Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from Intercontinental Exchange on Markets leadership and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism. Right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now, welcome inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
As much as things have changed inside the New York Stock Exchange over our 230 years, so to have things outside our building. The colonial era houses and trees, including an important one of the buttonwood variety that once lined what was a residential lane we now know as Wall Street, were long ago replaced by large brick buildings in the early 1900s. In the past decades, many of the spaces that housed the headquarters of Citibank, JP Morgan, and the Bank of New York, organizations renamed to reflect mergers and acquisitions to now Citigroup, JP Morgan Chase, and BNY Mellon, have themselves been underutilized, and even sometimes vacant. I'm still waiting for the old House of Morgan building across the street at 23 Wall Street to be redeveloped, hopefully into something other than a large pharmacy. Fortunately, one consistent thing about New York City, if you give it long enough, is its ability to reinvent itself.
Now, I've seen that firsthand since the beginning of my daily commute here across Lower Manhattan over the past 14 years or so, since 2009 when I started working at what was once known as World Financial Center, now known as Brookfield Place, and had to make a large loop from Rector Street Station around what was then the excavated area of Ground Zero at the World Trade Center. I've watched scaffolding go up and down along my walk as iconic landmarks of big business have been converted into mixed use spaces to support a growing residential community burgeoning around the iconic intersection of Wall and Broad Streets. Building projects, renovations, and modernizing existing infrastructure in New York City takes substantially more time, more money, and often more politicking than securing a local permit to erect a shed in a suburban yard. It's a lesson I've learned by working closely over the years with the New York Stock Exchanges architect Jim Katsarelis on a few projects around our building.
Now, Jim's ability to remain calm and patient while managing the supply issues, building codes, construction permits, and other issues that inevitably arise is an enviable skill, which brings us to our guest today, Howard Hughes Corporation CEO David O'Reilly, who's been hard at work on a number of projects just beyond the site line from my office at the 11 Wall Tower. The seaport where ships have docked since the early 1600s is actually one of the smallest projects in the Howard Hughes Corporation's portfolio that spans over 118,000 acres across the country. Our conversation with David O'Reilly on Howard Hughes Corporation's vision for the future of living and working, how the company is building the infrastructure to make that vision possible, and how David is poised to make that all happen, is coming up right after this.
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Josh King:
Our guest today, David O'Reilly, is the CEO of the Howard Hughes Corporation, NYSE ticker symbol HHC. He previously served as the company's president and CFO. Prior to joining Howard Hughes, David joined as CFO and CIO of Parkway Properties. Earlier in his career, he held senior positions at Banyan Street Capital, Yola Capital, Barclays, and Lehman Brothers. Welcome, David, inside the ICE House, and welcome back to the New York Stock Exchange.
David O'Reilly:
Thank you so much. It's always fun to come back down to Wall Street.
Josh King:
Come back down to Wall Street. David, last time you were here, you were joined by Chef Jean-Georges to celebrate the grand opening of the Tin Building, that historic home of the Fulton Street Market that had long been vacant and later damaged by Hurricane Sandy. What are the early reports from the reopening, and what brings you back to New York today?
David O'Reilly:
Well, given the work that we have in the Seaport that you mentioned in the introduction, I'm here at least a week a month. We have so much activations going on, whether it's our concert series all summer long, our sponsors coming in and out every other day, seeing the opening of the Tin Building, a building that we've worked on for almost 10 years, come to life and be filled every day, creating memorable experiences for people in Lower Manhattan and the visitors, that's part of the joy of the job, and it's part that I really enjoy.
Josh King:
Carne Mare, the Fulton, Momofuko, I've enjoyed each of them to the fullest so far. This is not your grandfather's South Street Seaport. An amazing experience, especially as the days get longer. Do you feel you've given Lower Manhattan a spark plug with Pier 17?
David O'Reilly:
Yeah, a little bit. I feel like it's in our duty at Howard Hughes with all of our communities, and with our large scale master point communities is how we create better experiences for those around us, and how we improve their lives. And we give back through our real estate development and by creating spaces where people can have unique experiences, and we're, I think, succeeding in a really strong fashion down at the Seaport.
Josh King:
A lot of the places around the country that you start from scratch, you can almost begin with a blank canvas by assembling the acreage that really has not had a lot on it before. But here in New York, once a 17th century outpost for the Dutch West India Company, the area developed as the key commercial hub and import/export cargo center for American Trade in the 19th century. So much historic significance to where you're working. How do you preserve history while building for the future in your projects?
David O'Reilly:
It's a tough challenge, and it was never more prevalent than what we saw at the Tin Building. The Tin Building was below the floodplain that was very much exposed during Superstorm Sandy, and we needed to raise it up. Unfortunately, if we raised it up, the awning of the building would've hit the FDR. So we waited, why, a lot of elected officials and those in the community debated the best course of action and solution, including one of those solutions, which I found a little comical, was let's just bury the FDR. Let's just move the entire highway rather than move this historical location of the Fulton market, the Tin Building. When we finally reached a conclusion, it was to raise it up above the floodplain, but move it 30 feet closer to the water so that historic awning wouldn't touch the FDR.
Josh King:
How did you deal with some of the flack and blow back that you got from that? Because I read some news articles that weren't happy with that move.
