Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - A Deep Dive On New York And San Francisco

Tyler Stewert
September 2, 2021
Podcast - A Deep Dive On New York And San Francisco

Broke with nothing but a duffel bag, Justin Palmer moved from Seattle to New York with one mission, to get into the real estate business.

Justin didn't know anybody in New York, nor did he have any real estate experience, but he had a plan: to not waste any opportunity he got and to outwork everybody else.

The plan was executed to perfection.

Now 12 years later, as Founder & CEO of Synapse Development, Justin has acquired $184 Million worth of commercial real estate and a deep knowledge of both the New York and San Francisco markets.

In today's podcast, Justin will share his amazing journey and provide his insight into what is currently happening New York and San Francisco.

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RealCrowd - All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Adam Hooper - Hey, Tyler!

Tyler Stewart - Hey, Adam, how are you today?

Adam Hooper - I'm great, it's a sunny day here in Portland, so things are well.

Tyler Stewart - Things are great!

Adam Hooper - Tyler, who do we have on the podcast today?

Tyler Stewart - Adam, today, we have Justin Palmer, founder of Synapse Development.

Adam Hooper - Yeah, we've done a couple deals with Justin in the past. Just a great guy, entrepreneurial, has had huge growth with his company, Synapse. We talked about his background which is one of the more interesting stories of sponsors we've worked with.

Tyler Stewart - Yeah, the art of the hustle is really, what that comes down to is, started from scratch and worked his way up to being a pretty big player in New York.

Adam Hooper - Yeah, San Francisco too. There's some analogies about him getting punched in the face, thrill-seeking, equating to MMA. I think the first time we've talked about that on the show. There's a whole bunch of different insights we came to today with Justin. One of the bigger ones was planning the exit when you're going in. We talked about on the show that you make your money on the buy and we discuss how the exit is just as important. You have to have a way to sell the asset.

Tyler Stewart - Yeah, and he plays in a very competitive world in New York and San Francisco and his focus is those mid-major markets within New York and San Francisco, which, there is a lot of hand fighting when you're looking for deals and looking to sell.

Adam Hooper - Another interesting point that he touched on is the team management. We always talk about how the sponsor is so important in these deals, but we dug a little layer deeper on that and the team around the manager, consultants, different stakeholders, that's really, at an execution level, what it comes down to in these real estate projects.

Tyler Stewart - Yeah, yeah, it's not only location, location, location. It's also building the right team.

Adam Hooper - Then one of the other interesting points to listen out for was the shifting nature of capital that we talked about in New York specifically with some of the traditional equity players getting more involved on the debt side of the capital stack now. It's an interesting part of the conversation. Well, listeners out there, as always, if you have any comments or questions or anything you'd like us to cover on the podcast, please send us a note to Tyler, with that, let's get to it.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper - Justin, thanks for joining us today. I think you're down in San Francisco, is that correct?

Justin Palmer - Correct, yeah, foggy and a little cloudy down here.

Adam Hooper - Just a perfect spring day in the Bay.

Justin Palmer - That's right.

Adam Hooper - Justin, why don't you take us just a little bit back? Tell us a little bit about Synapse. We did a deal together, actually in San Francisco, 1095 Market. We were just talking about, why don't you tell us a little bit about background of Synapse and what areas you guys focus in, and we'll dig in a little bit more from there?

Justin Palmer - Sure. As you guys know, I started the company in 2012 coming out of the Lehman Brothers Estate with a large focus on going out and finding development, redevelopment opportunities in core urban markets, starting in New York. We came out of the gate strong in 2013 with six acquisitions, and literally went from zero AUM (Assets Under Management) to about 100,000,000 in AUM in 12 months, before we felt like New York was getting too expensive and decided to head out west and had an opportunity on Market Street, which we did with you guys. We've since capitalized that project for construction. It's actually nearing completion. Bought a second asset on Market Street, so we've got about 200,000,000 in assets under management right now.

Adam Hooper - Nice.

Justin Palmer - We're still focused on New York and San Francisco, but starting to take a look around at other urban markets, just given where we are in the cycle and the prices that we own assets at in both markets is very compelling, and we're having a hard time finding value in both cities.

Adam Hooper - Before we get too deep into that, Tyler heard a rumor that you got some stuff going on the MMA side. What's going on there?

Justin Palmer - Yeah. I bought the UFC Gym franchise for San Francisco before the end of the year, for a couple reasons. One, besides just being a huge fan, we needed some space filled at 944 Market Street. We were having trouble attracting credit tenants. I was taking a look in the neighborhood and seeing what we needed. I reached out to the guys and it just worked out. They've got a new urban concept that's just boxing and high-intensity training, and it's a little like "MMA Light" for the people that don't want to get punched in the face every day, but still want to train like a fighter. We're pretty excited to roll that out. We're looking to open before the end of the year in a building that we own. Then we're out looking at other opportunities, but I really just started becoming a fan probably two and a half to three years ago, right before the rise of Conor McGregor. I really just enjoyed the athleticism of these guys and the competition and the fact that they go in, pour everything into the cage, and they can get up and shake hands with the guys at the end of it, no matter what happens. There's a lot of parallels to the real estate business, at least probably more so in New York, right, less so in San Francisco. I really got into it, and I was looking for something to take training to the next level and just started training, predominantly in Muay Thai, which I've really fallen in love with. It's a great workout, but also you constantly are pushing yourself. You're constantly training with people

Justin Palmer - that are better than you. It gives you that growth opportunity outside of work. I also think taking pain is a big part of business, right? It's just mental pain. I'm trying to master the physical pain component of it, right, to just be a tough dude.

