Clay Cove Capital

Today's developers should offer superior products and experiences that align with the multilayered needs of modern consumers. Generic developments that check basic ‘roof-over-head’ boxes are no longer enough to inspire the attachment and longevity required for sustainable communities. Tenants now expect spaces that foster productivity, collaboration, and convenience, with services and technology seamlessly integrated. This shift means real estate must be viewed as more than just physical assets; it requires focusing on creating environments that serve broader consumer needs. In this new world of consumer driven development, it is critical to align operational excellence with real estate assets so investors can offer smart technology, shared amenities, and flexibility to meet consumer demands. This approach fosters innovation and community, ensuring properties are more than just buildings – they become thriving ecosystems. As consumer expectations continue to evolve, the ability to adapt and offer more value for their square footage will determine a platform’s success in an increasingly competitive market. Those who prioritize experience and embrace this shift in power from buyer to consumer will lead the next generation of real estate businesses. What strategies are you seeing that are innovative in meeting the evolving needs of consumers?

Traditional asset classes or geographic constraints no longer bind real estate, with Covid-19 beginning the acceleration away from urban cores, particularly in the lower middle market. As remote work severed historical tethers to major employment hubs, many chose to relocate, no longer constrained by office proximity. Instead they prioritized affordable living costs, preferable climates, quality school systems, and other lifestyle factors. This shift has led to consumers toward spaces that blend work, living, and leisure in more flexible, dynamic ways. This convergence of asset classes — office, retail, hospitality, and even residential — reflects the evolving needs of the modern tenant. As businesses adapt, so too must the real estate that supports them. Instead of being limited to one purpose, these spaces evolve with the consumers that use them, offering greater value and utility. As the focus shifts toward creating spaces that cater to productivity, collaboration, and lifestyle, real estate must evolve beyond proximity to location. Blending functions and serving consumer needs will be key to unlocking value in this new landscape. What steps are you taking to align your real estate investments with the demands of a consumer-driven market?

Two of the key factors that often slow down value creation in sports entertainment mixed-use developments are 1) the long-term nature of infrastructure investments and 2) the challenge of aligning diverse stakeholders around a shared vision. Building the infrastructure necessary for vibrant, sustainable communities is a long-term investment, often requiring public-private partnerships to align interests and create lasting value for everyone involved. As Chris Buccini of Buccini Pollin Group, a seasoned developer of sports mixed-use entertainment projects, says, 'The infrastructure investments we make today might take years to pay off —that’s where the public partnership becomes crucial.' However, it's not just about laying the groundwork; it’s about winning over stakeholders who aren’t tenants yet. As Chris emphasizes, 'To truly succeed, we must paint a compelling vision for these spaces, showing potential tenants and stakeholders how their participation can transform these venues into thriving, 24/7 communities. It’s about creating places where people want to be—every day, not just on game day.' By fostering a collective spirit and demonstrating the potential for growth and engagement, we can turn sports and entertainment districts into vibrant ecosystems that serve as the beating heart of our cities."

As the 2024 Olympic Games come to a close in Paris, the question arises: What happens to the colossal structures now that the crowds have dispersed? Historically, these venues have embodied a "build it and they will come" mindset—designed for sports and entertainment but often left dormant afterward. It's time for a paradigm shift. The future of this asset class lies in 'raising the floor'—a fundamental change in how we assess their economic impact. Rather than focusing solely on the stadium's balance sheet, this approach emphasizes the value of integrated, mixed-use developments anchored by sports or entertainment venues, which can significantly boost the surrounding economic landscape. In this essay, we explore the market dynamics and investment strategies that are driving forward-thinking investors and developers to create consumer-driven projects. These developments not only deliver strong financial returns but also become vital community centers, cultural hubs, and engines of economic growth. Click below to read our thoughts. https://lnkd.in/eQj9nzyi

