MONDAY, AUGUST 11, 2008
by Jenn DankoChicagoAndrew Hochberg says he was unsure of his next steps after selling his family-grown Sportmart retail outfit to Sports Authority in 1998. With Hochberg presiding as CEO of what was once his father's company, he was ready to take some chances when the deal was done.
"I sent in two LLC applications very quickly after we sold the company," remembers Hochberg from inside the Northbrook offices of Next Realty LLC. "One was for Next Realty, which is our core business today, and the other was for Next Capital, which never turned into anything and has $100,000 in the bank."
Lucky for Hochberg and his team of principals, Next Realty steadily grew over the next 10 years. Today the company owns 36 properties in the Midwest and Mid-Atlantic states, compiling a total net worth of $375 million. And while Next's expertise has always centered around the management, development and leasing of retail properties, its ownership and operational interests in parking structures has emerged as another sector of strength. In the past six years, the company's parking division has acquired assets in five national markets, owns 11 structures that encompass more than 8,500 spaces. It now looks to extend its market share to reach both coasts.
"We find parking to be an interesting real estate niche because it's an operating business as well as a way to control core downtown sites," says Robert Caplin, executive vice president and principal of Next Parking, a division of Next Realty. "We found it to be a challenging and exciting business because everyday you can affect your business as opposed to retail centers, where as if they are leased, there is not a lot you can do except take care of your tenants and plan for the future. With parking garages, you are constantly reacting to the market."
Pieces of the puzzle
Now commemorating its 10th anniversary, Next Realty grew from the Chicago-based retail giant Sportmart, launched by Hochberg's father, Larry Hochberg, in 1971. After completing law school, Andy Hochberg went to work for the family company in 1987 as its real estate director. He acted quickly, building new stores and finding new locations for Sportmart stores across the country, and eventually as far as Japan; when the company went public in 1992, he was promoted to CFO and eventually took over as CEO.
In pushing forward his vision for Next Realty, Hochberg tapped George Galloway, who handled tenant representation for Sportmart, to join his new venture. He and Galloway partnered, with Hochberg helming the Chicago-area office and Galloway going to Washington, D.C.
"We came from completely different backgrounds," says Galloway from his East Coast office. "Andy's background was in equity-based sporting goods and I came strictly from service. It was an interesting dynamic-we talked early and often and it's (made for) a tremendous run."
Hochberg's arm of the brokerage business went on to specialize in finding land for developers; the D.C. office focused more on tenant representation, with Galloway serving as the office's managing principal and broker. As a whole, Next Realty made its first deal by buying an IHOP restaurant in suburban Washington in 1999.
"We did a 1031 exchange and then another 1031 exchange and it turned out to be a pretty big deal," Hochberg remembers.
Today Next Realty includes close to 50 employees between both offices and in its mobile home parks division.
"It's important to keep in mind that we built the firm one person at a time, one relationship at time," he says, smiling easily from inside the company board room. Beside him sits Caplin, a high school acquaintance from several years back. And across the table, Principal and COO Marc Blum says that he and Hochberg met on the Internet before he joined the company in October of 2001-"and it wasn't through a dating service," he laughs.
"Andy was on the board of directors of the Internet company I was involved with at the time," he says.
Finding the right pieces of the principal puzzle was important to Hochberg, who was reintroduced to Caplin at a charity fundraiser shortly after he launched the company. In his hunt for the right brand of dealmakers, the two began brainstorming about ways to further develop the fledging name of Next Realty.
"We had a conversation about parking," Hochberg remembers. "It was literally on a coaster where we started to write a business plan for the parking business and Bob went ahead and executed it well."
In the driver's seat
While Next's retail reach in shopping centers and development parcels has been its strong arm, Hochberg says that parking will be the focus of future growth. From the leasing retail end, Next still maintains an occupancy rate that exceeds 95 percent. It still efficiently manages retail properties through its property management division, but Hochberg is seeking something more.
"My expectation starting out was that we were going to be able to acquire power center assets and operate them better than others in the industry," he says. "What I was concerned with most was the lack of entrants coming into the market. If you look at it from a venture capital perspective in terms of what they were backing, I noticed there were very few retail concepts."
The company took up a rigorous period of buying properties between 2002 and 2005; since then Next has sold "a fair number of assets," according to Hochberg, while still retaining a fairly large portfolio of properties for a company its size.
