A quick outlook on multifamily with Paul Kaseburg.
Paul Kaseburg, Chief Investment Officer at MG Properties is back on our podcast to discuss the key factors shaping multi-family and where the market stands.
Paul joined MG Properties Group in 2010 and is responsible for the firm’s acquisition, disposition, and capital markets activities. At MG, he has been involved with the purchase of approximately 18,000 units totaling $3 billion in total consideration. Paul has 17 years of experience in real estate private equity investment, capital markets, and corporate M&A. Prior to joining MG, he held various roles in commercial real estate debt and equity acquisitions, development, and financing. He has a background in corporate M&A and venture capital investing at Northrop Grumman (NOC). Paul holds a Bachelor of Science degree in Mechanical Engineering from the University of Notre Dame, and an MBA in Finance and Entrepreneurship from the UCLA Anderson School of Management.
Paul is also the author of the book: Investing in Real Estate Private Equity: An Insiders Guide to Real Estate Partnerships, Funds, Joint Ventures & Crowdfunding (available on Amazon).
About MG Properties Group
MG Properties Group specializes in the acquisition, development, rehabilitation and management of apartment communities throughout the western United States. With a commitment to “Enriching Lives Through Better Communities,” the company has provided thousands of quality living spaces for its residents, produced excellent returns for its investors, and created fulfilling career opportunities for its employees.
Learn More About MG Properties Group At:
*If you’d like to learn more about how ReAllocate + Mariner Wealth Advisors can help you build a roadmap for your real estate investments head to — BuildMyRoadmap.com.*
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Adam Hooper (00:00):
Hello and welcome. I’m RealCrowd’s CEO, Adam Hooper, and this is The Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights and investment strategies, that passive investors can use to build real estate portfolios that last.
All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions, and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment [inaudible 00:00:34]. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.
Adam Hooper (00:42):
Our guest today is Paul Kaseburg, Chief Investment Officer at MG Properties Group. Paul joined MG Properties Group in 2010, is responsible for the firm’s acquisition, disposition and capital markets activities. At MG, Paul has been involved with the purchase of over 18,000 units, representing over $3 billion in total transaction value. In today’s conversation, Paul gives us an update on what he’s seeing in the multifamily market and what to expect here in 2021. We hope you enjoy this conversation with Paul Kaseburg. Paul, we find ourselves again in the studio with you gracing our presence. So thank you so much for joining us again today, and talking about what you’re seeing here in 2021.
Paul Kaseburg (01:27):
Thanks. Thanks for having me. It’s great to be back.
Adam Hooper (01:30):
So we were just talking before we started recording. It was mid last year. So I think July, was when we had you on the show last, that was right in the throws of trying to figure out what the heck was going to happen with the pandemic and with multifamily investing. So curious to get your take on how things have shaped up since then, have they tracked with expectations? Did you have any expectations? Better or worse, what is your lay of the land from middle of last year to today?
Paul Kaseburg (02:00):
Yeah, it’s funny I think time’s kind of compressed, over the last year, for sure. It feels like that was ages ago, but yeah, lots of change. I think, where we were at Q2 last year was in multifamily, I think across all asset types, everything just ground to a halt. Because no one wanted to transact, no one wanted to be the first people to transact, right? Because if you’re the first person to transact, you might be wrong about your decision to price it.
Paul Kaseburg (02:31):
And so you might look bad later, and I don’t think anybody wanted to be the first one to go out and make a deal happen. And so everything was at a stop, and there was really no understanding of what had happened to prices at that point. And so there was just a real disconnect. So, the market really started to open up later in the year, but Q2 was when we started to go out and just try to put deals together because of where the debt markets were at.
Paul Kaseburg (03:04):
And basically what happened was, the cost of financing multifamily dropped precipitously. And so you had this environment of just, unprecedentedly good debt, but no deals to buy with it. And so we went out and just started hitting the phones with folks who we knew and who we transacted with before, because there was nothing getting marketed. And what we found is, a lot of the traditional deals weren’t there, but there were situations for developers where they had just finished a development, and they could either transact around where they were previously before COVID, maybe a little bit of a discount, or they had the prospect of holding on for another 18 months or two years to see what happened.
Paul Kaseburg (03:55):
And the way the math works with their promotes and everything, it just made sense to transact. And so we actually, our first deal, we closed in August of last year, we put that under contract in Q2. And we had our all time low 10 year fixed rate debt. It was 235, which is incredible.
Adam Hooper (04:17):
[inaudible 00:04:17] Yeah.
Paul Kaseburg (04:18):
And so we just thought, with that kind of debt and prices at a little bit of a discount to where they were pre-COVID, and a long-term investment horizon, the math just made sense. And so, when you look at where the cash flows are likely to go, so our goal was, how do we take as much advantage of this as we can? And so we subsequently did two more deals that looked a lot like that. One in the Inland Empire and one in outlying LA.
Paul Kaseburg (04:46):
And then as the year progressed, the transaction markets started to come back, and deals started to be marketed again, people were getting on airplanes and touring properties. And so it felt a little bit more like normal and actually into the fourth quarter for apartments, the multifamily business kind of roared back to life. And there were tons of deals in the market. Everyone was trying to transact. And so, that happened.