David O'Reilly:
No, but we're going to respect the historians. We're going to respect the local politicians. We're going to respect the decisions of the community and partner with them on all of our large scale projects. We'll never make everyone happy, but if we work hard, and we listen, and we build consensus, we'll come up with a solution that I think most will enjoy.
Josh King:
Now, there is some precedence for that wild idea of bearing the FDR that you and I live through with a big dig in Massachusetts. It's not inconceivable that you can take a major urban highway and put it underground.
David O'Reilly:
No, it just takes a couple decades longer and costs three times as much as you'd expect. But to think about that, it's unlocked tremendous value in the city. It's created pathways and water-
Josh King:
In Boston.
David O'Reilly:
In Boston, absolutely a pedestrian friendly access that doesn't exist.
Josh King:
The Greenway.
David O'Reilly:
And that's a lot of what we do across our portfolio is create those opportunities for people to connect that didn't exist before.
Josh King:
And to think of the legacy of Robert Moses in this city and some of the ways in which he cleaved parts of the city from one another, these projects, when they can be accomplished. President Biden was in New York City this week talking about the new Hudson Tunnel. What construction can do to heal some of the wounds of the past is remarkable.
David O'Reilly:
Absolutely. I think we're uniquely positioned because as the master plan community developer, we're entrusted with all of this land. So we think in terms of decades, not days in terms of planning for the future, some of these other cities that are coping with growth, and that have seen the migration, the inflow of both residents and companies, are struggling, traffic crime congestion. Whereas when one developer is in control of the whole city, you are able to lay out thoughtful roadways, the thoughtful walking paths, connectivity to nature that can support that growth, embrace that growth, and make it actually beneficial for all the residents.
Josh King:
Highline is pretty revolutionary, isn't it?
David O'Reilly:
Absolutely.
Josh King:
So your career arc perfectly suits someone overseeing a publicly traded real estate corporation, but what initially drew you to civil engineering in the first place?
David O'Reilly:
So I was in high school, and I had no idea what I really wanted to do, but I knew I wanted to serve. And my father was in the Army, and I was all set to go to the Naval Academy. And two weeks before I was supposed to go there, they saw that I had asthma when I was seven years old and said, "Don't show up." So I was in the middle of June with no college to go to, and started calling every hockey coach that had recruited me. There was one guy that said, "I can get you a spot." And he was a coach at Tufts, Nick Metropolis. I'll never forget him.
And he said, "I got a spot for you. I can get you into the school, but you have to go to the school of engineering." And I said, "I like trains, why not? Let's do it." So I became a civil engineer, graduated with a civil engineering degree, and said, "Oh my God, I hope I never have to design a wastewater treatment plant." And that's what I studied. So I went into construction management, worked for a real estate developer in Boston who happened to teach real estate at Harvard Business School, and he took me under his wing, and I worked on a lot of new developments.
Josh King:
Which developer was that?
David O'Reilly:
His name is Bill Poorvu. He was one of the founders of the Baupost Group, tremendous individual. We were buying vacant flexi industrial buildings around the 128 Technology Belt in the late nineties and converting them to what we would call first class office, punching the walls like Swiss cheese, sticking windows in, a couple of beanbag chairs, a foosball table, and top rents from a tech company. And I was the developer. I didn't know I was a developer at the time, but I was a 22 year old kid with a civil engineering degree trying to manage general contractors, engineers, architects to effectuate this redevelopment. And after a while, he pushed me to learn the finance side of the business.
Josh King:
Do you find yourself leaning on those early career experiences?
David O'Reilly:
Yeah, absolutely. I think the part of the job and the journey that I loved the most was the tangible aspect of real estate. Seeing that you could take the clay and mold it to use these bricks and sticks and create places for people to work, places for them to live, to experience, to enjoy life, that was always what brought me back. And when Howard Hughes was looking for a CFO, and I met with the then CEO and Bill Ackman, I couldn't have been more excited because there was a company in Howard Hughes that was going to spend a billion to two billion dollars a year transforming cities without ever having to raise capital. And for someone who loved development, that loved the tangible aspect of real estate, it's a dream.
Josh King:
As we've been tracking through your career, we're going to talk a lot about Howard Hughes, but give us the backstory on the modern Howard Hughes Corporation's roots, from the man whose signature is your logo, founder of the old Hughes Tool Company, the storied legend in American business, to what was then known as Summa Corporation through its spin out in 2010.
David O'Reilly:
Actually, the roots of Howard Hughes go back further than that. And our corporation largely today consists of what we call master plan communities. Unfortunately, most people define master plan communities as a couple thousand acres, which is a residential neighborhood. For us, a master plan communities, 10, 20 or 30,000 acres, where you have one and a half jobs per rooftop, where you have shopping, dining, entertainment jobs, and residences all in one cohesive environment, really small cities. And that was started in the 1960s by Jim Rouse. And Jim was a resident of Baltimore and saw that the residents there, he had thought, lost their way. They stopped taking care of each other, they stopped taking care of their surroundings. He saw real estate development expanding beyond Baltimore where they were just razing the land, knocking down trees, not respecting nature, and throwing up houses all over the place.
