The Changing Face of Real Estate with Michael F. DiScala
Factors that influence real estate development
As President and Chief Executive Officer of M.F. DiScala & Company, Inc., Michael F. DiScala has witnessed many changes in the real estate industry during his family company’s nearly 100-year history. In today’s show, Michael shares the growth of his organization, his passion for industrial real estate, and what trends he sees forthcoming to the Northeast.
Key Takeaways
Industrial, specifically warehouse & distribution space, is the strongest performing sector in the commercial real estate market.
When building apartments, you want to be near retail, restaurants, and other services. The walkability factor is important.
Commercial real estate is an overregulated industry, which makes development projects take longer to complete.
“The industrial market right now is the strongest of all four markets in the country.”
Biography
Michael F. DiScala is President and Chief Executive Officer of M.F. DiScala & Company, Inc., Real Estate Investment Bankers, headquartered in Norwalk, Connecticut. Established in 1923, the company is a privately held, self-administered, real estate organization, which is engaged primarily in the business of acquiring, developing, managing and leasing warehouse/distribution facilities and commercial properties throughout Connecticut and in other significant markets throughout the United States. The portfolio of M.F. DiScala & Company includes over 60 properties in 11 states and 23 cities.
Episode Transcription
Eric Bernheim: Welcome to The Real Estate Roundup presented by FLB Law in partnership with the Greater Norwalk Chamber of Commerce. I am your host, Eric Bernheim, managing partner of FLB Law, a full-service law firm based in Westport, Connecticut. During this focus series of five podcasts, we'll be discussing current real estate trends in the Greater Norwalk region. Our expert guests will discuss topics including local development projects, workforce housing, and the trends in real estate markets, including industrial, retail, office, single-family, and multifamily residential properties. Thank you for listening.
We're here today with Michael DiScala of M.F. DiScala. We're going to be discussing his real estate business and the local and national markets with him. Thank you for joining us, Michael. Can you tell us a little bit about yourself and your company?
Michael DiScala: Good morning, Eric. Nice to be here with you as well. Our company is an old line, conservative real estate investment company. Its origin dates back to 1923 in Norwalk, Connecticut. We started grandfather, father, it’s a family business. We specialize in purchasing and developing commercial properties in Norwalk and other markets around the country. Mainly industrial, commercial real estate, some apartments, no offices, and some retail as well. We’re privately held and self-administered. We manage our own portfolio. We don't do third party management. We’re based here off Smith Street and the new apartment house we recently completed called Head of the Harbor. We lease the first floor from ourselves in this complex. And like I say, we're a full-service, very active company.
Eric Bernheim: Right, you have a management company as well, right? Sedona Group.
Michael DiScala: Yes. Sedona Group, which my son, John, heads up is probably one of the most active parts of our business is to manage our own portfolio, not only in Connecticut, but in other markets around the country. So we hire managers around the country to manage and we manage the managers so to speak. That's how we keep track of our assets from an accounting standpoint. Also, we have cameras on site to visually keep track of physical conditions of the property.
Eric Bernheim: That's great. So you've been at it since 1923. So you're going to have a big party of yours when you're 100 years old, I guess. That’ll be fun. Could you tell us how your company has grown over the years?
Michael DiScala: Well, originally, the company started off with my father and uncle as a residential real estate company called Talent Short Realty. Talent Short Realty basically did residential real estate. When I joined the firm, I actually started doing residential real estate, selling houses for a year or so. And it wasn't for me. I didn't care for it. So I said to my father and uncle, “Look, this is not for me, I want to change it to a commercial real estate firm.” A lot of resistance, but I started then, and we continued and then we phased out of the residential business and not strictly commercial. Then the sequence of events took place that the company grew. We had several offices, not only did we invest in real estate, we were a brokerage company. And it was called DiScala Fairfield.
DiScala Fairfield had 30 brokers. It was a large company at the time and Grubb and Ellis, a public company purchased us in 1986. So we were actually a public company for three years. We're part of a public company, we have typically how the sales go, not today. Today it's basically the transactions are far different than they were back then. You would actually sell your company and you receive cash, stock in an earn out. It's called golden handcuffs. And we stayed with the company for three years and I branched out back to what I really wanted to do, which is strictly an investment company and investment and management, and I've been doing it ever since. That's the origin of the sequence of events of where I am today.
