The Boomer condo opprotunity

My folks are planning to begin spending ~6 months per year in LA.

I’ve therefore been looking into suitable rentals and condos.

My parents are among the oldest Boomers. Like many of their generation, they’ve accumulated a decent amount of wealth through hard work and frugal living.

Now, they want to spend time in LA. They’re not looking for anything super-expensive. They mostly value security, walkability, access to culture (good movies, book stores, etc.), and, for lack of a better word, authenticity.

If you think about it, there actually aren’t too many neighborhoods in LA that qualify. Some, like Hollywood, DTLA and Venice, are walkable but not that safe. And others, like Beverly Hills, Larchmont and Santa Monica, are walkable and safe, but feel a bit like outdoor shopping malls.

It turns out that the best neighborhood for my folks is Los Feliz.

In looking around there, though, the options for rentals and condos are pretty limited. The existing stock of condos and rentals is pretty small. And the ones that exist are mostly sub-optimal for security-conscious Boomers (few doorman buildings, few elevators, substandard parking, etc.)

And that presents an interesting business opportunity.

I’m willing to bet that, like my parents, other retiring Boomers with money to spend will gravitate to Los Feliz. Someone is going to make a lot of money building condo buildings there to service this demand.

Maybe it will be me!

 

How leasing impacts acquisitions

“Hey Jacob. What did we get for the last 2/1 we rented at X?”

I think I ask that question of Jacob, who runs our management business, 4-5 times per week.

Why?

Because we’re constantly recycling the market information we glean from leasing back into our acquisitions underwriting.

The go/no go decision on each deal is sensitive to small ($100-200 / month) swings in the forecast rents. Across, say, a 10 unit building, a change of $100 / month / unit causes a budget swing of ~$120k ($100 x 10 units x 12 months x 10 GRM = $120k). That’s material.

Does this mean our rent forecasts are always right? Of course not… there’s a 9-12 month delay between when we buy a building and when it’s ready to be leased up again. And lots can happen in that much time.

But we need to use every tool at our disposal.

An off the wall idea for housing the homeless

Have been doing some more thinking about homelessness in LA and want to share an idea.

Let’s assume that LA accepts responsibility to house anyone within its borders who finds himself without a home.

In a perfect world, where the city had unlimited money and land, the simplest solution would be to build housing for these people in LA. The problem, of course, is that the city does not have unlimited money and land. Both are in incredibly short supply.

And that leads to the following cost asymmetry: Anyone who wants can come to LA for $49 or whatever a Greyhound bus ticket costs. But housing that person in a shelter costs the city probably $10k / year. And providing him with a permanent home costs on the order of $300-400k (the cost of a new unit of affordable housing).

Given the gigantic cost disparity, it’s impossible for the city to make real progress in reducing homelessness. People come here faster than the city can afford to add shelter / affordable housing beds.

So, the question becomes: How do you change the equation?

To answer that question, you have to understand why it costs to much to house people in LA: Because this is such a desirable city, and because we have such restrictive zoning, land for housing is incredibly expensive. Even in lower-cost neighborhood, the cost per dwelling unit of land is ~$40k.

What if we decided to house the homeless somewhere land was much less expensive? What if LA bought up land to the east, where its effectively free, and built shelters and / or supportive housing out there? The city could pay to build and maintain the housing and take advantage of whatever federal and state money and services are available (social security, Section 8, etc.) to off-set the costs.

Then, the offer to anyone without a home in LA would be pretty simple: We will fulfill our moral obligation to house you, so long as you are willing to be housed outside the city, where we have established a humane, orderly settlement for you at a manageable cost to us.

Thoughts?

 

One simple thing LA could do to reduce homelessness

Yesterday, the LA City Council declared a “state of emergency” regarding homelessness and pledged to spend $100MM to help ameliorate the problem.

As you might imagine, I have plenty to say about how the city handles homelessness in general and about this plan in particular.

But today I want to focus on one particular aspect of the problem that is totally, 100% within the city’s control: The delays imposed by the city on construction projects.

At any one time, Adaptive generally has approximately 150 units in various stages of renovation. I think it’s fair to say that construction on each one is generally delayed by approximately three months by the city (~2 months in plan check and then another month waiting for various inspections).

That means the city is imposing 150 units x 3 months = 450 apartment months of delay. That’s 450 / 12 = 37.5 apartment years. In other words, it’s the equivalent of taking 37.5 apartments out of the rental market for a year. And Adaptive projects represent an infinitesimal fraction of the total construction, both rehab and ground up, in the city at any one time.

Keeping so many units out of the spot market is 100% certain to increase rents, which everyone agrees leads to homelessness.

If the city is serious about reducing rents and, therefore, homelessness, it needs to radically reduce the delays it imposes on residential construction of all types and thereby ease the supply crunch.

What happens to Adaptive in a downturn

“What happens to you guys in a down-turn?”

A contractor with whom we do a LOT of business asked us this question yesterday. He’s concerned, because he’s basically given up working with anyone else in order to handle the volume we’re sending his way. (Incidentally, he’s not the only one: We have three contractors now who just work on our deals.)

It’s a reasonable question. Any time your business is entirely dependent on one customer, you have to worry about how that customer will behave as you move through the business cycle.

But I don’t think he has much cause to worry, and here’s why:

  1. Our projects generally take 9-12 months and the funding for them is in place from the beginning. In the event of a downturn, we’d still finish whatever we have in the pipeline, because it doesn’t do anyone any good to sit around with vacant buildings;
  2. Unlike most developers, we use very little debt, so a downturn is not going to force us to spend years negotiating work-outs;
  3. Instead, we will spend the first 6-12 months of a downturn finishing and leasing projects already in the pipeline and raising fresh capital;
  4. Simultaneously, we will begin developing and repositioning a portfolio of properties that we purchased in 2012-13 but have not yet touched, because construction prices are currently too high for the rents the neighborhood can support;
  5. Finally, we will start buying as quickly as we can, initially developable land in interesting neighborhoods and then apartment projects for repositioning

We’re not looking forward to a downturn. But we believe we have positioned our business to take advantage of one, whenever it comes.