As the Crow Flies: Tommy Lee’s Capitalizing a $14.5B Portfolio

Today, the company’s $14.5 billion development portfolio is spread across roughly 25 equity partners — including MetLife Investment Management, Clarion Partners, CBRE (CBRE) Global Investors, Principal Real Estate Investors and MSD Capital — and 28 debt partners.

Of TCC’s $14.5 billion portfolio, roughly 30 percent is office, 35 percent is industrial, and 25 percent is residential (the other 10 percent is a catch-all, including retail that’s part of mixed-use projects.)

TCC is an independently operated subsidiary of CBRE. As a merchant developer it builds a property, stabilizes it and sells it, meaning there’s a constant recycling of capital and never a dull day for Lee, who is busy marrying the company’s local and regional developments focus with national and international capital providers.

Lee lives in Rye, N.Y., with his wife Lindsey and 9-month-old daughter, Reagan.

Commercial Observer: You’re a New Yorker?

Tommy Lee: I was born in Brooklyn, the Marine Park area, and moved when I was a little kid up to Mahopac in Putnam County — a little town about 45 minutes north of the Bronx. My dad was a fireman, a captain in the FDNY, and my mom was a nurse. The move was easy because his career was in the Bronx, and my mom was able to change her hospital to Westchester Medical Center. We were a growing family; we started with just me and my older brother in Brooklyn but when my mom was pregnant with my little brother space quickly became a priority.

How did you get interested in real estate?

My interest really came out of finance. I went to Georgetown University, which is a target finance school for a lot of the bulge-bracket Wall Street banks. I had an internship with Lehman Brothers in their high-yield, distressed debt group but then they went under — this was 2008. The position I had was covered by Barclays and with all the chaos, the bank allowed us to defer for a year if we were pursuing a graduate degree that was finance-related.

Georgetown had recently opened up a real estate school and that’s where everything changed for me because I was taking classes from adjunct professors that were out there in the field; everything from investment banking, to development to brokerage to transactions. I followed through on my commitment to go to Barclays after that graduate degree and after about three-and-a-half years there, I knew the ultimate goal was to get to the development side of the business.

I was going through the interview process with a few different groups based here in New York, got connected to Trammell Crow Company, and knew I could make the jump directly there. I spoke with our then-CEO Danny Queenan [now Global CEO of advisory services], and I spoke with Adam Saphier, who is the president for the central region. They didn’t have a New York office at the time and said, “We want you to join our company, but we don’t know where to put you.” They had around 15 offices in the country — D.C. and Philadelphia were the closest — but they said, “We want you to go to Houston.”

Now, I’m from New York, and I didn’t know anything about Houston. But I checked it out, met the team there, and loved them. I was still hesitant on the idea but decided to pull the trigger. And that’s how I started at Trammell Crow.

What appealed to you about the development side primarily?

I’ve always enjoyed knowing every part of the process, and not necessarily being siloed in the acquisition role or the sourcing role, or the execution role or the disposition role. I love being able to understand all the aspects of the deal, and the idea of seeing something go from dirt and grass to a complete building was very attractive to me. I looked at it at the time as this perfect combination of venture capital meets private equity, because at the end of the day on the venture capital side, [a development] is not producing income, but you’re making a huge investment up front to produce a shell that eventually will be cash flowing. And you’re doing it with a pretty good amount of leverage, which is the private equity side. I like the ownership mentality and wanted to be on the principal side — to me that was very meaningful.

What was that initial experience like in Houston?

I stepped in as a senior associate on the deal side. I couldn’t have been luckier, because I walked into one of the most aggressive development periods in Houston’s history.

At that time, the rest of the country was working its way out of the global financial crisis, but Houston was driving one hundred thousand jobs per year. There was a lot of investment going into the city and I was able to join a team who were experts at sourcing and securing opportunities for us to go and do big deals. In a very short period of time I was working on five transactions that were well over 2 million square feet. And we were doing speculative developments that were being leased to investment-grade tenants, which in the development world is exactly what you want.

How did you like the city?

I decided to approach it with a “yes man” mentality. I actually never even saw my apartment until the day I showed up in Houston and the only people I knew in Houston were the guys that hired me, so I it was a leap of faith for sure. But it paid off dramatically. My apartment got bigger for the same price and everything cost a lot less. I just remember every person at the company down in Houston treated me like family; they invited me into their homes and brought me into experiences that I probably would never have otherwise. I got my first pair of boots, too.

Cowboy boots?

Yeah! And I always say, it’s a better version of Tommy Lee. It’s Tommy Lee with two extra inches on him. It’s completely culturally acceptable in Houston. So, I was like, “That’s great. I’ll take those two extra inches.”

What were the key lessons in those first years?

When times are good, you work hard to make sure that you’re producing as much as you can as fast as you can. Drinking from the fire hose is an understatement. Trammell Crow’s business model is still based on the premise that our local groups will source, secure and execute deals, and own them from start to finish. Watching that happen at an extremely fast pace with the group that we had down in Houston was tremendous.

It must have been interesting to be so busy in 2013 when most of the country was still languishing.