Adam Hooper - Sure. Are we going to see you in the octagon any time soon? Is it still an octagon, they still do octagons?

Justin Palmer - It is an octagon still. I have a personal goal of trying to fight amateur before the end of 2019, so I've got a long way to go. But if we finish construction on 1095, I'll be able to focus a little more on training.

Adam Hooper - There you go, keep us posted, we'll look for you in the ring then, I guess.

Justin Palmer - Absolutely, yeah.

Adam Hooper - You mentioned, you came out of the Lehman background. How did you get into real estate before that? You've got a pretty interesting back story, we want to dig into that, and what got you attracted to real estate at first?

Justin Palmer - As I've mentioned to you guys, I was a pretty rambunctious kid. I ended up dropping out of high school at a pretty young age and entering the work force in pretty typical blue collar jobs. Pretty quickly realized that those are not the places where you want to be over the long run if you want to do something with your life that's meaningful. I was working in a warehouse unloading copiers and loading copiers to offices and construction sites. I remember going to, there's a building being built at the time in downtown Seattle, where I was living, called the IBX Tower. They had just started excavating and putting in the piles for the building. I delivered a copier to the construction site, and I saw what these guys were doing, and I was like, "Whoa, I want to see if I can do that. I want to get involved in this somehow."

Adam Hooper - How old were you at the time?

Justin Palmer - I was probably 21.

Adam Hooper - Okay.

Justin Palmer - Really, no clear path, right? I needed to go back to community college to get to college level for a lot of things, because I never finished proper schooling. Just made a commitment to myself that I'm going to go do this. I'm going to try to move to New York and see if I can get into the real estate business, because to me it felt like New York was the epicenter of everything at the time, and put myself on a path to get an AA in about a year so that I could get out to New York as fast as possible.

Adam Hooper - You made your way from Seattle to New York. What was that transition like?

Justin Palmer - It was a burn the ship scenario, because I kind of needed to leave everything behind. I didn't really have a lot of money. I sold my car and packed a duffel bag. I found a roommate share in Spanish Harlem, which was all I could really afford, so about $600 a month. I set up a transfer to one of the city colleges in New York and moved out, didn't know anybody, but wanted to burn the ships and see if I could make it happen.

Adam Hooper - Once you got to New York, how did you get immersed in the real estate industry?

Justin Palmer - Yeah, so I needed to work while I was in college, and I found a part-time job at a real estate company. It was really more of a brokerage, but the principal at the company had just come out of Starwood Capital, before it was what it is today. But he had just come out of there and started his own company and was actually advising the Ace Hotel brand on new acquisitions, and just pretty much got lucky. I found this guy on Craigslist, and ended up working on the acquisition of the Ace Hotel in Portland, the Ace Hotel in Palm Springs, and then did some of the early due diligence work for the Ace Hotel in New York City. Just extremely smart guy, a guy named Michael Bisordi, very intense and I was going to school from 7 a.m. to 2 p.m. and working at the office from 3 p.m. to midnight and getting as much as I could out of the experience with him, because he's just a really intelligent guy.

Adam Hooper - Was he your first mentor in the space, it sounds like?

Justin Palmer - Yeah, pretty much. He gave me a lot of opportunities. I was going to grind it out with him, because he was an early stage entrepreneur at that point in time, so he was grinding it out. He absolutely gave me a lot of guidance and coaching, introduced me to a lot of people. He ended up helping me get summer internships and provided references and prep for interviews, and really all-around good guy. He saw that if you're willing to put in the effort, he was willing to help you out.

Adam Hooper - Good, and so then worked for him for a while, worked on some acquisitions. You liked the space, clearly. You're still in it, so it didn't turn you away.

Justin Palmer - Yeah.

Adam Hooper - What was the progression from there to eventually getting Lehman and then working out you starting Synapse?

