Posted by Behind The Facade – Episode 2 Transcript
Note: slide deck can be found in my SlideShare profile
What’s up guys, welcome to Behind the Facade. I’m your host Gavin J Gallagher and on this week’s podcast I decided to play back a 30-minute keynote talk that I gave in London at the Commercial Property Summit, this event took place last March before Covid-19 hit. The event was organised by Brendan Quinn Events and it was held in the Radisson Blu Hotel in Canary Wharf. I just thought it would be useful insofar as it gives some context and backstory to my journey to date and it also gives you a little bit of history to EastPoint, the business park that I’m running here and recording from in Dublin. I also cover some of my career ups and downs and then some of the lessons learnt and the Do’s and Don’ts of property investment along with some takeaways. I hope you enjoy this episode and without any further ado, here it is:
Thanks everyone. Okay so “Driving Trends in Office Space” I think that was Brendan’s heading which probably makes it sounds like I’m driving trends. It’s really the trends that are driving office space that I’m here to talk about today. Before I get into this I wanted to gauge the experience of the audience – I’ve been told there are some very experienced commercial investors here but I’ve also been told that there’s some complete beginners. So I thought I’d start with just a show of hands, who considers themselves experienced? Okay… and then beginners? All right so there are more beginners. Well, I’ve structured it so that there is some lessons really for the beginners and in fact… also for the beginners, a friend of mine showed up here today, Jason Graystone and Jason has a great financial podcast called Always Free that I’m plugging for him since he went to the trouble of coming to see me today.
Backstory – so a little bit of backstory on myself. Who is this guy? Why are you listening to an Irish bloke talking to the audience? My background is, as Brendan says, a lot about EastPoint, so this here is an image of EastPoint just taken recently. It’s quite a big business park. It’s about 40 acres in total, 37 buildings, about 50 occupiers and about 8,000 or 9,000 people turning up every single day for work. We don’t know exactly because the likes of Oracle and Google, those guys keep their numbers very much to themselves. They don’t like to blab about how much they’ve got to how many employees. My involvement in EastPoint has been right from the very, very beginning. It’s actually a family business that I come from. My father and his cousins were involved in buying the site.
EastPoint – I’m going to show you what the site looked like back in 1989, this here is the site and it’s actually a reclamation project. This entire area that we’ve built, EastPoint was once the estuary, what you see here, actually this whole area here, everything in green basically used to be the sea – the tidal estuary of the Tolka River. Over years, this was filled in using landfill just through the growth of Dublin Port. They kept on adding acres and acres and in the end we got an opportunity, back in 1989 to buy this plot of land. It was ex-landfill and therefore extremely cheap, but then again it was landfill, so it wasn’t clear what we were going to be able to do on it.
The master plan took about three years. We had a lot of negotiation with the local authority. They were very nervous about the fact that this was former landfill. You guys will be aware that landfill generates a lot of noxious gases like methane and hydrogen sulphide and carbon dioxide. Those things meant that this was never going to be a residential site. We were looking at it initially as a light industrial site to blend in with the port usage that was going on next-door. You see there’s a big warehouse shed here and that is a part of the site that we’d like to acquire today. As we were going through the discussions with the local authority, our architects were scouring the different projects going on around the world and they came across Stockley Park here in London, in Uxbridge.
When they saw that they brought it to us and suggested a low density campus type environment and that made a lot more sense, a lot more profitability potentially than light industrial. Also there wasn’t very much likelihood that there would be a huge amount of employment created by light industrial, whereas an office park… you can see nowadays we have 8,000 or 9,000 people employed… if it had been light industrial employment would have been a fraction of that.
Construction – getting into the construction, the development started in 1991, there was a lot of work to be done on the site. The fact that it is landfill, you’ve got to prepare the ground for the gases. The gases that were going to be escaping from the ground had to be mitigated, so we had to build a whole network of pipes that take the gas out of the ground. There’s trenches, there’s all sorts of stuff still today, nearly 30 years on now and we are still actually monitoring for gas in the park. There’s a whole system that’s monitoring constantly because this gas is odourless so no one’s going to smell the gas and we have automatic systems that starts to vent the buildings if there’s any kind of an issue.
