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Fernando de Leon, founder of Leon Capital Group, started a small land development company in 2004 with $100,000 and grew it into a $10 billion business, primarily focused on commercial real estate. He did it, he says, by predicting distress, tracking the source of capital, and drawing on his Harvard degree in evolutionary biology.
While others lost their shirts during the Great Financial Crisis, De Leon began to make his fortune. He left his job at Goldman Sachs to start his own business and was doing deals in residential land development. A year later, he said, he saw some of the first signs, stemming from subprime mortgages and overbuilding, that this was going to be “a difficult cycle change.”
“Basically we said, look, we’re seeing things here that are fundamentally unhealthy. We’re going to take these real estate positions and sell them and then wait and see what happens,” De Leon told Property Play.
“We divested, we brought back some cash, and then we kind of waited, and then between 2008 and 2012 we became fixers. We became people who could talk to banks, life insurance companies, companies exposed to loans, and we were able to solve their problems for them,” he said.
De Leon said he turned around projects that stalled and became problematic for lenders, an experience he said informed his thinking during the early years of the pandemic.
“In 2021, we sold many, many billions of dollars of real estate because prices were high, and that was due to low interest rates, euphoria and bad market incentives,” he said. “Part of it is understanding where the capital is coming from. You start to see players in the market that shouldn’t be there…and when they come together and that spreads through the supply chain, you start to see distortions and pricing.”
Today, De Leon said, he sees the same red flags floating around data centers.
The data center problem
While big players like Blackstone, KKR and Bain Capital are buying, De Leon said he’s staying on the sidelines.
“What I can’t understand is the data center game. I’m looking at a data center that costs $10 billion, right? First of all, there haven’t been any outflows above, you know, $4 or $5 billion, you haven’t seen accounts, so that worries me a little bit,” he said.
“Then I see big tech companies, the biggest companies on the planet, with a market cap of $4 trillion, saying, ‘I don’t want to own this asset. I don’t want to have it on my balance sheet.’ So I ask: Why? Why doesn’t the largest company in the world want to own its own assets? » said De Leon. “The AI sector is everything to them today, to the big hyperscalers, and so they say: ‘No, you build it, you finance it.’”
De Leon assumes that what’s inside these data centers, the artificial intelligence technology, will quickly become obsolete. After all, AI is designed to make everything more efficient, including itself. And the value of centers lies not in the four walls, but in what is inside.
Those 15- and 20-year leases that developers rely on, he suspects, are “Swiss cheese” leases — as in, full of holes in the deal over time.
De Leon said his biggest concern is that big private investors are getting the money they manage from things like teacher, police and fire pension funds.
“When they say, ‘I’m going to own this asset and lease it back to one of the hyperscalers,’ they’re putting other people’s money at risk,” he said.
Evolutionary biology in CRE
De Leon started in the real estate industry as a teenager, working as a translator for a local Texas developer. Instead of taking a salary, he asked for equity in a project. And rather than get a business degree, he chose evolutionary biology because understanding people is good business, he says.
“It was prescient. I mean, it turned out to help me make decisions about organizing and leading businesses, starting businesses,” De Leon said. “I think some of this stuff is about incentives, right? Basic business interaction between human beings is about incentives.”
He added that this was particularly true in sectors where there are established players.
“You still find a group of established status quo incumbents, and they have some advantages,” he said. “Understanding them from a sociological perspective allowed us to say, ‘OK, this company should be competitive on this basis. That’s where we can win, “by seeing things in the smallest details.”
Big opportunity ahead
De Leon said he was excited about the increase in capital flowing into commercial real estate – from wealth management companies, family offices, sovereign wealth funds and pensions.
“When allocations to real estate increase from 3% to 6%, that number means there is about $4 trillion in additional capital chasing a finite number of real estate assets,” he said. “When that happens, you’ll see an oversupply of capital, you’ll see price appreciation of fundamentally sound real estate assets. And so I think the story of the next 10 years will be real estate capital markets grow tenfold.”