GI121: Developing Multi-Generational Housing with Scott Choppin

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Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Scott Choppin. Scott is the CEO and Founder of The Urban Pacific Group of Companies, a Long Beach, CA-based real estate development company, founded in 2000, that focuses exclusively on workforce rental housing communities throughout California and the western US. So thank you so much for being on the show, Scott.

Scott:
Great beer, Charles. Appreciate the invite.

Charles:
Yeah, no, it’s great. It’s great to have people in all different walks of the real estate life and coming here to share their story. So can we start with a little bit of background on yourself prior to starting in real estate investing?

Scott:
Yeah, so I’ve actually been a real estate developer, my entire professional career. I’d never did anything else and happily, so I love what I do. I have you know, part of the reason that that was my career choice, that I have a family background in real estate development. So my dad, Carrie, my uncle Mike were both real estate developers in their own. Right. And so I got to grow up around the business of real estate development, which, which was good, was good background building. And then I had a couple of key events in my younger years that really solidified that, you know, like that choice of being a real estate developer one was for a couple of years after I graduated high school, I worked in the construction trades, actually working, building new apartments, you know, and then on the construction side that taught me two things.

Scott:
One is I didn’t want to do physical labor for the rest of my life. And two is, I got to see, you know, the developer quote unquote guy in the wild, right? Like he, you know, the developer for these projects I worked on would show up and like, I recognize who that person was. Right. And I will like want it to be that guy. And then the other one was I’m, I’m like a heavy reader. I still am always have been. And at 18 years old, I read a series of, you know, real estate investing books. So like the old school, you know, fifties era, you know, invest in real estate on the weekends and make a million bucks, right. Like that kind of, that kind of old school book. And that book taught me about deal-making right. About the idea of, you know, creating value in some sort of transaction.

Scott:
In that case, that was a true real estate investing book, right? Like buy low, sell high you know, buy, fix up and sell high, you know, various, you know, themes, variations on a theme and real estate development ends up. Charles is a, in fact my running joke is, you know, real estate development is like the most extreme version of value add, right. I take empty land and build that brand new building. Right. I don’t, I don’t, you know, paint carpet and cabinets, but it’s the same economic mechanism, right? Like you’re taking something that’s in this form, improve it and then, you know, land it in this, you know, higher value for them. So that’s sort of my story. And I, and I just like last point is I, I don’t in the last few years I have stopped like referring to myself as a real estate investor.

Scott:
I am purely a real estate developer and we invest in our own deals. So I mean, we are an investor and I, you know, invest in other types of assets, but it really, you know, I finally go, oh, you know what being a real estate investor and being a real estate developer are like really two different things. There’s overlap, like skill sets of how to underwrite markets and how to create value in real estate assets. But in there’s a core offer real estate development that, you know, is dealing with building new buildings, designing, you know, from scratch new unit types and projects, zoning politics that you don’t ever have to deal with in investing fortunately for most people, that’s the most complicated part of it. But yeah, I you know, w we’re we’re, we’re a real estate developer, you know, through and through, and I will really spend the rest of my career doing that.

Charles:
Yeah. It’s funny that you say that because when we’re buying a property, our probably checklist is a few hundred, maybe a couple hundred points of what you have to do and developing goes into the thousands.

Scott:
Yeah. It’s in fact, I’m working right now with so, so I, we have like two or three interns that work for our company every year they do about a year stint. And one of the things we’re working on now is actually creating a checklist of all the steps in each phase. So you got, you know, land acquisition, you got like design, you got, you know, the political process entitlements, right. Financing, right. And at the end of the day, the idea is to have a comprehensive spreadsheet of, of, you know, tabs and checklists that somebody could utilize either internally, or we may offer it, you know, out into the public marketplace that you can go through and know all the steps of at least our type of real estate development. You know, if you were doing a different kind of real estate development, or you were over in the UK or Sweden, or, you know, wherever overseas, it would be different, but for American, you know multi-family development, this checklist would be, will be very comprehensive.

Charles:
So what were the first couple of real state investments you did as being a developer where they developments as well? Or were you buying?

Scott:
Yeah, so well, so just a bit of background. So I spent, after I graduated from a school in California called Cal poly San Luis Obispo got a finance degree there. And I actually went purposely into like the professional real estate career domain for several years, a few years. And that was like, although I had the family background, I had the construction background. Right. I knew how buildings went together, like intimately, because I’d worked, you know, for a couple years, two or three years, like, you know, everyday out on job sites. I knew that I needed to get like a professional training, professional experience and background in real estate development, because one of the things about real estate development is even differentiate it from investing is it’s really very difficult even now still to go to a single source of knowledge and go, Hey, how can that, like, I want to be a real estate developer, teach me all.