Completion – here, it is closer to completion, this actually is quite a few years ago, since we opened, this whole area here has been turned into the Dublin Port Tunnel and so we are now only 12 minutes from the airport, which makes it quite an attractive site for some of the international companies. We managed to attract Google and Oracle and a lot of the big occupiers because of our proximity to the airport.
Investors – in terms of getting investors to invest, one of the negotiations we had was with the Department of Finance in Ireland. Because it was a regeneration project, former landfill, we were able to get tax breaks. So we turned the project into a capital allowance project and every penny that the investors spent buying was actually able to be taken back over a period of 10 years against their tax.
Moving On – when the project was finished it moved into more of an estate management role. What we had done is, we had sold off a lot of the buildings to investors and investment partnerships that were able to take advantage of the tax breaks that were there. So once it became more of an estate management role, rather than development, I didn’t find that quite so interesting.
Retail Property – I got a little detoured over into commercial retail. So it’s been interesting listening to the findings of the guys speaking before me. I found some of the things that Ranjan [Bhattacharya] has been talking about to be very much the case, easy management and all of that. But you’ve got to be very careful with your tenants because a couple of the buildings that we’ve bought over the years, actually today, if you were to go past them, they’d actually be sitting empty because the tenants have since gone bust and it’s very hard to let a building if a tenant has gone bust.
Bank Buildings – something that was far more profitable was bank branches. This here is a branch in Ranelagh that I bought in a deal with the bank itself and we replaced it with this building here, so that was the start of a… we basically became a preferred partner for the bank where we would actually buy some of their buildings off of them and replace them with brand new buildings, like the one you see behind that. At the time the bank was starting to offload some of their portfolio, they didn’t want to have freehold assets on their books and so they were offloading those and it was a good opportunity to step in and lease them back. I heard somebody talking about a hundred percent finance nowadays not being allowed, back then we were getting 110% financing on some of these deals!
Spain – I took another detour we shall say, and I went to the South of Spain and I fell in love with this project here. This is all retail and at the time when I saw it, I saw the boats that I saw the sunshine and I just thought, how can this not be the best deal of the century? I’m going to turn it into a sunny Bond Street – I’m going to fill it with Gucci and Armani and all of these different brands and they’ll all come in their flocks. That was a big mistake. I bought it three months before Lehman Brothers collapsed, so timing could be better. I ended up in a situation where about two years later, after spending two years travelling around the globe, meeting all these different guys – I met the head of Ralph Lauren and I met all these real estate guys for Gucci and Armani and they’re all saying “we’d love to move in, just give us two and a half million euros so we can fit out our shop please”. And that was the same conversation, once one went, they all went and so we ended up with a completely empty complex, which was a little bit of a dent in the CV up until that point.
Dubai – so I went to Dubai and I spent a bit of time working with a friend of mine. This here is the construction of the Standard Chartered Bank. It’s their headquarters in Dubai. A good friend of mine was quite friendly with the real estate team in there and he managed to convince them to consolidate all of their leases throughout Dubai into one building. So we got involved in this project together and here is the topping-out ceremony – us Irish go for very lavish ceremonies as you can see, and the project actually that’s it. They’re now completed. It was quite a nice project – before we actually bought the site, we had a fully leased up building so that was quite an easy deal to do and it shows it always down to the relationships that you have.
Ghana – the Dubai project spurred this – the guys in Standard Chartered were so pleased with how it went, that they asked us to go to Ghana in West Africa and actually build the Standard Chartered headquarters in Africa. That’s the completed project, I went to Africa and spent about six months there, but I didn’t stay on because it’s a difficult place to move things along.
