Staying on track

 In 2015-07

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This month marks the kickoff of Charlotte’s $37 million streetcar, aimed at revitalizing one of the few areas of the center city yet to sprout new apartments. The price tag for the 1.5-mile route from Novant Health Presbyterian Medical Center to Time Warner Cable Arena enraged a lot of people, even if the federal government is picking up two-thirds of the tab. But the happiest guy at the July 14 opening ceremony is likely to be a wiry, perpetually good-natured fellow who co-owns a chunk of land around the streetcar’s east terminus. Clay Grubb started investing in the Elizabeth Avenue development in 2003 after partnering with Novant and has since promoted plans for a $90 million cancer and heart outpatient center, office buildings, a Whole Foods Market and more than 800 apartments and condos. After $40 million spent on land and buildings, relatively little has happened, a casualty of a recession and health care industry changes that slowed the hospital’s plans. The Whole Foods deal fell through. A costly experience, yet it will turn out fine, Grubb says, as Charlotte becomes more densely populated by a generation that prefers mass transit, walking and biking versus driving a car and paying $10 or $20 a day for a downtown parking spot.
Grubb is a survivor whose ability to dodge the worst impact of the 2007-09 recession is a lesson amid the current, soaring values for real estate in North Carolina’s biggest cities and resort areas. Scores of the state’s commercial developers defaulted on their loans during the recession, especially those who expanded between 2004 and 2007, fueled by Countrywide Financial Corp., IndyMac Bancorp and other freewheeling lenders. Almost half of North Carolina banks lost money in 2009 after U.S. commercial real-estate values tumbled 47% within 19 months. Grubb saw trouble ahead and made no acquisitions between 2005 and 2008, while paring his company’s holdings from 40 properties to five, including two that had no debt. He was so negative about real estate that he pressed his six-member board of advisers to use company money to make an investment bet, called shorting, that homebuilder stocks would decline. The board said no, but such caution is the main reason Grubb Properties Inc. survived the quickest real-estate collapse in 75 years, he says.
“We couldn’t make sense of the opportunities during [2005-08] because if you were building at that time, you were doing so at highly inflated prices and hoping the market was going to come to you. But the writing was on the wall, and it was obvious to us that every homebuilder in America was going to go bankrupt.” Grubb was especially wary of Charlotte-based Wachovia Corp., fearing it was spinning out of control. “We had a senior team meeting in December 2007 to discuss what would happen to our company if Wachovia didn’t make it. At the time, they were the largest land lender in Florida, and we knew all the homebuilders were going under and all of those loans were going to go bad,” he says. “Our view was they’d lose all the shareholder value and Charlotte would get hammered by losing the headquarters. But we didn’t realize that the financial sector would also collapse and everybody in Eastover and Myers Park would have their 401(k)s wiped out at the same time,” referring to two wealthy Charlotte neighborhoods.
Grubb says he made mistakes, particularly with the Morrison mixed-use project in Charlotte’s SouthPark neighborhood, which opened in 2006 and did not lease as quickly as expected. Under pressure from bankers in 2010, Grubb says he sold his company’s interest in the site while retaining adjacent land.
“Clay exudes confidence because, even though he got his nuts squashed during the downturn, he still fared much better than anyone else,” says John Culbertson, a partner at Cardinal Real Estate Partners LLC, a Charlotte-based land broker and consulting company. Culbertson and his father, Bob, a longtime Charlotte life-insurance agent, have invested with Grubb for years, including the company’s newest fund, which is raising $30 million.
In 2010, with property values depressed, Grubb’s company joined the rush into apartments. Collapsing home values because of record foreclosures had destroyed confidence in homebuying, just as the population of recent college graduates and others in their 20s and early 30s exploded. With tight credit limiting new construction, apartments became lucrative.
“Outside of the period after World War II, there has not been a better decade for apartments,” Grubb says. “It’s been an incredible four-year run. A recession usually means a decline in multifamily demand, but instead we had a spike because there are so many jilted homeowners who now wanted to rent. Now that the economy is better, the millennials are arriving, but the apartments are mostly filled.”