Paul Kaseburg (05:13):
And in Q1 so far this year, I think we were expecting the transaction volume to stay high, but it’s moderated a bit and interest rates have really jumped. And as of our recording today, they’re up even more. And so that’s really put a little bit of a damper on the investment market. So, a lot of money chasing apartments, because a lot of institutional and foreign investors I think, saw what happened to their portfolio and multifamily and industrial really held up well.
Paul Kaseburg (05:43):
And so those are the preferred asset classes now. And office and retail, and other product types really struggled. And so we’ve just been seeing a lot of demand for not very many deals. So, that’s where it’s at, for us transaction-wise. In terms of our operations, we didn’t know what to expect last year early. We were all really worried about delinquency, and what was going to happen with our residents. And I think with all the stimulus that went into the system, our residents have done, I think better economically, than we probably would’ve expected.
Paul Kaseburg (06:28):
And the delinquency has been much lower than we were worried that it might be. And right now, we’re at call it after about 30 days, we have about give or take, five to 6% of our rents are delinquent. And then over the course of the next couple of months, we have payment plans with a lot of our residents. And so that number drops down to somewhere in the sub 2% range. So really all in all, not bad compared to other product types, and compared to, I guess, what we were worried about given just the magnitude of the crisis.
Adam Hooper (07:01):
Yeah. And I apologize, listeners, we just jumped in there without giving some of the new listeners a little bit about your background, Paul. So, before we go any further, I want you to just tell us a little bit, who you are, what you do, tell us about the book that you’ve written. And a little bit about MG Properties Group, before we jump forward here.
Paul Kaseburg (07:19):
Sure. So, Paul Kaseburg, Chief Investment Officer of MG Properties Group. MG is a multifamily owner operator, and MG has been around for about 30 years. We have been focused that entire time on existing West Coast, multifamily properties. We’re vertically integrated, so we do our own property management and construction management, asset management. We have about 20,000 units in the Western U.S. across all the major markets.
Paul Kaseburg (07:52):
We have been fairly active acquirers. We buy about a billion dollars a year. Last year with COVID, was a little bit of an anomaly. We were about 500 million. But this year is off to a strong start. So hopefully we’ll be kind of back there. So active on the acquisition and the disposition side. And I’ve been at MG for 10 years, and I focus on acquisitions, dispositions and our capital markets.
Paul Kaseburg (08:21):
And previously, I started my career as an engineer working on satellites and in venture capital. And then, I transitioned over after the dotcom burst, to real estate and have been here ever since. I guess I used to have a little bit of an outsider’s perspective, but maybe after 15 or more years in the business, maybe I’m-
Adam Hooper (08:45):
Paul Kaseburg (08:47):
I’ve been assimilated now. So, that’s my background. The book you mentioned, which I think is one of the reasons we initially first met was, I wrote a book called, Investing In Real Estate Private Equity, that’s available on Amazon. And I wrote that under a pen name. And it was just, I think, a reaction to looking out, hearing from my friends who were looking at deals, and just, they were asking me really kind of similar questions, what is a good deal?
Paul Kaseburg (09:18):
Should I invest in this deal? Is this a good sponsor? I was trying to point them to some good resources and I just couldn’t find great resources. And so just as sort of a weird hobby, I wrote this book and I wrote it under a pen name, just because it wasn’t about selling anything. I just wanted to give people good, honest advice about the way I saw the market and how to think about real estate deals, from an insider’s perspective.
Paul Kaseburg (09:46):
And just looking at them, in a way that was not from, official advisory perspective or the perspective of someone who is trying to sell people on deals, and just talk about, what is real estate and what is it not. And how do you make good decisions in light of having to invest, without as much information as we all would like to have. So yeah, that’s my background.
Adam Hooper (10:13):
Perfect. And again, we’ve had a lot of great feedback from listeners and RealCrowd members alike, about the book. So we’ll have a link in the show notes. It’s a great overview on everything real estate investing. So highly, highly recommend, listeners go check that out. So we’re talking about delinquencies, you said after 30 days, about five to 6% payment plans in place, that drops down to the 2% range, how does that track with pre-COVID numbers? It seems like that’s a pretty reasonable, average operating rate.
Paul Kaseburg (10:45):
Yeah. I mean, it’s great. I’d say pre-COVID, our portfolio average was 1%, ultimately, our write-offs. And so now we’re just a little bit under 2%, so twice or a little bit more than twice as much as it was pre-COVID. But given the scale of the impact of COVID, definitely not bad. And I think, we’ve taken the perspective that, we’re in the business of providing housing. We want to do everything we can to keep our residents there, and we realize what’s happened in the market.
Paul Kaseburg (11:23):
And so, we take a really bespoke approach to working with our residents and really give our property managers and regional managers a lot of flexibility, in terms of just coming up with a plan that’s tailored to each resident’s unique situation. And that just involves sitting down with them and just understanding, what’s going on with them. And I think that approach, it’s worked out really well for us and for our residents.