[00:05:00]
Eric Bernheim: It's great. So you mentioned that your company has a strong presence in the industrial real estate holdings which was a little bit surprising to me when I first learned that because you drive around Norwalk and you see a lot of retail and apartments with your name on it, but not a lot of industrial. Why is the industrial market such an important part of your portfolio?
Michael DiScala: Well, since I started, commercial real estate is really, I say commercial is a broad term. But I always started with industrial, I started purchasing. My first building I purchased when I was 20 years old was the Trolley Barn in Norwalk and that was really an industrial building at the time. I converted it to a warehouse and rented it to famous artists’ studios in Westport. They used it for storage and then Atlas Seeded Studios rented it because it had high ceilings, and they made have Broadway stage sets. And then Kitty Town rented the whole building for years. And then when the city approached me to say that they wanted Trolley Barn to be the anchor for the redevelopment of Wall Street. I came up with a plan to say I want to do a mixed-use development. The building had a 30-foot ceiling. I built a building within a building. The Trolley Barn now has 24 apartments. It has the offices, our corporate offices that were there for years. We just moved out two years ago. There's offices and then there is retail in front of a five-star restaurant.
Eric Bernheim: That's great. Can you tell us about some of your industrial buildings out west? I know you have a lot of holdings there.
Michael DiScala: Yeah, what happened in industry, I started buying industrial real estate in Connecticut, all throughout Connecticut. And then when Connecticut started to change where it wasn't as user friendly, then I started going to the Midwest. We had a major presence in Ohio, we still do. I think we have about 600,000 square feet left in Ohio in the Greater Cleveland area, industrial because that's the industrial heartland at the time. Then things started changing there in the Rust Belt. And then we sort of went into the Southeast, where we started buying real estate in Fort Pierce, Florida; Kentucky, Georgia, Virginia, all throughout the Southeast, South Carolina's most recent purchase, all industrial. When I say industrial, I caution, it's not a manufacturing building. Manufacturing base in our country has changed. And all our facilities, very few have manufacturers and all distribution centers to various degrees, small or large.
Our buildings range in size from 5000 feet to 1,200,000 square feet. Those are the ones on the west coast. So we go where the activity is. And again, it's industrial. So we've always been strong and industrial, we enjoy it, we know it very well. And we never really enjoyed investing in office space because office space here is on a treadmill as I say the tenant moves in, tenant moves out, but you have to retrofit the building, and you have downtime to get paid commissions. So although it appears as though you're making more money, the net present value because of all the work you have to do is really the same. That's why I say the expression, you're on a treadmill. So we've always avoided thank goodness, office buildings. Retail, we have I don't know, at least a half a dozen strip shopping centers. And so if I had a look at our portfolio and a mix, it'd be 80% industrial 10% office. I'm sorry, not 10% office, 10% retail, and 10% apartments, and it's just recently we do the apartments. Over the last few years, we've built and have in the pipeline about 400 apartments. That's new for us.
Eric Bernheim: That's great. So one last question about your industrial holdings, how are you charging rent on that? This was intriguing to me when we had our prep call about the value to which you mentioned 5000 square feet to, I think he said maybe 50,000-square-foot buildings. How are you charging rent for those industrial buildings?
Michael DiScala: Sorry, you said 5000 to what?
Eric Bernheim: You said 50,000 or was it 500,000?
Michael DiScala: No, the mix and size of our portfolio is as small as 5,000 square feet, and as large as 1,200,000 square feet.
[00:10:06]
What has changed, and this is a recent phenomenon that is starting in the West Coast, a lot of trends do start in the west coast and migrate west to east. One of the trends is relatively new, as they're starting to charge by the cubic foot. Because when you're talking warehouse distribution, you're storing things, to the extent that you can store your product higher, because our buildings are 40 feet high. That what we build ceilings. If I had a building 20 feet high versus 40 feet high, I could fit twice as much in the 40-foot-high building. Consequently, we don't look at the square foot values and in what we look at the cubic foot value, because a user's going to say, “How many of these widgets can I fit in your building?” A higher space ceiling, the more you can fit in and the more efficient the building is as well. That's why the cubic foot analysis comes into play.