Justin Palmer - Coming out of school, obviously I ended up graduating in January 2008. In the summer of 2007, in New York, summer internships are a big part of the process of getting a full-time job. With the experience that I had with Michael, I was able to get a summer internship at Clarion Partners, which is a private equity firm, and ended up having a very sort of quiet and boring summer internship because it was the summer of '07 right as the credit market started to freeze. But fortunately, was able to procure a job offer from those guys, and originally I was interning in acquisitions, which I thought was the sexiest thing in the world, and they ended up making me an offer to work on their value add fund with a guy named Jeb Belford and another guy named Dean Rostovsky, which ended up being probably the best thing that could have happened to me in my career, because they are just phenomenal teachers. Acquisitions were pretty much shut down by the time I started in January of 2008. But the value add fund had made a number of investments in multiple things. The guys who were running the portfolio were extremely smart, they diversified across the entire country. We bought the last developable parcel on the Houston Port to build a private port. A bunch of land assemblages, condo buildings, we did the Apple Store with the ... guys on 14th St in Meatpacking, apartment renovations all over the country, self storage, I got exposure to a lot of different asset classes very quick, and they were running a lean team already when the market started to slow down,

Justin Palmer - I became kind of the go to, hard-working laborer. I was willing to grind, and I was dirt cheap at the time. That was a phenomenal experience for me, and then after the market collapsed, our portfolio had pretty much stabilized, and I was looking to do something else. I was questioning if I wanted to be in real estate, and I have some friends that were at Lehman in pre-bankruptcy, who had stayed on, and I ended up having lunch with one of them, and he was like, "Look if you're bored it's a total mess over here." It's not what people think is a typical career path, but he was the same age as me, he was getting tremendous experience, because they just had no room to hire a large staff of people to manage the 16 to 20 billion in real estate that they control. I met with their team and I felt like it was a real career opportunity for me, I knew I was going to go in and work myself out of a job, but I also knew it probably was the experience of a lifetime, and it was tough to leave Clarion, because they made it clear to me that if I stuck around I had a nice career path there, but I felt like it was going to be too slow for what I wanted to do, and decided to make that jump in December 2009, and definitely ended up being the right move. I had a couple of days earlier on when I was like whoa what did I do?

Adam Hooper - While for better or worse, that was the crash in '08, nine, ten, I mean that was a huge opportunity to sharpen the saw, to learn the skills, to just roll your sleeves up and get elbow deep in the workouts. That is a hopefully generational opportunity to be involved in that side of the business, it had to be just a huge experience to learn from that and just be immersed in what it takes to right the ship.

Justin Palmer - Absolutely and I'm super thankful that I was at a place like Clarion Partners, before going to Lehman, because Clarion they are extremely conservative, white glove, they are an equity investor and have been in business for almost 30 years now, maybe a little bit longer than that, and they have a lot of very structured processes in place, they are very real estate oriented versus financial. That ended up being just a great backdrop, and getting dropped into the Lehman Brothers bankruptcy, and seeing I'm looking at deals where the senior, the mezz, we have a co-GP investment and we have a credit line to the developer on a land assemblage, and we can't even find fully executed documents from the last transaction. Just because of the kind of chaos that ensued from the bankruptcy, because they were closing deals up through the bankruptcy, and to go into that sort of extreme with the background of the ways things should be done, it was very powerful for me, and I'm super thankful that I was at a place like Clarion first.

Adam Hooper - We have talked and we had a couple of investors and listeners reach out, and we want to do an episode on what happens when a deal goes bad, and not many sponsors want to admit or come on and talk about what happens when a deal goes bad, but maybe we can talk about that on a future show, we'll get you back on to talk about what happens when it hits the fan I guess.

Justin Palmer - That's a big part of what has gotten us to where we are, I don't know a lot of companies our size and our vintage that have grown so quickly in markets like New York and San Francisco. It is because of that experience, I've had more experience than a lot of our private equity funds partners, in terms of workouts and restructurings and failed construction and how to get it moving and dealing with cities, you get really compressed experience like that, and it's a pretty powerful tool.

Adam Hooper - Okay so you righted the ship that was at Lehman, and then you decided that was enough of that I want to go and do it on my own?

Justin Palmer - Yeah I did a short three-month stint at another developer because I let people got me into, I heard a lot of "Hey you're really smart but you're not a real estate developer yet, you need to go work for a developer." I took a job with the New York-based developer that was capitalizing their deals one off, and really I saw some opportunities at that time to go out and buy assets that were in distress, and I was comfortable with that, and they weren't as comfortable with that, because they had not seen that same experience, and pretty quickly I realized now is the time, the market seems to be stabilized, I need to go out and buy assets right now or I'm going to miss the market.

Adam Hooper - And that was the start of Synapse.

Justin Palmer - Correct.

Adam Hooper - What I've always loved about your story Justin is just hustle, you are the epitome of hustle, and that's hugely commendable, and it looks like it's been working out okay, so we have loved working with you in the past, and thanks for sharing this story.

Justin Palmer - Absolutely and I'm very thankful for everybody that's been involved in our deals and helping us to get here. That's the name of the game in probably any business right, we kind of share that. You've got to grind right, nothing is going to be handed to you, we are a young firm operating in two global cities, that's where the MMA stuff comes in, it's a cage fight, you've just got to be the one standing at the end.

Adam Hooper - Yeah I love that. New York that was the first attraction, obviously global city, tons of real estate going on there, and then San Francisco, when did you guys start looking at San Francisco, after you'd started operations in New York?

