How to find and assemble large projects? What are the real estate market trends and investing strategies? Victor Menasce, an author, real estate developer, and host of the Real Estate Espresso Podcast, shares his knowledge.

Tell us a little bit about yourself.
My path into real estate and the world of development was not the typical career path. I came from the tech industry. I spent a bunch of time in Silicon Valley and started my career as a microprocessor designer, rose through the ranks of both public and private telecom and semiconductor companies, held senior engineering roles, did five mergers and acquisitions, one IPO, and got a bunch of business development experience. And then 2009 came along, I made a hard left turn out of the tech career into the world of real estate investing, which turned out to be a good move. It was a good time to be playing offense in real estate but a terrible time to be playing defense. It was a very forgiving environment, forgiving of mistakes and learning things that I thought I already knew, but it turns out, I had to relearn them again.

I started in 2009- 2012, it didn't make sense to be doing a ton of new construction, because you could buy things for a fraction of construction costs so why would you build? In 2011 and 2012, we are seeing the bottom of the market, we are seeing four or five years of pent-up demand where there have been virtually no new product introduced into the market. I started to develop a skill set of building new products initially in an urban infill setting, and then progressively over time, adding more and more components to it. The step from there to getting increased density through zoning variances was a small step from there to doing larger projects, it was a small step from there to doing land development, and so on. Incrementally, over time, we developed the skill of doing larger developments, where today, we have a reasonably sized organization, we're active in nine states, across the United States, and we are active in Canada as well, which is where I reside. A couple of years ago, we opened a consulting division, which we are also building for third parties right now, as well. We have 500 or 600 units of new construction that we're doing for other people, in addition to our projects, and just love the journey and are happy to be here.

You have many projects right now, but one in particular is huge. How did you get it? How did you put it together? And what are some of the good, bad and the ugly that so far has happened?
I have no idea because we don't hunt. We never have and every single one of our significant projects has landed in our lap. We've been approached, where somebody says, "I've got this deal. I don't know what to do with it. Can you help?" They've almost all had that characteristic and this one was no different. This was a huge property on the edge of Colorado Springs, it's 17 183 acres or 77 million square feet, pretty big and the perimeter is about seven miles. The history of this property is it was called the Norris Ranch and Mr. Norris was the Marlboro man in the cigarette commercials.

The original Norris Ranch was massive, it was close to 20,000 acres. We got the last remaining piece from his son, Steve Norris. Someone approached us who got it under contract, and didn't know what to do with it, he didn't have the money to put it together so he had negotiated a reasonable price of 10,000 an acre, about 23 cents a square foot. That's a pretty good number. It's a fair price for agricultural land. If you look at agricultural land anywhere across the United States, it will vary between 3 to 10,000 an acre, depending on where it's located. If you're growing weed on it, it's maybe towards the higher end of that spectrum. When I talk about land value, I typically talk about the entitlement multiplier that comes with land because it's just dirt, why is this dirt worth more than that? It's because of what you can do with it. An agricultural land, 3 to 10,000 an acre, if it's entitled for development, maybe you can put a subdivision on, it might be a couple of 100,000 an acre. If you can put a 40-storey building on it might be several million an acre, but it's all still the same dirt. Now, the supply and demand have to come into play here as well but it's largely tied to what you're allowed to do with it. So, if we can transform this from agricultural land into the growth path for the city of Colorado Springs, we can probably create a reasonable multiplayer value.

We negotiated a contract, we took over the contract, we renegotiated it, and got it re-signed with us. It started as a contract assignment but it got improved. We negotiated a fairly lengthy closing period, which included the entitlement. And now, it had some timelines associated with it, so the sooner the entitlement or the expiration. We did not meet the entitlement timelines, we were originally expecting, based on conversations with both the county and the city of Colorado Springs, that this is something that would be pretty quick. It has turned out to be not but it's still an amazing project.

The other thing we decided to do was to raise the capital, all 100% through equity, no debt -roughly a $20 million purchase. When something is a long-term project like this, we're talking about a major expansion of the city that would eventually be about 8,400 rooftops, retail, commercial, industrial, schools, fire, electric substations, arterial roads, collector, roads and local streets, it's a major undertaking. And so, raising 20 million to close the dirt is the price of admission, that's just to get started. There's a whole lot more to go into this after that. At first, when we were approached with it, we thought this was too big and complex. And we let it go at first for about two weeks and then we woke up one day and said, "We've done other projects at a zero, but it’s just another development project." We decided to go for it and we have been successful in closing it.

A couple of things that are unique about this particular property is it's not just another Ranch because ranch land does ranch land. Our immediate neighbor is Schriever Air Force Base, which is a US base command. When we hear about maybe a Zelinsky getting intelligence from the United States, it's coming from right there. It's a smaller Air Force Base, and it's now Space Force, it's the sixth branch of the US military, and it's no longer purely Air Force. It's a smaller base as they go because it doesn't have an airstrip. It's just a bunch of antennas pointing at the sky, but still, 7000 people go through the front gates every day. And we've had some very good conversations with the leadership at Schriever to find out what it is that they need, give us your shopping list. They need to add more missions on base, and they have constraints in terms of military construction budget so to do that, they need to move admin functions off of base, while the closest office space is 30 minutes away downtown, and that's not convenient. “Could you please put an office building right at our front gates, we'll be your tenant?” “Okay, what else would you like?” “How about a hotel, the closest hotels at the airport? 15 minutes away?” “Okay, what else would you like?” “How about a daycare? We have 7000 people through our front gates every day.” “Okay, what else would you like?” We've had a number of these conversations. We identified the needs because of that economic anchor that is our immediate neighbor. And put together a seven-phase master plan, this is going to be a 15-year project with easily 65,000, linear feet of arterial roads for different densities of residential, commercial, schools, retail police fire, and the whole bet.

