Dealmaker
Interview with Bob Murphy
by Douglas Fruehling
Three years after leaving Trammell Crow to start his own development firm, Bob Murphy, 47, talks about timing, the economy and his $1.5 billion in projects – enough to make even the most confident developer lose sleep.
You and your partners started MRP Realty in 2005, well into the last real estate cycle. Did you get in too late?
It’s so hard to time that stuff. If we had done it in ’06 we’d be worse off because we wouldn’t have pulled off some of the deals we had. If I could have timed it perfectly, would I have left in ‘04”? Sure. But ’04 was a huge year for Trammell Crow Co. and my partners and I, so the money we made in ’04 helped us start MRP in ’05.
What made you go out on your own?
Chris Roth, head of development locally for Crow, was a great partner and a great boss for a lot of years. I really just got to the point that there wasn’t anything left to do there. We had the biggest development shop in the country with Trammell Crow. We had some great institutional partners. If you look at what we were doing and what we were getting back after it goes back to all the shareholders, it was a lot smaller than what we’re getting back now. We are taking more risk, but the truth is, if you’re at Trammell Crow and you don’t hit the numbers, you’re at risk anyway, like any job.
You’ve started a lot of projects in your short history. How many people do you have?
Fourteen people, including the four partners. We’ll probably add one more person this year. To tell you the truth, we’re working on some big deals, big projects. If we had the work force to go with it, I wouldn’t feel good, nor would my partners. We’re pretty well-positioned.
Your portfolio is very diverse – a corporate center in Ashburn, the Gannett site in Tysons, a town center at Potomac Yard, urban infill at Washington Gateway. How were you able to cover so much geography and so many product types?
In this market at the time, it was so difficult for someone to do what we do at a local level to get paid for acquisitions – people were buying empty building without any leasing risk. The only way I could add value and get paid is through the whole entitlement process – getting a piece of ground, figuring out, removing risk before you broke ground. There’s a handful of very good local examples of groups who have done that – the Petersons, the Lerners, JBG. Look at their product mix. To be successful in a ground-up operation, you have to have a mix of product types.
Who are your money partners?
Rockpoint Group out of Boston, Brookdale Group out of Atlanta, Cornerstone Real Estate Advisers at MassMutual, GSO Capital out of New York, Parkwood Realty, which is basically people at Trammell Crow when I was there who have a fund.
So you have a big mix of investors as well?
You need to do that because of deal size, product type and location. Some people don’t want to be in the farther-out suburbs. Some people with a $2 billion fund, they’re not going to want to do $10 million deals. They’d prefer to do $30 million, $40 million or $50 million deals.
How are your deals structured?
We generally co-invest anywhere between 2 and 10 percent.
Is the remainder split among multiple investors?
No, usually it’s one group. When it comes to control, it gets more difficult with multiple owners. Generally you’re going to have one primary owner who’s calling the shots.
How quickly are they looking for returns?
If you’re somebody that’s stepping up and doing a ground-up development deal, you’re playing for higher returns – on an internal rate-of return-basis anywhere between 18 and 22 percent. And as soon as you get to the point where it’s a stabilized asset, you’re going to push those deals out the door. So these guys are anywhere between three- and five-year holds.
Did your first acquisition as MRP feel differently than when you were at Crow?
God, I’d love to tell you that it felt different, but it really didn’t. Maybe it will feel different when I make money.
And when will that be?
With the sale of Carlyle Overlook in Alexandria, which we presold half of to American Society of Clinical Oncology, we’ll see some money this spring.
Are you doing any fee development?
No, not at this time.
So you haven’t really made any money?
That’s true. We’ve done some small land things here and there, more cleanup of other assets.
Are you in the market for sites now?
We’re looking at deals right now, but it’s a tough time to buy. It’s pretty mushy out there, by that I mean you don’t really know where the bottom is. Most of the capital I deal with is sitting on the sidelines. My guess is probably 12 to 24 months out you‘ll see some good buying opportunities.
How were you able to snag so many major projects so quickly?