So he accumulated land that's known today as Columbia. It was the first master plan community in the country, and he wanted to build, in his words, a garden for growing people, a community that was a job center and a residential community, where all religions were welcome, all races were welcome. If you were going to be a home builder or a lender in Columbia, you couldn't redline, where redline was very prevalent in the sixties. And he wanted to build a diverse, inclusive community that respected nature, where people respected each other, and that's the roots of our company. George Mitchell, the great oil man, who one of the founders of fracking, saw what Jim Rouse did in Columbia and accumulated 28,000 acres north of Houston, and said, "I'm going to build the Woodlands just like Jim Rouse did," So in the same vein. And these two gentlemen were at the forefront of ESG and DEI before anybody even knew what those letters meant, and that's really the roots of the Howard Hughes Corporation.
Now, eventually the mall companies, in their race to own the most malls in the world, ended up gobbling ups the Rouse Company, which owned these assets and Howard Hughes Summa Corporation, to really get the malls. Eventually, General Growth that owned all these assets that we have today filed for bankruptcy. And then Bill Ackman from Pershing Square took control of bankrupt General Growth, saw these gems, these incredible assets, trapped in a public mall REIT, and spun them out into a new company. When that company was spun out through all the research and the general gross acquisition of Summa Corp, they realized that they owned the name, likeness, and signature of Howard Hughes, so it was natural to choose that as the name of the company.
Josh King:
As we were getting ready for this conversation, saw some of that history. And I went back into my personal archives because it triggered something. Growing up outside of Boston in Newton, one of my weekly activities was coming home from school Tuesday afternoon, looking at the mail. It was always the new copy of Time Magazine. And I'll never forget that Time Magazine cover art from August 24th, 1981, featuring Jim Rouse under the banner headline Cities are Fun. I want to hear from Rouse. We actually found a clip from him on a C-SPAN American profile that was recorded back in 1992.
Jim Rouse:
Our goals in Columbia were first to build a city to meet the needs and yearnings of people better than sprawl and clutter. Secondly was to respect the land. Third was to provide for the life and growth of man, woman, and family. And the fourth was to make a profit. Because our goals were in that order, this has been a success. I think it wouldn't have been otherwise.
Josh King:
Do you figure out how to have your new employees go study his legacy and learn more about who he was back in the sixties and seventies?
David O'Reilly:
It's absolutely part of so many of the materials that we have, both internally and externally. And the visionary side of Jim Rouse is prevalent in all that we do. And in that quote is a quote that we use all the time internally. What we should be doing is to better meet the needs and yearnings of people than what is today. That's our job. At the end of the day, our job is to improve the lives of our residents, our tenants, our consumers, through that vision of the way Jim Rouse would've done it.
Josh King:
What are some of the things that, as you've learned, as you and your colleagues have seen developments succeed wildly and fail miserably, are the things that most spark that human pleasure, enjoyment, growth, happiness?
David O'Reilly:
There isn't that one thing. There isn't that push that button and this development will be great. And I think it's because people often look at development as the postage stamp that they're developing. And at Howard Hughes, we don't just own the postage stamp, but we own all the land around it. And what creates a sense of place, which creates that enjoyment, is not just the development, but the connective tissue of that development to everything else that's around it.
We survey our residents every year, and we have 120,000 in the Woodlands, 110 in Summerlin, and almost every year, the number one amenity that they talk about is our trail system, 200 miles of walkability where they connect to nature, where their kids get to school safely without crossing stop lights. And it's in that vein that I think it's not just the buildings, but it's how the buildings talk to each other that drives a sense of place, that creates a view of community that drives the fulfillment enjoyment of our residents.
Josh King:
You mentioned the Woodlands. In 2020, the company moved its headquarters there, 32 miles north of Houston, along Interstate 45, now celebrating its 50th anniversary. What was the decision to move there, and how has that changed your commute up and down 45 from what used to be Connecticut to Lower Manhattan?
David O'Reilly:
It was easy to decide to move the headquarters there because we had an incredible office there already. Our regional team was located there and they did an incredible job. And it was also ranked the number one place to live in America. So if you're going to move your employees somewhere, not a bad place to move them. We went through the process this past year of getting lead certified as a city, as a community for the Woodlands. And I was a little scared when the team said we want to do this because everybody drives a truck. There's not mass transit. We do have a wonderful trolley system in the Woodlands, but it's not how people get to work. And I said, "Well, that's feels like a big carbon footprint."
But at the end of the day, when we did the research and peeled back the onion, we scored incredibly well. We got lead certified because the average commute in the Woodlands is less than five miles. It's less than 10 minutes. And I think back to my eight plus years at working at Lehman Brothers and living in southern Connecticut, and Metro North, and subways, and traffic, and congestion, and losing an hour in the morning, and losing an hour at night, and never seeing my kids when they wake up or go to sleep. And if I could have those two hours back every day-
Josh King:
Sure.
David O'Reilly:
... what a difference I would've made in their lives. And that's the difference I want to give our employees, that short commute, that time with family, the balance in their life that everybody desperately wants, that living in a big city, you lose.
Josh King:
So you succeeded Paul Lane as CEO in 2020, interesting year given COVID and what it must have done to the whole industry. And then early the next year in 2021, we saw businesses struggling with how to manage mostly empty offices, retailers mostly shifting to E-commerce. But what people thought about for their homes was exploding, and both the development of new construction and rehabilitation of old construction was just through the roof. Certainly saw it in many of the companies that are listed here that are in that space. How did that impact the direction of the company, and was it easy to pivot projects with such extensive timelines based on what was going to seem, at least in 2020 and 2021, as the new normal?