Scott:
I need to know and read a book or watch a series of videos. In fact, we’re like working in the background, I have a personal brand, a website that we’re actually developing a series of eBooks and courses that would actually, the intention is to do that. Because, you know, having learned that, like through the work environment, like I go, there is a way to teach it because it got taught to me and I teach it to other people like these interns, like, that’s one of the things we do. But really ultimately in the end of the day, you’re going to become a seasoned real estate development, either a corporate person or working entrepreneurial on your own by working in the industry. And my fact, I’m going to issue an ebook here pretty quick, you know, building your career in the real estate development business.

Scott:
One of them is, you know, get an internship, find a mentor, you know, get the right college degree work in this professional environment early. Right. And it’s sort of a series of steps that you go through to ultimately end up like in a professional career where you can get training and learn on other people’s dimes. Right? Like I spent five, four or five years working for major corporations that did large scale real estate development. And I got like the crash course on how to be a real estate developer and, and, you know, like by design, not at risk. Right. And, and I don’t like, there’s no criticism of people who would start their real estate development career, like without having gone through that, you know, professional development cycle, but it’s going to be costly either in time or energy or money or all three, like, you know, your first deal won’t work as good or maybe doesn’t work at all.

Scott:
And then the second deal is a little bit better. I would always encourage people if they have the capability to go work for others professionally, get that seasoning and that, you know, cause you have, you know, like you said, thousands of different things to track, well, there’s thousands of different things to learn and they’re all different. Every project has got its own unique idiosyncratic thing. So anyways background is I did that for about five years. And then as I was getting to near the end of that period of time, I knew like in my head I got, I knew I was already, you know, out the door to work for myself. Right. So I really just like almost like a side hustle. I started talking to people putting deals together. And in that case, I actually, the first couple of deals I did were basically joint ventures with other developers.

Scott:
Even my first career role was at a company called Kaufman and broad multi-housing group, a carpenter Brode as a home building company. People now knows Katie home, this division built apartments corporately for that, you know, for that company. And I actually went back and did JVs with my old employer. My Costa said, Hey, I got a deal, Mike. You know, I want to, I’m going to go out on my own, let’s work together. You know, I brought the deal, he brought the, you know, the capital and the, and the resume. And we ended up doing three or four deals together. And that was really what, you know, launched what’s now or specific on our 21st year of operations.

Charles:
So that’s how you got started because usually you have real estate investors that will start as a side hustle and do it part-time or something like this. And I feel that as we were talking about how many different steps, how does someone go? Is that the best route for some of the store being in development is to JV with people with the missing resources. I mean, is that the only way to do it? Or do you just have to take the leap and go full-time into it?

Scott:
I think that, I don’t think there’s a right or wrong answer. Charles emits a great question. In fact, when I was looking at the questions that we have prepped for this forum, that was a great one because I don’t think there is like one interpretation of what’s right. Of how to like do it. I, I focus on like, what’s going to be most effective for you. Like what’s going to be the short it’s time for you to learn least you know, like cost right. Of if you know, loss or you’re, you know, money in deals but also increasing probability of success. And so one of the things that I, I say in like sustain I coined, which is complexity, is the enemy of profits and real estate development. The more complex something is the more likely you’re going to erode or, or lower profits because, you know, complications are, you know, slow a project down on anticipated costs.

Scott:
You know, you make the wrong strategic decision on what product type you develop in the first place. So one of the ways, so then you go, what, what are the ways that I can lower risk and increased probability of success in JV is one of them, right? You pair up with somebody who’s seasoned and you go, Hey, I got this great deal. I want to do. I think I want to do a real estate development, new construction apartment deal. You take it to a developer and they go, great, interesting site, oh dude, your design of apartments and your mix is all wrong, right? Like, I’ll give you an example. A guy brought me a deal somewhere back east and we’d start talking about it. And I go, well, what’s your unit mix? He goes, oh, it’s all two bedrooms. Like, I go, the entire thing.