Justin Palmer - It was about a year and a half after starting up in New York, and we had a pretty specific focus in New York, because at Lehman I was working in Harlem, saw the demographics changing because I was up in Harlem every day, before going to our office dealing with some community issues, political issues, because we were foreclosing on about 40 buildings in that market, and I really just saw an opportunity for rent growth in Manhattan, and extreme value, so we started buying up in northern Manhattan on the west side, in between the Columbia university campus expansion, and Colombia Presbyterian, that hospital was implementing about a billion dollar renovation program, and so we just looked up in that area and saw massive transitioning happening from a commercial perspective and no new residential supply. That was what prompted us to start buying existing and renovating up there. In 2014 I was friends with the head of development for Yotel, the hotel brand, whose our hotel manager at 1095 Market St. We were looking for opportunities in New York with them, couldn't really find anything attractive, and he called me one day and he was like hey are you interested in going to San Francisco, our parent company is willing to put up 80 percent of the GP equity, they are not an LP but they want to be a GP, and we have this deal kind of teed up before it goes to market, if you guys are interested we just need a development partner, and they went to John Buck, John Buck said no because of the entitlement risk,

Justin Palmer - they went to a couple of other private equity funds which all said no because the entitlements were pretty complicated. When we flew out here, we kind of saw the same dynamics that we were seeing in Harlem. The building is on the market and seventh, sandwiched between Union Square on one end and Twitter and Uber's global quarters on the other end, and we're talking a matter of blocks here. We just felt like the property was in the path of growth, we looked at the hotel market which was extremely under supplied in San Francisco for a number of reasons, and just felt like for the value it was a great deal.

Adam Hooper - When you're looking at a market like New York or San Francisco, how local do you need to get, you're on Market and 7th, that kind of under supplied district is obviously a huge turnover time, there's a lot of gentrification, a lot of rehabs going on there, a lot of growth, how do you compare and how local do you need to get in those micro markets versus the San Francisco market as a whole or the New York market as a whole?

Justin Palmer - That's a really good question. For us we want to be as micro as possible. We want to know every land parcel, who owns it when it traded, what the stats of the entitlements are, because that's a part of the story. The better you can understand the neighborhood, the more efficiently you can price your product, and really when you're developing it's design your product first, because you've got to plan years in advance. For me it doesn't matter if it's Harlem or Brooklyn or Jersey City or San Francisco or Oakland, we are looking for the same dynamics, and we want to know as much about the neighborhood as possible, and figure out if there is a lack of what we are trying to do. We've been pretty forward thinking in terms of design, like doing the super efficient rooms with Yotel, building passive house multi-family with pretty tight units in Harlem, we're looking to fill a void in the marketplace, someone addresses the affordability component, and also is innovative in how you're using space, because in urban markets everything is expensive. You've got to find a way to innovate on how you use space, to be able to provide something that people can afford, and that you can make money on, on a risk-adjusted basis.

Tyler Stewart - When you're looking at these micro markets, how are you gathering intel for where you actually want to build within those micro markets?

Justin Palmer - Really, I don't think there is no substitute for pounding the pavement. You've got to really understand what's happening on the street, what's happening on the blocks and then what's happening around the corner. You let the opportunities guide you in terms of what's available, because as a small firm we can't go chasing deals that are going to take us 3 to 5 years to acquire. We need to know that something is in play, so when you have that opportunity and then you start digging around and seeing what else is out there, and one thing in particular I look for, is length of ownership in general, in that specific market, and when I looked up and down Market Street, at the time we acquired 1095 there was a lot of legacy owners, which to me meant that prices were depressed from an institutional level, right?

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Adam Hooper - That's a great point, and having tracked San Francisco for a number of years, everybody always felt like we were at the top, and then it just rose more, and then we were at the top and then it rose more. Have you seen that dynamic continue, what's your take on where we are at, we were talking about an asset you guys have in New York, maybe harvesting that one and maybe not looking at doing development there, where do you feel we are at right now cycle wise?

Justin Palmer - We bought 944 Market St in June 2016, which is really a deal that we tied up in November, December 2015. It ended up being great timing, I don't know if you recall, but the stock markets were getting a little bit volatile, people were thinking there was going to be a major collapse in tech, and we were able to cut a pretty good off market deal with the owners, because I think they wanted to retire. I've seen since that time, as we're finishing up construction on 1095 Market St, It's important as a real estate investor, to understand the development process and the development cycle, and the dynamics of the construction market as well, because that's going to dictate if you think you should build or not. What I'm seeing in the construction labor market in San Francisco is there is no capacity, right, the labor market is extremely tight. Contractors are struggling to maintain schedules, and the combination of that with higher land prices, we would have a tough time starting a new development project in San Francisco right now. That said, where we see the opportunity there's a lot of buildings that need some renovation, have tenants in place that are playing 30, 40, 50, 60 percent of the market rate, and because of that dynamic, the owner is probably opening cheap, they don't want to put any money until it everyone knows it's late in the cycle, so there's definitely an opportunity to go pick up some stuff that you can just mark to market that's an easier lift which is what we're doing on 944 Market St,

Justin Palmer - it has a little bit less risk because we've got cash flow covering our opex and debt service until we can mark to market.