David O'Reilly:
Yeah, that was an incredible challenge across the entire organization because one of the largest components of our business is selling land to home builders. And when the pandemic hit, and it didn't look like anybody was ever going to move or buy a house again, clearly the right choice for the company was to slow spending. We don't need to develop more lots because there was not going to be a lot of home builders to buy land. Well, 90 days later, we had record home sales in Houston and Vegas, and we had to go from the break to the accelerator instantaneously to get ready for that. And it exacerbated a problem that was already on the ground, which was a lack of supply. And to try to develop land and meet that under supply was a huge challenge.
I'm lucky that we have great teams. They're super talented and were able to meet that challenge and meet that demand, and we had record home sales 2021, and an incredible year in 2022, as well. And it wasn't just increased home ownership, but it was a shift in migratory patterns. It was those that lived in the coast, that lived in the East Coast, that wanted to get into better quality of life environments, better weather, lower taxes, better access to great schools and great elementary schools, and access to education systems that they couldn't get, whether it was San Francisco, Seattle or New York.
Josh King:
So San Francisco, Seattle, New York. What I'm about to ask you is not your problem, but I do want to probe because of your experience. You've got a mile and a half north of here, a huge amount of empty commercial real estate office space in Manhattan that begs for some creative, innovative reuse. What would be your prescription?
David O'Reilly:
I don't know that there's a one size fits all for every building. And while there may be a little bit of oversupply right now, that can come back in a hurry. The Global Financial Crisis, one of the most respected research firms in real estate out there, said that there was a 10-year oversupply of industrial space in this country. Well, they were wrong by eight and a half years, because with the advent of E-commerce and the way that space got gobbled up in a second, it changes quick. And while there has been a work from home hybrid that's created some vacancy in office space, I don't see that long term phenomenon continuing.
Getting back to the office is how we learn. It's how we collaborate, it's how we mentor. And we're back to the office at Howard Hughes. We're back full-time, everybody three days a week. And the collaboration that we see, the learning that we see, the way that people can advance their careers by emulating their bosses, walking in their shadows, drives better results. And I think a lot of other companies are seeing that, as well. Some here in Lower Manhattan, Goldman Sachs' announcements, Twitter's, even the technology companies, back to the office. And I think we're going to continue to see that happen.
Josh King:
Another challenge in a different part of this city, but a microcosm for other cities, too, slightly addressed, or addressed well, in an area like the Fulton Street Market, when I walk down there, are these empty corner storefronts in Greenwich Village, West Village, in buildings that may be eight stories tall, but have totally empty storefront areas. And then legacy, beautiful structures in much more low slung buildings in the village, they are also vacant, or sometimes over indexed in the area of pharmacies and banks. Do we need to see a reevaluation of this property and to bring rent's way down to let what you see in Fulton and more authentic creative retail come in?
David O'Reilly:
I think we need to be a little bit more creative as we think about our lease structures. And we've had to do that at Howard Hughes, clearly. Whether some of those restaurants that we've had with Jean-Georges or David Chang, we haven't done leases, traditionally. We've done partnerships. We've shared the cost of building out the space with these incredible restaurateurs. We've taken our percentage of sales as our rent, and we share the bottom line. And at first, our investors were beside themself because oh my God, you don't have a lease, you have such risk. And I said, "No, it's the same risk." Because if the restaurant doesn't work, one day I'm going to walk in and the locks are going to be on, and it's going to be dark. But they're our partners and they're much more reluctant to leave that space when you're in partnership. And the best example I can give you is David Chang. He had a lease on Ssam Bar in the East Village.
Josh King:
Right? I used to go there a lot.
David O'Reilly:
And he lost it during the pandemic, couldn't negotiate what he thought was a fair deal with his landlord. So he moved that concept into Pier 17, into our space where we are partners. And I think that approach, that creativity and flexibility in driving great outcomes, has helped us. And it hasn't, in my mind, created more risk. It's just created more upside and aligned our interest in a way that that will drive better long-term outcomes.
Josh King:
You are the Howard Hughes Corporation. You can do that. What about if you're a much smaller landlord in the village? How do they learn to follow that kind of path, or how do they make that kind of a partnership work with a smaller professional base to be able to execute it with the Jean-Georges or David Changs?
David O'Reilly:
But even some of the smaller businesses that we've worked with ... Funny Face cookies, not the most household name, decently known in New York City. We brought them into the historic district on a percentage only deal. Didn't charge rent, just a percentage of sales, to test it, to see how they do. We love their business. We thought they had great product. We thought it would get a great following. They didn't want to sign a long term commitment unknowing whether it would work in that neighborhood. And we've renewed every year, and their sales continue to go higher and higher with the more traffic that we drive there. And I think it's taking thoughtful, educated risks with good tenants that can help spur that.
But some of this phenomenon that you've talked about with empty storefronts and too many pharmacies, it's a regional, local issue. In downtown Summerlin, for example, we have a million square foot retail center, outdoor, streetscaped. We lost a lot of tenants during the pandemic. We back filled them all at higher rents, at better terms. And not just with brick and mortar retailers, with ... You mentioned the whole world's going E-commerce. Well, I think they went from brick and mortar to E-commerce, and now they're omnichannel. And some of the best leases that we've signed are deals with your traditional E-commerce only ... Casper mattresses, right?
