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Real Estate Titan Marcus Lets Loose In San Francisco

April 4, 2013 | The Registry

By Sharon Simonson

As Bay Area real estate magnates go, George Marcus is probably the most famous. Hamid Moghadam of Prologis might give him a run. So might Carl Berg of Mission West and John A. Sobrato. But Marcus’ achievements are singular.

In 1971, he founded two companies that have exercised major influence on the U.S. real estate industry. Palo Alto-based Essex Property Trust Inc., now a publicly traded real estate investment trust, owns more than 33,000 apartments (both outright and in partnerships) in the Bay Area, Southern California and Seattle. Marcus remains the company’s chairman.

Essex has expanded aggressively in the current multifamily housing boom, buying 3,016 units for nearly $802 million last year alone, hundreds of them in San Francisco and Silicon Valley. It also is developing, including nearly 500 units at Folsom and 5th streets in San Francisco and a proposed high-rise tower in downtown San Jose.

Marcus also co-founded The Marcus & Millichap Cos., the parent company of multiple real estate firms. That includes the most prominent, Marcus & Millichap Real Estate Investment Services, the largest U.S. commercial real estate investment brokerage. “George started one of the greatest institutions in real estate in the country,” TMG Partners Chief Executive Michael Covarrubias said March 28 in introducing Marcus. “It is truly an amazing organization.”

Marcus & Millichap also is parent to Bay Area homebuilder SummerHill Homes, which is led by Robert Freed, a former KB Home honcho; multifamily investor Pacific Urban Residential led by Al Pace; SummerHill Apartment Communities and Meridian Property Co.

Marcus’ reputation is that of a serial entrepreneur and modern day Midas with an uncanny ability to start successful companies, to make money in whatever field he chooses and to select great leaders to run his creations. With partners, he also owns two Greek restaurants. The first, Evvia Estiatorio, is in downtown Palo Alto; Kokkari Estiatorio is in San Francisco’s Financial District. By all accounts both serve excellent fare in exceptional settings and are financially prosperous.

In a rare public interview, Marcus agreed to be questioned by Covarrubias as part of ULI San Francisco’s real estate Icons series. The two men have known one another for 37 years. Marcus also entertained a smattering of questions from attendees. The first ULI San Francisco Icon was William Wilson III, recognized in 2011.

Covarrubias: Tell me about a day in your life. You are a deal junky. What percent of the day is working on deals, what percent working with political folks and what is the fun?

Marcus: The notion that I do deals is really a misnomer. I organize companies that think about better ways to be involved in multiple deals. From the beginning, I was interested in improving the industry. I had two principles: I wanted companies that sustained themselves beyond me. My other guiding light is that when I realized I had talent in the door, I would give them all of the responsibility they could handle. [William A.] Bill Millichap came into my office in 1971. It was the luckiest day of my life. It took a long time to get the brokerage going. Bill was excellent at it. I realized that I could lose Bill if I remained CEO, so I moved out of the way and started Essex [Property Trust Inc.]. My career has not been about the deal. It’s been about process and strategy.

Covarrubias: Back in the 1970s and 1980s, the value of information gave value to brokers. Now information is instant and everywhere. So who needs a broker?

Marcus: There is a value to representation, which will find the optimum buyer who will pay the most and still do well. A platform like ours is a massive auctioning. We started a policy 40 years ago, if you pocketed a listing without telling other brokers that was a fire-able offense. We are working for the client from the top. It is of enormous value.

Covarrubias: Talk about 2008. Where were you and what did you see?

Marcus: We didn’t really understand that this was possible. We were accustomed to monitoring employment, and it was a harbinger of normal changes in the market. None of us was ready for a capital meltdown. It was a surprise and we weren’t ready. We got hurt. If you see prices going down, make the deal faster and get it done. In homebuilding you have a million tomatoes that will rot if you don’t do something. All of your competitors will lower their prices. Beat them out the door, take the money and buy land. We are killing it today. Normally the margins for public homebuilders are 7 [percent] to 10 percent pretax. We are looking at 25 percent. Also if you have a building you are leasing, make the deal and take the lower rent.

Covarrubias: But you have to be in a position to do that. You can’t be illiquid, and you have to have a final position that ‘it is ok to get crushed now because I can come back later.’

Marcus: I’ve always believed that companies should be diversified. Service, investment and building companies don’t line up. Any one sector can be hurt but not all at the same time. I’ve been in brokerage for 40 years and made money in every year but one. Diversity matters. If you look at the risk of products, the riskiest is probably hotel resorts and on the other side with little risk would be a net-leased asset or building. Somewhere in between you had better know where you are: suburban office types are different from urban.

Homebuilding is very risky because your inventory becomes exceedingly expensive, you have to move it and you have to be very active. In the Bay Area, if you had an option on the ground now, you can’t get models up for three years and you won’t close out for five years. You have to know what your prices will be, at least in a range.

Covarrubias: Everyone in the room is on the island: in San Francisco and the Bay Area. In the rest of the country, every one wants to be us. Is this a bubble? Will tech crash? What inning is it? Is the Bay Area so far ahead that we are going to 2 percent cap rates and $1,000 a foot [to buy] office?

Marcus: No one really knows. I think we have a very robust economy, but every product and business is very different. You have to be thoughtful. You have to plan and work it. Neighborhood retail is pretty bullet proof if you have a good tenant. Speculative high-rise office towers? I have never understood that. If you are in a super high-risk business, you had better have a super low-risk balance sheet.

The Registry: Over the years, Essex has not been a big investor in San Francisco apartments and has favored the South Bay. In this cycle, Essex has entered San Francisco. Why?

Marcus: We didn’t avoid San Francisco. Santa Clara [County] was just much faster growing than San Francisco was 15 years ago. We basically looked at where we thought the fastest growing markets would be and sold out of slower growing markets and bought there.

Covarrubias: TMG has now done our fourth transaction with Essex. It turns out there are these opportune moments. We have never been in business together. We have been on a roll. It is a product of ULI and knowing someone for a long time that makes it happen.

Audience Member: Between Silicon Valley and San Francisco, where will technology [companies] go? Who will win that battle?

Marcus: I don’t think that is an issue. There is ample opportunity in both. If you are young and single and you have an engineering degree, you are in San Francisco. It is all about attracting the best and the brightest. The markets are 45 minutes apart. Between Facebook, Google and Apple, we have more than we can handle in Silicon Valley.

This is the best of times. You have such opportunity today. Work all of the time. Remember Aristotle and Confucius: Success is not in our nature. It is in our habits.

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