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In this episode, we're joined by Scott Choppin, founder of the Urban Pacific group of companies, a group that specializes in the development of workforce housing. It's important to note that Scott has gained extensive knowledge in real estate development and project management throughout his career working with several top developers. Today he oversees all operations for the Urban Pacific family of companies including business development, capital acquisition, and strategic planning.
Today we discuss several topics including why Urban Pacific focuses on developing workforce housing, the benefits of developing vs. the value-add strategy, what makes Urban Pacific's development process unique, recognizing competitive advantages, low-income housing tax credits, and much more.
Why Workforce Housing?
Urban Pacific didn't always focus on workforce housing. However, Scott's exposure to low-income housing tax credits gave him a certain level of comfort and understanding in this area. Urban Pacific's focus has been urban infill assets - downtown, loft-housing, living in the central city. Over the years, urban infill has still been the focus, but lately, Urban Pacific has been focusing on middle-income workforce housing. The area is undersupplied, and Scott's business fills the need and adds a lot of value there. The concept of workforce housing has been growing over the years, and many would even consider the concept mainstream these days in 2020. Urban Pacific is looking to directly meet this middle-income workforce housing model.
Developing vs. Value-Add on Existing Assets
Value-add multifamily is the highest demand asset in the country. There are a few key differences. Value-adding adds no new assets to the market. Urban Pacific, operating primarily in California, is in a state of perpetual demand for housing. When you buy value-add, you'll only ever meet the market demand with the asset you've purchased - there's no customization or flexibility there in the mix of the type of asset you hold. In the mind of Urban Pacific, oriented around very long term, why not add a brand new asset to the marketplace? Scott and Urban Pacific prefer to deliver a new asset, designed exactly how they like to fit the current and future market, as the developer they have full control over that. With a brand new building, you're looking at several years of extremely low maintenance needs and costs and low repairs. Lastly, Scott strives to differentiate UrbanPacific from other real estate groups.
Development should drive better yields than value-add multifamily investing. It's a higher-risk endeavor. There are large fundamental differences in the risk profile and the requirements for success between these two types of investing. Many investors decide that the risk is not worth the potential higher returns. There are additional issues, such as zoning issues and deep planning required in construction and design. Others include grading, demolition, full plumbing and electrical - everything that goes into taking a piece of dirt and turning it into a multifamily asset. Urban Pacific has their ways to how to navigate these waters, and it involves reducing complexity by creating repeatable processes.
Another large difference is the cash flow. Many investors are dissuaded by the lack of cash flow for the first several years after investment. The truth of development is that you'll be putting money out for at least two years before you ever see a dime come in.
Building a completely new product, designed for large modern multi-generational families, with monthly rates are lower the comparable housing - that's a huge difference and is part of what makes UrbanPacific unique. Scott loves the idea of marginal utility and competitive advantage: what do you have or offer that differentiates you from your competitors, that adds real value to your clients or investors?
Challenges Through Economic Cycles
One great lesson taught by the Great Recession was the planning and management side as it relates to General Contractors and the construction timeline. First, the timelines need to be fast - construction that's slowed or sitting in limbo is much more dangerous and risky. As you get towards the top of the market, this issue becomes more and more prevalent, as many GC's are busy and their timelines are backed up. Often, they are stretched thin over many projects. To deal with getting burned by this, Scott and Urban Pacific brought all of the higher-level construction in house. By hiring superintendents, project managers, and general contractors, the risk is higher, but the owning company also has the ability to schedule and plan exactly in line with the ideal process. It's easier to manage subcontractors when the managers of them are within the ecosystem of the investing entity.
Learn more about Scott and his work: urbanpacific.com