Uber and real estate

Want to spend some more time today on an idea I mentioned briefly in yesterday’s post: That Uber (or something like) has the potential to radically reshape our city.

To understand where I’m coming from, you need to take the following two pieces of information as given:

  1. Google or some other company will release a practical self-driving car within the foreseeable future (say, 10 years)
  2. Uber or a company like it will replace human taxi drivers with self-driving taxis which will be radically cheaper than current taxis (because there is no human labor involved)

The above isn’t sci-fi; I put the over-under at seven years from now.

What are the implications of this new, cheap, on-demand transportation for LA?

Currently, everything we build is geared around individuals owning, and having to store, cars. Because we mandate a very high level of parking for all new structures (residential, office, and retail), developers are forced to allocate huge amounts of money and space to cars that would otherwise go to the underlying use (apartments, offices, stores, etc.). This raises the costs of every kind of real estate we consume (for example: building one under-ground parking space can cost $50-60,000; imagine what that looks like when you’re building a new Target!).

With cheap, on-demand transportation, LA could easily relax the parking requirements, leading to denser and therefore cheaper living and working space.

And what about existing buildings, particularly those built since the 1960s, which have huge amounts of space allocated to parking? I believe those parking spaces are going to end up under-utilized. That means there is going to be an opportunity to repurpose and/or replace much of the space allocated to parking for other, higher-value uses. There are already developers in NY turning parking garages into condos; I believe we will see that kind of action here as well, so long as the city figures out how to relax / streamline the planning permission / building codes to make this feasible.

I’m certain I’m leaving out a few big changes… there are bound to be others, because this is a major, society-level trend that’s coming. People are going to make a lot of money betting on / around this trend. I’m not sure what the bets should be yet, but stay tuned.


Grandfathered zoning

Got to thinking over the weekend about plumbing and electric. (Bored already? Sorry.)

As you probably know, we almost always replace both systems when we renovate a building. Often, the last time the systems were replaced was sometime in the 1950s or 1960s.

I was idly considering whether anyone would ever have to replace these systems again in our buildings. After all, the new plumbing and electric ought to last for 50 years or more and many of our buildings were built in the 1920s. Is it really going to be worthwhile to replace them again sometime in the 2060s, when the buildings are 120+ years old?

The answer, baring some kind of major change in Los Angeles land use law*, is “yes”.

Why? The most important single fact about 1920s buildings is that you could not re-build them to the same designs today. Why? Because they are under-parked for today’s zoning code.

There is no way you could build, for example, 117 N Reno, a 16 unit building with 0 parking spaces. Under today’s code, you’d need ~20 spaces, which would require either subterranean parking or else much more expensive, multilevel construction.

Because today’s parking codes are so onerous, there is an incredibly strong incentive to keep those old buildings standing up (and, therefore, grandfathered in).

So, the likelihood is that some kid who will be born in the 2030s is going to spend his late 20s and 30s re-wiring / re-piping all these buildings we’ve done, because the alternative would be to scrape them and build new, and that would be insane, given how the difficulties with the code.

*Note: I can already see the glimmer of such a change, and it starts with Uber and Google’s robocar experiments. If we’re really all going to have robo-cars available on demand, perhaps that will be the things we need to jettison our antiquated parking requirements, opening up cities for massively dense in-fill development.

What people want

Have been spending a lot of time looking at both apartment and single family home listings.

In general, am absolutely appalled at both the properties on offer and the way in which they are marketed.

Here is what people want:

  • Clean, straight lines
  • Open spaces
  • Minimal detailing
  • Many / large windows
  • White walls
  • Real materials (real wood, real stone, etc.)
  • Modern conveniences like washer / dryer, dishwasher, AC, etc.
  • Outdoor space with access via sliders

Do you know why people want those things? Because they allow people to project their own fantasies onto the space, rather than having to accept someone else’s (awful) idea of style.

The amazing thing is that the above is not that difficult to deliver. And the premium you get in rent / sale price very often makes it worth doing the work to give people what they want.

A reminder

Sometimes I get wrapped up in thinking about buildings as financial abstractions. I think about the cost of buying and renovating them, the rents we can achieve, the likely operating costs, the expected yield, the value on exit, the transaction costs and the profit.

I have the luxury of doing this because our very able team takes over the buildings shortly after I handle the buy and then I don’t really have anything to do with them until just before lease-up begins.

So, just to kind of remind myself that we’re talking about real buildings, real apartments, real neighborhoods, etc., I periodically stop by one or more of our construction sites.

If, like I sometimes am, you’re in danger of thinking about buildings in terms of numbers on a spreadsheet, here’s a useful reminder that we’re in the business of transforming tangible things:

IMG_20140724_092311 (1)

The deal size problem

Here’s something true about real estate: It is much easier to find highly profitable small deals than highly profitable large deals.

Why is this true? Well, the smaller the deal, the more likely it is that the owner and /or listing broker are inexperienced / inept. Those kinds of decision-makers frequent screw up the management and sale of assets, creating opportunities for large profits.

On the other hand, larger assets tend to be controlled by sophisticated players who do a good job extracting close to maximum value, whether from on-going operations or from sale processes.

My business is all about deploying capital into profitable opportunities. Can you see the problem I face?

I am constantly tempted to reach down into smaller opportunities where I can see the potential for out-sized profits, at least on a percentage basis.

And yet it is extremely inefficient to deploy capital in such small chunks… you need to do a ton of deals to equal the capital deployed in one big one.

So, I constantly look for big deals to do and face some pressure to try to live with worse numbers, because doing big deals is very efficient from a capital allocation perspective.

What’s the solution? There isn’t one. I will continue to try to grab the absolute best smaller opportunities while getting involved in only those larger deals where the numbers work (even if they don’t work as well as the numbers on the smaller ones).

That kind of discipline is, I think, what separates someone who wants to have a long career doing this from someone who wants to make some very large heads-I-win-tails-my-investors-lose bets, cross his fingers, and pray.