Weekend Interview: Keystone Development + Investment's Rich Gottlieb On Improving Offices While Relying Less On Them

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If Keystone Development + Investment is known for one thing within commercial real estate, it would probably be the office sector. But Keystone and Rich Gottlieb, its president and chief operating officer, may warrant more recognition for seeming to have just the right type of property for what the local market seems to need.

In 2018, as local pharmaceutical wholesale giant AmerisourceBergen was on the hunt for a new build-to-suit headquarters in the Philly suburbs, Keystone had entitlements in hand for a prime piece of land on the Schuylkill River in Conshohocken, Pennsylvania, between its miniature office core and its restaurant drag.

Less than two years later, Keystone began converting floors of The Curtis, a former publishing plant-turned-office building overlooking Independence Hall in Philly's Old City, into life sciences just as buzz around the city's advancements in cell and gene therapy exploded.

Keystone, which changed its name from Keystone Property Group when it moved its headquarters to its 1K1 office building in West Conshohocken, has also converted part of The Curtis to apartments. It is poised to do so again at part of The Washington, another historic office building it owns just across the street from The Curtis as tenant Chubb departs for its own build-to-suit across town. 

Bisnow spoke with Gottlieb to see what it could glean about the driving force behind such well-timed moves.

This conversation has been lightly edited for length and clarity.

Bisnow: How have the last 12 months been for Keystone? What do you expect to be different in the next 12 months?

Gottlieb: Things change, and it’s a challenging time right now. We’re working to make sure our properties are positioned for the future. We believe that office has a place in this world. 

We’re seeing increased occupancy from the workforce in our buildings, and we believe that will continue to happen. But at the same time, we’re placemakers; we want to be in multiple specialties. So we’re looking to do mixed-use, and with mixed-use, bring all different types of real estate together to create a strong sense of place. And that’s our future.

Bisnow: The past 12 months have indeed presented a lot of challenges for CRE. What decisions are you glad Keystone made in the preceding years — say, 2018 to 2021 — that helped you avoid some of the worst effects?

Gottlieb: The best decision we made was getting in front of it early to speak to our lenders and to extend loans where we could, put new loans in place when we could, so we could be ready to withstand higher interest rates and be in position to capitalize on future opportunities that will present themselves.

We know at Keystone that the real estate business is a cyclical business. It is always changing ... we know it’ll get difficult, and when it’s difficult, we know it’ll eventually get good again. We knew that eventually, a downturn was going to happen, and we wanted to be ready for the downturn so we could take advantage of the opportunities which come in the upswing.

Bisnow: Any decisions from between 2018-2021 that you wish you could change, with the benefit of hindsight?

Gottlieb: You could always look backward and say you could have done something better. I’m not sure there were any fatal decisions we made. We did the best we could with the information we had, and all in all, I think we made a lot of good decisions. We sold a number of properties at a good time in the marketplace. It’s always good to return money to your investors.

Bisnow: What was it like moving offices during the pandemic?

Gottlieb: We needed to expand a little bit and we had an opportunity to lease some of our [previous] space. We were in multiple locations within a few buildings, and now we’re all together.

We had purchased [1K1], and we wanted to commit to this building to show that people could commit to this building.  

We’re really happy with our offices, the look and feel of them. We put a new curtain wall on the building using smart dynamic glass; we were one of the first companies to use it on an office building in the Delaware Valley. It’s good for ESG; there’s a lot of natural light.

We’ve been doing what we need to do to attract people today: We amenitized the building. We recently opened a first-class gym with spa-like locker rooms. In the lobby, we serve free coffee and pastries to try to put a smile on people’s faces.

Bisnow: How was the move affected by the heightened demand for remote work and the associated flight to quality?

Gottlieb: Six months after the pandemic started, we were back in the office five days a week with some flexibility for people who wanted to work a day at home. If people are going to have to go to the office, and I believe they will, then you want them to be happy. Our job is to help our clients, our tenants, create a good environment for their employees.