It's a big, complex project. The key to doing any project like this is to put together the right team. You can hire qualified civil engineers that can do things. You can hire qualified planners, while our planner used to be the head planner for the county and his staff. They are now on our staff. One of the partners in our project, his father used to be the county commissioner, and his wife is the current county commissioner. Here's an individual who can invite members of the city council or the mayor over to his house for a barbecue and they'll show up. It's getting that caliber of individuals on your team. One of the partners was Colorado Springs Citizen of the Year in 2019. He runs the local defense incubator, which means that there are several defense startup companies that all work in his facility, and a couple of 1000 people work in his defense incubator. He's a partner in the business.  There are guys with lots of stars on their shoulders walking through the front gates of his building, every day and I've physically witnessed that so he can reach out to these folks and have these conversations directly. When you say, "How is it that some dude in Ottawa, Canada is buying just under 1800 acres in Colorado Springs?" It doesn't make any sense. It's ridiculous and yet, here we are, it's because we put together the right team.

Like Ford famously said, "I don't know everything but whatever question you ask, I know who to call for the answer." And that's all we need. We are the orchestrators of these deals. What are some of the hurdles besides the entitlement that you faced that were hard?
The hurdles have been mostly bureaucratic. We started the annexation petition almost 18 months ago. And we're not through that process yet. There were some procedural attempts to slow us down. There's another large developer in Colorado Springs that owns 20,000 acres and they were trying to create an environment that would make it difficult for other developers to annex into the city by creating, essentially using water sustainability as an excuse. They managed to convince the city council to enact a new ordinance that would prevent new annexations based on water sustainability. That looked like it represented a threat to our project. We managed to overcome that, we influenced folks within the city council to soften the language. Today, anyone would argue that it's a known issue, we've gotten through that.

We are in the queue right now behind another large project of about 3500 acres that's supposed to be in front of the city council in the next couple of weeks. Depending on what happens with that particular project, that will affect some of the technical aspects of our application. If they get accepted, then our map changes slightly. If they don't get accepted, then it changes another way but either way, we're still moving forward. There are a few technical things that are obstacles, but these are solvable problems. It may turn out that we decided to build this initially within the county. When we first started the project, the city of Colorado Springs approached us and said, "We would like you to annex because we don't want the risk of another municipality appearing on the map between Colorado Springs in Schriever." Because we are large enough, we could incorporate it. They wanted to prevent that from happening and they showed up on announced uninvited at a meeting that we were having with the county. That was the impetus. The main benefit that being part of Colorado Springs brings us is access to its utilities. We still have to pay for those utilities extensions and we would still need to pull water and sewer about three miles. There is still a good $12-15 million of incremental investment just to extend those services, then we'll have to pay for that. But there are other options within the county. I don't think we'll have the water within the county to do 8000 rooftops. Maybe we'll start with 1500-1600 but that's a start. And then, maybe we annex later, I don't know. These are various strategies and scenarios that we're examining and we'll see how it goes. We don't feel threatened by the delays, we know we're sitting on tremendous value here, we know we're in a unique position and so I feel like we have the negotiating leverage to accomplish whatever we need to whether we go through door number one or door number two, we'll get it done one way or the other.

Where we are today in the market? Are the deals better? Is it time to buy?
I wouldn't say that it's better in the sense that there's less insanity than there was because I think we would all acknowledge that many of the valuations that we witnessed in 2021, 2022, and parts of 2023 made no sense at all. I think reality is setting in for many of those and that's going to create distress for a number of those. If you think about folks who would have started a project, maybe a value-add project in 2021 with certain interest rate assumptions, with assumptions about rent growth, and so on, they find themselves in a very different world today, probably with no path to get into permanent financing without writing a massive check. And initially, they were probably thinking they were going to get a significant cash-out to refinance, but it's going the other way.

I think the lenders are still in a mode of "extend and pretend", the bridge lenders in particular. The forecast flood of deals is a trickle, not a flood yet, I think it's coming but a lot of lenders don't want to recognize distress on their books. We are starting to see valuations become more reasonable. We are evaluating deals daily. We are looking right now at two projects that are significant opportunities for office-to-residential conversions at a decent price. We'll see how it goes. These are not a done deal by any stretch but I think there's there is opportunity.

Is there anything else that you think is important for our audience to know in today's market or with regards to real estate investing or anything else you'd like to share?
We're at a unique inflection point right now, where if you have projects that have a construction component, now's the time to do them. Construction pricing is hitting a low right now, both materials and labor, were laborers available. People at the front end of the process are getting laid off, architects, civil engineers, and electrical engineers, they have no work because so many projects have been canceled. We're starting to see distress at that front end of the process and we're getting regular. I'm getting text messages on my phone from folks who a year ago had 18 months of work in front of them, now asking for work. And that's pretty regular, so that's significant as well. Finding labor right now for projects at reasonable rates has gotten much easier. If you fast forward to 2026-2028, we are going to be wishing that we could build 2024 prices.

The other thing that we're seeing is we're starting to exploit global supply chains for materials to value engineer the projects because the increase in interest rates has been a significant headwind. The rent growth is not there, we can't forecast any reasonable rent growth because tenants are tapped out, and they're at their limit. We have to find ways to create more value by lowering costs. That doesn't mean going cheap, maintaining or even enhancing quality, but exploiting the global supply chain, so we're very active in that. And we've expanded our hiring ourselves to do exactly that because it's sometimes more complicated to procure materials that are in metric dimensions and adapt them for use in feet and inches and yet, they're significantly less expensive than acquiring domestically in North America. Where we're significantly redesigning, and we value engineering projects that we have in construction to exploit those global supply chains.

Victor Menasce
The Real Estate Espresso Podcast