In 2016, we made a strategic acquisition of Highland Square Mall,a Class C, grocery-anchored community retail center located in the Northside submarket of Jacksonville, Florida. We did this alongside our operating partner American Commercial Realty, whose innovative approach of revitalizing underutilized retail centers to serve less affluent African American communities aligns perfectly with our lower middle market strategy. Highland Square, is the dominant shopping center in the North Jacksonville market, and is a fixture of the community. The retail center contains a mix of regional, local, and national tenants, catering to the densely populated surrounding market with multiple restaurants, medical providers, retailers, banks, and other service providers. Our approach focused on transforming properties where others see no potential, turning them into vibrant, community-centric spaces. Historically anchored by big-box stores now made obsolete by e-commerce, these centers still have active supermarkets but required a new vision. Key initiatives undertaken include: - Redesigning and reconfiguring spaces to better serve community needs. - Downsizing and repurposing areas for discount stores and experiential spaces. - Introducing restaurants, fitness centers, and clinics that resonate with the local community. We extend our gratitude to Rick Baer and American Commercial Real Estate for their partnership, integrity and disciplined approach to creating value for underserved communities. Rick's expertise in financing and refinancing opportunities was instrumental in the success of this project. This investment is a testament to our dedication to making a positive impact where it is needed most. We are not merely developing properties; we are building stronger, more vibrant communities.

Buildings and communities in the lower middle market can no longer be shaped solely by the availability of cheap capital, high volume, and assumptions about steady occupancy rates or easy asset turnover. Investors or developers must strive to build and grow real estate businesses, where returns hinge on creating enduring value over time rather than generating quick returns that prioritize value capture - with a core focus on putting the consumer first. In this new era, consumers have unprecedented choices in where and how they live, favoring cities and communities that are thoughtfully designed for contemporary lifestyles. Municipalities that foster integrated live-work-play environments, blending hospitality-driven development with collaborative third spaces, retail, amenities, wellness, and strategic placemaking, will thrive. This has led us to defining what we call the Consumer-Driven Development Hierarchy. Today's real estate projects must focus on delivering superior products and experiences that meet the complex needs of modern buyers, who often encompass both individuals and businesses. Development that merely provides basic shelter is no longer sufficient to inspire the attachment and long-term commitment necessary for sustainable communities. Designing for experience—addressing intangible factors such as authenticity, engagement, and alignment with people's values—is crucial for creating thriving ecosystems. Those who recognize this shift in power from buyer to consumer and respond accordingly will distinguish themselves as leaders in building the next generation of real estate enterprises. At Clay Cove, this is the fundamental thesis to our new fund.  We have been heartened by investment communities response to our opportunistic strategies that are grounded in their connection to local economic and social fabrics - factors which are critical for the lower middle market asset class. 

What have we learned from our operating partners relationships over the past twelve years? Empowering operating partners in lower middle market real estate transcends providing capital; it requires a deep commitment to nurturing their expertise to transform visions into tangible, valuable assets. An integrated relationship between a private equity firm and an operating firm accelerates value creation and leverages the unique dynamics of the lower middle market. Three key elements are vital. 1. Strategic Finance: Strategic finance goes beyond financial tools – it's about integrating investors and operators to shape the business model. Viewing each building as a business within a larger platform means meticulously integrating all macro and micro inputs. This approach enhances risk distribution and portfolio management. By sharing perspectives and skill sets, the partnership ensures financial stability through multiple transactions and significant capital commitments, offsetting the incremental burden of increased diligence and controls. 2. Partnership Development: Partnership development focuses on forming relationships and identifying anchor tenants to create a thriving consumer ecosystem. These tenants, including branded operators of new retail and professional services, fulfill immediate commercial needs and attract further business, fostering an environment where each tenant contributes to and benefits from the ecosystem's overall health. 3. Community and Municipal Engagement Community and municipal engagement involves understanding urban and community planning to ensure projects endure and advance the community's vision. Effective engagement means aligning projects with broader civic goals, enhancing viability and sustainability, and making them critical contributors to long-term growth and success. Focusing on these three key investment elements volves investors from funders to true partners. This approach empowers operators to excel and ensures the creation of sustainable, thriving businesses that align with stakeholders' needs and aspirations, and will foster a generation of robust, innovative real estate enterprises that will shape the lower middle market for decades to come. Two of our many partners who have lived these elements with us, and that we’ve shared an excellent working relationship with are Stephanie Cusack and Michael Searls at Charter Stone Capital. We look forward to continuing partnering with the team on many more exciting projects to come.

