How we think about apartment design

When you’re designing apartment buildings, you need to resolve the following tension: You want the units to be cool enough to attract tenants today, while making them timeless enough to attract tenants for decades to come.

We have settled on what I like to think of as “authentic Socal minimalism”:

  • “Authentic”, because we avoid using any material trying to be something else… no fake wood, no fake cabinets, no cheap hardware masquerading as fancy, etc;
  • “Socal”, because we emphasize informal, open floorplans with indoor-outdoor flow, so residents can enjoy our amazing weather; and
  • “Minimal”, because we keep the stylistic flourishes to a minimum, to allow tenants to put their own stamp on these homes AND to keep the units from looking dated as tastes evolve.

Since we put a lot of thought into this stuff, it’s super cool when we see tenants embrace our aesthetic and use it as a canvas for their own creativity… like these tenants did at a really cool, small building we manage in East Hollywood.

One bad habit I’m trying to kick

One of the bad habits I’m prone to falling into is failing to grow my network of capital providers.

For any given deal, if we’re not deploying a discretionary fund, it’s easiest to reach out to the 3-4 families with whom we do the most business and get one of them to write the check.

You can see why, right? They trust us, we trust them, and we’ve already got the documents worked out. So it’s really just about explaining the specific deal and hammering out a few key economic terms.

The problem, from our perspective, is that doing the easy thing does not grow our capital base, which is essential if we’re going to grow into the company we envision.

So, I have been making a point of researching and cold emailing prospective equity partners over the past few months.

It’s not the most pleasant part of my job. The response rate is pretty low and, even when I end up speaking with a relevant decision-maker, I’m in the role of a supplicant, when, if they could see our operation and track record, we would be on at least equal footing.

But, somewhat surprisingly, it does work. The key, it turns out, is not trying to sell too much on the phone. Instead, I aim to get the decision-maker to come to our office and then take a tour of some of our projects.

Once they take the tour and meet the team, things start getting serious pretty quickly.

Cranking the machine back up

Acquisitions have been slow at Adaptive over the past few months.

And it’s not by choice… prices in our core neighborhoods in 2018 have generally run way out ahead of rent growth, taking our forecast unlevered yields down to levels we don’t find appealing.

However, recently, we have identified a few areas where the equation is swinging back into alignment, driven by a combination of price reductions and rent growth.

So, we’ve begun making some offers… and I’ve got a new spring in my step.

Why we’re sticking to our knitting

Regularly get asked the following questions: Are you planning to venture out to other cities? Start doing other product types (office, retail, etc.)?

The answer to both is that I would love to branch out. Aside from the intellectual stimulation that comes from learning new things, expanding the pool of potential projects would allow us to put more capital to work, which would be good for Adaptive.

But we’re pretty unlikely to expand to other cities or product types any time soon.

Why?

It comes down to “circle of competence”, the range of potential deals were our existing skills and knowledge give us an advantage over competitors.

When it comes to fixing up apartment buildings in Los Angeles, I can say, with no exaggeration, that our organization is the best. We know, with great certainty, how much we can pay, what we’ll do with a building, where the potential pit-falls lie, what kind of rents we can expect, how to finance the deals, etc.

Are we perfect? No way. This stuff is really hard and we make plenty of mistakes. But I’m confident, because we’ve fixed up ~80 buildings over the past 10 years, we know what we’re doing.

This is utterly not the case when it comes to buildings in, say, Austin. Or office buildings, even in the submarkets we know well.

Now, if we were in the midst of a down-cycle, when everything gets cheap and you can depend on subsequent rent / price increases to bail you out if you screw up, I would absolutely be looking to try new cities and/or product types.

But, since we’re in a pretty hot market, where we need to pay top dollar for assets, we’re going to stick with the type of deals we truly understand, even if it means I get a little bored of looking at hundreds of apartment buildings every day.

A little thought experiment

Thought experiment regarding American population dispersion: Imagine you picked up all of the people who live in the United States, then allowed them to pick where you put them down, with no regard to where they lived before.

How many would choose to be set back down in the Northeast and Upper Midwest?

How many would choose the West Coast, and, particularly, Southern California?

Note: Sorry to BB and SS, whom I used this line on at breakfast this morning!