Josh King:
Yeah.
David O'Reilly:
They have a physical presence in downtown Summerlin because they sell better, they have better results when people can touch, feel that fabric, that mattress. And there's a lot of examples just like that of those that are coming back to have a brick and mortar presence. And that's driven great success in our retail portfolio across the board.
Josh King:
I spent some time coursing through your website, pausing on the How You Live section. Your company has communities in many states, Texas, Maryland, Nevada, Hawaii, New York, Arizona. How are you deploying your leadership to oversee these unique geographic issues that arise in each, for example, hiring Jay Cross to serve as president of the company?
David O'Reilly:
We are a largely decentralized organization. We have great regional presidents in each one of these locations. I think Jay and I are smart enough to know that we can't make great decisions in Hawaii sitting behind a desk in Houston or New York. We need great local presence that can help drive those decisions. Our job, what Jay and I do, is provide the best support we can for our regional presidents to ensure their success. I want to make it easy for them so they never have to worry about IT, HR, risk management. I want to make sure that we have the capital available for them to deploy to improve those communities. And Jay drives great thought leadership in how we develop and how we up our game in terms of the quality, the architecture, the design. Jay came from 10 years of building Hudson Yards. He's uniquely qualified to do mixed use, master plan communities of incredible scale. And his insight is driving great results every day.
Josh King:
Let's talk about Phoenix, for example, fastest growing city in America for the last five years. You've said that, I'm going to quote you here, "Teravalis will be a model for forward-thinking development and offer an extraordinary lifestyle built on a robust economic foundation, incorporating best practices from across our national portfolio to advance environmental priorities and technological innovations." How do you make all that happen?
David O'Reilly:
No different than Jim Rouse in the sixties, George Mitchell in the seventies, Howard Hughes in the nineties when he created Summerlin. All of them went out to build, in the overused cliche term, city of the future. And we're going to respect their legacy, follow some of the groundwork and framework that they laid for us. But today, our employees of the Howard Hughes Corporation are going to create that next great city. We're going to embrace sustainable practices the way that George Mitchell did. We're going to embrace diversity the way Jim Rouse did. And we are truly going to execute on creating the city of the future, but the next great city, the next great place to live, work, and play in America.
Josh King:
How will I feel it as I drive into a place like Teravalis? Will the traffic lights be different? Will the sanitation be different? And what are the parts of the special sauce that you put into this?
David O'Reilly:
That's a great question and that's something that we're researching every single day. What I don't know, and clearly the thing I know best is what I don't know, is that in 20 years, what are we going to have as a technological advancement? Are we going to having flying cars or drone package delivery? So what we're doing today, as we're just starting to move the first pieces of dirt in 37,000 acres known as Teravalis, is we're building in the technological flexibility to change and adapt to whatever comes our way for the next 40 years. And this is a 40-year project. We think in terms of decades, not days at Howard Hughes.
So laying that fiber, laying those nodes, making sure that every home in there is a smart home with an EV charger, making sure that every home goes in with the latest in environmental sustainable technology, whether those are solar panels on the roof or water retention, greywater systems, and pushing the envelope that way. And then who knows what comes next. If we're only allowing self-driving cars in a portion of the community, do we only have to build roadways very narrow and increase the side of our pedestrian thoroughfares, and our sidewalks, and the connectivity? And those are the type of changes that we're going to continue to push the envelope on as we develop out Teravalis.
Josh King:
Teravalis in Phoenix, Las Vegas, Salt Lake City, these are great and growing cities. But you did touch on very briefly some of the aspects of having enough water to sustain that city and the greywater treatment process that you just talked about. But overall, how much does access to water keep you up at night?
David O'Reilly:
I wouldn't say it keeps me up at night. It's always a concern. Clearly, anywhere you go, having water is a concern. Even Hawaii, an island in the ocean, having enough drinking water there is a huge concern. I would say that I would look to the success that we've had in Las Vegas in Nevada, in Summerlin, as a roadmap for what can be done in Phoenix over time. Over the past 10 years, the population in Las Vegas has doubled. Water consumption is down, not per capita, gross. And that's because the per capita consumption is down to less than half of what it was before the strict conservation efforts that they put in place. And if we're able to continue to put those conservation efforts in place, remove turf, use natural drip irrigation, greywater retention, low drip fixtures, we're going to be able to develop and maintain our respect for those natural resources that are so important to continue growth.
Josh King:
What are some of the permanent changes that you've seen in home buying, such as what you have called the flight to quality that you think are going to reflect a permanent change in consumer habits?
David O'Reilly:
Well, I think it's this next generation's definition of success. When I was young and enthusiastic in business school, coming to work in New York City, I was driven by getting that corner office, big city. That was success. I think this next generation defines success as balance, defines success as professional success, but personal success. And that new definition is driving consumer behavior in a way that we haven't seen. It's driving them to choose where they live in a place where they have short commutes, connectivity to nature, time with their family, and able to coach T-ball and work, be professionally successful at the same time. And that kind of redefining success is really changing where people want to live. They want to be around great education, they want to be with low crime, and safety, and security, things that we often took for granted, but unfortunately were exposed at some of the worst times during the pandemic.
