Ep. 17 Investing in Housing for the NextGen
The Financial Commute

Ep. 17 Investing in Housing for the NextGen

Ep. 17 Investing in Housing for the NextGen

The Financial Commute

On this week’s episode of TheFinancial Commute, host Chris Galeski welcomes Todd Williams, ChiefInvestment Officer at Grubb Properties. Grubb focuses on investing in multi-family real estate and has $2 billion in assets.

Bob Grubb, founder of Grubb Properties, provided not-for-profit financing to people who were affected by redlining, a discriminatory practice in which services (financial or otherwise)are withheld from certain residents based on race. Since then, Grubb has evolved into a multi-family real estate manager and developer.

Grubb is now focusing on the segment of moderately priced multi-family housing for millennials and GenZ. These younger renters usually don’t need as much space and want to be in urban locations near major amenities and job bases at a certain price point that puts them in a range of income qualification between 60% and 140% of AMI (area median income).

Grubb only has six types of floor plans, all of which remove inefficiencies like awkward corners to give their residents more space and amenities. Having fewer floor plans speeds up approval processes and makes it easier for management teams to understand and lease these units.

Over the pandemic, Grubb offered a discount to residents who prepaid their rent and provided a cap on rental increases to long-term residents. This bolstered loyalty with residents and lowered turnover costs. Grubb also had a temporary flight of residents and capital toward the growth markets in the South. However, because they knew urban areas would eventually bounce back, they started building in the Bay Area, L.A. and Denver and were able to secure discounts and subsidies.


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Thank you for joining us for another episode of The Financial Commute. I'm Chris Galeski, your host and I'm really excited to have Todd Williams, Chief Investment Officer of Grubb Properties, Grubb focuses on investing in multifamily real estate. They've been doing it for close to 60 years, have well over 50 properties, and about $2 billion worth of assets. Todd, thank you for joining us.

Thank you for having us. And thank you for all the support for our fund programs. And certainly I know we'll get into it a little bit, but we really do appreciate all the investment support that we've had with the Morton team.

You're welcome. You know, we love investing in general, but it's not just investing in stocks and bonds. It's also intangible assets like real estate. And you guys have a really cool story. Tell us a little bit more about Grubb and how you guys kind of attack the multifamily real estate market.

Happy to do that. So Grubb Properties is, you know, getting ready to go on a 60 year old firm. We were a firm that was founded in housing. In fact, Bob Grubb, the founder of our firm, the parent of our current CEO, Clay Grubb, now deceased, unfortunately. But Bob founded the company in actually single family housing. Interestingly enough, in providing housing to folks that were otherwise locked out of it.

Back then, banks practiced a form of discriminatory lending called redlining, and he didn't feel like that was right. But he also saw it as business opportunity. And that's where we've always kind of seen mission overlapping with investment strategy. And in this case, what he did was basically provide nonprofit financing, or not for profit financing for folks that were otherwise locked out of homeownership.

And then that allowed him to fuel essentially a home building business at the time. Wow. Now, since that time, we have really evolved into a multifamily manager and then ultimately a multifamily developer today with our Link apartments brand, which we can talk about in just a bit.

There's a lot of different ways to kind of attack the multifamily space and it's a popular form of investing. It's one of the asset classes that's done extremely well the last 20 years. There's obviously a need for housing because the undersupply across the country. Tell us a little bit more about how you guys invest in multifamily. What makes you guys different?

Sure. So, you know, we have invested in multifamily now since really since the 1970s. We've done that in all sorts of different execution strategies from value add acquisition investing to ground up multifamily development. Over the last decade or so, we have been working on a particular product that focuses on a segment of the multifamily industry, and this particular segment that we focus on is really the moderate priced young renter.

So this is the millennial or Gen Z renter, if you will, that is really driving this very, very significant demand for multifamily housing. Yet they have very different needs than the workforce, their workforce housing counterpart, which is the folks that are typically using two, three, four and five bedroom unit configurations because they have families that's working class families.

This is the moderate renter that just doesn't have families yet either because they're too early in their lives and haven't had family formation yet or because they've chosen to postpone that, as many of the millennial generation has as chosen to do for their careers and so forth.

I did, I didn't have my first kid until I was 40.

I’m the same and, unfortunately, I'm not even a millennial, I’m a Gen X, so but the interesting thing about that is it really means that they have a very different need in terms of the real estate. And what we've done is try to focus on what that need is. And one of the key aspects of that need is one, they just don't have the bedroom configurations because they don't have those families.

