An Interview With: Jeff Neal
Jeff Neal and Michael Darby, who worked together at both Carr and Akridge, founded Monument in 1998. It’s now one of the most active developers in the region, with numerous high profile projects, such as the conversion of the Watergate hotel to condominiums. Neal, 42, from Nashville, Tennessee, graduated from the University of Virginia in 1985.
Bisnow: Many are struck by how active Monument is in both condo and commercial. Isn’t that rare? How did that come about? It’s not rare, but it is uncommon. JBG and Akridge do some residential. In the late Nineties, we were building to tech demand primarily along the Dulles toll road, and when tech dried up, since we’d built a whole company around doing office space for that kind of user, we had to find another way to deploy our resources. At the time, we thought that was a leap, but it turned out to be a fairly natural change of businesses, because we were building big boxes, and so instead of putting offices into the interior we started putting residences. We knew what we didn’t know well enough to hire the right set of consultants and experts to round out our skills, but our real estate skills and construction management skills transferred pretty well. They wouldn’t have transferred very well to building hotels or warehouse storage space near the airport or something like that.
If it’s that natural, why don’t more developers do it?
The real estate skill transfer is natural, but the market underwriting and capital availability are very different. In fact, most of the investors in our previous office development phase turned down the first few deals we took to them for residential because they weren’t convinced that we knew the market risks that we were going to take their money into. They could buy into the idea that we could put the bricks and sticks together, but they were correct that we needed to learn more about the market dynamics of residential.
Would you, in fact, consider going into retail or hotel development?
We’d consider, but there are some very accomplished people already in those businesses, and we don’t think that trying to compete would be a good idea; we’d get beaten. The residential market in this region was relatively untapped at that time, downtown hadn’t seen a lot of high-rise, multi-family residential development in many years. The skill set for that wasn’t very highly developed. Now, some will say apartment buildings were being built. But the office building people weren’t in the residential business and there were no dominant residential players downtown. No one was doing it on the scale we’re doing it now. So we saw a competitive opportunity and dove in. We found a capital provider in Lehman Brothers who believed the market dynamics would support the program that we put together, and they gave us the financial wherewithal to pursue it.
You have many condo projects with cool names: Dumbarton Place, Potomac Place, the Odyssey, Platinum Penthouse Suites, and so on. Putting aside your Watergate development, what is the common denominator that makes these different from all the other condos under development in this region?
I know everyone else would say this about their product, too, but we feel we go the extra mile to deliver high services and quality finishes. When the residents move in, if there’s a problem in their unit—even a scratch on the wall—our managers don’t say, “Well, your furniture must have scraped it when you moved in.” We say, “Yes, ma’am” or “Yes, sir, we’ll have that painted right away.” The other distinction is the locations that we choose. We’re doing a lot of infill, and the amenities that are in place already in those areas provide a lot of synergy with what we’re building.
What’s the range of prices for your condos, other than the Watergate? What do you get for what price?
At Potomac Place, you might get a 950 square foot one bedroom and den for $375,000 or $400,000. If you wanted the same at the Platinum Suites or the Odyssey, that’d be $700,000 to $750,000.
What’s the risk that you undertake when you set a development in motion? How confident are you there will be a demand? In this region, it’s pretty easy, because we rely on the history that in the last 10 or 15 years, there’s been 50,000 to 75,000 new jobs per year; that is the fundamental underpinning of our underwriting, and there’s old product taken out of supply. There’s a widespread concern that we’re building too much, but we still see a pretty good balance between what we and our competitors are building and the demand out there. We’re building more than we have in many years, but that’s because we were not doing anything before. All the new households were going out to the suburbs, but now they’re moving back in.
H ow long does it take between identifying a site and the first tenant? It can be 10 years, but a normal cycle would be three to four years.
What has caused the return to the city? A demographic shift, lifestyle changes, people wanting to avoid traffic, empty nesters wanting to live closer to restaurants and in-town entertainment. The last kids leaving the house, and mom and dad are still active and don’t want to sit by the fireplace and watch Lawrence Welk on TV. They’d rather be living in a close-in condominium instead of their spread in Potomac, Maryland.