Back in Dublin – this is around 2014/2015 – the recession in Dublin was absolutely brutal. Land prices in EastPoint dropped by 80% so we had some struggles with our banks. Obviously once you go below 40% – 50% you’re already in a bit of difficulty, you go to 80% and it takes a real struggle to keep the business afloat. But we managed to do that and in fact by bringing in partners that were larger than us, we were able to buy back some of the buildings from the original partnerships we sold to, and we ended up buying back buildings at less than the cost that we had constructed them 10 years earlier. It was during that period that we managed to buy back 16 of the buildings that we had sold off. It’s been a good experience.
EastPoint Today – there’s about 50 occupiers as mentioned. They’re all, well most of them are multinationals and we have Deutsche Bank, Oracle, Google – Oracle are in seven of our buildings, Google are in six, so they’re a very large presence and we put a lot of attention into looking after them, making sure that they’re very happy with the way we’re running the park. We have a bus service that brings people to the local train station. We do about three and a half thousand people a day on that service. We have about two and a half thousand people driving in every day. Another thousand people cycling in and then the balance walk or take public transport. I’m in contact with the occupiers on a day to day basis and by communicating with them so frequently, I’ve started to see trends that are filtering in and there are things that you see first of all with the big guys, then you see the smaller guys starting to drift in that direction too and my prediction is that these trends will actually become ubiquitous and we’ll all be looking at this before too long.
4 Trends – so the four main trends that I see in the office space, the first one is Smart, proptech innovation, all of that kind of stuff. And the second thing is Green but actually what I’m seeing these days is the two go together, so you’re seeing smart & green, you’re not seeing one or the other, Wellness is another area I’m going to talk about and then Flexible space.
Bloomberg HQ – so obviously most of you will be familiar – this is the Bloomberg building here in London. Obviously a guy that can spend 500 million in 4 months of a presidential campaign, can afford whatever he wants to build in central London. This building apparently costs a billion pounds to do. It’s the greenest building in the world now. It’s hit this level, I think BREEAM 98.6 or something. Nothing has come close to this, well there’s something in Amsterdam that has come very close.
IOT Sensors – this here is the Microsoft headquarters in Dublin and similarly they’ve spent a huge amount of money on technology & sensors. Some of the stuff that we’re seeing is IOT sensors, the entire buildings are laced with IOT sensors – every time you walk into a toilet, the light comes on. It’s sending signals back to a database that says that toilet got so many uses today. Then there’s other parts of the building that don’t get used, they can re-purpose them, they can move things around. It’s extremely efficient, space efficient, they know exactly how much of the building is getting utilised, how much is not, and it’s allowing them to move to an agile workplace where staff are working from home, if they decide to come to work today, it’ll allocate them a desk while they’re in the car on the way in.
The role of AI, I really do think artificial intelligence is going to start creeping in, in a big way. The more people that are using IOT sensors, the more data that’s being collected. It starts to get beyond the ability of a facilities manager to manage all of this data. And so AI I think is going to start entering into the conversation where the building is actually being managed by the AI and the guys… you know that old joke – they have a guy and a dog and the dog is there to keep the guy from touching anything. The guy’s job is just to feed the dog!
Privacy – finding a balance is one of the more difficult things, obviously everyone is talking today about privacy and GDPR. We have noticed that when we started looking at putting in technology like cameras and sensors and things like that. The problem is that you get a bit of push-back from the occupiers’ staff that are working in the building. They don’t want to be constantly monitored, they don’t want to be watched and there are sensitivities. So it’s finding a balance where there can be a bit of a struggle.
Sustainability – moving to green, this is the building in Amsterdam I spoke about. It’s called The Edge it’s in Amsterdam and it’s occupied primarily by Deloitte. When Deloitte did an internal study into their recruitment, they found that 67% of the people working in the building were working there because of the building itself and that is what has filtered out into the conversations that are going with some of these big companies. That’s why you’re seeing the likes of Apple, Bloomberg, Microsoft, Oracle as well in our park, all investing huge sums of money in their buildings.