Paul Kaseburg (11:53):
And so our turnover has been very low. We’ve been able to come up with plans that kind of work. And our collections have definitely been above industry averages. And I think, that really highlights the benefit for us, of self-managing because management, we don’t do that for other properties except for just a small handful. We really just have management capabilities for our own portfolio to drive the value of our properties. And so when COVID hit, we had the ability to just say, “What should we be doing now? It’s our own management team. We can do anything we want. How do we address this?” And so I think there were a lot of really fast changes, that we made to our management strategy as a result of that. And I think in retrospect, that worked out well.
Adam Hooper (12:43):
Good. And so I guess a little bit more to the investment side of the world, it sounds like 2021 is coming back. You were talking before we started recording. You’ve got some activity that you guys are working on right now, some finals and some larger portfolios. How has the learnings over the last year impacted your investment strategy or has it? Are you guys looking at anything differently now? What has that done to how you guys view an investment opportunity here going forward?
Paul Kaseburg (13:17):
I think, the fundamental analysis of our investments is the same, but COVID has impacted the inputs to that, in almost every respect. And so I think, our process is all the same, but the answers that we come up with are a little bit different. And so, if I were to describe that, I’d say, there are some big changes with resident preferences and with the way markets are performing because of COVID.
Paul Kaseburg (13:50):
And so that’s rolling into property performance changes, and therefore our expectations for deals going forward. So I’d say, the big changes that we’re seeing in the market that are driving our strategy changes, are with probably two big changes. One is a movement from core urban locations to the suburbs. I think for reasons that make a lot of sense, people don’t need to go into their office in urban centers.
Paul Kaseburg (14:28):
They can work from home, and they don’t want to be in a real dense urban environment, because all of the amenities and restaurants and things that you do there aren’t open. And you don’t want to be in a high rise apartment building because you don’t want to be in an elevator and you can’t be around other people. So people are moving to the suburbs. And the other big trend that we’re seeing is people moving from large, high-cost metros to more secondary and tertiary locations, that are much more affordable.
Paul Kaseburg (15:04):
And so we’re seeing jobs move, and we’re seeing people move as well, whether they have jobs or not. And so it’s really been interesting, to see how COVID has impacted different markets in different ways. And I think if we look at our portfolio, the performance has been widely varying. And it hasn’t necessarily changed in a way that I would have predicted even when we first found out about COVID.
Paul Kaseburg (15:34):
So across the board, the more urban locations are performing worse. Fortunately, we tend to be more suburban garden style, apartment investors. And so that’s actually worked out okay for our portfolio. But areas like downtown LA, San Francisco, downtown Seattle, downtown Portland, had a really tough run last year. Those locations are all really, really struggling because not only were they impacted by people wanting to move away, but then they also had all the supply coming in.
Paul Kaseburg (16:09):
Because that’s where all the development was focused. And so you had this double hit that really hurt those areas. In the suburbs, you have negative effects of COVID, but you have that kind of offset by this additional demand that wasn’t there before. And people, are moving away from those coastal, urban locations. And they’re going places like Phoenix. Phoenix has been the top performer in our portfolio. I think delinquency is actually down in Phoenix, amazingly, and rents are up substantially.
Paul Kaseburg (16:42):
Las Vegas was a market where we really … I mean, we were braced for the worst because of its reliance on a gaming industry, which obviously is not a great industry to be in with COVID, and hospitality, travel, all those things did not bode well for that market. But what we’ve seen there, surprisingly is although delinquency has been high and is continuing to go up, the occupancy is really high there. People are moving to Las Vegas, it’s affordable. And they want to live there and rents have actually been going up. So if you look at our revenue at all in Vegas, revenue is up, which is not something I would have expected, if you asked me in Q2 of last year, how Vegas was going to look this year.
Paul Kaseburg (17:30):
So, it’s been really interesting to see how those trends have unfolded. And so our investment strategy is I guess, taking those into account, we have expectations for near term high performance for those more secondary, affordable markets like Phoenix. And I think Vegas soon. And I think we would be interested in investing in urban core locations, if there was a discount, but what we’ve seen is, multifamily, because it’s held up overall pretty well. And I think a lot of owners have been pretty strongly capitalized.
Paul Kaseburg (18:10):
No one’s been willing to sell at a discount, in urban locations because they haven’t had to. And for obvious reasons, I mean, we’re seeing the vaccine start to come out. I think there are expectations that the world starts to recover over the next couple of months. Why would you not just hold onto those urban assets as opposed to selling them at a discount now? So I think, we’re interested in buying those at a discount as a lot of people are, but there’s nothing to buy. So, the investment strategy is partially, where do you think performance will do well, but then it’s also in part, what can I actually buy given what the market is transacting right now?
Adam Hooper (18:45):
Yeah. And I think, there was definitely an expectation that we would see a lot more distress than we’ve seen, in the transaction markets.
Paul Kaseburg (18:53):
Adam Hooper (18:54):
Obviously seeing that somewhat in hospitality, retail, I mean, even in those spaces, we still haven’t seen a ton of distress. Right? And certainly haven’t seen it in multifamily and in some cases you have even seen pricing go up, which was definitely unexpected. So, do you think we’ll see any opportunistic distress? Everyone’s out there raising opportunistic funds to take advantage of these generational buying opportunities that we had thought were going to come middle of last year. It hasn’t materialized, right? Are we going to skip over a lot of that distress, just given the lenders’ willingness to work things out, the relative strength of balance sheets coming into the crisis? And this much liquidity going after some of these asset classes? I just don’t think we’re going to necessarily see the distress that we thought we might’ve.