Eric Bernheim: That's great so you get to use more of your cubic foot to generate more profits based on today's technology into such an Amazon and everything. So technology has really helped in the real estate market in the industrial region.
Michael DiScala: Yes, the industrial market right now is the strongest of all four markets in the country. I say four markets: industrial, office, retail and apartment. Industrial by far is the strongest followed by apartments.
Eric Bernheim: That's really interesting. So back to your Trolley Barn comment where that was an industrial building that then you converted into a mixed use, primarily apartments and some office, which seems like it was because you needed a place to put your office and then some retail. Are you seeing any other change of uses for any of the other buildings around? Are you considering changing uses for buildings that you have and repurposing them?
Michael DiScala: Well, there is a trend around the country. And again, especially in California, where the demand for industrial space or warehouse space is so strong, that office buildings, what you may consider to be a very modern, attractive office building, that's partially empty. They tear them down, they tear the office buildings down, and build warehouses, they tear shopping centers down, very common, can't rent them anyway and build industrial. So that's a trend that's continuing, we almost did this on one of our properties, tear it down an office component in there to build industrial, because you can rent industrial, you can’t rent offices.
Eric Bernheim: Just proves your point that the industrial market is the strongest of all four of the markets, I guess, right? So let's shift now to the apartment, residential market.
Michael DiScala: There is a property in South Norwalk, we just finished Bates Court next to the rail station that had a factory on, for years, we owned it. We tore down the factory and built an apartment.
Eric Bernheim: So that's a perfect segue. So I wanted to hear about some of your -- I know you said you just recently got into the apartment market, and it's about 10% of your portfolio now. So you must feel that the apartment market is strong and not becoming oversaturated. A lot of the chatter around Norwalk at least is that there's too many apartments going up and people can't believe it. So - what are your feelings on the apartment, residential real estate market?
Michael DiScala: Well, it's a very interesting question. I think I'd have to answer in a complex way. I think real estate is really the underlying pin. Real estate is a commodity at the end of the day. And the current market right now seems to be still holding up and is strong. Future is very difficult to predict. But let's look at the stock market. When the stock market is strong everybody jumps in. The problem is the timing of when do I get out? And fear and greed really drives a lot of these decisions. So people usually find it easy to get in but they don't know when to get out. Same thing holds true with apartments. When do I get out and stop building? I don't have a clear answer to that. But I will say there's certain things that are going on right now that will be a contributing factor. And there’s three areas I will look at. One, significant rise in construction costs anywhere from 20 to 40% rise in construction costs. The cost of land has gone up tremendously.
[00:15:00]
Third, it appears that interest rates are going to go up. So those three factors lead to a very thin margin when it comes to apartment house development, which is going to slow things down. Plus, there's too much. I think we're going to be reaching a point where there’s over saturation, and that's going to happen. I can't tell you when but the three factors, as mentioned, are going to slow things down naturally. And we're at a point now where we think it's going to happen. We'd like to get out sooner before it actually hits when things are slowing down. And I think we will, very soon, calm it down, bring it down. There's different markets. We're up in Essex. And we're up in Waterford, Connecticut, and we have new buildings up there 57-unit garden apartments and 72 units garden, they're new.
Those leases pretty quickly because the Eastern Connecticut, it's all driven by the submarine base, expanding like crazy. They're hiring 1000s of people literally, that's what is driving that market for us. That's unique, Fairfield County is much different demographic wise, than it is in Eastern Connecticut. So we'll look at things differently. Real Estate still is a local market at the end of the day. We built Bates Court, because it's literally right next to the railroad station. We said well, we're going to get a lot of commuters here. It didn't happen. There are no commuters and a pandemic hit. There are no commuters, we have just normal tenants. And that was a surprise, I think New York starts opening up again, people start commuting again, I think our values and our renters will go up. Because that's a natural draw. So there's certain things that are unique.