War For Talent – it’s because the young people that they’re trying to attract, this War For Talent that all of these big corporate are fighting. It’s critical for them to have a building that speaks to the younger population so they feel that they can take out their phone, they can choose a desk for the day, they’re not cubbyholed away in one area. There are different spaces, there are all these breakout areas – it’s the agile workplace, it works on the basis that it’s an activity-based workplace, so you have got people that are, for example, in the sales department, they’ll all have desks that can be raised because sales guys find that they perform better when they’re standing on their feet, but then you have the accounts department – these guys are at a computer all day, so they want to sit at their desks. So you’ve got these agile workplaces that are now moving around so a person could decide they’re going to go into a room, they’re going to book the room using their phone. It’s all interconnected now.
Big Data – this is some of the data being harvested by the sensors – they’re providing water temperatures, air temperatures, the quality of the air, the amount of carbon dioxide in the air. All of this is feeding into their systems and they’re able to optimise the building for the best performance, both of the staff and from a sustainability point of view. Environmentally, it’s very important – you’ve got a lot of millennial’s that won’t work in a building anymore if it’s not considered sustainable.
Reporting – I’m finding a lot of the conversations I’m having with my tenants is now about their waste. How is their waste being handled? How much of it is recycled, how much of it is going to landfill? They actually want to know these details from me and in the past we were like “I don’t know, go ask the bin company”. That’s not good enough anymore. You really do have to be on top of it all and unless you’re using technology, it’s not going to be very easy to answer some of those.
Sustainability is not just the building fabric itself, it’s the operational aspects of it – things like reusing water, rainwater harvesting, all of that stuff.
Reporting – the reporting is becoming a major thing as I mentioned- I get approached about every three months by a lot of the occupiers and they have what’s called a CSR Audit and they have to fill out a document on their corporate social responsibility and there’s all these boxes, how much of our energy is coming from wind generated electricity, how much is coming from coal-fired furnaces. All of these details are starting to filter in and I know that on a smaller scale, in smaller commercial you’re not going to have these considerations yet but I do think that the market is shifting in that direction. One of the things we’re concerned about is we’re seeing all the larger tenants moving so much towards it, that if we’re not keeping up with it they just won’t rent your building and you’ll have a building that can’t be rented in a couple of years unless you’re keeping up with this.
Mobility is another huge area – so many more people are cycling. When we designed EastPoint back in the early days, nobody cycled. We had one or two bike racks in the park and they were half empty all year round – it was only on the sunny days that people would decide to cycle in. Now we’ve got about a thousand people a day cycling in and even in the rain the bike racks are all full and so storage is becoming a bit of an issue – the guys don’t have enough space so we’re constantly buying bike racks and adding them into the park. Also things like electric car charging, that has started, we’ve got guys driving in there with Tesla’s and they’re saying “where am I going to charge my car?”
Global Emissions – this here is the roof of one of the Oracle buildings, it’s all solar panels. This is a green roof, it’s all part of the way these things are moving. One of the reasons for it is 40% of global greenhouse gas emissions are coming from real estate and that being the case, we are an easy target as an industry and we’re all aware of the climate protests that are going on out there. There’s so much of this happening that at some point in the near future, if you look at Finland, they’ve just appointed the youngest, she’s not only female, but she’s the youngest prime minister ever elected I think at 37 years of age. That’s the way it’s starting to move and once the younger people are in power, you’ll start seeing the agenda shift towards climate change and I think we are an easy target at 40% – if we’re not making these things better, they’ll just tax us and we’re going to find ourselves getting taxed for badly performing buildings.
Wellness – this is not what I mean by wellness by the way. A lot of the stuff that’s coming out now, there’s actually a WELL Certification for buildings, there’s an organisation in America called The International Well Building Institute. They certify that your building has been designed with the occupant’s health and wellness in mind.
Thermal Comfort, both hot and cold. One of the biggest issues I hear from our facility people is that somebody arrives in wearing a tee shirt – for example Jason over here is in a t-shirt while the people sitting next to him wear jackets, you can never find the right balance. So that is a big issue for staff, which is why they’re creating these different breakout areas so that if you’re too cold, you can go to one area. You’re not stuck at a desk with a fan above your desk, freezing you when you want to warm up.
