Episode 14: Changing the Culture of a Building
Joe and Ryan talk about adding value to buildings by changing the culture for occupants. After acquiring buildings, they work to improve the tenant-landlord relationship and the association tenants and clients have with the buildings moving forward.
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Joe:
But I think part of the reason we are good at changing the culture of buildings is we're in our 13th year of business, and we've been through a bunch.
Ryan:
And we've known each other since third grade.
Joe:
And there's two of us, so when one of us is sort of screwing up, it's like, "Hey, you're off the track, bring it back on a little bit." But I think that the way we've improved as people over the years when we've hit roadblocks, when our companies hit roadblocks, has made us better investors and building owners and company owners.
Speaker 3:
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Joe:
Ryan, today we're going to talk about one of the number one ways that we add value to buildings, and it's a way that I don't think most people think about, it's almost like a secret sauce of ours. But the way we're going to talk about today is changing the culture of a building. And a lot of people are going to think, "Culture of a building? Buildings have culture?"
Joe:
I start by thinking, if you're going to buy a company, one of the first things you do is you walk in and you get a feel for that company. How are people acting? Are people grouchy? Are people unhappy? If people are unhappy, if people are grouchy, then that's a company that's going to struggle to be profitable.
Joe:
And buildings are the same way. They're a culture, they're an ecosystem, and if tenants aren't happy, if they have a bad feeling towards the landlord, towards the building, you're going to see higher turnover, you're going to see lower NOI. And as investors, as value add investors, one of our goals is to raise NOI, and one of the ways we do that is by changing the culture. And we're going to talk about that today.
Ryan:
Yeah.
Joe:
Any thoughts on that?
Ryan:
Well, I think about our company's culture, because just like when you're acquiring a business, if you're attempting to change the culture of that business, but your culture stinks, you're going to have a hard time. Our company, we've worked hard on the culture that we have, the environment that we have, it's positive, it's caring, we have our core values that we really live by, and that naturally emanates out.
Ryan:
So even as we acquire a building, if our team members have developed the skills of extreme ownership, if they're positive, they're caring, they're humble, that culture emanates out to the building. And so many times we've seen where tenants initially are reactive or angry or frustrated, or they just have their wall up because they're used to what they were dealing with before.
Joe:
Yeah.
Ryan:
And all of a sudden they meet someone who's smiling and who is engaging and who is really listening to their needs. It changes them. I think of a building we acquired recently with a large government agency in it, and they had their guard taken down by the approachable and the humble demeanor of our team members.
Joe:
I'd say, Ryan, that companies reflect their ownership, and where ownership struggles as people, where they may be negative or difficult, they tend to attract difficult employees, and same with building ownership. Building ownership, when it's negative or difficult or, I don't want to say tight-fisted, they tend to attract tenants like that, and they tend to reinforce negative behavior.
Joe:
There's an interesting piece of psychology here which is that to own a company with great culture, and to own a building with great culture, by the way, companies and buildings with great culture also have great value, it's almost like you have to be a better person. And this is an interesting idea, but I think part of the reason we are good at changing the culture of buildings is we're in our 13th year of business, and we've been through a bunch.
Ryan:
And we've known each other since third grade.
Joe:
And there's two of us, so when one of us is sort of screwing up, it's like, "Hey you're off the track, bring it back on a little bit." But I think that the way we've improved as people over the years when we've hit roadblocks, when our companies hit roadblocks, has made us better investors and building owners and company owners.
Ryan:
Yeah, absolutely. I think of a property that we acquired a couple of years ago called Century Center, and the prior ownership was a large REIT, real estate investment trust, and they owned it through the great recession, and then they ultimately were foreclosed on the property. And so you can think of the distress that this property has gone through, and the tenants, they've gone through the global financial crisis, they've gone through a very institutional and bureaucratic ownership, and then they went through foreclosure on top of that. So the tenants have their guard up, they were defensive, they were used to prior ownership that was very institutional, very difficult to deal with, very uncaring.
Ryan:
And I think that was probably the biggest thing that we were able to bring to the property is a breath of fresh air where the tenants, they felt heard. And feeling heard is probably the greatest step that you can take toward being able to have a good working relationship. And a good working relationship of course means an economic exchange because, we're landlord, they're tenant. But if it starts from a caring attitude, and it starts from understanding their business, it ends up being a far more effective relationship.
Ryan:
And through that, it kind of felt like we didn't have to work that hard to create value in that property, because we started by working with the tenants and understanding their needs, and working through how we best accomplish our objectives with the property while helping boost their business.