When you build an apartment house, you should look for three things. One, you should ideally be next to a railroad station for commuting, very important. Two; be in a downtown area where you could walk, the walkability factor, where you can go to a restaurant, go to a barber shop, manicure, you name it, coffee shop, the arts, these are services that people want. So you want to be there. Third element is being on the water. That's a very big draw. Those are the three things we look at before we choose a location.
Eric Bernheim: Sure, and I was just going to say so it's really, it's no different than any other real estate transaction, location, location, location. So you have to have one of the three key points otherwise, they're going to be tough to lease it sounds like. What impact does the apartment market have on your retail holdings?
Michael DiScala: Well, retail is driven by foot traffic, by apartments, for example, take Wall Street, where we are, you need people to walk the streets to revitalize an area to support the retail, we don't have that yet. You're not going to revitalize the retail unless you bring the people back down to the town. So to that extent, there's a correlation between strong retail versus apartments, you need the apartments first, then the retail will follow. People don't want to open up the store and there's no traffic. So that's the reason.
Eric Bernheim: All right, so that's really interesting. So how do you deal with those challenges if the apartments aren’t currently where you have a retail holding? How are you dealing with the challenges that retail is facing in order to lease out your properties?
Michael DiScala: Well, if your question has to do with strip shopping centers, I could answer that in that fashion because we own strip shopping centers. If you have a strip center that has an anchor tenant, let's take an example of one of the properties we own all Marshalls on Westport Avenue. Well Marshalls is a great anchor. That property has good visibility from the street, abundant parking, good tenant mix and a traffic light, easy in and out of the location, that's the kind of shopping center we’ll always survive and do well. It's the marginal shopping centers with limited parking, poor access, no anchors, just a mix of tenants here and there and sometimes bad tenants.
[00:20:02]
Those are going to continue to suffer, we can't stop the trend, it's already embedded that e-commerce has taken over our country and will continue to grow. That's why the industrial market that I'm in California is doing so well. It's all ecommerce driven strictly. So all we do is the warehouse is for distribution, comes off the port in California, to our building and gets distributed. So that's what's happening, you're not going to stop that trend. So, retail, the value of retail has gone down, I think 30%, our rents have gone down 30%. So $30 rent is now $20 is the new norm. Now, good shopping centers, like Marshalls, they're still $30 or more. But a margin shopping center with no anchors or doesn't have all the bells and whistles, $20 is really the right number. And that's hard to swallow with a lot of landlords.
Eric Bernheim: So when you have a marginal shopping center, like you mentioned, does it make sense to try to rethink the development and make it a better situated development? Or is it more effective to just drop your rents from 30 to $20 a square foot and take what you can get?
Michael DiScala: I think one has to do with the debt load that the investor has. If you're not over leveraged, you could afford to drop your rents and still do well. If you're over leveraged, you can't do it. So I think that building, raising marginal, retail and building apartments is the right answer in most cases. Because you're pushing a rope off the hill, with some of these retails. You see the signs all over the place, so you can't see it. By the way, it's not just Norwalk where you see all the signs, California, South Florida. Vast numbers we don’t, we were overreached before the pandemic even did. There were too many Chinese restaurants, too many Italian restaurants, too many of this, too many of that. And it's caught off sort of slightest downturn where you have some issues, it shows. The kind of tenants that are occupying strip shopping centers now, they're not retailers, they are service businesses.
Eric Bernheim: Yeah, I was just going to ask you, when I first started practicing law and got into real estate, it seemed like the restaurant industry, they were kind of the redheaded stepchild of retail. But now I see more and more and my real estate leasing practice has grown so much that landlords are really pursuing good restaurant operators because they help drive people there. They allow people to stay longer in the search. Are you seeing that in the strip malls too? Or is that more of a mixed-use development type trend?
Michael DiScala: No, a good shopping center, we have a shopping center up in Trumbull, Connecticut. And it's four years old, and we built it with a mix of tenants. It has a restaurant there that is doing phenomenal. And the whole center is doing well. This restaurant is actually a draw, it’s doing so well, but that's an exception. General rule is they are all struggling. They're all starting to come back a little bit. But their business is off, all restaurants. I don't know what to do about that. I think again, it's a difficult business to be in and the secret is not about the kind of food you have, it's all about management, the good managed operators, not the good chefs are the ones that succeed.