Air Quality – if you want performance from your team, more oxygen in the air, that’ll actually give them a higher performance. That is all starting to get measured.
Lighting and glare, the amount of lighting actually can put you to sleep if it’s a certain lux. And also your concentration levels are affected by that.
Sound quality as well – for a lot of people there are three different areas, I call it the 3 C’s, you’ve got areas for concentration, you’ve got areas for collaboration and you’ve got areas for communication. People on phones don’t want to have all this background noise. Guys concentrating don’t want all this background noise, but if you’re collaborating its no problem at all, in fact the more noise the better, everybody is getting their word in. You need to mix these spaces up.
Access to healthy food – you wouldn’t have thought it but nowadays if you having a pizza takeaway next door to the building, that is not a positive any longer. The vegan restaurant is what everyone seems to be going for.
Natural daylight is another big one, everyone wants to have natural daylight. You’re not going to find people sitting in the inner core of the building any longer.
In-house Gyms – this is actually the Oracle in-house gym that they built in EastPoint. The building opened just recently and I mean this would put a lot of gyms to shame around Dublin and this is exclusively for the use of the staff. They even have a drying room so the guys that either run or cycle to work can go in and have a shower and then they can put their sweaty clothes into a drying room and it’s blasting hot air all day so they actually have dry clothes to take home later on.
Meditation and Yoga – this is another room actually in the Oracle building and it is specifically for people to do either yoga or meditate. They’re actually creating spaces for people to take a break, go down and do a little 10 minute meditation.
Biophilia, you’re going to see more and more of that. It’s the ability to touch and feel the green around you. Access to nature is a major thing now for people’s mental health.
Flexible Space – WeWork were in the news for all the wrong reasons in the last couple of months, but they’ve actually got the product market fit really, really well. They found a niche – everyone was moving out of coffee shops. They wanted to move into something where they could mingle with like-minded people and that has filtered down and even though WeWork might be in trouble. I don’t think coworking itself is going anywhere. It’s here to stay.
What I found in Dublin, I believe probably London would be the same, is that anything under 5,000 square foot, we are struggling to find tenants for it today. They will just automatically go to WeWork and so a company of up to say 50 staff, they’re not even going to talk to us any longer. They’re just going to go straight to WeWork because they can shrink and expand as they need. It’s expensive, but they don’t have to fit-out an office and they don’t need to pay for dilapidation at the end of the lease.
Convene is one of the companies in New York, they actually work with landlords to create these flexible spaces and that’s an interesting model rather than WeWork which goes against you as a landlord. Industrious is another. This is One Windmill Lane in Dublin. It’s a lovely space that has been re-purposed from an old building – I find these things very attractive and very usable.
Lessons Learnt – so that is the office market. Now I thought I’d give you a couple of lessons learned and some do’s and don’ts that I’ve picked up over my 25 year career.
The 3 E’s – Emotions, Ego and the Economy. Don’t ever ignore these okay. This project that turned into a complete disaster for me was primarily because I ignored the 3 E’s.
Emotion – I fell in love with this project – my emotion got in the way.
Ego – I had people asking me “are you sure it’s going to work?” “Absolutely I’m sure, I am going to do this” – my ego also got in the way. Some of the biggest things for the young guys in the room that are starting out, if you have a couple of real successes, that’s an important time to take a moment to reflect, because the success can really go to your head and get you to make serious mistakes. I probably would not have bought this had I not had a couple of years of huge success and made lots of money and thought “yeah, I can do anything, why not move to Spain and try a completely different sector that I don’t know anything about”
Economy – who knew four months ago that we would be looking at this Coronavirus thing here today? things can change overnight and that’s something that people need to remember. You look at your figures and you believe that your asset values are definitively going to grow and you will definitely see rents increasing over the next couple of years. Sorry it doesn’t always happen like that – don’t forget it!