We do use the new office as a recruiting tool; it’s a nice place with plenty of open air, privacy to make phone calls, places to eat, etc. I used to say to people pre-pandemic, if you ever talk to a young person who works in a new office building, they love telling people about it. 

I think people generally like the environment here and like working. So I think when my people say they want to work at home, obviously some of them don’t get the benefit of working in the office. I think it's very important, as we ask our people to come back to the office, that we make it a great environment. And that's what we have here.

Bisnow: Among your office tenants, how many do you think have settled on their remote vs. in-person work plans, and how many are still figuring things out?

Gottlieb: I think this is evolving almost daily. I try to talk to senior people in upper management and ask them how they think. Their public statements are different from their private statements, typically. They’re frustrated, they would like to have more engagement with their people, they would like to see more people in their office, but they’re having trouble bringing them back.

The job market continues to be strong, and as long as people feel they can get another job easily, employers will feel like they need to tread lightly. Regardless of what people say publicly, I don’t think most companies have finalized anything as far as their work and office usage plans. I think they’re constantly evolving and watching the marketplace, and people are having a tough time making decisions today. I can’t blame them.

People said no one was coming back to the office six months to a year ago, and now, more and more companies are saying they want their people in the office. It may not be everyday, but it’s not zero. And back then, people were talking zero.

I don’t know how young employees can get noticed by superiors when working remotely. When this whole pandemic started, people had seasoned teams that knew what they were doing, but people cycle out. They get other jobs and retire; people move on. So when a new generation is coming up and no one knows each other, it’s hard to be a cohesive team.

Bisnow: Keystone has done a lot of conversion work with office into multiple different asset classes. With so much attention being paid to the potential for office-to-resi conversion in downtowns in the years to come, how much fire is there behind that smoke?

Gottlieb: I can’t predict how much is smoke and how much is fire and what’s going to happen, but I think people are looking very hard at it, and there’s a lot of smart people who will get it done.

This is not a new phenomenon. Buildings get old and they need to be repurposed. When I first started, in Philadelphia at least, they were taking multistory warehouses and converting them to apartments, because no one wanted a multistory warehouse.

We’ve always tried to buy in good locations, and good locations can help you out. We’re looking at converting several of our older properties right now; you need to start with a building that works and have the right basis in the building. If you can get past those first two items, it makes a lot of sense. 

I tell people that no matter what happens in the virtual and digital world, people have to live somewhere. So it’s natural to go to apartments. Even with all the deliveries we’ve seen across the country, there still appears to be a housing shortage.

An office building wasn’t built to be an apartment building so its shape is typically not ideal for apartments. Truthfully, in a lot of older buildings, the floor plates are very ideal, and they work a little better and you get that window-to-natural light ratio that is closer to what you’re looking for.

Location is one thing, though it’s not as difficult to get over for an apartment conversion as it would be for office and retail. Zoning is an issue in some places. The basis in the building needs to be good enough for you to spend the money [on conversion]. Construction costs are high today, financing costs are high, so you can’t start with an expensive building.

Bisnow: What do you think the conversation about conversion is potentially missing? 

Gottlieb: I think that there is distress in the market, I read something Larry Silverstein said recently that one person’s distress is another person’s opportunity. I’m not sure that the owner of a building today will be the one to convert it. It may be the next owner.

Bisnow: There has been a lot of talk about the tough position downtown office is in between occupancy trends and debt maturities. How would you compare Keystone’s downtown office portfolio’s performance with its suburban portfolio?

Gottlieb: Our portfolio [in] downtown [Philly] is on the east side of town, the Independence Mall area. It kind of worked out that way, and we have good activity down there. It’s got good occupancy and leasing, with occupancy in the mid-80s to 90s.

At The Curtis, we have everything going on in there: office, life sciences, retail and multifamily. And that has helped increase the activity in that building, which makes it vibrant and very attractive. We literally have a waiting list for our apartments, which is amazing.

At The Washington, we have good occupancy now, and we will be losing Chubb at some point soon, so that’s why we’re looking at doing some conversion to apartments there. We want to piggyback on some success we’ve had at the Curtis, where we call the multifamily portion The Lyndon. The Washington is a similar type of building, and we’re already adding a mix of uses in retail spaces.