Adam Hooper - I was going to get into the tale of two strategies, you've got ground up development which you guys have done a bunch of, and then you've got the more traditional value add, like you were looking at 944, I think you kind of commented on there, as the cycle progresses you don't want to be starting at square one now with the development project later in the cycle, that's an earlier cycle phase, so are you guys are shifting away from just as a general strategy, are you shifting away from ground up opportunities, are you looking at those more traditional later cycle value add plays now?

Justin Palmer - Yes absolutely, you're spot on. To go into something with no cash flow for the next 3 to 4 years is a pretty hard sell for us at this point, unless there was tremendous value in the acquisition of the asset. What I've always said internally to our team is we are going to develop opportunistically, because first and foremost we are real estate investors, so if there is an opportunity to buy core stuff at two to 300 basis point spread of where it should be, because whatever reason, whatever dynamics are in the market, the submarket, the ownership, where we can clean it up and bring that yield in, we are happy to do anything. We want to go where we can get the best risk adjusted returns, and right now we feel like that value add mark to market is definitely a much better value proposition, and a little more defensive going into the end of 2018 early 2019, which from what we are hearing, a lot of people are expecting some sort of correction, they don't know how big is going to be, but they are expecting some kind of correction. Yeah at least not the continued growth that we've seen, and I think there's a cautious optimism still in the space from a lot of groups that we've been talking with as well, that said it is getting harder to find deals, and certainly in core markets, the Manhattan's and San Francisco's, so I guess to that point are you guys looking at markets outside of San Francisco and New York?

Justin Palmer - Definitely, it's something that is tough for us to go and get scale, because we have also stepped up in deal size, our first couple of deals were in the five to 10 million range, and now we're doing 30 to 100 million, and we'd like to stay above 30, but we are going out looking at other markets, particularly in the multi family and senior housing space, we think there's still a lot of opportunity in housing and urban markets around the country, there's a lot of urban markets well they're are seeing tremendous growth, and I think that's more of a structural shift in where people want to live and work, and I think like you said, you're probably not going to see the rent growths you've seen around the country in the past four or five years, but there are still opportunities to go buy a B asset and turn it into a B+ over the next 3 to 5 years and make good value there.

Adam Hooper - If you guys are looking at over 30 million, you're square in institutional territory there. How as a younger more nimble firm that maybe doesn't have a million-dollar balance sheet to go play around with, how are you guys competitive and how do you compete with the institutional space because that's a very crowded world, a lot of capital chasing deals there now?

Justin Palmer - Absolutely, you're a hundred percent right, I think the biggest value that we can provide or what we can offer is that we've got a co-GP platform with Kuwait real estate company also known as AQARAT, which we formed at the end of 2015 after successfully entitling 1095 Market St, they made an offer to partner with us on the platform basis, we've since bought 944 Market St with them, they own our land assemblage in Brooklyn with us, so we have done multiple deals with them, they are six to 700 million dollar company, and we don't have to go out and raise capital to close on those acquisitions, we can close without outside capital if we need to, the platform is set up as a general partner platform, but for the assets that are more of a value add play, than have a cash component, AQARAT has a bucket of capital that's much more interested in that in the US, and so we are pretty competitive, if we can syndicate the equity and structure promote, it's a better deal for everyone right just from an asymmetric risk reward perspective, but we don't necessarily need outside capital to make those acquisitions, and they're extremely sophisticated and institutional, and they have access to a lot of other capital outside of just their balance sheet.

Adam Hooper - You have that relationship where you guys can go in and tie something up, and not have to worry about a deal level capital raise to get it done which keeps you guys competitive, plus you have the more nimble, maybe take on a little more hairy deal than more conservative institutional lines might not want to take on.

Justin Palmer - Absolutely, we can go in and get comfortable, if there's permitting issues, or some sort of zoning issues or a heavy lift on the construction, we are totally comfortable in that space.

Adam Hooper - Now with AQARAT, and I guess more generally international investments, San Francisco and New York clearly on everyone's radar. Have you seen international capital looking at markets outside of this kind of prime global cities, or is that still the main focus for international capital is the tier one cities?

Justin Palmer - That's a great question, it's always going to be easier, part of the reason why we wanted to focus on New York and San Francisco, is because the buyer pool when you're trying to sell an asset, on the exit it's going to be much greater. You plan on holding an asset three years, five years, seven years, 10 years or whatever it is for that business plan, but you never know when you're going to need liquidity, or if you decide the market is too hot for construction, let's sell this dirt, obviously being in a core urban market it has value. There's been a lot of international capital going to markets like Los Angeles, Miami, I would say it spread to Seattle for sure. It seems to be kind of happening in Portland, as Portland becomes more institutionalized in the real estate site, so I think international capital has gotten a lot smarter and less picky over where they're going. New York is kind of, they're just parking capital at this point, because there is no yield in New York, and rent growth has leveled off, so it's a little bit of a different strategy, I mean I think people still want to be in New York and San Francisco, but they're willing to allocate other dollars to other markets.