Josh King:
Personal success, professional success, whether or not they get the corner office or not. You've described Howard Hughes as having this apprenticeship culture. So much of real estate development, and I look at it only from the outside with no experience, but has to be walking the property, testing the dirt and soil, building the models, supervising construction, thinking really in three dimensions. How has the rise of remote work affected your talent development, and what are your long-term plans for your own office footprint?
David O'Reilly:
So our long-term chance plans for our office footprint, to answer your last question first, it's growing, company's growing and we're out of space. And we're excited, and we love having our employees back in the office. We try to make it a more pleasant experience. And more break rooms, more healthy food options, creation of what I call the third place. People work in three places, they work in the office, they work at home, and they work in this mysterious third place. Often that third place in a place like New York City is Starbucks, or it's that unique spot where you feel comfortable and you're productive. Well, if you can create that third place within your own office space, or within the building that you're in, and keep more employees together, working in that third space, you can drive collaboration. So we're creating a lot of what we think are great third spaces, and to add to the ones that we already have across our office space.
But it's a trend that we're seeing with so many employers, chasing great employees. And once upon a time, CEOs put a flag in the ground, said headquarters here, jobs here. We would throw our kids, dog, spouse in the wood grain station wagon and drive there because that's where the jobs were. Now, employees are deciding, "I want to live there," and employers are forced to chase them. And that migration of people has been followed by the migration of companies. We've done more California corporate relocations into the Woodlands and our office properties there that had filled those buildings.
In January of 2020, strategic timing, right before the pandemic, we bought a million square foot office building, entirely vacant, and we're almost entirely full today. And the majority of that absorption has been from out of market relocations into the Woodlands, companies that want their employees to come back to the office. And the way they're trying to attract them is great amenities. We have a world-class gym, fitness, basketball court. We have great food options, immediately walkable. It's just an experience that they couldn't get in their existing office location, and they're using that as part of the why it's better to be back.
Josh King:
Why it's better to be back. We certainly have a nice third place here in our library here in the New York Stock Exchange. After the break, David O'Reilly, CEO of the Howard Hughes Corporation and I are going to talk about the connection between master plan communities and ESG. And that's all coming up right after this.
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Josh King:
Welcome back. Before the break, I was talking to David O'Reilly, CEO of the Howard Hughes Corporation, about his career and the development of the company he leads. So last year, two of your Houston projects, the Woodlands and Bridgeland, received, as you mentioned earlier, leads pre-certification. Talk about some of the efficiencies both of these developments are going to offer their residents. And what is a mass timber office?
David O'Reilly:
A mass timber office is building built with timber, timber components that are manufactured ... Think Lincoln Logs, that takes the steel and concrete out and does it with a much more carbon footprint friendly material base like timber. It creates great open loft type offices, very warm. And this mass timber office building that we're building in Bridgeland will be, I think, the most environmentally friendly sustainable building built in Houston, probably ever, with incredible efficiencies in our carbon footprint, our electrical utilization, our water utilization, and I think be a calling card for the type of community we're trying to build.
Josh King:
Speaking of ESG and talking about Houston area, we recently had Bobby Tudor on the podcast to talk about Houston's energy transition plan. Is that something that you consider when developing in the city, and is there a role that Howard Hughes will play in keeping that region flourishing?
David O'Reilly:
We're always thinking about what our energy consumption is, and always, candidly, especially in Teravalis and Phoenix, thinking about our reliance on the grid. And when you're starting a community from scratch, how much redundancy do you want to build yourself? Do you want to think about your own nuclear power generation on that site? As temperatures rise and there's greater demand on electric, relying on third parties is hard, and knowing that you have some redundancy in house that you've helped create is a meaningful benefit. Now overall, making sure that we're reducing our energy consumption by thinking about better efficiencies, better design is always forefront.
Josh King:
What about working with public authorities, some of the issues that Disney has worked out and almost lost in Florida, the access to police, fire department, et cetera, and whether these communities can be sort of self-governed?
David O'Reilly:
So we are a part of larger communities, and the Woodlands is an unincorporated township that's within Harrison, Montgomery County, and we rely on Harrison, Montgomery County for our police and fire. But we partner with them to make sure that they have all the services they need within the Woodlands to do effective treatment. As we develop a neighborhood, one of the first things that we put in is police and fire, even though we may not need it because the homes aren't there yet, but as you drive in to buy your home, knowing that that is right there is an important decision as you think about where you want to live.
We pride ourselves on safety and security, always have, and it really accrued to our benefit during the pandemic, as we saw a lot of folks moving because of concerns in their own backyard. Now, we have to partner on all of our large scale developments. We have to collaborate with not just the municipalities, the local authorities, the government officials, it's all of the above to make sure that we're developing what's consistent with the long-term vision and what we've said all along.
Josh King:
So the master plan communities projects that you have going in Texas, Arizona, other places, have been a major growth area under your leadership at Howard Hughes. Can you talk about the layout, what the business model of a master plan community is, and how different aspects of Howard Hughes' business combined to create this virtual cycle for both the company and the clients you have?