For leasing, the suburban [portfolio] is pretty equal at this point. We’ve noticed a pickup in activity for leasing, we’ve done 365K SF of leasing so far this year across all our buildings, and we’re expecting to continue at that pace over the rest of the year, if not better.

Bisnow: Keystone’s conversion of office space to life sciences at The Curtis gave it a big first-mover advantage in landing life sciences tenants. With a substantial amount of new life sciences construction coming online this year, what’s the outlook for converted space in Philly?

Gottlieb: Our initial competitive advantage was that we could deliver quicker than any new construction, so now that those buildings are close to being delivered, our competitive advantage is we can give a high-quality product at lower costs.

The new construction that is going on right now is going to require tenants to pay a high rent because of the costs they have going into it right now. Because of that, and because there isn’t as much capital investment in the life sciences market as there once was, people are looking at their bottom lines right now, stretching their dollars and looking at their costs. When money was infinite, it didn’t matter to them so much. But with money finite, they’re looking more at costs.

We’re being very diligent at converting a bit [of the Curtis] at a time and not the whole thing, so we’re really well-positioned to give a reasonable rental rate for a high-quality product. As far as conversions, [owners of] other buildings want to do it, but most buildings do not work for that. You haven’t seen us do it in all our buildings for that reason. 

It does require a tremendous amount of capital, but physically, the Curtis works very well. It just worked out that way. We have the ceiling heights, we had abandoned elevator shafts that created a lot of fresh air for lab space. The floor loads were stronger and heavier than most office buildings, and it was a low-vibration floor because it needed to support printing presses.

While people are looking to do conversions and are serious about it, I don’t think you’re going to see too many conversions going forward. It just doesn’t work.

Bisnow: What initially drew you to commercial real estate? What has kept you in the industry long enough to make it a career?

Gottlieb: I like working with other companies and learning about many businesses. Everyone has different needs so no two transactions are the same.  So you constantly have to be creative and innovate.

Bisnow: What is one challenge you had early in your CRE career that younger workers in the industry today don't have to deal with? 

Gottlieb: Finding good places to make calls during the day.  When I started no one had cellphones and when we got them they were very expensive to use. So I would find a hotel with pay phones — remember them? Then I’d call my office for my messages, and make return calls in the hotel or other places.

Bisnow: What about a challenge you see for younger workers that you're glad you didn't have to deal with at their age?

Gottlieb: We had no choice but to get out there and knock on doors and meet people. Younger people today have grown up with virtual apps like Instagram.  They believe they can create relationships this way. These are great tools, but people generally do business with people they know and like. I worry young people will not know how to create strong personal relationships so they can excel and grow their careers.

Bisnow: Anything else Keystone has going on that you want to highlight?

Gottlieb: We’re in more areas of development now. We opened our first hotel during the pandemic in Conshohocken and created a mixed-use environment there with the headquarters of AmerisourceBergen. That really raised the bar for Conshohocken. We have a restaurant [at the hotel] called Hook & Ladder where you literally can’t get a reservation for 10 weeks. 

So we’re looking at bringing this type of execution to other products, like putting apartments in our buildings. We’ll be pushing forward with a project in Dadeland, south of Miami in South Florida, which is a conversion of office into 120 apartment units. We’ve been successful in getting its zoning changed to create mixed-use.

Much like how people were talking about the flight to quality in office for years before the pandemic, people were talking about creating live-work-play environments at their developments for a while, but it wasn’t really happening. It really happens now. 

Traffic isn’t going away, so having people get in their car less is a positive thing. So we look for transit-oriented sites if we can, and we look to create a walking environment so you don’t need to get in your car for whatever you have to do that day.

Bisnow: Give us a bold prediction for the rest of the year.

Gottlieb: By the end of the year, most people will be back to the office at least three to four days per week.

Bisnow: What is your weekend routine or favorite weekend activity?

Gottlieb: My weekend routine starts with Friday night dinner with my family and friends. I like to play golf when the weather is good, but visiting my grandchild is my favorite activity.