Paul Kaseburg (19:50):
Yeah, I agree. I think, the structure of the real estate industry and capital markets are different now than it was 30 years ago. And really, the MG was really built on the opportunity that was created, by the RTC days. When all of those, there was so much real estate that had to come to market and it was just sold for whatever the market clearing price was. And so there was this huge, incredible opportunity to invest in real estate at this amazing discount.
Paul Kaseburg (20:25):
And I think the expectation after that, and there were a couple of cycles where there were some good discounts after that, but I don’t know that that ever was seen again, since then, and even back in the financial crisis, something similar happened in that there was a lot of money raised for opportunistic investing. We were all looking for those opportunities, looking for those big discounts, and they just never materialized.
Paul Kaseburg (20:55):
And there were a couple of people who jumped on minor discounts, and probably did the best, during that crisis. And I think COVID is something similar where you just don’t have sellers who are forced to get liquidity and transact. And even lenders are capitalized well enough that, they don’t have to do that either. And so, I think there’s some regulatory reasons for that, and that’s probably been healthy for the market, to not force this liquidation.
Paul Kaseburg (21:27):
And the other factor with COVID is, it’s such a different kind of crisis because of the fact, it’s health driven and there’s hopefully an end to that, that’s kind of insight, over the course of, I don’t know, a year or two years. Right? And so I think a lot of owners of real estate, if they have the ability to hold, they’re expecting a sharper recovery than previous downturns. And so I think they’re just more willing to just hang on for it.
Adam Hooper (22:02):
And now, let’s talk a little bit about the debt landscape. You said that you guys are seeing rates at 2.35, which is just insane. They’ve come back up a little bit. How have the debt markets impacted your underwriting? And I guess, where do you see that going forward and how has that affected the kind of yields that you guys are looking for in these acquisitions?
Paul Kaseburg (22:28):
Yeah, that was a real opportunity. I’d say that, we didn’t see the opportunity of prices going down in our space. But we did see an opportunity of really attractive debt for a window of time. We tried to take as much advantage of that as we could, but still, where we are today, our deals tend to be a little bit longer term investment, strategy. So we tend to be our average hold periods, right around seven years, the deals that we’re doing today, for the most part we’re putting on ten-year debt, some seven year debt, here and there. But kind of longer term hold. And so for us, 10 year fixed rate, full term interest only debt, is somewhere in the low threes. Maybe we’re heading toward the mid threes, where the capital markets are going right now, but still by a lot of measures, historically [crosstalk 00:23:25]-
Adam Hooper (23:25):
Still doing pretty good.
Paul Kaseburg (23:26):
That’s a great rate.
Adam Hooper (23:27):
Paul Kaseburg (23:28):
That’s nothing to be sad about. So I still think, it’s a very attractive debt environment today. It’s not quite as attractive as it was in the depths of the crisis, but that’s to be expected. And so I think, we still think it’s a good time to take advantage of that debt. Cap rates have come down, and I think what we’re seeing in the apartment industry mirrors what we’re seeing across the investment landscape, which is, this is just a low return investment environment. Stocks are very expensive.
Paul Kaseburg (24:06):
The bond market is expensive, a little bit less so today. Real estate is expensive. And that’s really driven by all this liquidity that’s been flooding into the market. And so, that’s both a good and a bad thing. I think, as owners of real estate, it’s great that we have all this liquidity and that’s been supporting prices. But obviously, that means that, yields are low for new investments. So that’s kind of the nature of it.
Paul Kaseburg (24:34):
And the way I think about it is, how do these returns, compare to other investment types? And what we hear from our investors is, they’re very excited and we have a lot of demand for new deals, even though our expectations and our underwritten returns are probably as low as they have been in our history. And I think that just is a real testament to the state of the other investment alternatives. They’re also just not that attractive right now. It’s just a low investment return environment. I think, this isn’t the business where you just say, you just sort of quote unquote, should get a 15% IRR on apartment investments or something.
Paul Kaseburg (25:22):
Because that’s just what it should be. Right? It’s just a function of, everything changes and it’s a function of how does that compare to your other alternatives out there in the market? So we’re out there just trying to find, what are the best deals we can find right now in light of this? And let’s use debt, that’s conservative enough that we have lots of downside protection, and we can hold this for the longterm. Because I think in the longterm, the fundamentals for apartments are really strong.
Adam Hooper (25:51):
And you mentioned the shift in resident preferences, how they use the space, what they’re looking for in amenity packages. Those kinds of things. Outside of that, what makes an attractive investment for you guys right now? Is it the market? Is it the style of the property? Is it the age? Is it the quality of the asset? Is it the amenity package? What are you guys looking for in a really attractive acquisition right now? And has that changed either pre-COVID or during COVID? What’s changed there?
Paul Kaseburg (26:25):
Yeah. I think that, a lot of it is similar. So, we have a very specific box at MG, where we look at essentially every larger institutional size deal in our target markets, underwrite, every deal, offer on every deal. And then just see, what falls through the cracks for one reason or another, or try to take advantage of our relationships in the industry to try to drive deal flow.