The 6 R’s – do try to remember the 6 R’s
Roadmap – this is knowing your plan into the future. I’ve, as I mentioned, Jason’s podcast is very good at pointing out that investing is a marathon, not a sprint. If you guys go into it thinking “right, I’m going to make 5 or 6 million in three years and that’s going to be great”, maybe you’re going to do that, but the reality is you might have that Coronavirus that comes out of nowhere and you’re suddenly 10 million in debt overnight – that is something to bear in mind. So just be comfortable with your roadmap. Think of your career as say a 20 year career and say to yourself, right, I can make a nice steady income and grow steadily over the next 20 years. I’m going to lose some deals, there will be some wins and some fails. If you just assume that right from the beginning, you’re not going to get yourself into a situation where you bet the ranch on one deal and it all goes pear shaped.
Reputation. Some of the great reasons that we’ve been able to do some of these deals in EastPoint is down to our reputation. We do quality, we don’t take shortcuts and that has stood to us over the years.
Relationships as I mentioned relationships, half of these deals that we’ve done wouldn’t have gone to the market because we’ve got relationships with people. They tell you, they give you a little insight, tips, they tell you that their headcount projections are growing for the next couple of years, we’ll actually be needing an office very soon. All of this kind of stuff, they’re not going to share with strangers, but if you have a good relationship, your reputation obviously helps your relationships as well.
Resilience, as I mentioned, the market can go pear shaped overnight or certainly within three or four months. Who knows where this Coronavirus is going to go. But with resilience you’ve prepared for the difficult times because you know they will come and they’ll catch you.
Realistic – I’ve seen guys buying property on the basis that the market is going to keep on going up, up, up, up. It’s never going to stop going up and okay, you’ve got some markets you’ve got Toronto and you’ve got Australia where it never sees a down season, but that’s very much in the minority and the likelihood is you’re going to get caught if you keep thinking that it’s never going to stop.
Reserves don’t fall into the FOMO trap, Fear Of Missing Out. Every deal that came to me “yes I’ll buy it” because I didn’t want to miss out on the opportunity but then when the market turned south and lost 80% of its value I had no reserves. I couldn’t take advantage of the low prices. Now, thankfully the family business weren’t as reckless as I was personally and they were able to go and do a couple of deals. If you have your capital reserves put aside, don’t touch it. We call it a buffer and if you don’t touch your buffer, you’re never going to fear the recession when it does come along.
Takeaways:
Sustainability if it hasn’t been obvious, that is going to be something that really everyone is going to be affected by.
Hospitality – in this industry I’m pretty certain hospitality is going to be important, the WeWorks of the world have left people expecting a certain level of hospitality. Now when you’re walking into a building, the old days of just collecting 4 cheques a year that Ranjan spoke about earlier, I’m not sure that that’s going to continue. I do think there’s an element of hospitality and experienced that people expect at a certain level. They’re not going to be happy for the landlord who lives in the distance only to see them once or twice a year.
Engagement we’re putting out videos now for our tenants & staff. We’re communicating with them, telling them about the latest things.
Brand Building is another thing that’s I think that the days of being a real quiet real estate guy that just sits in the background and nobody knows about you. I think those days are gone. We’re in social media now. People expect to hear from you, they check you out, they look at your background. So a certain amount of brand is important.
Anyone want to learn more? Unfortunately I’m not able to stay around because I have an airport to get to, but you will find I have a blog that I keep, I have a YouTube channel and I’m about to launch a podcast soon so you’ll learn more about that if you follow me on social media.
Thank you.
Okay I hope you found that talk useful, interesting, engaging. If you want to see the actual video of this talk, I’ll put a link in the show notes below. Also, if you want to see the slide deck that I put together for that particular talk, you’ll find that in SlideShare, if you look up my name Gavin J Gallagher, I’ll actually put a link in the show notes below.
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It has been good talking to you. Hope you’re staying safe and hope to hear from you in the near future.
Speak next week.
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