an office market, to me, the most simple basic question one could ask to understand are tenants focused and customers focused on um kind of growing in the future, um, and do they perceive it becoming a remaining a customer market or a landlord market?
00:35:01.199 --> 00:35:03.679
Meaning who's got the leverage in the negotiations?
00:35:03.840 --> 00:35:12.320
And so the simple thing that we always look at is where what is the uh depth of early renewal discussions?
00:35:12.639 --> 00:35:13.920
I'm sure there's a lot right now.
00:35:14.400 --> 00:35:18.079
And and we're everybody we're talking to is like 2029.
00:35:18.639 --> 00:35:18.880
Exactly.
00:35:19.199 --> 00:35:20.320
Starting to get to 2030, at least.
00:35:22.480 --> 00:35:36.159
If there are no early renewal discussions, that that means the customer base perceives that that that rents are perhaps flat or maybe perhaps going down, and that they're positioned to negotiate with a landlord is going to be better in a couple years.
00:35:36.400 --> 00:35:39.840
Uh but if they're you get those inquiries at scale, you're like, okay.
00:35:40.239 --> 00:35:57.199
That's a data point that we can look at that again says that our customer base perceives that the market is changing and and that they are uh they are in a better position to try to negotiate a long-term extension today than they would be in two years.
00:35:57.440 --> 00:36:14.239
But it and it also, I think, provides some some anecdotal support that would indicate they're not focused on shrinking their headcount in two or three years, uh that they're willing to go ahead and make long-term bets now because typically our leases run anywhere from you know can be 10 to 15 years.
00:36:14.639 --> 00:36:30.480
And so if an Amazon or an Oracle or these companies are they're they're they're they're kind of speaking with you know their actions, and and so I think it's a it's a very positive signal for for all of us in the in the office business.
00:36:31.920 --> 00:36:38.800
It's interesting hearing it from the other side because we I mean we have these conversations all the time of like, guys, it's tight and it's not going anywhere.
00:36:38.880 --> 00:36:40.159
There's no new buildings coming.
00:36:40.239 --> 00:36:46.800
And um I we were with a a group the other day and they were like, you know, we have a couple more years, but we want to do some changes and stuff.
00:36:46.880 --> 00:36:49.199
We're like, don't paint the walls, don't do anything.
00:36:49.360 --> 00:36:53.360
Like you don't want to show your landlord you're doing you have any intention to stick around.
00:36:53.599 --> 00:36:53.840
Yeah.
00:36:54.079 --> 00:37:07.039
So it it is um so you know again, the the what what is what has gotten us here, again, demand is is has begun to normalize.
00:37:07.519 --> 00:37:18.400
Uh but what you're touching on is there's been no new supply, nothing's been built in years, and and even if something were started now, it's still a three to four year process.
00:37:18.559 --> 00:37:27.679
So the for all intents and purposes, there there will be nothing new of any size or scale delivered in Atlanta until after 2030.
00:37:27.920 --> 00:37:35.760
So if we're starting to get to a point where we're the market is tightening today, you know, fast forward to you know four or four years from now.
00:37:36.079 --> 00:37:37.920
Um some healthy rental rates.
00:37:38.400 --> 00:37:38.960
That's what's coming.
00:37:39.280 --> 00:37:41.920
It it and we've seen that in some other markets.
00:37:42.159 --> 00:37:42.320
Yeah.
00:37:42.559 --> 00:37:51.280
So as an example, uh I'd say Dallas from a demand perspective is is been one of the strongest markets in the country.
00:37:51.679 --> 00:37:52.159
Uptown?
00:37:52.239 --> 00:37:53.840
We were there last year.
00:37:53.920 --> 00:37:58.320
And I mean, they were talking about 50s net, now it's 70, 80, yeah, 90.
00:37:58.960 --> 00:37:59.840
80 to 90.
00:37:59.920 --> 00:38:09.920
And so, you know, uh uh we bought a building in Uptown by the name of the link that delivered and gosh, that probably delivered in 2023.
00:38:10.559 --> 00:38:20.719
Um the rents in, you know, the a building like that when they was delivered were in the 50s net, and and anything new today that would deliver and they're and they're achieving it.
00:38:20.880 --> 00:38:25.840
Um you know, it's it's it's around$90 uh on a triple net basis.
00:38:26.000 --> 00:38:31.199
And so you've seen rent growth, not quite double, but pretty, pretty close.
00:38:31.440 --> 00:38:33.599
Um and so that you know that can happen.
00:38:33.920 --> 00:38:38.079
Hey guys, before we continue, I just want to thank one of our partners, corporate environments.
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00:39:02.159 --> 00:39:04.159
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00:39:04.239 --> 00:39:04.960
Now back to the show.
00:39:05.199 --> 00:39:06.159
Um switching gears.
00:39:06.320 --> 00:39:13.039
I digging up on past interviews you've done, you talked about Houston being kind of a case study in your career.
00:39:13.199 --> 00:39:15.039
I'd love to just kind of hear that story.
00:39:15.199 --> 00:39:20.480
It was y'all were taking a bet on a market that maybe you thought was a little more diverse than it was.
00:39:20.559 --> 00:39:23.440
And I don't know, I'd just love to hear the the story on that.
00:39:23.760 --> 00:39:24.000
Yeah.
00:39:24.159 --> 00:39:26.400
It um yeah, Houston.
00:39:26.559 --> 00:39:28.880
That um great city.
00:39:29.039 --> 00:39:29.280
Yeah.
00:39:29.440 --> 00:39:32.800
Uh and where were you at in your your you were were you chief investment officer?
00:39:33.440 --> 00:39:54.000
So I I was the uh I was at the time the chief investment officer at at Cousins and and actually I pri prior to me arriving in in 2011, that you know, the company had started to repurpose itself and you know, a lot's changed with with Cousins over the years, but it was about that point that the company decided to refocus on on office.
00:39:54.320 --> 00:40:02.800
Um if you went back to 2011, the you know, cut cousins was um was subscale, right?
00:40:02.880 --> 00:40:11.280
Meaning it was uh$500 million equity market cap, you know, candidly probably too small to to really exist in the public market.
00:40:11.679 --> 00:40:13.519
It was a bit over-levered.
00:40:13.840 --> 00:40:37.760
And it it was uh I characterize it as geographically concentrated in Atlanta, but uh very diverse by product type, meaning it was kind of all things to Atlanta, obviously the office, but significantly invested in retail, industrial, condos, lots, uh, you know, all kinds of things.
00:40:38.000 --> 00:40:46.079
And the which is the exact opposite of what the public market wants in a public REIT.
00:40:46.320 --> 00:40:54.960
They they want a a a REIT to be uh product type specific and geographically diverse.
00:40:55.280 --> 00:40:55.440
Right.
00:40:55.599 --> 00:41:05.360
So they they want to be able to uh invest in one company and say, if I want to get Sunbelt Trophy Office exposure, uh I can invest in cousins.
00:41:05.440 --> 00:41:09.840
But if I want multifamily exposure, I can go invest in MAA.
00:41:10.719 --> 00:41:14.960
Uh I don't need one company trying to do both.
00:41:15.119 --> 00:41:25.920
And uh because they want to create their own diversification as a public investor and be able to hit the button, now's the time to sell multifamily, now's the time to buy office, and they can kind of get in and out.
00:41:26.159 --> 00:41:28.800
And so we were we were kind of in the exact wrong place.
00:41:28.880 --> 00:41:41.599
And so the decision was made to uh one, to recognize that we needed to to grow, we needed to get bigger, have more scale, and then two, focus on um one particular product type and try to be really good at it.
00:41:41.679 --> 00:41:59.599
And I think as the company kind of self-evaluated itself and and and and and ultimately had to make some decisions as to where to go next, the the office business is where we probably had the largest concentration and and the deepest kind of customer and corporate relationships.
00:41:59.760 --> 00:42:11.599
And so when I joined in 2011, it was effectively to help sell all the non-office real estate that we owned and reinvest in Trophy Office.
00:42:11.760 --> 00:42:16.880
And at the same time to expand outside of Atlanta and grow into some other markets.
00:42:17.039 --> 00:42:19.840
Atlanta is is our hometown and will always be.
00:42:20.000 --> 00:42:26.320
Um we love all of our love all of our children and all of our markets, but but obviously Atlanta is near and dear to us.
00:42:26.400 --> 00:42:30.000
But but we ultimately needed to expand and create some geographic diversification.
00:42:30.079 --> 00:42:37.039
We made the decision to stay in the Sunbelt because we felt like that was the highest amount of growth, but we needed to be in some other cities where we could achieve some scale.
00:42:37.280 --> 00:42:58.880
And in 2013, an opportunity came along to buy a large portfolio in Houston from a company by the name of uh Crescent Real Estate that was a a prior publicly traded company that my old firm, Morgan Stanley, had taken private and was run by a guy by the name of John Goff.
00:42:59.039 --> 00:43:08.639
And they made the decision to effectively break up this company and sell off about a billion-dollar portfolio that was largely Houston.
00:43:09.039 --> 00:43:20.880
Um for us, that represented an opportunity to achieve some of this geographic diversification I mentioned, but also raise a bunch of public equity around it and grow the company.
00:43:21.119 --> 00:43:25.840
And and so um kind of an interesting opportunity.
00:43:26.000 --> 00:43:38.000
The the risk associated with it was that, you know, Houston is largely a uh highly concentrated city uh from an industry perspective.
00:43:38.159 --> 00:43:41.599
It's it's predominantly run by, you know, it's an oil and gas town.
00:43:41.840 --> 00:43:54.159
And and so we did a we did a bunch of work, and candidly, I'd say we rationalized a way that it wasn't so concentrated to oil and gas, and it had become more economically diverse.
00:43:54.239 --> 00:43:59.679
And and so we we we we made the purchase and raised, you know, gosh, I think we did a six.
00:44:00.000 --> 00:44:15.920
$600 million equity, public equity offering the day we announced the acquisition, grew the company, broadened our uh our our geographic footprint, and for about nine months, it was a complete home run.
00:44:16.239 --> 00:44:30.559
And then I remember in on Thanksgiving Day of 2014, you know, my wife's in the kitchen, you know, cooking Thanksgiving, our Thanksgiving meal for family.
00:44:31.440 --> 00:44:46.800
And I happened to be watching on my computer the results of an OPEC meeting that uh that they said they were going to flood the market with oil to compete against the frackers in the U.S.
00:44:46.960 --> 00:44:52.079
to lower the oil price and create real pain effectively in Houston.
00:44:52.320 --> 00:45:08.239
And um, that uh I'm sure my wife remembers that day because when that decision was announced, there was a a loud expletive that was you know yelled in our house because I knew it was going to be instantaneously really bad for Houston and really bad for cousins.
00:45:08.400 --> 00:45:22.480
And and it was the the Houston bet that we made at the time represented about 40 percent of the company, and and the market immediately began to implode uh from an office perspective, from a jobs perspective.
00:45:22.880 --> 00:45:32.559
I have this mental image of you sitting at Thanksgiving dinner just staring at your food while everybody's I wasn't I wasn't very uh I wasn't very festive.
00:45:32.880 --> 00:45:32.960
No.
00:45:33.199 --> 00:45:33.360
No.
00:45:33.599 --> 00:45:34.000
Oh my gosh.
00:45:34.400 --> 00:45:35.199
Uh yeah.
00:45:35.360 --> 00:45:39.360
There's you know, there's probably there's probably a lot of wine that you know had.
00:45:39.519 --> 00:45:42.719
And uh and so it was a learning, it was a learning experience.
00:45:42.800 --> 00:45:54.480
And and because of that and the concentration we had to the Houston market, our our stock price relative to other office companies disproportionately suffered, significantly under underperformed the whole sector.
00:45:54.719 --> 00:46:02.000
Um you know, and and I I think created uh you know a lot of pressure on the company.
00:46:02.239 --> 00:46:04.719
The you know, I was the chief investment officer at the time.
00:46:04.800 --> 00:46:06.800
It wasn't my sole decision by any means.
00:46:06.960 --> 00:46:17.280
Um but I but I certainly felt a little bit of the uh you know, this is this has not gone according to plan, you know, to have a little bit of egg on my on my face.
00:46:17.760 --> 00:46:24.400
But I I think one of the the hallmarks of cousins is is nobody points fingers at anyone.
00:46:24.719 --> 00:46:29.119
We're we're a very much a team-based culture all the way up to our board.
00:46:29.280 --> 00:46:44.079
We collectively made a decision together, and and then ultimately, you know, we we worked really hard to find you know a solution to our problem, which was just an over concentration to a specific market.
00:46:44.400 --> 00:46:53.119
And and over time we we found a very elegant uh solution, but but there were a couple of years that that was it was pretty tough.
00:46:53.679 --> 00:46:54.719
It was pretty tough.
00:46:54.800 --> 00:46:56.400
Um but you you learn, yeah.
00:46:56.559 --> 00:47:01.119
You learn a ton from kind of those missteps.
00:47:01.360 --> 00:47:21.519
And and so, you know, when I try to talk to people, something that's always important to me is to is to kind of understand if um any, I think, good investor ha has to have made some really bad investment decisions to to to really truly understand kind of risk.
00:47:21.760 --> 00:47:24.559
Uh and and that was certainly one of those moments for me.
00:47:25.599 --> 00:47:30.880
So y'all just ended up holding on and that turned just turned around eventually or no.
00:47:31.119 --> 00:47:40.480
So um around the same time, there was another company, publicly traded company by the name of Parkway Properties that you might recall.
00:47:40.639 --> 00:47:41.039
Yeah.
00:47:41.280 --> 00:47:57.360
Um and and Parkway was executing a very similar business plan to us, took a view that the best place to position an office company was uh the benefit from the migration of the Sunbelt and the flight to quality.
00:47:57.679 --> 00:48:02.960
And and they were at the same time running the exact same play as us.
00:48:03.039 --> 00:48:07.199
Uh we we would one day announce uh an acquisition of a great building in Atlanta.
00:48:07.280 --> 00:48:10.000
They'd buy, they bought Buckhead Plaza.
00:48:10.159 --> 00:48:15.920
Uh we would announce uh an acquisition of a great building in Charlotte, and they'd buy the one across the street.
00:48:16.159 --> 00:48:18.880
And and so it became a bit of an arms race.
00:48:19.199 --> 00:48:30.320
And what was interesting is they had also made a similar bet in Houston, uh, not quite as outsized as ours, but it brought a pretty similar uh bet.
00:48:30.719 --> 00:48:40.079
And you know, so over a course of a couple years, naturally as you'd expect two companies kind of doing the same thing in the public arena about the same size.
00:48:40.239 --> 00:48:48.000
You know, sometimes you have some conversations as it makes sense to to put the two companies together um and achieve some scale.
00:48:48.159 --> 00:48:52.480
And and um and so some of those conversations had had had happened.
00:48:52.639 --> 00:49:02.800
Um, you know, we still couldn't figure out this Houston issue because if you put the two companies together, you still had this big Houston issue, a bigger Houston issue.
00:49:03.039 --> 00:49:23.920
And and that the it it was and the reason that was a problem is you had actually um the the the companies both had trophy portfolios outside of Houston in the in the Sunbelt, but then this Houston exposure, and what we found when we would talk to our investors and say, like, I love everything about the company.
00:49:24.000 --> 00:49:28.079
I want to invest in in cousins, but I just don't want the Houston exposure.
00:49:28.159 --> 00:49:30.639
I want all the other core trophy stuff.
00:49:31.039 --> 00:49:38.400
Well, then you talk to some investors who would say, Man, I think this Houston thing is overblown, the market's gonna turn, it's really, really cheap.
00:49:38.639 --> 00:49:46.880
I would love to invest in just Houston and I'd get it at a really attractive price, but it's kind of muddled up with all this course, you know, high-quality stuff.
00:49:47.199 --> 00:50:04.159
And so ultimately in in 2016, we came to an agreement, I think a pretty elegant solution for both companies that we made the decision to merge Cousins and Parkway in a public-to-public large-scale merger.
00:50:04.800 --> 00:50:17.360
And then we simultaneously put the Houston portfolio together, which was a you know, billion plus dollar portfolio, and we spun it out into its own separately traded public uh company.
00:50:18.639 --> 00:50:29.119
Cousins, I guess, got the you know, maybe Parkway, the team there got the short end of the stick because they there was we put the companies together and spun out Houston.
00:50:29.280 --> 00:50:37.119
The Parkway management team went and ran Parkway, which was the Houston company, and Cousins got the got the good stuff.
00:50:37.519 --> 00:50:37.760
Got it.
00:50:37.920 --> 00:50:48.079
And and so what that did is that separated out in a liquid vehicle the Houston and the non-Houston that allowed the market to price those separately.
00:50:48.400 --> 00:50:57.360
And so Cousins, the combined company that bec it became Cousins, uh traded really well because it had great trophy properties in the markets that you want to be in.
00:50:57.599 --> 00:51:08.320
The Houston stuff didn't trade as well as one might expect, but it found uh you know, it it found its price in the market and it allowed investors to choose.
00:51:08.800 --> 00:51:11.599
If you didn't want to be take the Houston risk, you didn't have to.
00:51:11.760 --> 00:51:13.760
But if you did, you could invest in either vehicle.
00:51:13.840 --> 00:51:25.920
And so that that ultimately happened, and that that effectively solved the Houston issue for cousins, but I'd say importantly for shareholders, because when we did that, they got shares in both companies.
00:51:26.079 --> 00:51:29.920
Um, and we obviously cared how our investors did with their exposure to Houston.
00:51:30.159 --> 00:51:47.199
And probably less than a year after that company was spun out, um, one of the large pension plans in Canada took a look at Houston and said they thought it was really attractive and came in and paid cash and took all the shareholders out at a premium.
00:51:47.280 --> 00:51:56.239
And so it ended up being a really great um elegant execution that you could really only do in the in the public markets.
00:51:56.559 --> 00:52:04.159
Um but you know, that ultimately, by the time the the Houston sale happened for cash, I think that was 2017.
00:52:04.559 --> 00:52:31.039
So it was a three or four-year journey that had a lot of twists and turns and uh and it just again required persistence, it required patience and required us to be calm, admit the mistakes that we had made, learn from those mistakes, and just kind of calmly and rationally try to go find some way to uh to solve the problem.
00:52:31.360 --> 00:52:37.199
Hey guys, before we get back to the episode, I just want to thank one of our partners, USA Cabling Technologies and Solutions.
00:52:37.440 --> 00:52:43.840
Alex Morris and his team have been incredible partners for us and actually helped us bring our studio setup to life here.
00:52:44.000 --> 00:52:46.079
And also got to give a shout out to Danny Pratt.
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00:52:59.360 --> 00:53:00.000
Now back to the show.
00:53:00.239 --> 00:53:01.840
Sounds like, yeah, you landed the plane.
00:53:02.079 --> 00:53:06.239
We landed the plane pretty pretty pretty well out of given the circumstances.
00:53:06.559 --> 00:53:08.880
Um we've kind of danced around this a bit.
00:53:08.960 --> 00:53:12.400
I'm I'm curious where you see opportunity now in the market.
00:53:12.559 --> 00:53:19.679
And just if we're to hang around specifically the office product, there was there was an uptick of trades.
00:53:19.760 --> 00:53:26.079
There I felt like the the values had kind of hit a a rock bottom and there was some recovery, and it feels like it's kind of plateaued now.
00:53:26.159 --> 00:53:42.320
I know there's you know a good bit of product that's on the market right now, but it's like the owner has an expectation, but the buyers have this kind of they've seen the comps on some of these trades, and they're like, oh, this has to be you know worth this much, and there's there's still a delta value.
00:53:42.559 --> 00:53:47.440
Um I'm curious how I mean we're going in two different directions.
00:53:47.519 --> 00:53:51.360
I uh maybe one of the questions is like, how do you see that playing out?
00:53:51.519 --> 00:53:57.519
Do we just need more time for the office values from the capital markets perspective to pan out?
00:53:57.679 --> 00:54:01.440
We know leasing is strong, but how do you see the value per foot and and all that?
00:54:01.599 --> 00:54:04.639
And then yeah, part two is where where do you see opportunity?
00:54:04.960 --> 00:54:14.559
Yeah, it it is um so there's a couple of different things happening um that are impacting uh trades and the investment sales market.
00:54:14.800 --> 00:54:23.119
Um because naturally, as we just discussed, the the underlying fundamentals of the business are improving meaningfully, real time.
00:54:23.519 --> 00:54:30.960
And uh, you know, given that you'd expect uh there to be the the the investment dollars to follow.
00:54:31.519 --> 00:54:56.639
Um I I do think that uh because the uh the uh the impact to office over the course of COVID was so severe on certain and many investors that um you know many of those investors are still dealing with plenty of legacy issues and are and are just still not prepared to to um to to kind of make a bet.
00:54:56.880 --> 00:55:16.960
Then you have those that don't have legacy issues that you know there's still quite a bit of negative sentiment around office, just because it it takes a little bit of time for um for for people to uh you know forget what's just recently happened.
00:55:17.119 --> 00:55:30.000
Uh so if you're a you know a large capital allocator in New York and you're the acquisitions person, you know, do you want to run down to your investment committee and pitch an office building where you might get some pushback?
00:55:30.159 --> 00:55:34.719
Or, you know, hey, let's just go talk about the next industrial building and I'm gonna get no pushback.
00:55:34.880 --> 00:55:38.559
So there's a little bit of you know that that I think plays into it.
00:55:38.639 --> 00:55:57.199
But then the you know, the third challenge the office market faces now in terms of getting more trades for kind of this high-quality trophy product, um, you know, core type transactions is there's just not a lot of core capital available, not just for office, but across all sectors.
00:55:57.280 --> 00:56:34.719
And and the the underlying reasons for that, traditionally the large acquirers of core real estate are the open-ended core vehicles, you know, JP Morgan's Fund or Invesco's fund, or the large private REITs, BREIT and others, and um those funds have had pretty significant cues to to get out of those funds and outflows for the reason being that um that they they they have not fully marked themselves to today's market prices.
00:56:34.880 --> 00:56:49.599
So if you're an investor in one of those funds, a pension plan, and and you're looking at a fund that has been marked at a you know five and a half cap, but you're seeing the public market trade at seven, well, you're gonna say, naturally, I'd like to get my money out of that uh and go reinvest it.
00:56:49.760 --> 00:57:01.199
And there's just been uh with those those those outflows to get out, the the large core funds and the private wreaths have have just had no capital to go buy a core asset on the market.
00:57:01.519 --> 00:57:03.679
And over time that will that will change.
00:57:03.760 --> 00:57:13.679
Those those those private portfolios are being marked real time, and the market will find some equilibrium, and then new capital will will return to those funds.
00:57:13.920 --> 00:57:18.719
Um but but in the moment, there's just they they have not had the capital to go invest.
00:57:18.800 --> 00:57:48.480
And then the other, we've got a last piece that that's been a challenge for those type of funds to raise money, notwithstanding what's happened, the pricing with their own portfolio is um you know, if you're a a global pension plan or sovereign wealth fund, you know, investing in office or multifamily with 3 to 5% NOI growth and maybe a 10% type return versus investing in NVIDIA and generating, you know, a thousand percent return.
00:57:48.639 --> 00:58:00.159
So there's just so much capital right now that is getting shifted over into some of these tech-oriented sectors, and it's just leaving a bit of a a dearth of capital.
00:58:00.559 --> 00:58:12.159
Um but we've seen these cycles and they they over time normalize and um but I think that's been a bit of the headwind for again, not just office core core transactions broadly across all sectors.
00:58:12.480 --> 00:58:12.639
Yeah.
00:58:12.880 --> 00:58:13.440
It's competitive.
00:58:14.239 --> 00:58:15.199
Like, where do you rent your money?
00:58:15.360 --> 00:58:15.679
Oh.
00:58:15.920 --> 00:58:16.239
Yeah.
00:58:16.719 --> 00:58:16.880
Yeah.
00:58:16.960 --> 00:58:19.440
We're not just competing against other you know, real estate.
00:58:19.519 --> 00:58:21.840
It's you're competing against all sectors.
00:58:22.159 --> 00:58:22.400
Right.
00:58:22.559 --> 00:58:22.719
Right.
00:58:23.039 --> 00:58:24.719
Okay, so back to the opportunity question.
00:58:24.960 --> 00:58:28.000
What where do you see and it could it could be outside of real estate.
00:58:28.159 --> 00:58:28.239
Yeah.
00:58:28.400 --> 00:58:29.920
I'm just curious your perspective.
00:58:30.559 --> 00:58:40.480
Well, so we at Cousins actually quite like an environment where there's not a lot of capital out there to compete with.
00:58:40.880 --> 00:58:49.840
And um, you know, we've, as I said, we've been pretty active, and I hope to continue to be active across, you know, all parts of the market.
00:58:50.000 --> 00:58:59.760
But but when we invest dollars, you know, there are three things that we're focused on uh for us to to make the decision to to invest to invest money.
00:58:59.920 --> 00:59:04.400
So when we when we do it as a publicly traded company, are we able to grow our earnings stream?
00:59:04.559 --> 00:59:06.559
That's kind of what our investors care about.
00:59:06.800 --> 00:59:14.400
Um so we're not gonna go invest money if if if it means we're gonna deliver less in our annual earnings.
00:59:14.719 --> 00:59:16.320
Uh so we got to grow earnings.
00:59:16.480 --> 00:59:22.239
You know, the second is does the does the investment does it upgrade the overall quality of our real estate?
00:59:22.320 --> 00:59:28.880
And you've heard us talk about this flight to quality, and we want 100% of the portfolio to be kind of in the in the top tier of assets.
00:59:29.039 --> 00:59:30.559
So does it does it accomplish that?
00:59:30.800 --> 00:59:41.840
And then third, are we able to fund that investment in a way in which we don't add meaningful leverage to our balance sheet?
00:59:41.920 --> 00:59:46.559
So we run the balance sheet on a very conservative level, kind of low leverage.
00:59:46.719 --> 00:59:50.079
Um, and we can talk about the the reasons for that.
00:59:50.239 --> 00:59:58.880
Um but we wanna we've got to match up if we're gonna you know, think of it as sources and uses, if we're gonna invest new money and that's the use, what's the source of money gonna be?
00:59:59.119 --> 01:00:00.480
Can we tap the public market?
01:00:00.639 --> 01:00:01.679
Can we sell another asset?
01:00:01.840 --> 01:00:03.119
Can we do a joint venture?
01:00:03.280 --> 01:00:11.679
But when we match all that up, right, we don't want leverage to be higher and we want earnings to be better, and we want the quality of the portfolio to be better.
01:00:11.760 --> 01:00:13.599
So for us, what does that mean in terms of opportunity?
01:00:13.679 --> 01:00:31.039
What we've been doing for really the last 18 months, um it's been a really unique environment because there are some sellers that do want to go sell a new trophy asset uh because they want to reallocate the money somewhere else, whatever their particular reason might be.
01:00:31.360 --> 01:00:36.480
And there has not been a lot of competition because the core funds and the private REITs have been out of the market.
01:00:36.719 --> 01:00:49.440
So to mention, we've done well over a billion dollars of trophy brand new buildings that we've been able to buy at really attractive cap rates because there's just not been other competition.
01:00:49.599 --> 01:00:59.599
So from our perspective, we can go buy an asset at a cap rate that's higher than where our stock trades means it's immediately accretive.
01:00:59.760 --> 01:01:01.519
We can raise new money around it.
01:01:01.679 --> 01:01:11.199
We've we've we've over the last 12, 18 months, have raised, I don't know, almost$600 million in the public equity market uh to fund these transactions.
01:01:11.440 --> 01:01:14.320
And so it's a bit of low-hanging fruit uh for us.
01:01:14.559 --> 01:01:21.760
And you know, some ask, well, why not go do some of these deep value things and convert this or well, we haven't had to.
01:01:21.920 --> 01:01:22.079
Yeah.
01:01:22.239 --> 01:01:22.400
Right?
01:01:22.559 --> 01:01:32.000
If we can kind of buy what we care, you know, very low risk but pretty high returns buying the best and highest quality because we don't face a lot of competition, that's the easiest thing to do.
01:01:32.079 --> 01:01:32.320
Yeah.
01:01:32.559 --> 01:01:37.760
Um over time as those cap rates compress, you know, we'll focus on some more of the value add.
01:01:37.840 --> 01:01:43.519
And and I and I don't think development is actually probably that far off either.
01:01:43.760 --> 01:01:49.679
And and when the the time comes, we hope to be, you know, active and and engaged there as well.
01:01:49.840 --> 01:01:50.079
Yeah.
01:01:50.239 --> 01:01:54.639
Um, but right now we haven't had to because there's just been you know pretty fat pitches.
01:01:54.880 --> 01:01:55.760
That's right.
01:01:56.480 --> 01:01:58.400
I was I don't think we've done this before.
01:01:58.480 --> 01:02:01.599
We we do have another office leasing guy here in the studio with us.
01:02:01.679 --> 01:02:04.079
Brian, do you have any questions for for Colin here?
01:02:04.400 --> 01:02:08.239
I'm throwing you on the spot, but yeah, I'm curious what you're what you're thinking of.
01:02:08.559 --> 01:02:08.719
Yes.
01:02:08.960 --> 01:02:14.559
I guess the other question is, you know, we've talked about it also focused on kind of the class A plus trophy, like anything.
01:02:14.880 --> 01:02:26.079
Again, you all looked at additional markets as far as you know, like going from secondary to tertiary, or are you still focused on kind of like the the primary Sunbelt market?
01:02:28.079 --> 01:02:29.039
Did yeah.
01:02:29.280 --> 01:02:30.320
Did the mics catch that?
01:02:30.480 --> 01:02:31.280
Should I repeat it?
01:02:31.679 --> 01:02:34.719
Yeah, good great question.
01:02:34.960 --> 01:02:46.239
Um for us, we're we're in you know about seven or eight different cities across the Sunbelt, and that that are the the major markets uh within the Sunbelt.
01:02:46.320 --> 01:02:50.800
So Atlanta, Austin, Dallas, Charlotte, Nashville, Tampa, et cetera.
01:02:50.960 --> 01:02:54.239
Um, there are some other really great markets within the Sunbelt.
01:02:54.400 --> 01:03:11.440
I I think for for us, when we consider investing in a new market, um, you know, we we do we do run our business uh around very local um entrepreneurial operating platforms.
01:03:11.599 --> 01:03:20.960
So in each of our markets, we've got you know boots on the ground, we've got a managing director, we've got a VP of ops, we've got you know leasing teams, property management teams.
01:03:21.119 --> 01:03:24.719
And we think that that is a competitive advantage for us.
01:03:24.880 --> 01:03:26.880
Again, we talk about customers, not tenants.
01:03:27.039 --> 01:03:33.039
We have relationships with all those customers because we have people that are engaging with the customers each and every day.
01:03:33.280 --> 01:03:58.400
And and so for us, and we really look at um investing in a market to really justify having boots on the ground and having a local operating platform, we think that we need at least a million and a half plus of trophy product that we've either bought or built to be able to support that type of team.
01:03:58.480 --> 01:04:11.599
And so as you think, look at secondary, tertiary markets, while they're in all of those cities of Birmingham or Greenville or uh Charleston, I mean, these are all really great growing cities that are benefiting from a lot of the trends.
01:04:11.679 --> 01:04:18.719
But for us, there's just not enough size or scale for us to put together the the size of a portfolio that that we need.
01:04:18.960 --> 01:04:27.519
You know, we do look at you know some other markets in the Sunbelt that we've been invested in in the past that we not current currently would be a Raleigh Durham, South Florida.
01:04:27.679 --> 01:04:31.760
We've been in both of those markets and and in time perhaps we could again.
01:04:31.920 --> 01:04:32.000
Yeah.
01:04:32.159 --> 01:04:36.159
But but we don't feel opportunity constrained in in in where we are today.
01:04:36.400 --> 01:04:42.480
So um we're we're at the moment, we're we are staying focused on kind of you know the main thing is the main thing.
01:04:42.880 --> 01:04:43.199
That's good.
01:04:43.440 --> 01:04:46.559
Dude, I hear South Florida, you're talking about Miami access rates.
01:04:46.960 --> 01:04:47.920
250 a foot.
01:04:48.239 --> 01:04:53.599
I I heard I don't know maybe you've heard a higher number than that, but there's some very healthy, yeah, healthy numbers.
01:04:53.679 --> 01:04:56.719
And again, because there's been an influx of demand from the Northeast.
01:04:56.800 --> 01:04:56.960
Yeah.
01:04:57.119 --> 01:04:58.639
And there's just very little product.
01:04:58.800 --> 01:04:59.039
Right.
01:04:59.280 --> 01:05:04.559
And and so that is um that that has driven rental rates up very significantly.
01:05:04.639 --> 01:05:09.599
And it and it is it has some pretty uh obvious obvious geographical boundaries to it.
01:05:09.679 --> 01:05:15.199
And so um that that has absolutely driven rental rates higher.
01:05:15.360 --> 01:05:17.280
Uh so we're we're interested in South Florida.
01:05:17.360 --> 01:05:29.039
That one of the again, the challenges that a market that like South Florida has is it historically was not a large-scale office market and it had a bit of an older demographic.
01:05:29.199 --> 01:05:41.199
So one of the questions that we're watching um in a South Florida is can it continue to uh generate this kind of demand without the the local infrastructure to support it?
01:05:41.440 --> 01:05:49.679
So I think schools, that yeah, uh private schools, and when these businesses move down, they they're coming from New York, they want to put their kids in private schools.
01:05:49.840 --> 01:05:52.960
Well, there's only so many spots in private schools in South Florida.
01:05:53.199 --> 01:06:04.480
And so it's it's gonna be some of those infrastructure items that that could be uh you know limiting factor, but at the same time, you're you're you're hearing people talk about building more and new.
01:06:04.639 --> 01:06:14.239
And so it's just it's a market that we're watching, and it's kind of those underlying things that we're watching to see if it can support the the the additional growth.
01:06:14.719 --> 01:06:15.199
Got it.
01:06:15.440 --> 01:06:18.480
If you're a private school out there, you should go build a go build a school.
01:06:19.760 --> 01:06:20.400
It's interesting.
01:06:20.960 --> 01:06:39.280
When we talk to in investors all the time, you know, they'll they'll they'll ask questions like, well, with you know, rental rates going up in Atlanta or Dallas, is it as um is it as interesting for companies thinking about making the move from the West Coast or the Northeast?
01:06:39.519 --> 01:06:39.760
Right?
01:06:39.920 --> 01:06:49.679
Is the is there less pricing uh disparity and and will that ultimately um you know slow the demand growth?
01:06:49.840 --> 01:06:55.840
And what we again hear from our customer, well, they care about their office rent.
01:06:55.920 --> 01:06:59.039
They they want to get the best deal that they possibly can get.
01:06:59.280 --> 01:07:08.800
But when we talk to an Amazon um and they they are far less focused on the office rent.