Paul Kaseburg (26:58):
And so within that box, if that spans everything from eighties or even older value add deals, to brand new deals like we did in the course of the last year where we’re buying deals that are just finishing their lease up. So, we kind of span that range and we try to do a bit of everything. And there are times when we’re doing a little bit more stabilized product, and when we’re doing a little bit more value add, over the course of the last few years, we’ve seen so much money raised for value add deals, because I think there’s a story there.
Paul Kaseburg (27:32):
And it sounds good that we felt like the returns on those value add deals were about the same as buying newer high quality stabilized assets. And so we felt like on a risk adjusted basis, it just didn’t make as much sense to do those value add deals. And so the proportion of heavy value add deals that we did, that decreased, we still found some here and there, but we did fewer of those and a little bit more of cleaner, well located, stabilized deals.
Paul Kaseburg (28:03):
With COVID, I think that is basically the same, but we’ve seen the deal flow really change. So there aren’t as many value add deals hitting the market right now. There are a few of them, but I think everyone was kind of waiting to see is value add still as attractive of a strategy. Do residents still value it? And what we’re starting to see in our portfolio is, yes. And so we’re assuming that we’re going to go in and continue value add programs, on deals that we’re looking at today. And that’s born out by the demand that we’re seeing in our portfolio.
Paul Kaseburg (28:44):
I think if anything, residents are valuing their homes and more than they did pre-COVID, because they’re just spending so much time in them. I think the things that we’re looking for investment strategy wise, are deals that are going to benefit in the near to medium term, from the trends that are happening because of COVID. And so those are going to be the moves to the suburbs, moves to more secondary markets. I think the other kind of trends that we’re seeing with tenants are, there’s a little bit less turnover.
Paul Kaseburg (29:24):
They really value the interior of those homes, the finishes, and the ability to work from home. So, those workspaces really matter now, and whether that’s getting an extra bedroom so that you can have your own office or for awhile there, maybe 15 years ago, there was a trend where apartment developers would build these little computer nooks, right? And those, or like workspaces where you could sit there and do homework for your kids. And those went out of style. And so we spent a couple of years just trying to say, what can we do with these spaces? Am I going to put a wine fridge in there or what?
Paul Kaseburg (30:04):
And now all of a sudden, those are perfect. Everyone needs those again. And so I think just looking at the bones of a particular deal and saying, does this serve the needs of what residents are looking for right now, given the trends in the market of working from home, and spending more time in my apartment? And just thinking through those, I think that, that’s really driving the performance that we’re seeing this differing a lot, market by market.
Paul Kaseburg (30:36):
The other things that we’re really seeing kind of trends are, I think smart home, that is very popular and kind of increasingly popular. I think this is really going to accelerate the PropTech space, where there’s just a lot of technology out there, that I think there was momentum around implementing that with real estate pre-COVID, and COVID has really just only accelerated that.
Paul Kaseburg (31:01):
And so we’ve seen, we switched very quickly to virtual leasing and online leasing, and we were mostly ruled out with that, but immediately rolled it out throughout the portfolio. And this shift has gone from, in-person service calls, talking to the people onsite about, what’s happening at your unit. If you need help with a plug toilet or whatever, or you needed to talk about an issue with paying rent, all of that’s moved online, it’s moving to apps, it’s moving to websites.
Paul Kaseburg (31:37):
And I don’t see that changing back. I think that’s kind of a one-time shift that, it was already happening and this has just kind of accelerated, it’s not going back the other way. So I think from an operating perspective, that’s all changing as well.
Adam Hooper (31:53):
Yeah. I definitely want to dig in on a few more trends that will outlast this health crisis, but I’m curious, when you talk about the strategy of value add versus more core stabilized assets. At some point in the overall market inventory, do we run out of value at opportunities or by the time that we’ve made our way through a lot of the easier value add opportunities, maybe the value add strategy that was done back in 2010, that’s ready for another refresh of a value add cycle. Can you talk about that cycle of renovations in value add? Or do we at some point just run out of value add opportunities?
Paul Kaseburg (32:36):
Yeah. Thankfully, the value add opportunity is a infinitely renewable resource. Because our residents, they use our units and they get beat up over time, and the trends go out of style, in and out of style. And so, over the years the value adds, become post value adds, and then you give them a couple of years and they become value adds again. So I think, value add, that’s something that we’ve done for a long time.
Paul Kaseburg (33:16):
And we really try to focus on, what are the things that we can do to a unit that are going to create long-term value, as opposed to just short-term value? Because again, we’re a longer-term owner. And so as an example, there are a lot of multifamily investors out there who will go in and just put, as the saying goes, lipstick on a pig, right? And you just take an old property and you paint it, and you do some just surface things to it.
Paul Kaseburg (33:45):
And then, you try to move rents quickly and then you sell it. And then the next owner, if they’re not sophisticated, they’re going to buy that. And then they’re going to see, all of those benefits erode, as the not very valuable improvements that have been made, start to wear out. And so we, as longer term owners, we really try to focus on things that are going to move the needle for the longterm. And a good example of that is, I guess the two things, right?