David O'Reilly:
Yeah, absolutely. It's like I said earlier, is that we're existing to improve the lives of our citizens. And how are we doing that? Well, we're selling land to home builders, and they're building the homes for residents to move in. The more residents to move in, the more amenities that they want, ballparks to play in, places to shop, places to work, places to eat. We take the capital that we generate from selling land to home builders and build those amenities, and we build them on our vacant land at outsize risk adjusted returns. The better we build them, the better the community we build, the more people that want to live there, the more we want to sell land to home builders. And that's the cycle that goes on, and on, and on within a master plan community.
Josh King:
So I made this time for our conversation for this podcast at 10:00 on a Thursday. We finished our fourth quarter ICE earnings call at 9:30. There was some follow up to be had. I just made it in the nick of time. In some ways, there's a lot that a company like ICE can talk about after three months more of activity. What you and I are talking about, though, doesn't happen over three months, sometimes not three years. How do you make looking at Howard Hughes Corporation's financial results interesting every 90 days?
David O'Reilly:
We're focused on value creation. There's never once that I'm in a board meeting or we're talking to executive management teams about next quarter's earnings, how are we going to squeeze out an extra penny. What we care about is where the net asset value on a per share basis of the company will be next year, three years, five years. And that's the framework that we look at our decisions. And our investors, they look at our results every quarter and they track our net operating income from operating assets, making sure it's improving, that we're filling our new developments. They're looking at our land sales, and is our price per acre increasing, and the number of acres we're selling going up, and how many condos we're selling in Hawaii. And if those things are going well, those drive value creation.
So there are markings, if you will, every three months. It's more like a breadcrumb trail than it is of true earnings, being able to tell whether it was a good or bad quarter. But there's enough there, I think, for folks to track and say, "Yes, they're making progress, they're driving value creation, they're improving the underlying value of this company."
Josh King:
Not really a lot of a breadcrumb trail on development of the Tin Building, which was this laborious process, and so much care and time that went into it. But thinking about speed to market, and the Tin Building came about through the probably span of maybe three mayoral administrations, but New York City is one of the most expensive and slowest places to build. Now, that may be thawing a little bit under Mayor Eric Adams. I want to listen a little bit to his recent news conference.
Mayor Eric Adams:
We used to build things. We can do it again. We built the Empire State Building in just over one year at the lowest point of the Great Depression. One hundred years ago, we built 750,000 new homes, more than three times the number of homes built over the past 10 years. Think about that for a minute. But as the decades have passed, the disfunction has increased.
Josh King:
Are you optimistic that Adams is going to be able to remove some of the red tape he promised in his Get Stuff Built action plan?
David O'Reilly:
I'm hopeful. It'll take a while to materialize. I think it's very well-intentioned, and I think it's a barometer on growth for the city, and it's ... Part of what he said is part of why we've been able to attract so many companies to the Woodlands. Alight Technologies, they needed an office building. They needed several hundred square feet, and they had one year to move in. I delivered a build to suit office building that met their full specs in 11 months, in the Woodlands, in the number one place to live in America.
I gave their employees short commutes, gave them great schools to go to, gave them the houses of worship to enjoy their religion. And they couldn't have gotten that done in any major city. And it's part of the partnership that I work on with the CEOs that come to the Woodlands because most real estate developers are going to partner with you to build you an office space. I'm partnering with you, your spouse, and your kids to find you a place to live, to find you great schools, to find your connection to culture and arts in our community, to sports fields to play on. And that's part of the value proposition that we bring.
Josh King:
I'm coming up on the end of my seven-year adjustable rate mortgage, which I thought would be able to be refinanced at some point at an even lower mark, because that's what we had got used to as home buyers and homeowners for so long in the United States. What's the impact of rising mortgage rates, not just on home buyers, but the entire lifecycle of your projects, beginning with acquiring land?
David O'Reilly:
Yeah, I think interest rates are a meaningful, but piece of the puzzle as it relates to affordability. Everything comes down to affordability. What home can I afford? And for so many of our residents that are coming from California, San Francisco, LA, or New York, they're moving into Summerlin, they're moving into the Woodlands. They're getting twice the house for half the price. So a 6% rate versus a 3% rate isn't driving that decision. The local buyer is getting squeezed on affordability, but there's been so much that's gone on in the past two years as it relates to home prices.
One, we've seen home builders increase margins from what have historically been high teens to mid-twenties, record highs. We've seen land prices at record highs, and we've seen our price of land gone up 35% over those three year period. And we've also seen material costs spike with supply chain issues during the pandemic. All three of those things can give and offset the increase in interest rates in terms of a home buyer affordability. And I think we're going to continue to see folks look for homes. Again, we have a massive shortage that we need to address, and there's a way that all of us land owner, home builder, homeowner, can adjust to make sure that we can find that affordability.
Josh King:
And create places that people say, "This is such an awesome place to live." As we are recording our conversation, February 2023, you and I were talking about this a little bit before we turned on the microphones. We know that the Oakland Athletics are in Las Vegas shopping for a new home. The prevailing thought is that the team might play in Howard Hughes Corporation owned Las Vegas Ballpark for a couple years as they're building something new. How would adding a major league tenant to downtown Summerlin impact the community, you think?