Adam Hooper - Yeah you just brought up a really interesting point, is good to reiterate. You have to have an exit, everyone talks about how you make money on the buy, but if you have no way to exit, it's going to be hard to actually capitalize on that purchase. That's a really good point, so I always have, you could have a vision to how you're going to execute the plan, and then once you have executed the plan, how the heck are you going to get out, and I think that's a very, very important point.

Justin Palmer - Yeah and it's one I used to get really frustrated at the Lehman estate, because the estate wanted total optimality in every position, even if it was a liquid debt position. We would really have to think, 360 times two on what our potential exits were, because the bankruptcy plan got approved to liquidate, you needed to be in a position to monetize, whether it was debt or equity or somewhere in between where you are foreclosing, and that ended up being great great training for me personally, to just take a look at our assets, and be like where are we at in terms of cash flow, what can we REFI at, what can we sell this thing at, is an opportunity to buy out our partners and create more value, so we are constantly evaluating our portfolio for those types of opportunities, and we've executed on them a few times, like I originally bought the first two parcels in our Williamsburg land assemblage with one group of partners with a family office, by the time we close it was worth one and a half to two times what we paid, they saw dollar signs and wanted to flip it. At that time in our company I wanted to try and build it, and I also saw an opportunity to buy another parcel, and so I ended up cutting a deal with them to buy them out, I put the other parcel in contract, and then was able to recapitalize the project and get them out, they made money as well as create more value for the development, by adding an assemblage right, so you've always got multiple options, but I agree with you, you've got to have that focus.

Justin Palmer - What are we doing with this asset and what options do we have and how close are we to actually being able to execute on those things?

Adam Hooper - With yield compressing in the tier one San Franciscos, New Yorks of the world, the nature of opportunity is changing, so was not necessarily that there aren't opportunities there, it's just the higher octane juicer deals aren't there. It's just a different kind of capital coming into that space, how do you see that playing out with the nature of capital changing. What's chasing those opportunities, do you see any dynamics for your strategy going forward, or anything that your listeners should be aware of as that kind of capital dynamic changes in the markets?

Justin Palmer - We've seen a lot of private high cost debt moving to New York and San Francisco, and there's a lot of family offices, I mean you can call it whatever you want, bridge lending, hard money lending, that space has grown pretty significantly in both New York and San Francisco where investors are effectively taking a short position on the ownership, because they like it at 80 cents on the dollar. The opportunistic capital has really shied away from development in both cities, because it's late in the cycle, they made their early bets they bought things at certain prices, and there's been a run-up in prices. Construction is tough, it takes longer than everyone expects. You're seeing that shift and here's a lot of properties in New York right now. I don't think there's as many in San Francisco just because the transaction volume isn't as high, but I think there's a lot to New York right now that is getting ready to go into a major restructure or some sort of foreclosure or transition of ownership, because the value is just not there, developers were scooping up land at insane prices per square foot to build luxury condominiums, and that market today is just flat because there's so much supply.

Adam Hooper - I want to go back to something you said there, just to pick apart a little bit for the listeners, so the high yield debt, bridge debt, hard money loans, you said they liked those deals at 80 cents in the dollar. What you're saying is basically these traditional equity players that would have historically been in the GP or LP position, that pricing last dollar in is inflated enough that they are now switching over to the debt part of the stack, so they are in last dollar at like you said 75 or 80 cents on the dollar. If as essentially a short position, if market corrects, if issues happen with the asset, it's basically a loan to own strategy, where they can get in at a discount because they're in the debt position, versus coming in behind a senior lender in an equity position, is that what you're saying there?

Justin Palmer - Forrect. You're seeing it move up, it goes from senior to pref equity or mezzanine financing, and what's interesting is that you are seeing a lot of the New York families making those loans or setting up ventures to make those loans or pref equity investments, because they're obviously very sophisticated, it's a much better risk-adjusted return at this point in the cycle. They can earn a current yield what you're trying to figure out if you can execute on the business plan, if you get it built great, if not the own the thing for 20 percent discount.

Adam Hooper - That's a really interesting point, that switching strategy. Not that they don't like the real estate, they just don't like it necessarily at the current equity price. If you can switch around and get on the debt side of the stock, then you're in a little better position, interesting.

Justin Palmer - Yeah absolutely, I think the saying is "There's no such thing as bad assets, there's just bad prices."

Adam Hooper - I like that. Let's go back a little bit to 1095, we were talking before we started recording today and you mentioned also the labor markets, when you're halfway through execution of the strategy and things like that come up, can you forecast for things with that, can you build that into a performer or a plan, and how do you trust those things mid stream as you're executing on the project?

