John Ziegenhein on the IREI Podcast with Host Mike Consol

Listen to the full episode here.

Mike:

This is Mike Consol, your host. Thank you for joining us. Welcome to the program. Our subject is multi-generational real estate investing. As in, what is the definition and objective of multi-generational real estate? What role does real estate play in preserving family wealth? And why is real estate particularly well-suited for multi-generational wealth building? To discuss those and related topics, we're joined by John Ziegenhein, President and CEO of CCLC, where he oversees the company's new development and 2 million square feet of existing commercial and residential properties. He has more than 25 years of experience in real estate development and management. John Ziegenhein, welcome to the program.

John:

Thank you, Mike. It's great to be here today.

Mike:

First, how about a definition of what exactly multi-generational real estate is? Does that suggest real estate that has been controlled by a family over generations or real estate being acquired with that intent in mind or both? 

John:

I’d say it's a little bit of both, but I think philosophically, it's really the intention of preserving and growing wealth not for the current owner alone, but for future generations. The primary goal is preserving real estate capital purchasing power across decades and generations rather than optimizing for short-term IRRs.

Mike:

So what about the role of real estate in terms of preserving family wealth. What makes real estate particularly well suited to this ambition that any family has for preserving wealth or growing their wealth for future generations?

John:

Yeah, I think there's a number of factors to consider there. I mean, historically, real estate has served as one of the most effective wealth preservation vehicles because it combines income production, value appreciation. It has inflation protection and tax efficiency, and it also has long duration. So unlike stocks, equities and other, you know, financial instruments, real estate will continue to generate utility regardless of market sentiment. People will always need a place to live, work, shop, receive healthcare, you know, et cetera. And so those factors, including inflation, you know, commercial leases have that built-in annual escalation and periodic market reset. So that helps ensure your top line revenue over time is rising alongside with or above inflation. And at the same time, replacement costs increase over time. Quality real estate often preserves purchasing power better than any other financial instrument. And then those tax efficiency measures and wealth transfer to sort of make it natural to pass the assets on to the next generation over time. The only other point I'd make in terms of the family office is, you know, I think there's a lot of there's a lot of connection that the family has. It creates a lot of engagement, unlike, you know, a stock portfolio. If we own stocks together, that would be great. But if a family owns something that's visual and tangible and something that they felt like they created and it helped foster a community and they can live in that community and they can experience that, that really gives you a sense of pride. And I think that's something that's easy to pass on from generation to generation.

Mike:

So then the grandparents die or the parents die and you've got children who decide that they have different ideas about what to do. Is there a governance element to this? Because I could see where some of the kids say, look, I want to liquidate that because there's things I want to do with the money while others are saying, no, that was not the intent. And this is, you know, this has been in our family for a few generations. You know, it would be an apostasy to sell this property. How big, how do you handle something like that? What does a family do to make sure that you don't run into these huge conflicts?

John:

Yeah, it's a great question. And fortunately for me, all of that had been solved when I joined the company. My company has been around since 1890. We're, you know, 5th, 6th generation. And a lot of the governance that we have in place has been in place for quite some time, whereas a lot of my peers, we talk a lot about what is the right structure when you have that first generation to second generation. Oftentimes, that's typically the most difficult transfer. But yeah, we have, I think, all layers of governance. And I think it's really important that a family office have that for that very example where a shareholder or family member decides I'm changing my mind and I want to take a different path. Well, in our world for CCLC, we are governed by the management team at the company and then we report to a board of directors. And that board of directors is a combination of family shareholders and independent board members. We have strict bylaws where we operate the company by the bylaws. We also have strict transfer rights on our shares. And since we've been around, we have a liquidity provision, but it's a sort of private sale. We don't offer shareholders to simply call us and say they'd like to cash in their chips because if we allowed that, well, as you get into those next generation, other generation, you likely face that risk that you're now faced with a liquidity crisis because maybe there's a global recession and a lot of family members or shareholders want to access that through liquidity. And in commercial real estate, those two concepts just don't marry up. We're in a very illiquid environment. And if you're in a scenario where you're faced with a global recession, that's likely the worst time to think about liquidating a building to provide capital to the shareholders.

Mike:

So your company then is a multi-generational real estate company. You've got real estate that you own, that the company owns. It's a family-run company, is that right? Or is it not a family-run company?

John: 

Today it's independent. Today we are the management team's completely independent. That's sort of changed over the last 20 years. Historically it was run and controlled mostly by a or multiple family members, but today we're completely independent.