As funding becomes tighter and consumer demand drives development, the lower-middle market presents a unique opportunity for creative and progressive development initiatives to not only receive capital but also to thrive. Why is this market segment so appealing? The lower-middle market tends to be less affected by major market fluctuations and remains aligned with the core values of real estate, making it an excellent platform for valued-added real estate. This environment allows investors and developers to engage in bespoke projects, explore mixed-use developments, and lead the way in sustainable construction practices with a freedom not available in larger markets. Such initiatives can produce significant impacts, establishing new benchmarks for efficiency, sustainability, and community involvement. The lower-middle market also maintains a closer tie to the local economic and social contexts, enabling developers to tailor projects more precisely to the needs of the community. This close connection leads to projects that are more responsive and responsible, fostering stronger community support, enhancing the sustainability of the real estate, and accessing new markets and demographic groups. On a basic level, the investment scale required in the lower-middle market allows for innovation without the fear of excessive risk. In this setting, the performance of a single building, particularly as part of a platform strategy, does not jeopardize an entire portfolio, promoting a more daring approach to innovation. This liberty to innovate is crucial in a time when urban living is dynamically evolving due to changes like the increasing prevalence of remote work and shifting consumer preferences.

The unveiling of the iPhone by Steve Jobs in 2007 was not just a product launch; it symbolized a seismic shift in integrating technology into our daily lives. Just as the iPhone heralded a new era for telecommunications, a similar revolution looms is underway for lower middle market real estate, promising to transform it from individual assets into integrated platforms that puts the consumer needs first. The concept of asset convergence in real estate, much like the multifunctionality of the iPhone, signals a shift where buildings and spaces offer more than their traditional functions. Real estate is being reimagined as dynamic platforms – environments that not only provide shelter, shopping, logistics, or workspace but also deliver a comprehensive suite of services and experiences tailored to modern lifestyles. At Clay Cove, we firmly believe that this will unlock unprecedented societal impacts by treating real estate as dynamic businesses rather than static assets. Instead, properties become ecosystems offering services and experiences, aligning closely with the contemporary ethos of convenience, connectivity, and community. The platform approach in real estate goes beyond diversifying uses within a single property to create an interconnected consumer experience. This strategy leverages private equity's strengths – capital agility, strategic vision, and operational expertise – to accelerate innovation across the sector. It optimizes space, reduces redundancies, and creates opportunities for synergies between different property functions, enhancing the consumer experience and promoting sustainability. Embracing asset convergence in real estate can redefine the future of our built environment, creating dynamic, sustainable, and consumer-centric ecosystems.

As Malden has become a hub of over flow commercial and residential development from Boston, Clay Cove Capital believed a multifamily redevelopment would provide a value-add opportunity for investors due to the site’s convenient access to transportation as well as the market’s affordability compared to Downtown Boston. Along with our partners North River, the properties were purchased for $8.10M or $210 per square foot. According to the business plan, the properties would be operated as office and retail buildings for the first ten years and and then would be fully demolished and prepared into a multifamily site by exit. The stabilized unleveraged yield on cost in Year 6 was projected to be 8.13%, a 138 bps spread over the fundamental cap rate for office assets.
 Although 69% of current leases in place were expiring at the end of 2021, the location of the Dartmouth-Pleasant buildings in Downtown Malden within walking distance to the MBTA rapid transit Orange Line mitigated the leasing risk. Meanwhile, with the properties renovated in 2004 and 2015, minimum improvements were required, making a conservative, long-term hold business plan viable. The properties sold to Quaker Lane Capital in 2019. Quaker Lane submitted an unsolicited offer on the property as it was in a Qualified Opportunity Zone fitting with their overall strategy. If that sale did not happen, we had the option to pursue the original business plan of obtaining entitlements for multifamily. The partnership could also have sold the entitled site or developed the property, aligning with our thesis of multiple exit strategies. We are excited to continue partnering with Chris Pachios and North River Company. Their deep understanding of urban evolution and metropolitan trends aligns perfectly with our vision. Together, we can continue to identify and capitalize on emerging opportunities ahead of the curve.