Paul Kaseburg (34:13):
So hard surface countertops are a great value add, because not only do residents really love them, but that’s a really expensive turnover item. So if you put in hard surface countertops, they last for a long time. If you’re putting in a laminate countertop, or you’re just spraying the countertop, so it looks nicer. A lot of times we have to replace those on every turn or every other turn. And so you have this ongoing capital expense over the course of this longterm hold. That really adds up to probably, much more than you would spend just putting in a good quality, hard surface countertop.
Paul Kaseburg (34:48):
Plus you get the rent pop from it. So that’s kind of a no-brainer and hard surface flooring is similar, where carpet is, it takes a lot of wear and you have to replace it all the time. And so when you put in harsh hard surface flooring, number one, residents love it. They’re willing to pay a premium for it, which is great. Plus it decreases my turnover costs. When we really focus on value add, we try to take into account the whole life cycle, cost of that.
Paul Kaseburg (35:13):
And I think value add overall is probably a little bit overrated in our industry, because if you make an improvement and that improvement, let’s just say, it adds value for five years, and then it’s tired and it needs to be value added again, you can’t just look at the increase in rents that you get in the short term and then cap at your cap rate, and think, “I’ve added value.” If it’s going to be value added in five years again, you have to make up the cost in those five years of cashflow through increased rents. And that, I think happens less frequently than a lot of owners like to admit. So, we try to be just thoughtful about the types of value add we do, and really take that kind of longer-term mentality.
Adam Hooper (36:01):
Okay. So good news, we’re not running out of value add opportunities. Perfect.
Paul Kaseburg (36:06):
Plenty to go. We do go through periods in the cycle where, just there’s so much money chasing value add, that there are times when there’s more value add and less value add, but you give it a couple of years in this bag.
Adam Hooper (36:21):
And where do you think we’re at right now? Is it more or less?
Paul Kaseburg (36:26):
I think, there has been a lot done over the course of the last five years. So we’re at a part of the cycle where there are fewer value add opportunities, than there were in, let’s say 2013. Right? At that point in the cycle, you had the financial crisis, all of a sudden, all of those value add business plans, went out the window and people just said, “I’m conserving cash. I’m managing through this crisis. I’m going to set aside that value add.”
Paul Kaseburg (36:54):
And so you had this period after the financial crisis, where there were a lot of deals coming to market, that they were value adds before the financial crisis. And then they had nothing invested in them for five or six years, and they were really a value add. So we had some of that for a while, but a lot of that’s been fixed up in the meantime.
Adam Hooper (37:13):
Okay. So back to the trends, that’s something we’ve talked about a lot on the show. People are probably tired of me hearing it, or tired of hearing me talk about it. Two things, this COVID as the accelerant from a lot of these trends that were already underway. And then, this discussion or conversation around what are these trends that are going to stick long-term. I’d love to get your thoughts in terms of, how your residents are using the space.
Adam Hooper (37:39):
Obviously, we talked about the work from home thing. We talked about going more suburban. We talked about technology, right? These are all trends that were arguably underway before, they’ve been accelerated more likely long-term. Are there any surprises that you guys have seen in terms of trends of either how properties are being used or amenities that are being requested? Any surprises or anything interesting that you’ve seen that will likely outlive this more acute health side of the crisis?
Paul Kaseburg (38:07):
Yeah. I think one item that’s going to be interesting to watch is the coworking space, and that’s relevant for multifamily properties with all the working from home. Right? So before COVID, there are a lot of mixed use multifamily deals, which are more recent vintage deals that are often more infill, but sometimes some of the suburban deals that have really underutilized retail. Because cities forced developers to build deals with all this retail, because they’re trying to create this bucolic, live workspace, environment.
Paul Kaseburg (38:44):
But the reality was, the retail just, it wasn’t a fundamentally good retail space. And so there’s all this underutilized retail on the multifamily industry. And so, there’s kind of this ongoing struggle of, what do we do with all this retail we were forced to build? And so one of the things we’ve been talking about is, does it make sense to use that space for coworking space?
Paul Kaseburg (39:10):
And so, we were having that conversation pre-COVID. And then, with COVID hitting, obviously people don’t really necessarily want to be sitting at a desk, a few feet from someone else. And so I think coworking, definitely has not had a great year, but I think if you look into the future, I think it has a lot of opportunity. And part of the trick here is, what are the dynamics going to be for people going back into the office?
Paul Kaseburg (39:37):
And I think we’re going to understand this a lot better over the next couple of months, but as the vaccine rolls out, I think people who are working from home so far, there’s been this opportunity to work from home all the time. Right? And so there are a lot of people who have said, “Not only am I going to work from home in my apartment, in the suburbs.” They’re saying, “I’m going to work from home, from Las Vegas or Phoenix.”
Paul Kaseburg (40:03):
In fact, I was on my last trip to Las Vegas, when you fly into the airport, they have big posters that are up in the airport, that are advertising, Las Vegas is a great place to work from home. And so they’re specifically marketing people to, come here for a couple of months. Why not go back when you have to, to the office. I think that’s going to be a lot harder when people have to go back to the office, some. So, I don’t necessarily think that working from home is going to be 100% option for a lot of people. What may happen is people just have more workplace flexibility.