Joe:
Yeah. So in due diligence, we're often talking to the tenants, hearing their needs. That's when they're feeling heard happens. But after that, we lead with value, we lead with capital. Normally we start from the curb and we work our way inside. One of the easiest ways to add value and show new leadership and show that things are different is to paint the building. And not just paint it a color, but paint it a thoughtful color scheme that you've worked on with an architect that rebrands the building. Also changing the signage, resealing the parking lot, trimming up the trees. These sorts of little details say that, this building's going to be different now. And then moving into the lobby, and then into the hallways. Those are the sorts of things that say, this building's going to be different.
Joe:
At the same time leadership, just like in companies, sometimes requires making cuts. Often the tenant mix we inherit when we buy a building, a portion of it isn't a good fit, it's poisoning the culture. And sometimes difficult conversations are a way to change that. But frequently, I'd say with almost every building, one or two tenants need to move on, and we help them make that transition, and we bring in new tenants that reflect the values we're working to accomplish in that complex. And that makes everyone happy, and that raises the value of the property, and that increases the ability to raise rents. It leads to a happier staff, which makes them happier to work on the project.
Joe:
So curating culture and taking a leadership position, and leading with capital that's pre-planned for that property, allow you to reposition it.
Ryan:
And I'd say we're in a human business.
Joe:
Yeah.
Ryan:
So human interaction, face-to-face interaction, is such a critical part of what we do. In our geography, in particular, we see a lot of ownership that's based in Los Angeles, San Francisco, other major markets that are kind of helicoptering into our area. And with that you've got this detached relationship, because you've got an owner, sometimes a property management company that is based out of the area. And if you're not able to provide that human interaction that makes the landlord have a character and a face, it makes it much more difficult to understand the tenants needs to be able to really respond to the market in an effective manner.
Ryan:
I think it's a real strength that it's our team members that have the same culture, the same values, the same way of doing business that we do. They're the ones that are interacting with the tenants. It not, I hired some third party management company that I interviewed, and hopefully they're going to provide the same care and the same culture that we as a company provide.
Speaker 3:
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Joe:
We often talked about the three legs of the investing stool, opportunity, capital, and team, and the team part is really highlighted here because that team is leading the charge on culture in that property. If you're going to operate at scale, for example right now we're working on six or seven properties at one time. You and I are providing leadership, but we have a team of 15 people that are carrying out that leadership. And if they don't reflect our culture, if they don't reflect our values and our vision, if they don't communicate care on the front lines to those tenants, if they aren't modeling being heard, and listening, and being responsive, you can't scale and you can't create value at scale. So again, culture, and who we are, and the type of people that we bring into our company, is extremely important.
Ryan:
I think one last thing I'd add is that culture has to be consistent throughout in our experiences. So we recently acquired an apartment community, and with that came a team of staff members. And kind of the first thing that we did, subconsciously, all of our existing team members, us, the first thing we did was evaluate that onsite staff through the lens of our culture.
Joe:
Yeah.
Ryan:
And fortunately the team was just in a tremendous alignment, and much like you mentioned, were coming out of a different culture, they were happy to be a part of the culture that we had created, they were happy to be a part of a team where transparency and honesty and humility are valued core attributes. And so, in a sense, we were able to supercharge the changing of the culture of that property, because we had team members in place that already exuded those values.
Joe:
But with those team members, we lead with value. First we heard them, and understand the things they'd always wanted to do to this property, we listened. It turned out that those things they wanted to do very much aligned with what we wanted to do. Then when we hired them, we increase their pay a little bit. We increased their health care a little bit. We increased their autonomy a little bit, and we brought joy and our core values to the relationship. So it's more pay, more autonomy, I'm feeling heard, I'm part of a team that's doing cool stuff. They were energized, they were jazzed about what was going to happen.
Joe:
I point out too that managing culture is a very challenging thing, but for us, we have a process around it, which is that we bonus around our culture pillars every quarter. We evaluate every employee by whether they get it, they want it, they have the capacity to do it. We also do that for each other. We go through our core values and we think, does this person have this? And we score around it. And ultimately we bonus around performance that way. And we often talk about how trust is what our company runs on, and trust happens when you have shared core values. So it's really important to who we are.
Speaker 3:
Thank you for listening to Durable Value, an investors podcast, where we demystify commercial real estate with safe, sound investment strategies, to help you balance your portfolio. If you enjoyed this podcast, be sure to rate it on iTunes, or wherever you get your podcasts. To learn more, visit GraceadaPartners.com, where you'll find more information, investors tools, case studies, and more. This podcast is hosted by Joe Muratore and Ryan Swehla. It's produced, edited, and mixed by Melodic, with intro music by Ian Post. Thanks again for listening, and we'll see you next time.