Scott:
He goes, yeah, I go, why’d you make that choice? I got it. Wasn’t trying to be a jerk about it. And he goes, well, I did my research. I go, cool. And, and what did you see? Oh the most units in the market were two bedroom. So I assume that was like the right product to build because if everybody else did it, I must want to do it too. And I actually said, that’s the opposite of what it is. You, you don’t want to go. Cause that’s where the predominance of your competition is like, look for the gap. Where’s our part of the marketplace. That’s underserved that has demand. And you can go into that marketplace and not compete as directly. So those are the kind of like subtle thinkings that you get from joint venturing, but you could do it other ways, Charles, you could JV, right?

Scott:
Which gives capacity knowledge to your deal. You could get a mentor, right? Find somebody who’s willing to, you know, coach you whether it’s, you know, a colleague, a friend, or even somebody you pay you can, you know, you can go be an intern for somebody else, right? Like I have people now, in fact, one of our interns, he has a professional, he’s a professional project manager in real estate development. He works for a like a telecom company doing basically real estate development of cell phone towers. You know, they require zoning and planning, approvals, and CDs and plan check, all that kind of thing. So he’s going through the fundamental steps of the process. It just happens to not be his deal is an income generating in the way that we think of apartments, right. Or multi-family, but he’s basically spends probably two or three hours a week with us.

Scott:
We do a weekly one hour call and my goal is basically to teach them how to do the different parts of development, like high level, Hey, here’s your strategy? Here’s your land act. Here’s your design and politics, your entitlements, here’s your construction. Here’s your lease up? Here’s your value or sale, right? Or, or hold. And so we’ll go in and do practical things. So like, one of the things we’re working on right now is, you know, we’ll, you know, some people from our land act team will bring us a deal. I found a deal. Even the interns have brought deals and we’ll get on a zoom call and we’ll, I’ll record it. Like this is going to be come part of our coursework and we’ll go through the steps, Hey, look at the site, Google earth, Google street view, what do you see? You know, what’s good, what’s bad.

Scott:
You know, what, what do we think about this site generally? You know, what’s our assessment of it. And then we’ll go check the zoning. Right. And we’ll see the zoning standards we’ll apply that to our strategy. Right? Our, our product type has a specific type of workforce housing called urban townhouse or UTA. And so we’ll apply that like strategy from a density, dwelling units per acre, like how many units can we fit on the ground? And then we’ll underwrite the deal. So like yesterday we found a site, did the assessment of it looked at the zoning parameters and then put it in a proforma, ends up the deal, didn’t work like, you know, badly. So it was like not a good deal, but this is what you do. In fact as I told him yesterday, you’re going to do nine out of 10 deals.

Scott:
Won’t make it. Or let me say it different way. Nine out of 10 deals shouldn’t make it. This is, and I say it that way because beginning developers and, and young project managers, I did it myself. Like there’s no deal. I couldn’t do Charles. Every deal was I can make it work. Right. I could solve all the complicated problems and the hair on the deal. Like I could make that work now. I’m like, dude, I don’t like any little on it. Any little slope, any little issue with the land sellers, you know, zoning forget it, man. Just move on. And we’re just like clicking through lots and lots of deals. And again, that’s one of those strategies to lower complexity increase, you know, profitability. Interesting. So that was a really long answer that I answered your question.

Charles:
Let me check. Yeah, you did. I had a question here. I just want to go back a minute or two and you’re talking about, so we’re buying standby in a multifamily property and I want to verify what rents are currently that they’re accurate and where they could go very easy. Right. I can do that within an hour with myself and one other person finding out a comparables and all this kind of stuff. Very easy. How do I do that? How do I know where the gap is? I obviously I can look at and see what’s being rented and what’s not, but you know, you don’t know. Do I look and see Seattle and that’s been on for or whatever. How do you find the gap?

Scott:
Yeah, it’s a great question. You know, I talked about this yesterday with somebody and I was sort of fleshing out and the, yeah, the gap is the first thing to look for. So you first, you know, you start really high level. You go, what’s the total market. Like if I’m going to get, well, even back up a step, you go, Hey, my strategy is to own, income-producing multifamily in Chad, in Chattanooga, Tennessee, I’m just picking up city. Right? you go to that market and then you look at the totality of the marketplace. You want to look at what the rental stock is made up of fright. You know, how many big projects, how many little projects, how many, you know, studios, ones, twos, and threes, right. Get the sense of the mix. And then you’ll start to look at places that are like gentrifying or like places where development, like clearly as like, like the next step is to develop in this neighborhood because it’s on the edge of, you know, XYZ neighborhood.

