Scarlet Capital Founders Might Be Young, But They Know Old Buildings — And How To Hack Capital Markets

Houston has a reputation for tearing down and building new.

Brothers Alexander and Daniel Ron have a different approach. Although the two are part of a younger generation of developers, they feel they have cracked the code to making the adaptive reuse of older properties both possible and profitable. 

The brothers' firm, Scarlet Capital, last year remodeled The Docks, a century-old “trophy warehouse” just north of Interstate 10 near Downtown Houston, into modern flexible office and retail suites. The Docks is fully leased, and now the pair is remodeling a neighboring 1940s-era 20K SF warehouse to accommodate even more office and retail users. 

Despite traditional development largely freezing due to high interest rates and difficulty securing financing, Alexander Ron said he uses a method similar to the one he started with at age 19, less than 10 years ago, when he bought and flipped sub-$10K properties in Houston’s Sunnyside area. 

“With these adaptive reuse projects, if you know how to do them extremely well and you watch your costs like crazy, you can actually stabilize these projects at double-digit yields pretty easily,” he said.

Alexander and Daniel Ron, now 28 and 30, founded Scarlet Capital in 2018 with adaptive reuse projects as their top priority. Their completed portfolio includes the Purse Building, a 20K SF historic warehouse at 1701 Commerce St. in Downtown Houston. Scarlet Capital in 2023 repurposed that building into office and studio space. 

Nearby, The Docks is contributing to a major overhaul of a historically industrial part of Houston’s Inner Loop.

The brothers helped complete The Docks' renovation over a 90-day period last year, stripping it “to the studs” and creating office suites of 800 SF to 4K SF. This helped bring the building from about 40% occupancy to 100%. New tenants include Alpine Partners, a commercial real estate firm, and Apollo Media Group, a sports content producer. 

Scarlet Capital is now working on renovating a neighboring 20K SF warehouse. This project doesn’t need to be done in 90 days, but they also don’t see a need to wait for interest rates to drop.

“It doesn’t really make a difference if you’re borrowing at 4% or 7.5%,” Alexander Ron said. “If you’re stabilizing the project at 12% [yield], it’s kind of inconsequential in the grand scheme of things.” 

And although financing sources have dwindled in recent years, Daniel Ron said they were still always able to secure traditional financing.

“We’re not aggressive borrowers,” he said. “We're not looking to squeeze every last percentage point of yield. We're taking a little bit less debt, but if the property underwrites better from the perspective of the lender, we're perfectly happy there.”

Scarlet Capital is also selective about the properties it chooses to acquire, Alexander Ron said.

“We make sure that whatever we buy will be able to stabilize at a yield that's higher than the interest rate,” he said. “That's all it really comes down to.” 

Scarlet Capital purchased The Docks at 1125 Providence St. on the last business day of 2023 with “extremely generous seller financing terms,” low interest and high leverage, Alexander Ron said. They finished the remodel and refinanced within three months to stabilize the property.

“We were really cognizant of the high leverage because we wanted to control the entire property for a very small piece of equity,” he said. “That's why we were so, I don't know, just obsessive over completing this in 90 days.” 

The development is near The Deal Co.’s adaptive reuse project where Meow Wolf opened late last year, as well as the longstanding Saint Arnold Brewing Co.

“Being next to Meow Wolf and Saint Arnold and all of the Hardy Yards, new apartments and [University of Houston] Downtown, we don't feel like pioneers,” Alexander Ron said. “It’s much easier to play into the ecosystem than generate your own.” 

Despite the area’s resurgence, the timing to buy The Docks was dictated simply by it being available for sale, he said. The brothers grew up in Houston and had heard about the property their whole lives, with many telling them that they used to work or party in the buildings.

“This is something that's, in our mind, a trophy in the city of Houston,” Alexander Ron said.

The property was never publicly marketed for sale, but Scarlet Capital was one of a few groups approached with the opportunity to buy it, he said. It won the deal by putting up a substantial amount of nonrefundable earnest money.

For the neighboring 1940s warehouse at 1133 Providence St., Scarlet Capital bought into an entity with an investor who has owned the property since 2002. Scarlet helped secure that deal by agreeing with the Texas Department of Transportation to run the condemnation process on part of that property.

That process wrapped up about 45 days ago, allowing Scarlet Capital to start the redevelopment. The brothers expect to welcome tenants within the next six months.

Alexander and Daniel Ron founded Scarlet Capital in 2018, partially focusing on opportunistic investments like retail centers filled with pharmacies, dollar stores and other triple-net-leased tenants. 

While strip malls are again gaining investor attention and some are getting a major glow-up, Scarlet Capital is happy to focus on vintage assets that house longtime staple businesses.

“They’re not sexy, but they pay the rent,” Daniel Ron said.

Scarlet Capital's strategy for shopping centers, industrial properties and potential adaptive reuse prospects centers around buying assets for far less than it would cost to replace them, Alexander Ron said. They typically pay less than half of what a replacement build would cost, then charge similar rents to a new build after completing deferred maintenance, repairs and minor aesthetic touch-ups.

“It just seems like a cheaper way to get into that space,” he said. 

Late last year, the company bought two shopping centers: the 70K SF multitenant Williamstown Shopping Center at 9501-9533 Southwest Freeway and a 10K SF property at 7728 Lockwood Drive.

The company also acquired a 45K SF warehouse bordering Buffalo Bayou at 700 Plastics Ave. before 2024 closed.

Both of the retail centers have tenants with triple-net leases, which helps insulate the landlord from inflationary costs, Daniel Ron said.

“On triple-net assets, we get to pass back the operating expenses to the extent that tenants can afford it,” he said. “We're not really affected by those costs.”

The brothers seek out blue-chip tenants that are stable and pay rent on time, Daniel Ron said. The Lockwood Drive property is leased to Dollar General, and Williamstown Shopping Center has Giant Dollar, Cricket Wireless, a barber school and other restaurants and businesses. 

“There’s a price point at which everyone needs something,” he said.