Mike:

So are you handling the property almost like you would for a family office? Is it a family office of sorts or is that not the case?

John:

No, I'd say that's the case. We've been, since I've joined the company, we've been transitioning the company more into a traditional investment management slash family office. But now I say that we used to do property management. We used to have a substantially larger team. And we felt that for the value to the shareholders, we weren't running an efficient management team. We started to pivot from that to a more traditional portfolio management company with a lot of seasoned executives on the marketing side, asset management side. And so now the way we think about it, CCLC used to be perceived as bringing value because of the land that we owned and controlled. Now we're shifting to the value we're creating is through the expert asset management and portfolio management. So we view ourselves now as a family office investment management company dedicated obviously to one sole family.

Mike:

Okay, so let's take another family office. It's a family. They've hired an administrator. It's a single family office. They've got maybe a family member or two. Let's say there's a family member who says, “I want to liquidate some of this because I want to invest in AI because it's so hot.” And the government says, “no, we're not going to do that.” But let's say they've got financial issues and they're saying, I need to get some kind of cash out of our holdings. What are the options for doing something like that if somebody does run into some financial issues, but you don't want to liquidate the property? What are the options there, John?

John:

Well, I can't speak to the universe of family offices because they all have their own way of operating and some I think might have other means. But from my knowledge in those scenarios, that shareholder or investor, however the interest is owned in that collateral, they are allowed to sell their interest to other investors. So they can't force the liquidation of the asset, but they can offer their interest for sale. Then you go into a private conversation, private transaction, and then that transaction is consummated outside of the operations of the company. And then whatever owner, operator elects to buy those shares has now just increased their position in the asset.

Mike:

Okay, I see. So which property sectors have- actually, let me back up a minute, because when I think about somebody who, an investor or an advisor listening to you right now and thinking, things have changed a lot since COVID. office, which used to occupy big portions of real estate portfolios are now greatly diminished. People thought hotels were going to get wiped out. That proved to be wrong, fortunately. Same with senior housing. But not all property types do that well in the last several years. Real estate's been in, well, it hasn't been as hot as it used to be. What would you tell somebody about how the state of real estate right now and taken into consideration the reservations they've got about real estate, what would you tell them? To ease their concerns, their trepidation about getting into real estate.

John:

Yeah, well, obviously right now we're in a very challenged environment, likely the most challenged environment that I've seen in my career. Again, from our perspective, when we're looking at real estate and we're thinking about these long-term horizons, you have to acknowledge and accept that there will be ups and downs, there will be recessions, there will be, rates will increase and leverage will sort of fall away. So you have to really position yourself to understand those changes in the market should be expected at some point through your holding period. Even, you know, the darlings always been multifamily. Multifamily has always been one of the strongest asset classes. And even today around Washington, DC and other major markets, it's going through a challenging phase. Now, multifamily challenging phase means occupancy drops from 95% to 90%. And maybe you're maybe you're seeing rent growth of, you know, 1% instead of 4%. So that's very different from what you're seeing right now in the office market where, you know, values have plummeted and cap rates have, you know, gone up close to 10 or over 10% in some cases. So multifamily has always been a strong asset and I think has always been favored just based on its characteristics. And, you know, people always need a place to live. Population growth is always gonna continue. And as an owner, you know, multifamily is the one asset where you benefit from highly adaptive leases where you can adjust your rental rates every 12 months. So, if you're in a high inflationary period, you can keep up with that inflation and your operating expenses by adjusting your rents that way. And then, you know, I'd say grocery anchored retail is another good example. And when I joined the company, I joined during the pandemic, one of my favorite assets was one of our grocery anchored centers in Virginia because it seemed like the COVID proof center. It had the grocery store, Starbucks, it had the Chipotle, it had the CVS, it had the liquor store.

Mike:

Would it be some medical office in there?

John:

No, there's no medical office. It was the one stop shop for everything that you kind of needed for your basic goods during that period. And obviously it was performing very well.

Mike:

So there's some resilient categories like you've got residential, industrial has been pretty resilient, I would say. But we have a lot of these specialty or niche categories now, John, that a lot of people are really committed to. I mean, you've got data centers, you have student housing, you have self-storage and so on. What about- what about kind of these niche categories. My understanding is they add complexity to the portfolio, and you need more expertise. What are your thoughts on that?

