John McNellis co-founded McNellis Partners in the early 1980s and opened his first shopping center in Healdsburg in 1984, a center the firm still owns. Nearly 100 deals later, almost all of them supermarket-anchored neighborhood centers within a two-hour drive of San Francisco, the product has barely changed. The size has. Around 1990, after a run with institutional partners that ended badly, John scaled the business down by a factor of ten and has funded every deal since with his own capital. His reasoning is blunt: he’d rather own 100% of a million-dollar deal than 1% of a hundred-million-dollar one.
The conversation works through the mechanics of competing as a small shop. John hands brokers 5% of the back end to bring him off-market sites, something the public REITs in his niche legally can’t do. He sells through the big houses for coverage and buys through the one- and two-person shops for local knowledge. He calls the IRR “total crap” and underwrites instead to return on cost and the NTM, net to me, with his own time factored in as a dimension of the return. He likes leasehold positions in ground leases, which trade about 200 basis points wide of the same asset in fee because most investors won’t touch them. And he has kept overhead near zero: 11 employees at peak, five today, with architects, engineers, and property management all rented rather than owned.
Then there’s the part most people in this industry only whisper. John is candid about how hard development is. He tells audiences two-thirds of firms fail inside ten years, and he devotes a section of the third edition of Making It in Real Estate to his own worst deals. He wildly overpays his team, pays his contractors on demand without arguing the bill, and has used the same two builders for more than 30 years. Asked what it feels like to look back on four decades, he doesn’t reach for a number. He says he has enough.