Eric Bernheim: Okay, so how has the real estate market changed? How's it different today than it was when you got started?
Michael DiScala: It's vast, it's vastly different, but the changes really have taken place over the last decade. I love the business; I really enjoy every day coming to work. I’m not sure I would do it again if I had a chance. Because there's certain things that are going on that really, really are difficult. Let me give you an example. We're an over-regulated industry right now. Over the last 10 years, it’s getting worse and worse, over-regulated from a city, state and federal level.
[00:25:00]
The regulations, very often, if you're doing a large development it takes longer to get the approvals than it does to actually build the building. We say to somebody, we could build your building in 14 months, especially a warehouse. They’re simple. But we can't deliver it for probably three years because we have to get it approved.
Eric Bernheim: And what are the hurdles that you're seeing there? Obviously, I have a lot, I have a strong land use practice. So I understand the local regulations and the process behind that. But is it neighbor opposition? Is it the actual regulations and the hoops you have to jump through with the municipalities? What are the biggest hurdles and getting those entitlements so that you can actually put a shovel in the ground?
Michael DiScala: For the neighbors, we appreciate the neighbor’s feedback, but they're not the issue. Their intention is usually good. It's the bureaucracy at all levels of government, the inefficiency of government, that they think they could do things better than us, as developers, and they can't, but they certainly think they can. So from an environmental standpoint, it's difficult and a traffic, offsite improvements that the government is saying, you're going to have to do this, this and this, and they hold you hostage. You want to build this, you got to get it built, they burden the cost, and it's got to be quite expensive, we have to pass that on. And some of the things they ask you to do are reasonable. Some are really not reasonable. But they just try to get the developer to pay for it.
The other thing is when we had the meltdown, in the residential market, the subprime problem that was a residential driven problem, not a commercial driven problem. Yet, when they change the banking laws, it affects all products, all financing. So, some of the bureaucracies that we have to go through to finance, which is extensive, as a result of something has nothing to do with us. But we still have to follow it. So, the government says one size fits all, it doesn't. That's the way we have to operate.
Eric Bernheim: Sure. Well, that was very interesting. One other thing that we mentioned earlier on our call was that you said some properties actually are not quoting rents anymore when they're going out to market. Can you tell us a little bit about that?
Michael DiScala: Oh my goodness, Eric, that is something I just ran across on my recent visit to California three weeks ago, we all went out there, Allen Weber, our Chief Financial Officer, John DiScala and myself to visit our industrial park. And our brokers saying, we're not quoting prices any longer, we stopped. What do you mean? Well, the demand is so great, and there's no supply. You can't run, everything is taken. So rents are going up, there’s a combination of factors why. But supply and demand is the number one. But rents are going up 1.5% a month, that's 18% a year. And so they just won’t quote prices, because everything they quote now is underwater. So, they'll give you a range, but they're not going to lock in a number.
Eric Bernheim: Until you sign the lease. So, it's beneficial for the tenants to not nitpick on that lease and get it signed sooner than later, I guess.
Michael DiScala: It’s a landlords’ market for sure Eric; it’s a landlords’ market.
Eric Bernheim: So you said that you see a lot of trends starting out in California and making their way east? Do you think that'll be one of those trends?
Michael DiScala: I don't know about that trend, because you have to have a robust market, where the demands are tremendous, and supply is zero. We don't have that here in the Northeast. So I don't know if it's going to continue across. There might be certain segments of certain sections of the country that might experience that, but will it be up here, I doubt it.
Eric Bernheim: Well, thank you, Michael. This was very interesting. I really appreciate your insight and sharing your experience on the real estate market, both in Fairfield County and beyond. So, thank you for your time today and it was great talking to you.
Michael DiScala: Thank you. It's my pleasure.
Eric Bernheim: Thank you for listening to the Real Estate Roundup. If you'd like to learn more about FLB Law, please visit our website at flb.law. I invite you to connect with me on LinkedIn to be kept apprised of developing trends in the real estate market both locally and nationally. Thank you again to our expert guests as well as our co-sponsor the Greater Norwalk Chamber of Commerce.