Since 2010, the company has invested in apartment projects with combined values of more than $250 million in 11 cities stretching from Richmond, Va., to Atlanta. Grubb wishes he’d been more aggressive, particularly in 2010 and 2011, when apartments in the southeast U.S. often traded for $35,000 to $50,000 per unit. Now prices are usually around $100,000 to $150,000. Fearing the market is overheated, Grubb has slacked off from buying apartments over the last 18 months. Despite his love of mass transit, Grubb has not bought properties in Charlotte’s South End neighborhood, where about 3,000 units have been added since the opening of Charlotte’s first light-rail line in 2007, with another 2,700 units under construction. Land prices in the neighborhood seemed too frothy, while Grubb has been more successful buying and renovating older properties, says Todd Williams, an executive vice president.
Still, Grubb has plenty of skin in new apartment developments. The company starts leasing a 204-unit property in Raleigh’s Glenwood South neighborhood this month, after opening a project of similar size next to BB&T Ballpark in Winston-Salem earlier this year. It’s Grubb’s first investment in the Triad since 1996. In downtown Charlotte, the company is a partner with Atlanta-based Novare Group and Batson-Cook Development Co. in a 24-story project called SkyHouse. It’s across the street from a 19-story office building (photo right) that New York Life Real Estate Investors and Grubb bought this year. The insurer paid $57 million and Grubb provided $3 million for the tower. Both projects are within three blocks of the $1.1 billion light-rail line scheduled to connect downtown and UNC Charlotte’s suburban campus by 2017.
Grubb is not worried about an apartment glut over the next couple of years, because the improving economy is enabling more twenty-somethings to leave their parents’ basements. New apartment construction nationally remains barely above the average over the last 30 years, he says. “Historically, 75% of everybody under the age of 30 has rented, and now you have this millennial generation, which is bigger than the baby boomers, who are coming through the rental cycle.” Still, he foresees a downturn because real-estate developers inevitably become overly optimistic. “We’ll eventually get up to 1 million starts a year [from a long-term average of 350,000], then it will be an even worse decade for multifamily investors because we won’t be able to stop that train.”
Like many developers, Clay Grubb’s success is rooted in a family with a long history in North Carolina. His great-grandfather, Henry Clay Grubb, owned lots of land in Davidson and Rowan counties and, most notably, built a nine-story building in downtown Salisbury that opened in 1911 as the state’s first steel-beamed office tower. Two years later, in a sensational incident that has become lore in Salisbury, Grubb was shot to death while sleeping, and a jury acquitted his wife on grounds of self-defense.
Clay Grubb grew up in Lexington, where his father, Robert Grubb, was a lawyer who formed a real-estate company in 1963, initially building homes and apartments. Unusual for the time, Robert Grubb made mortgage loans to residents of redlined Davidson County neighborhoods, who had no other access to credit, charging the same interest rate as his borrowing cost. He pioneered the conversion of apartments to condos, particularly in Chapel Hill and other college towns where parents wanted to own their children’s living space, says George Grubb, Clay’s brother and a professional photographer in New York City. Clay started collecting rent for his father’s business at age 12 and continued working through his high-school years at Virginia Episcopal School in Lynchburg, Va. “Clay was a genuine, down-to-earth guy,” says Winn Maddrey, a Charlotte communications consultant who attended the boarding school at the same time. “He’s the same person today.” After enjoying New Orleans’ nightlife during a visit there, he enrolled at Tulane University, where he met Deidre Grogan, whose family owns Mundelein, Ill.-based Medline Industries Inc., which Forbes magazine ranked as the 62nd largest privately held company in the U.S. with $5.8 billion of sales of health care equipment last year. The couple married in 1992, while Clay was attending UNC Chapel Hill School of Law, and they have become major patrons of several Charlotte arts groups, Maddrey says. Grubb’s father pressed him to earn a law degree, but a summer internship convinced him that he wasn’t meant to be a lawyer.
After his father’s death in 1995, Clay’s mother, Rochelle, took a bigger role in the family business, with her three children, Clay, Gordon and George. “We’re a family of chiefs,” George says. In 2002, Clay became president with some company properties spun off to Gordon. Grubb Ventures LLC, Gordon’s company, develops office and residential properties inside Raleigh’s beltline. He remains an investor in Clay’s funds, while Clay does not have any financial interest in Grubb Ventures. Gordon declines comment on the family’s businesses.