So that's an issue. Two, they really want to be and need to be in urban locations, near jobs, near major amenities that they can avail themselves to, near transit. They need ideally to be near stable and growing job bases. And so for us, those are major medical, you know, biotech campuses, research centers, universities where there's a lot of growth going on in the economy.

But the other key aspect of it is they also need to be in those types of locations at a price point that puts them in a range of income qualification between, say, 60% and 140% of AMI. Okay. And so that's a really, really difficult income segment to reach because of the cost to produce housing and the rising cost of producing housing that we've seen it really over the last decade, more markedly so even over the last two years as inflation has been pretty rampant in the housing industry.

So your goal is to really build great units for the growing millennials, Gen Zers that don't need as much space, and you're able to efficiently build these units and maybe fit more into a building than what a traditional manager might do. And that could increase income that way?

Yes. What's interesting is so I'm a recovering architect and urban planner, admittedly, and what I've been amazed at as I go around the country and tour apartment communities, I'm really blown away at how it non innovative the industry has really been over the last, I guess, 70 years since it's really been in place, post-World War 2, and what I've really discovered is that, you know, that the industry itself is not really focused on efficiency and not on any kind of programmatic way.

Certainly you can find multifamily developers that are, you know, doing individual projects with some of these characteristics, but nobody's doing it on a programmatic basis. And so we really tackle it two different ways. The first is through, no coincidence because of my background, design and on the design side, we, you know, we build just six highly efficient unit floor plans and we duplicate those across our portfolio.

They're almost like a Lego block system, if you will. And so we rearrange them on different sites, create new skins that wrap those, and then that allows us to have really the most efficient product compared to our peers in the industry, literally right across the street from us from a design perspective. Yet these units feel every bit just like any Class A apartment unit that that's out there with, you know, European style cabinets in the kitchen and under about sinks and stainless steel fixtures, you know, solid surface countertop piece, you know, underground sinks, all that.

You know, glass backsplashes, under cabinet lighting, everything you'd expect in a kitchen. We really focus on squeezing out the inefficiency in the space, you know, areas such as awkward corners or entry hallways, things that aren't necessities where we can drive out space and focus on a space that's really important for the resident. So for us, 60, 65% of our resident base are our female residents because they represent 60% of college graduates today, for example.

Yet they suffer from a gender pay gap still. And so rent is even more sensitive for them. But amenity is important. And so for that resident, you know, we even our smallest units have full walk in closets, for example. So that's an idea where we're actually expanding space in that area, but cutting it out of other places because that's what's really important for that resident.

In our bathrooms, for example, we're doing 48 inch long vanity countertops with offset sinks, so there's plenty of countertop space and a full bank of drawers underneath. You know, for product. I don't use a lot of that these days.

You don’t have to use very much of that.

But our residents do. And so you know so that's the way we approach design, it's from the inside out. How do we make the units more amenitized in suite for the resident and how do we create a very, very efficient unit floor plan type that we can duplicate. How does that compare in the industry? If you walk into an average apartment community in the United States today, it'll have anywhere from 25 to 30 different unit floor plan types compared to our six.

Yeah, and I can tell you, there's just no way you can be that efficient with that many unit floor plan types. I walked a project in Aurora, Colorado, where we're building a project right next to the Fitzsimons Innovation Campus, big medical Multi Hospital, Medical Campus and Biotech Center emerging in just outside of Denver. And the project that I walked on was a little over 400 unit deal and it had a 100 different unit floor plans.

And I was walking with a leasing agent and asked her, you know, how in the world do you know what unit we're going to see here? And she said, I don't I'll let you know when we get there.

So you can build faster then because you're being more efficient with less number of units?

Well, what it's funny, it's actually helping us three different ways. One, we can design to permit quicker, which is accelerating our ability to get shovels in the ground, two, we can build it quicker, not only can we build quicker, but also we're finding we're getting logistics benefits. You know, for example, our tub manufacturer delivers only one tub for every unit we have.

And that’s also very different than the industry. Most apartment communities will have different tubs and showers for the different unit configurations. So that logistics efficiency, for example, is providing a lot of benefits to us, especially over the last year and a half, when we've had a lot of logistics issues in the industry. And then the third benefit is one that we're realizing now that we're at scale with this product.

And our product, by the way, is called Link Apartments. We now have roughly about 12,000 units of this product, either fully built under construction or in various stages of pre-development in design and so forth. And so now that we're getting to scale, the third big benefit is that our management teams that are managing these properties are managing those same six unit floorplans and so they know how to lease those effectively, they know how to manage those for performance and that's starting to pay dividends at a portfolio scale, which is really powerful.