"We're opportunistic in the fact that when we see the market peaking, we'll sell an asset, which we have done over the last two years" says Blum, who oversees all of the management leasing, acquisition and investor relations for Next Realty. "We've taken advantage of the high market."
Next had decided to expand its market to parking, partially because of the market-driving capabilities and sheer demand for structures in urban areas.
"We are applying concepts from other businesses and putting them to the parking business," Hochberg says. "Operationally, parking is a business housed in real estate. As someone from the retail business, it doesn't bother me to be operating a parking garage because my background is operating retail stores . . . We are establishing ourselves as experts in the parking industry, and that comes from having background as people in real estate."
Unlike its retail operations, Next Parking hires out third-party managers to manage the garage portfolio. For an operating officer such as Blum, evaluating market rates on regular basis is key to the company's success. Tending to monthly collections, establishing billing methods and engaging the newest technology is a huge focus on the garage side, he says.
"For the past seven years (rates) have gone up," Blum says. "I don't think it's gone backwards in any one category."
In May, Next Parking debuted what they intend to be an annual Chicago Parking Survey, which tracks garages and lots downtown to better gauge its future market moves. Prior to the May 2008 survey, Caplin says there had been only one parking survey conducted on a national basis, which included 20 to 25 of the largest markets.
"Parking is a very fragmented business," he says. "Since Chicago is our own market, we wanted to understand where the opportunity was in the future or where markets were overpriced or overbuilt."
The survey revealed, among other statistics, that commuters who drive to downtown offices can expect to pay and average $310 per month to park their car in a garage. Overall, the survey indicated a "healthy" parking market in Chicago.
"There is no better evidence of a market-driven product than parking," Caplin says of garage rates. "If you are too expensive, people are going to park somewhere else. If you're too inexpensive and your garage is full all of the time, you are not doing a service to the city because people are driving around looking for a place to park. The market sets the rate."
Tenacious D(eals)
Despite its long-term growth plan for parking, Next continues to demonstrate tenacity in the retail development and leasing front. Last year, the company faced what could have been a huge setback when it 85,000 square feet of tenants vacated the 120,000 square foot Roosevelt Plaza in Lombard. Foreseeing the flight, Next repositioned the property through major upgrades to the façade and interior. On account of its efforts, the company was able to backfill most of the space and created several million dollars in value on the asset. Now tenants including Harbor Freight Tools, Hobby Lobby and Roundhead's Pizza will be opening up through the remainder of summer.
"We have much flexibility in the types of deal structures we put together for acquisitions than some of these larger companies," Blum says. "You have to have a vision and see where you are going to create value."
Next Realty faced another setback this spring when it lost Prism Mortgage as a tenant in the basement of the building at 354 West Hubbard. With big-brand tenants including CVS, PetCo and Ace Hardware coming on board, Next was left with nearly 7,000 square feet of nagging space-until they attracted the Michigan-based Steve's Deli to lease open its first Chicago venture in the building.
"We leased that one in house," Hochberg says. "That brought us to 100 percent leased at the Kingsbury Center."
Dealmaking continues to drive the passionate principals of Next, who use their motto of speed and determination to define their style. Their company mascot, the burtle, says it all-part bunny, part pet turtle. Every pen from every signed lease is tagged with a date and displayed behind a glass case inside the Northbrook office like a retail relic. "Sometimes the quality of the pen depends on how big the deal is," Hochberg muses.
Work days at Next Realty are equally quality, with the principals and brokers drifting between offices and consulting with one another on their next real estate moves.
"It's very interactive," Caplin says of the office vibe. "If there were no offices between me and Mark, we would just be yelling back and forth all day. The most exercise I get in the day is walking the 40 steps between each office."
The absence of corporate hierarchy within the company promotes annual retreats each year with the Washington D.C. office and an annual outing to the Las Vegas RECON conference.
This year, Next Realty has a new retreat planned.
"We're going to see 'The Dark Knight'," Hochberg says of the new
Batman movie released in theaters in July. A portion of the movie was filmed in one of Next Parking's garages on the corner of Randolph and Wells last summer.
"We have a lot of fun with what we do and that really shows in our results," Hochberg says. "If you don't enjoy what you're doing, you're not going to be good at it."
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