Justin Palmer - Scenario building is critical for any business, and being able to sensitize based on the most important factors, in a construction project it's cost and time, and so obviously when we go into it, when we acquire a deal we're looking to sensitize, for hey if this takes eight months longer, if this takes 25 percent more to build, is it still a good return but not quite an opportunistic return or is it a zero. If it's a zero we likely won't make that acquisition, because there's too much risk in it. Planning for its hard, because going into a deal investors and lenders don't want to hear that there is all that risk in it. Everyone knows it, everyone is sophisticated, but it's not a good part of the story, so being able to properly sensitize those deals and be able to defend, delay scenario, a cost overrun scenario, is what you should be able to do if it's a good investment. Things always come up, construction is fraught with risk for sure, and most importantly what's gotten us through, I mean in our project in Harlem, we ended up firing the general contractor, and I took the subcontracts myself, which is a pretty risky bet. At the time I'm like look, I'm paying these guys overhead for their company, their mismanaging the construction from our perspective as the owner, and is it more risky to terminate them, or less risky to go in and take control of it. At least we have control over the outcome at this point, and we did the analysis, we had a lot of debate with our partners,

Justin Palmer - and they just came down they were like look if you want to take that contract risk do it, we want to get this finished, and I did that analysis and felt like I could control the construction better with the team that we have internally. That's a tough decision to make, but once you do it you rip the Band-Aid off and then things start going well again, and then people start believing in the project again, because it's hard, you're managing anywhere from 20 to 50 consultants on any given project, the sized projects that were doing, and team dynamics are important right. If people feel like there's no sense of urgency, or it's really difficult to get things done, that starts to wear on the team over time, so you've got to do something, if that thing is on life support you've got to bring a shock to the system right?

Adam Hooper - Yeah that's a really good point, the team management. We talk about the manager all the time, and that's a big thing for us and for the listeners out there, really you're betting on the jockey not the horse. What you just said is, that jockey has a stable of horses, that they're managing right, it's not just they manage themselves, it's all these different stakeholders in these projects that as a manager of the asset you also have to manage that team, that's a really interesting point.

Justin Palmer - It's one of the hardest things to do, which you guys can probably attest to as entrepreneurs, is managing a team of people that have different goals, different ideas, different work styles, different personalities, that's the most difficult thing in life right. You've got to figure out this is just a real estate project, you've got to have a team that matters to your point, and I think part of being a good manager is picking that right team. It's like being the manager of a baseball team, you can't just pick two star players and think you're going to win, you've got to go find, there's going to be people that you need that are really good at task managing, there's going to be people that you need that are really good at technical construction things, there's going to be people that you need that are great at permitting, and then you need a strategy person to sit on top of all those people, and really understand the dynamics of everything, the market, the city, the investors, the lender, and that's kind of what you do as a developer, you're that strategy person.

Adam Hooper - And especially a project that was as complex as 1095. You have a change in use, you had an historic building, it was one of I think, it was one of the only buildings to survive the big earthquake right, so you've got a pretty interesting asset there with a lot of moving pieces to try to manage on that process.

Justin Palmer - Yeah absolutely, very, very complex project. We have ... as our general contractor, and they're a global publicly traded construction company, and they are like this is one of the most complicated projects we've seen in the US.

Tyler Stewart - When you're looking at a reuse play like that, is it almost easier to start just from the ground up rather than have to address all of these historical issues?

Justin Palmer - Short answer yes. You can control a lot with ground up construction. You've got a little more room for forgiveness in variation. Especially with our business plan on 1095 because of the density play, you have zero margin for error, if the survey is off by half an inch, we are not meeting code in 20 percent of the rooms. Our architect likes to call it the Swiss watch of hotels, and it really is and we've seen that, we've really had to pay extra attention to layouts and the measurements within each one of the rooms, because it's been really tight. We had to make some adjustments along the way, we've had to sacrifice a few things where we thought we were going to get to code, and then the city changed it because no one has ever built what were building right now.

Adam Hooper - For the listeners out there that might have invested in that project, do you want to give a quick status update on where your at with 1095?

Justin Palmer - Yeah, absolutely, we are about 90 percent complete with construction. We're getting into the final stages and starting to plan for the temporary certificate of occupancy which we're targeting right now, like the middle of May. That starts a number of inspections with the city, but the asset looks great. The construction quality came out phenomenal as I mentioned. The rooms are super high-quality, we're excited to have everybody come stay there, on like a friends and family opening to test it out. The building looks phenomenal, and we are just pushing to the finish line, at this point the last 10 percent of the project is the hardest for the construction and development team. It makes the first 90 percent look relatively straightforward. Now it's really just like punch listing and quality control, and we'll upload some new photos, because we just went through the asset this week doing like a pre-punch list with the general contractor. I'm personally really proud of the quality of construction and the desig. The design team, Nicole Hollis and BAR architects nailed it. We're going to have a really special asset in downtown San Francisco.

Adam Hooper - When is the target opening do you think?

Justin Palmer - We're trying to get it open before 2Q 2018, but it may slip a little bit depending on some facade work that has to get done according to historic planning here in San Francisco. We don't want to open with scaffolding, so we may do a pre-opening, just friends and family.

Adam Hooper - The hospitality asset class, that's one that we've had a few people talk about in the past. San Francisco as you mentioned I would agree with you is relatively underserved in terms of the hospitality sector. Is that an asset class you guys are going to focus on going forward in different markets, or is that more the relationship with Yotel that brought that deal together?