John:

Yeah, you absolutely need expertise. And we put those in the bucket of alternative investments and we would love to get some exposure to those assets. A lot of them can be very strong performing assets, both in the short term and the long term. Our view is we're not familiar with those assets from a development and operating point of view. And so, if we were to enter into one of those markets, that would likely for us be through a joint venture with another operator where we would do an equity investment. That's something that our company has never done before. And so it's a new concept that we've toyed around with it. We've talked about it. We may explore it. But traditionally, we have been the owner and the operator of all of our real estate. So it's a little bit of a pivot, but I think it might be the right time for us to take strong consideration, especially when you see how much growth there is in those sectors.

Mike:

So for the person who's saying, if I think in terms of a 20 or 30 or 50 year time horizon, it's really difficult to evaluate opportunities that are out there that are going to abide over that period of time. Is the answer that, hey, look, you're not like a Junebug and Amber. You're going to- you're going to move things around as if a category gets weaker over time like office has because of a hybrid office, because of COVID and hybrid office and a lot of remote work, that money gets, some of that gets liquidated and re-funneled into other property types. How much shucking and jiving does your organization or other organizations you see that's trying to do the same thing do in terms of reformulated portfolio every so often?

John:

Well, our approach and again, our company, when it was started, it was started by creating a trolley from downtown Washington, DC to Chevy Chase, Maryland. So we've always had this transit-oriented slant to us. And so, a lot of our approach when we think about those 2030, you know, longer duration type of investments, is yes, there's obviously a near term development and an asset that we're going to hold. But we also look very, very hard at what is the long-term opportunity? What is the next cycle going to bring? Is there optionality with that asset in terms of the underlying land value and the ability to do some strategic repositioning, adding additional density and rezoning? So, I think it's more important if you're sitting in our shoes and thinking the way we are, near term cash flow is obviously very important, but you really need to look for that flexibility long term if that's your task of taking things through those longer durations. And again, it's interesting. We're shifting that mindset a little bit because I do think one of the mistakes that family offices make is they can buy an asset and they can consider it a legacy asset. and they hold on to it for well beyond that optionality that I just talked about. And now you're starting to see your, you know, your equity erode, your values drop. And so you have to recognize that not every property is going to endure every cycle and offer upside long term. So we take a approach today, especially in today's environment with all of the changes that we're seeing. where there's certain assets that we have, including one that we just redeveloped into a large mixed-use property, and that's one that we've owned for 100 years, and it's gone through several different developments, and it's provided the community with several different means of real estate through retail shopping centers and a lumber yard and some other uses. And now it's a large scale mixed-use property with close to 600 apartments. So I think it's you kind of have to bifurcate your thinking on what you're doing and which assets you're going to you're going to want to hold for that long duration and which assets you think maybe this is a near more of a near term exit.

Mike:

What about the trolley line? Is that still in the is that still controlled by the family?

John:

So that trolley line eventually became Connecticut Avenue. And then after that, trolley line is in many ways the location of the red line of the Washington Metro system. And the history of it was it was put in place, if you believe it or not, to take people to Chevy Chase, which is a neighborhood inside the Beltway to get people out of the city and out into the country. And that was the beginning of Chevy Chase, Maryland, which was the first master planned residential community in the United States.

Mike:

Interesting. So obviously an investor does well to be dispassionate. You don't want to let your emotions drive your decisions. But on the other hand, if there's a piece of real estate that's really kind of signature piece of real estate that the family has owned from the beginning, it was like our first property. or the first thing we were doing with that property. There's, I would imagine, and it's not the finest piece of real estate we own anymore, but we don't want to give it up because it's meaningful to our family. You get into situations like that as well, I would imagine, and you wouldn't necessarily talk somebody out of holding on to something that they consider to be kind of a family icon or talisman, correct? Or is that kind of faulty thinking as an investor?

John:

Well, I think it's our duty- we view ourselves as the fiduciary to this family and all of the shareholders. And we would be compelled if there was an asset like that where people felt there was so much attachment that we couldn't part ways with it. I think we would approach the family and let them know that it's our recommendation that we exit that and deploy the capital into other properties. If you take that attachment and then that continues, you're really not serving the next generation of the shareholders. If the next generation is now looking at something and they all say, wow, why didn't that asset get sold 30 years ago? And now the value has continued to erode. So that's not really providing the long-term wealth. And so we would be in a position today to kind of, to help the family come to terms with separation of that attachment.