Paul Kaseburg (40:40):
So maybe they come into the office two days a week, or three days a week. But if you’re coming into the office two or three days a week, you probably don’t want to live in a different state. That’s not convenient. And so, that’s going to all of a sudden bring people back to a much narrower radius to their workplace. And so, they’re probably in comparison to pre-COVID. It may not be as important to live right around the corner from your office, because you’re avoiding a commute.
Paul Kaseburg (41:08):
Maybe you’re a little bit more tolerant of driving to the suburbs, because you only have to make that drive a couple of days a week. It’s not that big of a deal, if you really like your location. But I think, people are going to continue to want to have the ability to work from home at least a couple of days a week. And what that’s going to mean is, they’re going to need space in their unit, or they’re going to need flexible coworking space, where they can do that environment that’s more attractive than driving into the office.
Paul Kaseburg (41:36):
So I think, that’s something that’s interesting to see. And I was touring properties last week. And one of the properties I was touring in Dallas, which, incidentally Dallas, just Texas, has been lifting their COVID restrictions. They have the highest proportion of office utilization in the country. I think about half of office workers are back, going into the office, which is much higher than everywhere else. And so one of the properties I was touring had a beautiful built out coworking space, and it was really busy, even right now. This was last week.
Paul Kaseburg (42:10):
And so, I can’t imagine that that’s going to get less busy over the course of the next six months. I mean, I think that’s going to be a really important trend. And so, that was maybe a little bit more detailed than you’re looking for, but I think that’s a really important … It’s a driver of the space, but it’s also a driver of, I think, where our people are going to ultimately land and settle. Suburbs, urban areas versus other kind of more affordable markets. I think there are going to be a lot of trends that are long-term, in favor of more affordable markets, but in the short term, we’re going to get a little bit of movement back to offset that as people go back to work.
Adam Hooper (42:48):
And I would imagine maybe some of the newer development will react to this by larger unit sizes. Have you guys seen any difference or performance differences in properties that maybe have a larger unit size, than some of the smaller this trend towards, micro living or smaller studios, whatever that might’ve been? Are you seeing any demand changes there in terms of unit size?
Paul Kaseburg (43:11):
Yeah. Unit size, so in previous downturns, what we’ve seen is, deals that have a lot of studios and ones have struggled in comparison to deals with bigger units. Mostly because people, roommate up when they’re under financial duress. Right? And so it’s just cheaper to live with roommates. And so those bigger units do better. There are a little bit different trends this time, right? Because on one hand, you have that trend.
Paul Kaseburg (43:42):
On the other, you have people who probably live with roommates who didn’t necessarily want to be just in close contact with a lot of other people. And so maybe they wanted their own place. And so you have a trend to live in your own space, even if it’s smaller. I think on net, we have seen the bigger units perform a little bit better, but I don’t think that change has necessarily been as pronounced as the real trend toward suburban living, and the real trends between markets. There’s some offsetting factors there.
Adam Hooper (44:10):
Yeah. I think it’s going to be interesting to see, like you said, as we start working through this, vaccines coming out, how those are going to shift. Are people going to go back to smaller? Is it going to want to stick with bigger units? It’d be really fascinating to see what happens later this year and into 2022. Are we talking about 2022, [inaudible 00:44:32]?
Paul Kaseburg (44:34):
I know. It’s going to be interesting to see what happens with urban areas too, right? Just because people feel safe again, being around other people, that doesn’t mean that the things that made urban areas dynamic are going to be there again. Right? A lot of those restaurants unfortunately, are just not coming back, and a lot of the reasons why people lived in cities, it’s going to take time for that to rebuild. And so I think that, it’s just going to be interesting to see how those areas perform and how quickly they recover over the next couple of years.
Adam Hooper (45:07):
So before we get to let you go here in just a couple of minutes, but just real quick, are there any new factors or metrics that you guys are tracking in response to the last year, the health crisis? What are you looking for in those factors and maybe just share any insights or how listeners can maybe find some of those factors, if you guys are looking at anything new, from this time last year?
Paul Kaseburg (45:31):
Yeah. I think, the real trends that we try to keep an eye on are a lot of the same trends that we did pre-COVID, but those have different drivers. And so, I mean, delinquency for sure is the factor that we’ve been looking at much more now. Because I think that’s an indicator of, resident profile, how that property demand is lining up with the market right now. So we definitely keep a real close eye on delinquency, with new acquisitions.
Paul Kaseburg (46:04):
The other normal factors that we really focus on, rent growth, what’s happening with that. Vacancy, absorption in the market and how that compares to the pipeline. Really trying to keep a close eye on pipelines, because as demand has moderated, you had this situation over the last couple of years where you had really strong, household formation and demand for new units. And that was paired with a really strong pipeline.
Paul Kaseburg (46:33):
When COVID hit, all of a sudden that household formation kind of shut off, but the supply of new units didn’t. Because construction jobs were considered essential work. If a deal was under construction pre-COVID, it pretty much continued through COVID. And so we’ve had this continued supply in an environment of less demand. And so I think, it’s more important now to really think about the supply pipeline than it was necessarily, 12 months ago when you had just this better demand for new units. So that, we’re definitely looking at job migration, and where are companies expanding, moving to. That’s something we’re paying attention to.