It was incredible. I was able to see a full development life cycle multiple times in that period of time in Houston. In New York, if you do one deal for 10 years you don’t know how to do a disposition until year 10. But when you’re working on four or five deals, suddenly you have comfort in multiple areas. That’s probably why I was able to grow so quickly as a developer at that time; I was getting reps that a lot of people weren’t. It was really a crash course in the development cycle.

You moved from the development side to the capital markets side of TCC in 2017. Was your task to expand the number of partnerships that Trammell Crow has on the debt and equity sides?

Not necessarily to expand, because more capital partners isn’t always necessarily a good thing. It could be in a perfect world, but you also have a management of expectations issue in terms of how you distribute your pipeline. As an organization, we have roughly $14.5 billion worth of development going on right now in the country. We’re a merchant developer, so the minute we’re done with a deal and stabilize it, we sell it. We’re constantly recycling each year, and this year alone we’ll capitalize another $3 billion worth of deals. In terms of scale, we are developing, hands down, the most square footage in the country and across several product types. If you think about $14.5 billion worth of development, somewhere over 74 million square feet, and each of those deals being capitalized individually, we need somebody to be looking at a national picture of how we’re doing that capitalization and who we’re doing it with, and how we can do it better. So it really came down to efficiency and effectiveness.

Capitalizing a $14.5 billion development portfolio must keep you on your toes. What’s your take on the debt markets right now in terms of construction financing?

In terms of the debt market overall, it’s reached one of the historic highs across multiple products. People raised a tremendous amount of money in the last couple of years and they need to put it out, so there’s plenty of debt. In the world of development, it’s very product-specific, and very location-specific. Everyone loves industrial — which is great for us because we have a lot of industrial product — and you’re still seeing aggressive lending: 60 to 65 percent loan-to-cost (LTC), non-recourse and good rates anywhere from the low twos to the threes.

Shift over to multifamily, and I think lenders are being very specific about where there’s softness, what type of product you’re building. You can get non-recourse, but I think the LTC, compared to industrial, is a little bit lower. That said, pricing is still fair. So again, it’s very focused on sponsorship and what you’re building. With office, it’s not easy to get a speculative office building financed right now via a senior bank without expecting some level of recourse, some level of pre-leasing and just a general lower LTC.

What’s your capital stack approach?

My personal preference is the simpler the better. Debt can mean a lot of things. There’s a wide spectrum of what debt is, and the constant majority of our debt is banks providing senior debt, and that’s because it’s nice to know that there’s a single person on the other side of the table. When you start chopping up the capital stack, you start to get a lot of people focused on where their position is and their experience in those positions. That’s a lot of calls to make in a challenging environment.

Do you find yourself working with the same capital partners today?

In a perfect world, we’d only do repeat business. And the idea behind that is development changes on a geographic basis, but there are always time constraints that are involved. So, if we can focus on the real estate as opposed to the partnerships, that’s better. I look at our partners in major buckets; one-off partners that we’ve done one deal with that we want to do more with; repeat partners that we do a lot of deals with, and the docs have minor modifications on each one; and then programmatic partners where you can take a document from one deal, cross out the project, and then apply the same terms to the next project. So, in terms of effectiveness and efficiency, I want everybody to be a programmatic partner because at the end of the day, we want to do as much repeat business as possible with trusted capital partners.

That helps with speed of execution, I’d imagine.

It makes a dramatic impact. And as much as it helps us on the front end, it also helps us on the back end. Especially being a merchant developer, where we’re constantly having to replenish the pipeline. Inevitably you’re going to run into a down cycle. And who do you want to be in business with in that down cycle as you have to figure things out? That’s how we try to approach each and every capitalization.

Any thoughts on where we are in the cycle?

Oh yeah, I can tell you exactly [laughs]. My cop-out answer is we’re in the back end of it. Do we know when the shoe will drop? No. So we can simply do what we’re in control of, which is continuing to find deals that have significant spread and make sure that we’re constantly focused on the ways we can hedge ourselves, which is through our partnerships and by constantly finding and developing the best product in the best locations.

In terms of searching for yield, are you targeting secondary or tertiary markets?

There’s been a huge shift towards secondary and tertiary markets. But it’s as much yield as it is [a question of], “Where’s the job growth?” We’re focused on job growth and population growth. While that sounds simple, they are the major drivers of how people want to capitalize our deals. So, we want to be in front of those factors, as every time there’s an investment committee call, those two factors come up. And if we can find the right location and build the right product in markets where job growth is strong and population growth is strong, that’s a good formula for success.

You’re based in New York, but Trammell Crow isn’t active here … So, what’s wrong with New York?

Being a merchant developer and being IRR focused, New York is a very difficult market in which to get long-term control. Prior to bringing in capital, we want to remove as much risk as possible and New York is a market where it’s very difficult to do that. It has very short due diligence periods and very short closing periods and requires a lot of hard-earned money to come in upfront. So, it’s challenging for a merchant developer, but easier for longer-term REITS and real estate holding companies to take these long-term positions.

With that said, we do it in other markets like L.A. and D.C., which have similar issues. And so, I think for us, New York is not necessarily off the list. We just entered London, and if we can enter London, we certainly have the capability to enter New York, so never say never.