Something like Dumbarton Place, the old CQ building, why not just level it? Why keep the structure? It’s a close call on the cost side. That building had two things that made the call to save it. It had an existing 120 space parking garage below ground; it was more parking than we ever would have built. Above ground, there were some zoning matters than made it advantageous. It would have exposed us to new guidelines and we couldn’t have built as much space.
Can you walk us through the financial numbers of the building you’re putting up next to the Post?
We bought the land from the Post company for $50 million two years ago. We named it Columbia Center to reflect its location in the heart of the business district. We’re digging the foundation now, we’re going to build 400,000 square feet of Class A office space. Comparable properties have sold for $700 a square foot. If you do the math, that’s $280 million. $50 million bought the dirt, and we’re going to spend considerably more than that to build the building, but we wouldn’t do it unless we expected a significant margin.
Why not make it condos?
Location. It’s the heart of the business district. The highest and best use of that location is office space.
There’s a rumor a law firm is looking closely at it.
Yes, that rumor is well founded, and that is the target customer for a building like this.
How’s it financed?
A somewhat unconventional financing structure. Normally we would be in a partnership with a financial institution like Prudential Real Estate or Lehman Brothers and we would layer in a construction mortgage from a bank, like Fremont Investment and Loan, or Corus Bank out of Chicago, or Bank of America. So in the risk return picture, the bank or lender gets their money first, then Lehman or Prudential would get second, and if we invested alongside them we would get capital returned at sale, prorated to us with Lehman. But once capital is returned to Lehman and us, then we would kick into a split of profits with the developer making a disproportionate share.
How’s Watergate going and what’s the square foot price of units?
We closed on that almost two years ago. The final purchase price was about $50 million, and we’ll spend tens of millions renovating it starting the early part of next year. Then a year from the start date, we’ll begin moving residents in who will have paid on the order of $1000 a square foot. There’s 103 apartments averaging 1700 square feet. On the upper floors, larger units might sell for $1500 square foot, since they have unique, one-of-a-kind views of the Potomac. We’re going to go after an international market, since this will be some of the highest quality real estate in the city.
What do you have going on near the planned baseball stadium?
We’ve accumulated land on which we can build roughly a million square feet right at the front gate of the stadium. We’re in a competition right now with several other developers for development rights to two-plus million square feet intertwined with what we own as well as on other blocks close by. If we’re successful in this bid with the city, we could be embarking in the next 90 days on a three to three-and-a-half million square foot development that could happen over the course of three to five years. It would completely change the neighborhood, making it one of most dynamic areas of city, with several thousand residences for five to six thousand people, 375,000 square feet of entertainment and retail, and a few hundred thousand feet of office space for several thousand people.
How did you get front gate property?
We started prospecting there almost two years ago when baseball coming to the neighborhood was just a whisper. But we knew that the growth of the city needed a release valve and it had to go somewhere. If you look at a map and track development cycles, it was a natural next wave of development, because you hit walls. The east end developed and there’s not any raw ground because you hit established neighborhoods in every direction. So we saw that coming, it was just a macro trend you could predict. The problem is you don’t know if it’s going to happen in two years or 20 years, and you don’t want to get too far ahead of the curve. A lot of people we were competing with wanted to stick their toe in the water. What we did was dove in head first, because we knew that even without baseball, the neighborhood was going to be transformed.
How do you and Darby divide things up?
It’s an informal division. Michael tends to do the development and construction, and I’m more the financial side. But it’s often interchangeable.
Do people say, “Hello, Michael” to you, because they know you’re these two guys and who can remember which is which?
When did you realize you would do real estate for your life?
When a friend in the fourth year of college told me it was high time I went on a job interview, and he told me to bring my resume to his real estate finance class, where there would be a company called Oliver Carr, and I should see if I could land a job.
What did you do at the beginning?
In late 1985, I was sitting in front of a computer for them and crunching numbers, with absolutely zero real estate knowledge under my belt. I worked for them until a year after their IPO, then left in January 1994, re-teamed with Michael who I’d worked together with at Carr. He left a year before I did to develop a golf course in Prince William county in Virginia. I hooked up again with him and we spent a year trying to put together a golf business around his development. We spent about a year at it, but didn’t make much progress. Then I came back into the city and became a partner of Chip Akridge for four years until October ‘98 when we started Monument.
Think you’ll be in this business a while?
No where else to go. :)