Mike:

Okay. But ultimately it's up to the family. I mean, if they own a theme park and it's like, yeah, it was not what it used to be. It doesn't really attract the crowds like it used to, but we just don't want to give it up because it is precious to us. from an emotional and family history standpoint. Ultimately, they make the final decisions, but you're giving them your best analysis or recommendation as to how they can maximize the value of their real estate. It sounds like is what you're saying.

John:

Yeah, I think so. And I think it's important to understand that, and again, I'm going back long term, the legacy family office and the private investor structure around commercial real estate has changed significantly in the last 50 years. Going back to the tax acts in the 1980s, there was a time where families like ours and others were typically the sole owners of commercial real estate. It was high-net worth individuals, family offices, private investors. There was no liquidity outside of that in commercial real estate. And that all started to change quite a bit in the 1980s and then in the 1990s with the introduction of the reach structure. So, over the next 20 years, that really pivoted where a lot of institutional capital came into the market. And now they are the dominant owner of commercial real estate in the country. So, the traditional family office, I think, used to have a lot of leverage, and I think they used to be able to control what they bought and sold. And it was a very, very private type transaction. Whereas now, when an asset's put onto the market, you're going to get, you know, if it's a quality asset, you're going to get bids from buyers around the world. And many of them will be institutional players with very high liquidity and very competitive offers. We're no longer playing in that world where I can go down and talk to, you know, the owner down the street and negotiate a quiet deal over a cup of coffee and we have a transaction and no one even hears about it. So, the playing field has gotten very, very competitive. So, you have to think, you know, with that mentality as you think about what assets you should hold and what assets you might want to buy. So, it's, and the other takeaway to that is, The risk to us and other families like us is we are not transacting very frequently, whereas a fund or, you know, they're putting out capital, they're recycling capital throughout the year. When you're dealing with someone who is maybe buying or selling an asset once or twice or every two years, you're not known to the sellers, you don't prove your execution, you need to be tested more, which means you likely have to be the highest, very aggressive bidder to win the deal. And so, I think the family office legacy owners are at a little bit of a disadvantage in today's capital markets.

Mike:

So how do you think in terms of leverage and risk when the goal is long-term preservation? You're looking at properties. What about leverage? What about risk? How do you approach that, John?

John:

I think that's very simple. Leverage can simply make or break a legacy owner. I think most multi-generational owners will view leverage as a very modest tool. It does obviously offer a lot of upside and a lot of growth in your portfolio. But the objective should be really to match your duration of your term with your anticipated holding period. And, you know, like we typically target 35 to 50% leverage. Very rarely will we try to maximize our debt to juice the returns because that's a very short-sighted approach. So, we take the long- we play the long game and, and we've done fairly well by that. So, you know, and the benefit is if you are matching that duration and you think about the next generation, over time, your tenants as they pay rent are effectively paying down your amortization. So your equity is increasing, your values, appreciation, and at the same time you're collecting your cash flow. So we tend to be very conservative on the debt side. I think most legacy owners are. I think you see about and hear about those that are looking at very short term gains and where they try to juice the returns through floating rate debt and obviously higher risk, higher reward, but that's not the business we're in.

Mike:

What is the is there a mistake, a big- the biggest mistake that you see families make when it comes to this investing in multi-generational real estate or managing that real estate? I don't know if there's any kind of standout thing that you have seen happen on repeated occasions that you would point to and maybe wave a yellow or red flag about?

John:

Well, I think we've touched on too. And again, back to your earlier question, and we're shifting this mentality, you know, more and more. And that is we should avoid becoming emotionally attached to specific properties. And I think some some family office will confuse wealth preservation with asset preservation. And we believe the goal should be preserving and growing the family's capital and their mission, not holding on to, you know, every asset forever. So that's one thing that we're really focused on right now. And you just have to acknowledge that sometimes growing capital requires selling those legacy assets and redeploying into other markets and adapting your portfolio. And as you mentioned, there's a lot of new, you know, alternative asset classes out there that you might want to get exposure to. So, you're not missing those returns in your portfolio. And I think the second is over leveraging in pursuit of maximum yield. High debt loads, you know, during a bull market might give you a nice short term cash distribution, but they can also, they don't leave very much margin for error. And so if interest rates rise and you're in a market like today where vacancies spike in an office sector, well, then you don't have a choice of whether or not you're going to sell that legacy asset. It may just be taken from you.

Mike:

Our guest has been John Ziegenhein. He is president and CEO of CCLC, where he manages multi-generational real estate. John, thanks for coming on the program. Really interesting stuff. Appreciate your time.

John:

Yeah, thank you, Mike. This has been a great conversation. I appreciate it.