132 N Alvarado is done

Just completed this 4plex on Alvarado just south of Echo Park.

This one is near to our hearts, because it’s the first building Jon and I ever built from the ground up.

The units are 3 bed / 1 bath and have two parking spaces each. The downstairs ones are particularly cool; they have huge sliders off the living room leading to very large private decks.

If you’re interested in taking a look, please email julia [at] adaptiverealty.com [dot] com.

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My problem with WeWork

Have been doing some thinking about WeWork’s business model and I’m not impressed.

In case you haven’t run into WeWork, it’s kind of the prototypical co-working company. They develop and manage nice, shared office spaces that individuals and small companies can rent on a week-to-week basis.

The reason WeWork exists is that there is a mismatch between supply and demand for smaller spaces / tenants. Most landlords want to rent space on long-term leases to established companies. Most smaller tenants are not well-established and don’t want to commit to a long lease.

So, WeWork steps in, signs a long-term lease with the landlord and then subleases the space to tenants. Because smaller spaces usually rent at a higher price per square foot and because WeWork is willing to accept a short time commitment, it can extract rents from its subtenants which are far in excess of what it needs to pay the landlord.

That delta, between what WeWork pays the landlord and what the subtenants pay WeWork, is the margin on which WeWork lives.

Because that delta has been pretty large, WeWork has been able to attract large amounts of capital to build out huge amounts of co-working space all over the country pretty quickly.

But what, really, is the barrier to entry? WeWork spends a lot of money to wrap services, coffee / food, networking, classes, etc. around the space in order to differentiate its offering. I’m not sure whether that’s what the tenants care about.; I think it’s mainly about the flexibility.

So, any landlord with suitable space sitting empty can just bite the bullet, spend the money, hire two people as staff, and set up as a co-working space. Over time, as more landlords do this, the premium WeWork can charge goes down, compressing its margins.

And as those margins compress, WeWork will find it harder to sustain the kinds of programming its trying to use to differentiate itself, dynamiting its barrier to entry.

Bottom line: My strong bet is this is not a sustainable company.

Mixed feelings about a house for my folks

Am inspecting a house for my parents today in Silver Lake.

It’s a very odd feeling to see them paying $1MM for a house which they could easily have bought for $700-800k just a few years ago.

Obviously, my deal-doer alarms are ringing, particularly because this is a single family house where, if they rented it out, the yield would not come close to being acceptable.

On the other hand:

  1. People need to enjoy their lives, and if having a nice house helps you enjoy yours and you can afford it, you should go for it
  2. I strongly believe Los Feliz, Silver Lake and Echo Park are on a one-way trajectory towards becoming some of the most desirable neighborhoods in the city… there will be cyclical ups and downs, but, over the long term, I believe values will increase at a rate in excess of inflation, which is all you can ask

So, I’m going to the inspection with an open mind. Hopefully, it will end up being a wonderful place for my folks to live.

Regulatory insanity

Sometimes people wonder why rent is so high in Los Angeles.

Here’s a perfect example. We’re adding four units to a duplex we bought in Highland Park.

Because LA has decided to go down the path of “low impact development”, this is what we’re confronted with (again, on a six unit project!):

“First they have to come back with corrections.  They will probably request a modification from the grading department for the use of pumps.  Grading department mechanical plan check.  Assuming there’s no delay there, once we do the corrections we have to go back to Sanitation at which point they’ll generate a covenant.  Once the covenant is created we have to get with you to sign and notarize the covenant.  Once it’s notarized we have to take it to the county recorder’s office.  After they give us the purple copy of the receipt we take the whole thing back to sanitation.  After sanitation clears it, we have to go to the bureau of engineering to clear the tie in to the public street ( they won’t look at until sanitation clears).”

This is insanity… there’s no way on earth adding four units to an existing building in a densely populated area should require this level of insanity.

And, because it does, fewer units are built than would otherwise be the case. Less supply at a given demand level equals higher prices.

When liquidity dries up for supposedly liquid funds

When people invest with us, I always warn them not to expect their money back at any particular time.

Why? Because real estate is a fundamentally illiquid asset (eg it takes a long time to sell). As long as you’re not a forced seller, you’l probably do very well… but you can get killed if you need your money immediately.

Some mutual fund investors in the UK are apparently learning this lesson in a pretty painful manner today.

Per the Wall Street Journal [subscription required], five funds which invest in UK commercial property have suspended investor redemptions since the Brexit vote. That means investors can’t get their money out… which is supposed to be one of the virtues in investing in a publicly traded fund like this.

Why can’t they get their money out? Because the funds’ money is invested in real estate and you can’t easily liquidate properties to generate cash to fund redemptions. So, when large numbers of investors want to pull out, there’s no way for the funds to oblige.

Even worse: When the funds do manage to liquidate their portfolios, they will be doing so under duress, meaning bidders will know they are dealing with distressed sellers and will act accordingly.

It’s kind of amazing to me that these funds are allowed to exist, period. There’s just too much of a mismatch between the short-term nature of investment in publicly traded vehicles and the long-term nature of commercial real estate.

Anyway, word to the wise: If you’re going to put money into real estate, make sure it’s money you don’t need to see again at any particular time. Otherwise, you’re in for a world of hurt.