Justin Palmer - We're totally opportunistic. We are always going to look at what we think can get those best risk adjusted returns, as I was mentioning earlier. San Francisco has a very unique supply demand imbalance. It makes it attractive to pursue hotels here, but the Yotel relationship was important as well. In terms of how they operate the building from a design all the way down through management, it kind of aligned with our values of how we design and operate our residential buildings, where you're looking to kind of maximize that and NOI that yield per square foot which is not a lot of hotel companies were doing until the last two or three years, and we've seen a lot of companies push into their space. Marriott, Hilton, every major hotel company now has a brand that's trying to replicate what Yotel has been doing. Yotel has a 10 year advantage in terms of operating history, and so they are kind of innovating on Yotel 3.0 while everybody is still looking at 1.0 for those types of business models within a big company, so we are very bullish on the Yotel model overall. They have had tremendous expansion. They just opened in Singapore. they just opened in Boston. I think they opened at the Paris airport at the end of last year as well, and I think they have like 17 to 20 hotels in active development right now. They also announced at the end of last year Starwood capital bought a 30 percent stake in their operating company, which I think is a huge vote of confidence

Justin Palmer - for the power of their platform. We are really proud of that, that said I don't know that we could pursue another hotel investment at this stage in the cycle, unless it was a Yotel opportunity in a market that we felt had similar supply and demand economics.

Tyler Stewart - What is it about Yotel and how they maximize the use of square footage, what are they doing, what kind of experience are they providing guests that allows them to maximize that?

Justin Palmer - Yeah that's a really good question. They've kind of taken the airline model of automated check-in, as well as technology being able to use your phone and have a lower touch point at the hotel as an experience for the guests, because everybody's a little more self-sufficient with technology. That component alone eliminates a big factor in the operations of the hotel, just by going what I would call labor light. It is also an experience that people are looking for. If you're a business traveler, you don't really care, if you're staying in a place for two days, most people that are on the younger side of demographics, they don't need that high touch point of someone greeting them at the door, then someone else walking them through the check-in process. You come in at 10 PM off a coast-to-coast flight, you just want to swipe your ID, swipe your credit card and go to your room, drop your stuff. Yotel really fixated on that early, because they saw how successful it was in the airline space. In terms of density, the way that the rooms are designed they flip the bathroom and the sink, shower, toilet to the window line of the room which opens up the room in a very tight space. They also have the mechanized bed, which is pretty cool, it's similar to a lay flat on an airline. During the day you can use it as sort of a couch, and at night you can lower it down and sleep on it, and it obviously allows us to get about 50 percent more rooms than anybody that we were competing with to acquire 1095 Market St, which is tremendous

Justin Palmer - value in terms of efficiency. Then because the rooms are smaller they're faster to clean, you need less housekeeping, there's no mini bar, there's not all this laborious component to servicing those rooms and getting them ready for the next guest. It's truly an efficient model through and through, and that ends up impacting your NOI margin pretty significantly. Where they're running in the 35 to 40 percent range, and in their airport hotels they run it like a 50 percent NOI margin which is just unheard-of in hotel space.

Adam Hooper - I would go on record as trading a minibar for the rooftop deck that you guys are building any day.

Justin Palmer - Yeah, exactly.

Adam Hooper - What's up next for Synapse, we've talked about maybe looking at some different markets, being a little bit more opportunistic. What is 2018, 19, 20 look like for you guys?

Justin Palmer - We've been pretty heavy on the execution front the last year-and-a-half, and over the last 90 to 120 days, I've really started to focus on that question of what's next. We definitely see opportunity in the south-west in the housing space, whether it's multi family, student housing, senior housing. Given where we are in the cycle we think that's a better play from an investment perspective right now, but we'd also like to start raising a fund, and I would like to have the flexibility to make those pref equity investments in deals that we like, because we see a lot of deal flow in the New York and San Francisco markets, but we don't necessarily like the cost basis. We are going to look to push into the capital market space as well and really round out our platform, to be more than just a development company right, and be a pure play real estate investment company.

Adam Hooper - Any international stuff on your radar?

Justin Palmer - I would love to break into some other markets, but I'm happy to wait for a downturn.

Adam Hooper - There's enough to do here in the US first right?

Justin Palmer - Yeah, which raising a fund for us will give us that flexibility to go pick some different markets and make some investments, get to know those markets a little bit better, because it's always better to be in a lower basis in a market that you're not a hundred percent comfortable with.

Adam Hooper - Alright, I think that's awesome. Anything else that you want to sneak into the conversation that we didn't touch on?

Justin Palmer - No, I just really appreciate you guys reaching out, it's good to catch up, I'm glad we had a chance to chat, and this was a great conversation. I appreciate you guys taking the time.

Adam Hooper - It's our pleasure, again we've always enjoyed the conversations, we look forward to hopefully getting a few more deals on the platform soon with you guys.

Justin Palmer - Absolutely.

Adam Hooper - Perfect. Alright thanks Justin, and to listeners out there as always if you have any questions or comments feedback please send us an email to, and we'll catch you at the next one.

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