Why “Off the Beaten Track” IsNow The Yellow Brick Road November 3, 2017 An interview with Marc DeLuca Non-gateway downtowns are the new golden ticket We’re at the point in the investment cycle where heads are turning toward non-gateway cities, says KBS eastern region president Marc DeLuca. The reason: record pricing in traditional gateway cities, driven mostly by foreign investors who are fleeing a deflationary environment in their home countries and turning to the U.S. as a safety hedge. “My region will be a tale of two cities,” Marc says of the East Coast. “Some downtown markets, such as New York and Boston, will experience slower growth than, say, areas in the South, such as the Carolinas and Atlanta.” From a rental growth perspective, Marc adds that Atlanta and Raleigh are two top markets. Funny how times change, and so quickly. “At the beginning of the year,” he says, “it would have been New York.” Marc’s team is now on the trail of non-core markets, which offer durable employment potential, the right demographics, and attractive environments for corporate growth. “Given the size of the Millennial generation and their increasing role in employment in the U.S. job market, their desires can’t be ignored.” “We’re looking for best-in-class assets,” Marc says, “coupled with credit tenancy and what we call generational quality.” That quality, of course, refers to the Millennials, who have made the workforce a buyers’ market. “Given the size of the Millennial generation and their increasing role in employment in the U.S. job market, their desires can’t be ignored,” Marc says. Those desires include creative space, well located near housing, retail and transportation. And that’s just what they prefer on the outside. Inside is yet another story. “Today’s office space is more open,” Marc says, “with areas aimed to provide a more collaborative environment.” Location in real estate has never been more of a first priority, as well as the appeal of a commercial property to the future workforce. Back in the day, workers traveled to where the work was; today, the opposite is true: corporate America is setting up shop where the Millennials are — and intensely competing for their attention and their skills. KBS answers the call with properties in the right locations, offering walkability — the very key to the Millennials’ preference for a live/work/play environment. “We have a very creative culture that we, in turn, deploy on our assets,” Marc says. “Today’s office space is more open with areas aimed to provide a more collaborative environment.” The vibe: creative amenities and common areas. Two great examples of this trend are KBS’ recently delivered development assets: Bank of America Tower and Mid-Town Plaza, in North Hills, Raleigh, North Carolina. These two office properties, which began with little-to-no pre-leasing, reached a 95% lease rate within just two months. Also in the works in North Hills is a Class A multifamily development. “It’s a vibrant 24/7 community,” Marc says. “This is a level of quality that has yet to be seen in the marketplace. It’s already very well received with pre-leasing a little over 25%.” The quickly rising pre-lease rate is proving the that non-gateway cities are actually floodgates. KBS’ newest acquisition, Main & Gervais, is another ideal investment in the secondary market. This asset is located directly across from the South Carolina State Capitol. It was developed in 2009 at a cost of $60 million. “It’s in an irreplaceable location and quality level that can’t be built today for that basis,” Marc says, “or in this location.” The continued growth in South Carolina, by companies like Boeing, BMW and various medical employers, insure that there won’t be substantial pullback with a flat-growth economy. More of these projects are coming; top-tier developers are attracted to KBS as a joint venture (JV) partner/capital source because Marc sees investors as more than just a business relationship — it’s also a human relationship. “We look at our JVs as a marriage,” Marc says, “and as such, you take the good and the bad in stride together. Also, by being understanding and a true partner, it allows a level of trust in our JV partners that fosters mutual respect for each other and enhances the probability of success.” Marc’s personal reward for each new non-gateway acquisition? A good cigar. “My favorite is the Cohiba Behike,” he says, now that Americans are allowed to enjoy Cuban cigars. “They are blended from not one, not two, not even three, but four unique Cuban tobacco leaves. Those leaves create a smoothness that is unforgettable.” KBS makes its central East Coast location in Washington, D.C., so that the team can be in any market — gateway or non-gateway — in a matter of hours. As a native Washingtonian, Marc experienced many political climates, but what he finds most amazing is the various interpretations of how Washington is perceived, especially in its current incarnation. “When people find out where I’m from, I become the professor of politics,” he says. “The funny part is, in college I really wanted to get into politics. I was obtaining my major in public policy when I realized that was a crazy idea, so I majored in business economics as well as public policy.” Little did he know how much his double-major would be applied to the most unusual and unexpected of political and business upsets — both inside and outside the Beltway. A special thank you to blog writer Ron Sklar for conducting this interview. Marc DeLuca is Regional President overseeing the Eastern U.S. As regional president for KBS, Mr. DeLuca is responsible for all acquisitions, dispositions and asset management activities in the Northeast, Mid-Atlantic, Southeast and Ohio. Mr. DeLuca is also chairman of the KBS Investment Committee that meets regularly to review and approve all new investments for the firm.