Scott:
So you’ll get a total assessment of the marketplace and then, then you start to look for like gaps. So one of the ways I look for gaps is where is everybody predominantly? So that two bedroom example I gave you, it’s like, you got wow and chatting. And I don’t, I’m making this up, but let’s say in this marketplace, there’s a lot of T you know, 60% of the market is two bedroom units. You go, you know, you go, okay, that may be, there’s a really high demand for two bedrooms. Or historically there’s been a high demand for two bedrooms over the years that development took place. And people made that decision to build that particular product type, right. That, that unit size and bedroom count. But that’s not necessarily what the market is now. Right. So I look at that and then I’ll look at what do you know the renter profile for that market?

Scott:
Is it is a skew young, is it skew old? Are people moving into that market from other locations? Are they leaving that location? Right. Like, you know, we we’ve looked at investments. I love, you know, the rust belt story you know, units, you can buy like incredibly cheap, but then I start looking at the population. I go, man, they’re losing population every year. It’s not it’s, you know, depending on the market, like at one point we looked at like Columbus, Ohio, like it was interesting market to me. And I just went and did some research one night and I just couldn’t get comfortable with the story of like people leaving that market, like loss of population it’s like Detroit, however, minor it might be. Yeah. Detroit is probably the most like, you know, extreme version of that, but still, you know, now Detroit has the story of like this younger population coming in and gentrifying.

Scott:
So that’s sort of interesting. So there’s, so you look for those trends, right? And part of the way you’re going to look for gap as a trend that started here and it’s going to go up here and you want to like catch that travel in between the now and the then, right. One of the places like our UTeach model is a workforce housing model. So I’ll give you a specific example that we use. I have a background my, my time at Kauffman Umbro and multi housing group, I did affordable housing. I did government subsidized tax credit financed, apartment projects, new construction. Well, I knew from being in that domain, we used to, at one point build a lot of four bedroom apartment units in these tax credit projects. And those were always in the Southern California markets where we did those. That was always like extreme amount of applications for those units, right?

Scott:
Like just way more oversubscription to those units than there was for say like a one or two better still, you know, ones and twos were in high demand, don’t get me wrong, but you could look at the numbers and you could see who those people were, their families, you know, interesting. Now, like, again, this is not anything I could have, like arrived in LA and maybe necessarily made that assessment. So it’s a combination of your own knowledge plus your research. And then the third part of it would be talking to people. So what I would, the example I’d use and you, you guys already do this, but same for development is let’s say I just, you know, I, I, Chattanooga’s a market that I like. I would go talk to every investment sales broker who knows anything and everything about Chattanooga and go, what’s selling well, why is it selling well, what’s selling poorly.

Scott:
Why, what are the valuations? Why is this one high, this one low? I mean, even in the LA we’re, we’re about to sell two of our projects and the values are coming in like really high, like higher than I expected. Great. Right. Good, good problem to have, but the broker and I were like, like, why is this happening? You know, rents are going up. Of course, there’s like the, the surficial like, you know, signals, right. Rents are going up in our per product category, particularly. But we were starting to just like, just talk about, you know, and assess why is this market the way it is? Why is the trend going up? What are the underpinnings of that trend? Is it a defensible trend? Like one of the things we’re always thinking about is like, okay, I’m going to make this choice.

Scott:
Our UTeach units are five bedroom, four bathroom, three story townhouse, rental units with a two car garage. So it’s, it’s a rental unit, but it lives like a house at least like a townhouse, like an attach. And we’ve recognized as a trend even before that pandemic for families, particularly to who are forced to rent, but yet want a good life for their families. And even multi-generational families is where we focus that there was a lack of product for those families. And that came again also from my background and and affordable housing. So it’s not going to be one thing and you weren’t meaning that, but it’s going to be several different things, your own knowledge, your own research talking to people in the marketplace, talking to your colleagues, talking to brokers, talking to lenders, talking to equity investors, you know, Hey, you know, you know, CVRE, capital markets, equity group, like, you know, what you, what do you guys like?

Scott:
You know, what are you interested in? What do you see new trends? And then, you know, I would also track the, the, the ongoing real estate media. So something like globe street you know, Forbes and Bloomberg sometimes. Right. Okay. Articles, but you know, like globe street and other CoStar writes good stuff. Right. and re like get on everybody’s email list. Right. In fact, I would encourage people if they want to go to our website or pacific.com and click the sign up button, we put out a Saturday e-blast. And what we do is we basically have a main article we’ll w we’ll write about a trend that we see, Hey, we’re noting multi gen families are growing work from homes, a big growth people are leaving the city and go into suburbs. What’s inside of that. