Maddie Heckman: Good afternoon everyone, this is Maddie Heckman with IMN, and I’d like to thank you for joining us for our next panel discussion, “Adaptive Reuse and Best Practices in Repositioning Distressed Assets.” We have a wonderful group of experts lined up to address this topic, and I’d like to thank them for joining us. A few housekeeping items before I introduce our session moderator: please feel free to submit questions throughout the webinar using the Q&A at the bottom of the screen. You can upvote questions from others, and popular questions will be prioritized. While the Q&A is run through Zoom, you’ll notice that the Hub platform is still open in your original browser. You can communicate with other session attendees using the chat function in the Hub page for this session while also listening to the discussion in Zoom through a second tab. Also, in Hub, you’ll see an evaluation section to evaluate the panel and leave comments on other topics you would like to see discussed in this area. You must have this session added to your personal Hub schedule in order to evaluate it. Without any further ado, I’d like to hand things over to Will Johnston, who will be moderating the discussion. Thank you.
Will Johnston: Thank you, Maddie, and welcome everybody. Good afternoon, and welcome to our panel on adaptive reuse and best practices in repositioning distressed assets. My name is Will Johnston. I’m Counsel in the real estate and finance practice groups in the Philadelphia office of White and Williams LLP. I’m a recent transplant from New York, where I grew up and began my career in real estate back in 2006. In a moment, I’ll introduce today’s panel. We have three very experienced and insightful panelists who will discuss adaptive reuse, which is adapting and repurposing commercial real estate assets to suit new and different needs. I think this is a very interesting topic with great examples of adaptive reuse everywhere, in different sectors and in different markets—here in New York, Philadelphia, and all around the globe. This isn’t a new trend, but perhaps one that’s been accelerated by COVID-19 and the new habits that have been brought about by the pandemic. Without further ado, today’s panelists are Nadir Settles, CJ Follini, and Christian Dalzell. I’d like to ask each of them to say a couple of words about themselves and give us some insight into the sectors where they’re involved in their businesses. Perhaps let’s start with Nadir.
Nadir Settles: Thank you, Will, and I hope everyone is safe and well at this time. My name is Nadir Settles, and I look after all aspects of New York regional office investments and strategy as the fund portfolio manager for capital markets, finance, as well as asset management. So, accountability for all New York regional office investment activity rolls up to me. What we’re focused on right now is that we’re still highly convicted in New York City and the New York market. We haven’t seen the distress, but when that opportunity comes, we’re buyers of New York. That’s for traditional assets, although we believe traditional assets may look different—they’re not the big, lumpy million square foot assets but more boutique and well-connected neighborhoods. We like work-live-play assets for the traditional office aspect, and we think there’s going to be a relative value bias before too long. You can’t keep tracing industrial or apartments without looking at the spread between traditional office and other asset classes, so we like that. Additionally, we like the tailwinds of life sciences.
Will Johnston: Terrific, thank you Nadir. Christian, if you could just say a word or two about yourself and your market.
Christian Dalzell: Thank you, Will. I apologize for being on mute. My name is Christian Dalzell, and I am the managing partner and founder of Counter Management, a vertically integrated multifamily and residential-based owner, manager, and sponsor of commercial real estate assets up and down the East Coast in specifically targeted markets that support a high ratio of medical and educational industries. Like Nadir mentioned, this is a very interesting time. In my past 24 years, all of the major disruptions I’ve seen have been primarily capital-based or capitalization-based. What’s interesting about the current situation is that we find ourselves in a much more fundamentally different position compared to past downturns. I think this particular topic is of unusual importance in this environment and will grow in importance as things start to unfold from all the volatility over the past 12 months.
Will Johnston: Thank you, Christian. And CJ, how about yourself?
CJ Follini: Thank you, Will, and welcome everyone—my fellow panelists and everyone who’s watching from wherever. I’m CJ Follini, the managing director and CIO of a multifamily office with approximately $1 billion AUM, and 65% of investable assets are in real estate. Within that portion, we focus on what we call “alt real estate,” which comprises cold storage within the industrial sector, life sciences within the healthcare real estate sector, and covered land play, specifically parking garages for long-term hold. All of these are in one way or another subject to adaptive reuse, whether on the front end or the back end. Since Christian started with an outlook comment, I’m going to pile on and say that despite the tragedy of the past year, we haven’t even begun to see the opportunities present themselves in most of these sectors, especially throughout the country. I do not do much in New York despite having holdings there currently. We are geographically agnostic around the country as well as in parts of Europe.
Will Johnston: Thank you. So, a lot of diversity in focus, markets, and sectors. Context will be very important for everybody in discussing this topic. It’s all very relative. Taking a step back, if everyone could perhaps share any lessons you’ve learned from prior downturns where you’ve been active that are informing the decisions you’re making today. CJ, perhaps we could start with you.
CJ Follini: Well, as Christian mentioned earlier, if we’re looking at the most recent past, the 2007 to 2009 disruption was really a credit dislocation—a dramatic one, specifically focused on the credit markets, and derived from the residential sector. I think it’s hard to draw macro analogies to today, which is a total Black Swan event, albeit an extended one. However, we have taken micro lessons in specific investment strategy and thesis, one of which is the repurposing and adaptive reuse of hospitality. We learned from the previous dislocation that hospitality waxes and wanes in terms of its supply, and we feel it is currently oversupplied. The adaptive reuse of something like that into a different form of housing was very constructive. Residential, especially rentals, was a big win in the seven to eight years post-2007. Our current focus is on the oversupply in hospitality and retail, which I think is even more dramatic. We’re focused on adaptive reuse of this huge oversupply of retail boxes across the country.
Will Johnston: Great. Christian, what about you? What lessons have you learned from previous downturns that are informing your decisions today?
Christian Dalzell: During my career, I’ve seen many downturns—whether it was the devaluation of the Russian Ruble or coming out of the early 90s in Dallas with my first job. I’ve seen a lot of noise and volatility in the market. Real estate is obviously a highly leveraged asset class, and leverage drives a lot of the resulting transactions. What’s interesting about the current situation is that past disruptions have primarily been balance-sheet based, whereas this disruption has migrated out of the balance sheet and into our living rooms and offices. As we moved into the year, people have been trying to navigate this fundamentally changing issue, which is making us look at how we operate, manage, and own real estate, as well as what real estate we buy and where we buy it. Many lessons will be learned from this past year, the coming year, and future years. I think it will be getting back to the basics of building fundamentally solid and flexible or elastic properties that can adapt to changing demands. Municipal risk is going to be a major factor in determining whether a development is successful or not in the coming years.
Will Johnston: That’s an excellent point, Christian. Nadir, I’d like to ask you the same question, considering both where we’ve been and where we’re headed. Any lessons learned from previous downturns?
Nadir Settles: Sure thing, Will. It’s two things for me. One, I’ll build on CJ’s point about how we haven’t even seen the amount of market dislocation that’s to come. And two, I don’t want to underemphasize the lessons learned about protecting what we have. In times of distress, it’s important to stay in constant contact with appraisers to ensure they’re informed about the performance of your properties. This helps avoid broad assumptions that can negatively impact your valuations. Another lesson from the last downturn is that patience is key when pursuing distressed opportunities. It took six to eight quarters after the GFC for transactions to really pick up in earnest, so it’s important not to jump at the first opportunity that comes along.
Will Johnston: That’s a great point about appraisals, Nadir. CJ, would you say the same about valuation dislocations creating opportunities?
CJ Follini: Absolutely. Nadir made an excellent point about valuations. We experienced this early in the year when appraisers applied a broad 30% haircut to properties due to COVID, without substantiating data. In the nine months since, that assumption hasn’t proven out. Identifying opportunities in the delta between what appraisers are valuing versus the reality of the cash flow or underlying potential is critical. I think this is where some real opportunities may arise.
Will Johnston: That’s a great insight. So, now we’ve discussed current portfolios and valuations, let’s move on to potential targets for adaptive reuse. Are you all looking inward at your current portfolios, or are you scanning the market for new opportunities? CJ, how are you identifying opportunities?
CJ Follini: Yes, we do look at both our current holdings and potential new opportunities. In terms of cold storage, for instance, it’s as simple as piggybacking on the food supply chain—Whole Foods, Amazon, and Walmart’s direct food supply logistics. We’re also involved with REO shops and financial institutions looking to shore up their balance sheets. While we’ve seen some slow velocity in the distress markets, we expect more opportunities as things unfold. It’s still largely shoe-leather work until that happens.
Will Johnston: Christian, how are you identifying opportunities? Are you focusing on the markets you’re already in, or are you branching out?
Christian Dalzell: We’re market-focused, but we’ve always been selective. Since I started buying assets after leaving ST Capital in 2016, we targeted markets with a high concentration of medical and educational jobs. Medical office and life sciences are industries we were bullish on before the pandemic, particularly because of the aging population in the U.S. The pandemic only accelerated that trend, and we continue to look for opportunities in markets that have these favorable fundamentals. Converting office properties to life science buildings, for example, requires a different level of expertise, but with the right building—one that’s low and wide with good loading and ceiling heights—it can be done.
Will Johnston: CJ mentioned competition earlier, particularly in cold storage. Nadir, are you seeing competition for similar assets when it comes to your strategies?
Nadir Settles: Absolutely. We’re always scanning the New York market, and yes, we’re seeing competition. For us, it’s all about being specialists and deeply knowing our region and sector. That said, we’re focusing on life sciences because New York has a significant supply-demand imbalance. Boston has about 20 million square feet of life science space, while New York only has about two and a half million. Our current project involves converting a former automotive building into a Class A life sciences facility, and we believe it will be highly sought after due to its location, infrastructure, and the talent pool in the area. We’re focused on office repositioning, too, adding health and wellness amenities that will be attractive in the post-COVID world. New York is still highly attractive to us.
Will Johnston: Nadir, your life science conversion project sounds impressive. Could you elaborate a bit on the challenges and benefits you’ve experienced with that project?
Nadir Settles: Sure, Will. The building we’re converting, 125 West, was previously an automotive building, which means it already had the floor loads, ceiling heights, and vehicular access that are critical for life science buildings. Those types of buildings are hard to come by, and you can’t just drop a life science building anywhere. That’s one of the biggest barriers to entry in this sector—finding suitable existing assets. But once you do, you’re sitting on gold because demand far outweighs supply in New York. In terms of challenges, it’s a highly specialized process, and as CJ mentioned earlier, you’re competing with large players like Alexandria who have cheaper capital. But we’re confident in the location and infrastructure of our building, which we believe positions us well.
Will Johnston: Christian, going back to life sciences—how do you see that evolving in the markets you’re in, like Philadelphia, where you have a strong educational and medical presence?
Christian Dalzell: Philadelphia is a prime example of the importance of talent pools and institutional support for life sciences. With one in five doctors coming from Philly, and over 100 degree-granting institutions, including major universities and teaching hospitals, we have a strong base for growth. Employment in Philadelphia’s medical and educational sectors has grown faster in the past 10 years than it has in the last 50. We’re already seeing life sciences support not only real estate but a wide array of ancillary businesses. Going forward, as more capital flows into healthcare and life sciences, we’ll see even more demand for lab space, healthcare facilities, and associated infrastructure.
Will Johnston: CJ, as Christian mentioned, life sciences is booming in Philadelphia. You’ve said before you’re not as focused on New York, but are you keeping an eye on other markets like Philadelphia for adaptive reuse opportunities?
CJ Follini: Well, I was born and raised in New York, so I’ve got deep ties there, but yes, we do look at other markets like Philadelphia, particularly for distressed assets. However, for our focus—cold storage, covered land plays, and structured parking—the opportunities in New York are a bit more limited. I agree with Nadir that New York will bounce back, but for us, we’re primarily targeting big-box retail and hospitality for adaptive reuse into cold storage or multi-tenant uses. Hospitality into student or healthcare housing, particularly near hospitals, is a strong play for us as well.
Will Johnston: Nadir, are you seeing the same level of interest in distressed assets in New York as CJ is? What’s your outlook?
Nadir Settles: Absolutely, Will. We’re buyers of New York, and I think it’s a generational opportunity. There’s no better time to buy in New York than now, and if you can get into the capital stack through mezzanine financing, preferred equity, or direct purchase, you’ll be in a strong position when the market recovers. You have to pack your patience and be strategic, but I believe the long-term potential in New York is immense. Whether it’s life sciences, boutique office buildings, or other repositioning opportunities, New York will remain a vibrant market.
Will Johnston: Great insights. Christian, would you say you’re similarly optimistic about the future of life sciences and adaptive reuse?
Christian Dalzell: I agree with both CJ and Nadir. Life sciences, cold storage, and even data centers are going to be key areas of focus moving forward. The one thing I’d add is the single-family rental (SFR) market. We haven’t touched on that yet, but I think there’s a big opportunity in combining SFRs with multifamily operators or even hotel operators. The growing demand for rental housing, particularly in the Sun Belt and Southeast markets, makes this a compelling area to watch. I think we’re going to see a lot of creativity in how these spaces are adapted and managed.
CJ Follini: Christian, I completely agree. Watch what Blackstone is doing with manufactured housing—it’s going to be a huge play, just like their spin-off of Invitation Homes in the single-family rental space. It’s definitely something to keep an eye on.
Will Johnston: This has been a great discussion, everyone. We’re just about out of time, but if anyone would like to reach out to the panelists, please do so through IMN. Thanks again to all of you—Christian, CJ, Nadir—for your time and insights. And thanks to our audience for joining us today.
Maddie Heckman: Thank you, Will. I really appreciate it, and I hope everyone found the discussion valuable. I’d like to thank Will, Christian, CJ, and Nadir for the work they put into this panel and for sharing their time and expertise with us.
Immediately following this session, we have a networking session, followed by our next panel, “Urban Multifam and NYC Condos: Are We Set for a Long Period of Distress?” These live sessions can be accessed through the Schedule Builder and Hub once you’ve left this Zoom webinar.
Thank you again to our speakers for their participation, and we hope you enjoy the rest of your day.