“I’m not surprised that Clay and Gordon wanted to do business their own way, which led to the division of assets,” says George, who is one of six directors of Clay’s company. “I sometimes play the peacemaker, and there’s some competition, but overall I think they seem to do a good job of working through things.”
Clay has built the 150-employee business into a much larger enterprise over the last decade, transitioning from a reliance on individual investors to more institutional ownership, George says. The company partners with dozens of developers such as New York-based Kalikow Group and Philadelphia-based Rubenstein Partners and wealthy individuals. One of Grubb’s investor groups includes senior executives of Comcast Corp. and Bloomberg LP. Roger Altman, executive chairman of New York investment bank Evercore Group LLC, plugs Grubb on his firm’s website.
“We do really well with sophisticated investors because we aren’t the promoters who tell you want you want to hear,” Clay Grubb says. “They are very conscious of what we’re investing in, much more so than typical real-estate investors.” Grubb Properties invests in about one of every 125 projects that it reviews, and because it operates in multiple markets, an apartment building in Charlotte must offer better prospects than deals in Chattanooga or Atlanta. Big investors like Grubb’s transparency (page 63) and his work ethic. “I used to share an office with him and he’s just 120% about real estate, 24-7,” Culbertson says.
One of Grubb’s biggest successes came when he and Rubenstein Partners bought a 485,000-square-foot office campus in Morrisville for $26 million in December 2013, spent $52 million on improvements, then sold it 14 months later for $127 million to an investor group based in Dubai. The offices had been empty for several years after being vacated by Sweden-based Ericsson Inc. Four months after Grubb and Rubenstein bought the property, they signed Chinese computer manufacturer Lenovo Group Ltd. to a 13-year lease, the largest in North Carolina in 2014. Grubb Properties, with 5% of the equity, more than doubled its investment.
Current projects include a downtown Charlotte building acquired for $12.1 million amid speculation that its main occupant, the Charlotte Chamber, was moving out. “We had no expectation that they would stay, and I don’t think anybody in Charlotte thought they would stay,” Grubb says. But the chamber signed a 15-year lease because of its strategic location, President Bob Morgan says. Grubb may have collected more rent by leasing the space to several tenants, “but we think the Chamber is still going to be around in 15 years,” he says.
In Winston-Salem, Grubb is buying the 18-story GMAC Tower, which was built by Integon Corp. in the late 1970s. (A final contract wasn’t completed as of mid-June.) “It has the best view in the state of North Carolina, and we’re buying it at a price that we can go in and aggressively lease it,” he says.
Not everything works out as well, as Grubb’s Elizabeth project shows. Investing with an entrenched hospital company in a popular neighborhood seemed like a low-risk venture. Contrary to public perception, he says, it’s a blessing that the Whole Foods plan fell through. “That was a very large project and we might not be sitting here today if we’d been building that project when the business world stopped,” he says. The stock-market slump also slammed Novant’s investment portfolio, prompting Moody’s Investors Service Inc. to downgrade the company’s bonds in 2009. Now the Winston-Salem-based health care company won’t start building its cancer-cardiac center for at least two more years, hinging on raising $60 million from donors, says Andy Mueller, senior vice president for Novant’s Charlotte region. When the John M. Belk Endowment pledged $10 million for the project in March 2014,  Novant had said it expected to break ground this fall.
Grubb hopes that Novant will move more quickly, especially after any controversy over the streetcar’s cost and politics fades. He’s referring to former Mayor Patrick Cannon, who pleaded guilty to a public corruption charge last year after FBI agents posed as real-estate developers seeking favors from the city. Cannon told the agents that he had some influence related to a “prominent developer” along the streetcar line, whose name has not been disclosed. Grubb says he doesn’t know if Cannon shared his name with the FBI, and he had no inappropriate dealings with the mayor. “We were very close and good friends, but he was always on the fence on the streetcar, which irked me a bit, and I was always trying to figure out why. Then we read about what was going on.”
A happy ending is in store for Elizabeth Avenue, Grubb says, predicting it will become the city’s trendiest restaurant destination. “A lot of people don’t understand the value of infrastructure in building property values,” citing the millions of dollars in property taxes sparked by development around Charlotte’s light-rail line. “The streetcar and our investments will dramatically improve the neighborhood.”
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