Yeah, that's, that's a nice tangible benefit in terms of you can have operational efficiency with that as well. There's obviously a lot of risks and benefits to investing in real estate. COVID was a big surprise for everybody. I love the story in terms of how you guys reacted during COVID, not only to help protect yourselves, but also your tenants.

Why don't you share with us some of those things those changes that you guys made when COVID came about?

So it's interesting, You know, at the outset, of course, nobody had any idea what the true impact was going to be. And there were all sorts of, you know, stories, both anecdotal and real, about whether rents would even come in right at any meaningful range that would allow us to do everything you need to do as an owner from, you know, paying operations teams and vendors to, you know, making debt service payments.

So that was a real scare at that time in early March. And I recall it very well. But, you know, fortunately, we had a very, very progressive and thoughtful CEO who said we got to get out in front of this very, very quick. And we got together as a team and we said, look how can we motivate our residents to, you know, get their rent in early so that we'll have confidence going forward that we can, you know, continue to perform at the highest level.

And we did that. What we did is we went out to our residents and, in March and we provided them a discount if they prepaid their April rent. And we had a very, very high collection basis on that which gave us then the confidence to move forward. So what we did is then we went to our vendors and we said, Look, if you get your bills in by the 25th of the month, we'll make sure you're paid right away.

And but we need you to do the very best service on our properties. And so we did that. Our vendors were happy. They gave us that best service. And if you remember at the time, that service meant a lot of extra cleaning and Senate sanitizing because those were you know, those were perceived issues at that time.

And so that made a huge difference. And then our, you know, our residents, I think, had a 10% discount if they prepaid their rent. We then continued that program for the very next month. And I think one of the things that did for us is not only give those residents that benefit then, and this just before PPP and all of the additional programs that came out, but it then built an entire loyalty program almost with our residents at that point.

And we had just rolled out that year as well a renter loyalty program, which I think we may be one of the only, you know, national companies in the country that even has such a program where if you lease from us long term, we'll provide you a cap on your rental increases. And so, you know, that's also another powerful way in which we can, you know, seek a win win with residents and with our operations.

And it's actually really beneficial. It's truly a win win because not only the residents get the benefit of that cap, but we have lower turnover costs, which is a huge cost in the industry because you have downtime when the unit has to be remarketed, you have refurbishment costs, paint, flooring, all that, all that sort of thing.

And so if you can reduce that, it actually is more beneficial to provide that as a cap for that resident than to incur those costs. And so we always, you know, that's a case in which it's been beneficial to both parties.

That's pretty cool. Obviously a lot has changed since COVID with all the money printing and stimulus policies. We've now been seeing the fears of inflation in the past call it nine, ten months. And we've seen the rise in interest rates as you guys look at making investment and property decisions in the future. How are you guys navigating this new landscape?

Are you changing your strategy at all?

Yes, it was interesting at the outset of the pandemic, not only were we being, you know, aggressive on the defensive side by putting in place a lot of those things that we just talked about and many more, but also we decided we were also going to play offense, and so on the offense side, we saw a huge opportunity taking shape, especially in the gateway markets where we had this temporary flight of consumers, residents, you know, out of those markets and also a flight of capital out of those markets very significantly.

So rents were decreasing, occupancy was decreasing and capital was flowing and capital was flowing into more of the growth markets in south, southeast, southwest. And so what we decided to do is try to take advantage of that dislocation, temporary dislocation. We had no idea because we were, you know, we felt long term those markets would be solid. They had been for, you know, as many recessionary periods as we could look back at.

They had typically low correlation to recessionary risk. Obviously, the pandemic was a different type of risk, but we felt that they would recover. We had no idea they would recover quite as quickly as they had. But what that did is it opened up the opportunity to secure sites for new development at incredible discounts. So we went into markets like L.A., the Bay Area, New York, D.C. and even to a lesser extent, the Denver market, which is a bit of a both a resilient and growth market.

And we were able to secure very significant discounts in many cases, we were able to secure subsidies. And that gave us a lot of confidence to go in those markets because we felt like we had this you know, nice margin of safety that we were building with pretty significant, you know, lower cost basis than had typically been there pre-pandemic. In markets that are normally super high barrier to entry and have enormous housing challenges.

Right. Yeah, even more so, even more acute than many of the traditional high growth markets. Yeah.

Well, Todd, thank you for sharing your story. We really appreciate the work that you guys do in helping us protect our clients’ capital, helping them find ways to grow and generate income. And I just think your story is fantastic. So thanks for joining us today.

Thank you for having us. And thank you for investing with us. We really appreciate all the support. A program that we've been working on is as it's gotten to scale, it's really become even more powerful and we're just so we're just so happy that we could team together.



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