Adam Hooper (47:16):
Paul Kaseburg (47:16):
And then I think really ultimately, multifamily is just driven by what’s happening in the economy overall. And the economy overall, really right now is just driven by what’s happening with the virus. And so, how are vaccines getting rolled out? What’s happening with the local area in terms of how it’s handling the virus, how it’s opening back up? I think those are all things we keep a real close eye on too. So, in terms of where can people go to find information about it? I think the National Multi Housing Council, the NMHC has great information.
Paul Kaseburg (47:58):
They have a delinquency tracker that they do every month. It’s really interesting. And they put out all kinds of reports on this. So NMHC for sure. The Urban Land Institute, ULI, has a lot of great information. And you can actually find a lot of great detailed information. If you go on major commercial brokerage sites, they have just a lot of free reports that you can download. For instance, Berkadia or CBRE, you can go on there and just get access to a wealth of market-specific data, national data about what’s going on as well as just random reports that they put out on different topics. So those are all good places to go, find info.
Adam Hooper (48:48):
Perfect. And we’ll put some links in the show notes for those too, for listeners out there. All right. Last couple of questions, Paul, what’s keeping you up at night these days?
Paul Kaseburg (48:58):
Well, there’s a lot of uncertainty out there. So I’d say, the capital markets are for sure something that we’re keeping a really close eye on. And I think that probably has to do more with the ability to find interesting new deals than anything, because we tend to be long-term fixed rate borrowers. So for our existing deals, the cost is already pretty much locked in. But to the extent that we see interest rates going up, I think that’s going to really impact the state of the transaction market for apartments.
Paul Kaseburg (49:37):
So, we had kind of the house view late last year that we wanted to try to get more transactions done in the first half of this year, then the second half, because we were worried both about the potential for the 10 year treasury rate to increase, kind of the fundamental rate increase. But also, Fannie and Freddie, the agencies have lower caps for their lending volume this year by their regulator.
Paul Kaseburg (50:04):
And so, I think that has the potential to constrain them later in the year. And so that could also cause rates to go up. And usually what we see is, the alternatives to the agencies like life companies, they tend to be most aggressive early in the year and then much less aggressive later in the year. So I think all those things are lining up to create some capital markets risks for mortgage rates later in the year. So that’s something we’re definitely keeping an eye on.
Paul Kaseburg (50:33):
I think, the impact and the timing of stimulus, and how that’s rolled out to residents, I mean, that’s something we also are keeping a real close eye on. I mean, clearly the most important thing that keeps me up at night is just what’s going to happen with COVID, right? And how fast is the vaccine going to get rolled out? Do you have a new variant that comes out that is going to send us back to square one?
Paul Kaseburg (50:59):
I mean, those are all things that are just really hard to forecast in kind of our wheelhouse. So that’s out there. I think the development pipeline, we talked about a little bit, that’s definitely something we keep a real close eye on. And I think in certain sub-markets, that’s going to create some issues over the course of the next year or two. So I don’t know. I think overall, I have slept reasonably well over the course of the last year, because I’d feel just very fortunate to be in the apartment business. Because it hasn’t been perfect, but it’s been a pretty good place to be.
Adam Hooper (51:37):
And that said, what are you most optimistic about here in the end of 2021?
Paul Kaseburg (51:45):
I think that the recovery feels like it’s getting closer. And we’re recording this in early March, so the vaccines starting to get rolled out, there’s a material number of people who already have it at this point, it’s starting to change some behaviors. You’re seeing it start to change, the legislation starting to change in some places. So I feel like, we’re definitely not out of the woods at this point, but you can feel like the end is in sight.
Paul Kaseburg (52:18):
I feel like there’s some opportunity there. I think that any recession, just resets the economy to some extent. And so you get this clearing out of businesses that, they were perhaps on their way down anyway. And so it just clears that out. It creates this opportunity for a lot of new companies to start up and to grow. And so I think that, it’s going to be really interesting to see how the economy changes post-COVID, to take advantage of these shifts that were happening already, but then all of a sudden they were rolled out really quickly with technology.
Paul Kaseburg (53:00):
Changes in workplace environments, just the way people use real estate. I think it’s going to be really interesting to see, I think we’re going to see more changes over the next couple of years than we have in a long time. And so I think that’s going to be fun to watch. I don’t know, I’m optimistic to get back to a little bit more normal life.
Adam Hooper (53:19):
Yeah, I don’t think [inaudible 00:53:21]. All right. So what can listeners do to learn more about what you guys are up to?
Paul Kaseburg (53:29):
Well, they can check out our website. So, MG Properties Group, our website is, mgproperties.com. And come to our website, take a look at our company, feel free to just shoot me an email, firstname.lastname@example.org, and we’ll let you know.
Adam Hooper (53:49):
Perfect. Paul, thank you again so much for coming on today. It’s always a fascinating conversation. I know we kept this one, tried to keep it to under an hour. Because then we got to jump. But like you said, there’s probably five days worth of talk [inaudible 00:54:00]. So, I really, really appreciate your time, coming on the show today.
Paul Kaseburg (54:05):
Thanks for having me. It’s been great.
Adam Hooper (54:06):
All right, listeners, that’s all we’ve got for today. As always, please send us any notes or comments to email@example.com. And with that, we’ll catch you in the next one.