David O'Reilly:
I think it'll be additive because it's major league versus AAA. But I think the real additive sauce for downtown Summerlin was building that ballpark and bringing a family friendly, affordable amenity to our 110,000 residents, 80 plus nights a year. And it was a good investment for us. It was about $125 million cost to build the ballpark. We expected to make eight to $9 million annually, which as a real estate developer, you go ... But what it did to the community, what it did to the spaces in between, how it connected the tissue, drove such great financial results for us. And it's that long-term thinking.
So before and after Ballpark, we saw retail sales at our million square foot retail center up almost 15% in what was supposedly a dying retail world. Our office rents are the highest in Las Vegas Valley. Our multi-family rents are entirely ... our buildings are full and we have the highest rents in the valley. And our price per land was up almost 300,000 an acre. And at the time, we had 3,000 acres left to sell. 3,000 acres times 3,000 ... That's a lot of value for our shareholders. Is that all a hundred percent correlated to the ballpark? Certainly not. But I think the ballpark had a meaningful impact on it.
Josh King:
There's a raging debate always about public financing of ballparks or private financing of ballparks, what they actually do to the surrounding real estate. I've got a good buddy down in Atlanta, runs a company called Hardball Capital, owns a couple minor league teams, has partnered with a bunch of municipalities to build beautiful ballparks or reclaim traditional industrial places like Camden Yards is the classic example of that. Now, there's also a consolidation of minor league teams, and fewer of those teams to go around. What is the puts and takes of attracting this 80 night a year amenity, whether it's minor league baseball, professional lacrosse, major league soccer, women's soccer, women's basketball, different sports that may not be at the major league level, but still make a community that much more livable?
David O'Reilly:
Well, look, I think that it drives the experience that folks have in that community. It drives how they feel about where they live, feels about the pride of what they have, of their community, and I think it has a tangible, positive impact. We paid for the entire stadium ourselves. We didn't have any municipal financing. We own the team, we own the stadium, and we own all the surrounding dirt, 22 and a half thousand acres of Summerlin. So we are meaningfully incentivized to spend that money ourselves. I think it's a much harder proposition when you're just building a ballpark and you don't own the adjacent real estate. You don't have that same type of benefit, that tangential benefit that a community builder like the Howard Hughes corporation has.
Josh King:
So as we just move on from Las Vegas, one more question about it. The city continues to grow as a preferred destination for those fleeing the more expensive ones, but also faces a lot of infrastructure stress. We talked about water, but there's a lot of other climate change issues about Las Vegas and the cost of air conditioning and access to the grid. What's your outlook for that city and your investments in it?
David O'Reilly:
I'm incredibly optimistic. It has been the great receiver of new residents for the past three years, and it's not slowing down. One of the interesting, lesser known facts about Las Vegas is that it's entirely land constrained. The Valley is surrounded by land that's owned by building land management, or permanent conservation easement, or Nellis Air Force Base. And as a result, there's no place for Vegas to grow. So the remaining land that we have, which is almost 2,500 residential acres, is the largest, by far, residential land holdings, and we'll be building that out, welcoming new residents for the next 10 to 15 years.
Josh King:
As we wrap up, David, we've been focusing on where Howard Hughes is currently developing or has developed in the past, but where do you have plans to break new grounds and look at cities that I've not listed so far?
David O'Reilly:
So last year, a little over a year ago, we bought Teravalis, 37,000 acres in the West Valley of Phoenix. To me, that's a once a decade opportunity to find 30,000 acres assembled, fully entitled, ready to go, in the path of growth, on a major freeway that connects Los Angeles and Phoenix, and with the future I-11 that's going to connect Las Vegas to Phoenix going right through the middle of the property. You don't come across those every day, every week, or even every year. I'd love to know where that next property is going to be. I couldn't tell you where it is today. What I could tell you is that it will be in a business friendly state. It'll be in a warmer, less expensive environment. It will have great access to major thoroughfares and larger cities that provide great amenities. And we'll build a community that has great education, trails, and connectivity to nature.
Josh King:
You've mentioned technology changes like autonomous vehicles, like drone delivery, like vertical takeoff, transportation taxis, which would be transformative to a place like New York if it were to ever happen. We've had several companies go public here with that business model. But to put your Jim Rouse futurist hat on, just give us an image of what the future holds for communities, things that we might not be thinking about that are just going to blow our minds.
David O'Reilly:
It's tough to say which one of these technologies are really going to take hold. Look, I can imagine us in my lifetime building a community where there are no, there's no vehicles, really, other than a fully autonomous within the confines of your three to 5,000 acres, that there may be a nesting center for where you take your car when you leave the community. And then once you get in, you're on autonomous buses, autonomous vehicles, or scooters, or electric bikes to get around everywhere. And if you can build a community like that where you can work, where you can shop, where you can live, you can dine, your time that you actually have to hit the nesting center and leave could be nominal, every other week. I think that could have a meaningful impact on a quality of life.
Josh King:
You are just down the street, and I look forward to going down to the Tin Building for dinner.
David O'Reilly:
We'd love to have you.
Josh King:
That's our conversation for this week. Our guest was David O'Reilly, CEO of the Howard Hughes Corporation, NYSE ticker symbol HHC. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected], or tweeted us at ICE House Podcast. Our show is produced by Pete Ash, with engineering and editing from Ian Wolf. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information, and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.