We’re in an area that has superb growth. People have been pretty busy. When people get busy, it creates opportunity. There was a lot more money in real estate than there was 10 or 20 years ago. And the capitalization of the real estate has changed. It really enabled people like me and MRP to go out there and find money and do deals, because the capital’s been available. It is something I think will be different for the next two or three years.
How is the credit crunch affecting the commercial market? I
f you look at the kind of returns we get in real estate – we call it the capital stack – debt is a hugely critical piece of that. Debt has to be a component of it. With the banks kind of back on their heels a bit, it’s going to slow our business down more than it slowed down during the tech wreck.
You’ll be trying to line up construction financing for your projects in the next couple of years. How difficult will that be?
If the returns are there, the equity will be there. We need more liquidity on the construction loan side. Now it’s pretty difficult to get deals through. It’s absolutely going to happen but I think it’s going to take 12, 18 months for things to stabilize, normalize.
Will that be a problem for your projects?
No, no. Deals are still getting done. The deals we have done we try to wrap pretty tightly and make them pretty financeable.
How do you do that?
You try to remove as much risk as possible. You might pre-sell to somebody, which means that you get a core buyer who doesn’t want to take development risks to step up and agree to purchase your building at completion. They’ll take the leasing and marketing risk, but they don’t want to take the development risk. We’re working on a number of deals like that. The banks know that there’s a takeout for them at the end of the day. The real risk for them is our ability at MRP to build a product, and we have a pretty good track record. In my mind, that’s the easiest part of the business. The hardest part is leasing it up after.
Are you doing in-house leasing?
No, not in-house leasing. I did it at Trammell Crow, but I don’t want to build too big a firm. I don’t see it getting bigger than 15 or 20 people. I would rather go best-of-class brokers out there on the street.
You bought most of your sites at the height of the market? Will that cause problems down the road?
There was only one project we bought that was fully marketed – the former Verizon building at 1310 N. Courthouse Road in Arlington. It’s the only existing asset we have [all other properties are in development}. Everything else was off-street marketed, though we weren’t necessarily the only people bidding on it. And usually there was some way to add value – for example, at Carlyle Overlook we changed a floor of parking into a floor of office because it was on top of Metro. That’s a 10 percent increase in land value. At Washington Gateway we added 250,000 square feet of additional density and got the right to do hotel and apartment.
Do you take full title or go under contract while you seek entitlements?
It depends. Potomac Yard we took full title to. Washington Gateway we had under contract for almost two years. Tysons we closed on. It depends on what the seller id looking for. Some sellers just want to have their cash and go. Others want to have a higher price and they want to take some of the risk associated with the redevelopment. In those cases you give them the price, they give you the time.
Did you see the problems with the housing market and credit crunch coming? I wouldn’t be working anymore if I saw that coming. I would have shorted everything.
If every cycle has a lesson, what have we learned from this one?
You have to really be careful on leverage. There are some things you can control: I can control my plans, I can control my general contractor, I can try to time things as well as I can. But at the end of the day, you can’t control the economy. You can’t control the credit crunch. My old boss, Chris Roth, used to say the bullet’s in the air. The bullet’s always in the air. You have to be smart about who your partners are and how you position when it comes to riding cycles. There are great examples of people who have loaded up 100 percent leverage on something. Look at the GM building in New York. I’m too much of a wuss to do that. Our deals are really well capitalized. The most highly leveraged deal is probably 70 percent.
But even at 70 percent leverage, you’re at a lot of risk, being a young development company and all.
You are, but it goes back to what you can do. You can diversify product type. You can diversify by market. You have to do that. When you make money, you don’t go buy a bigger boat. You keep it in the company.
Do you lose sleep when the economy is like it is now?
Of course you do. We haven’t ever overextended anything in any of our projects. We have good partners. You roll your sleeves up, batten the hatches down and punch your way through it. We’ve done it before, we’ll do it again. Staying awake at night is not being fearful. It’s more like, we know we have to do this. You just have to make sure that in your mind and your actions that you’re organizing your efforts and staying focused.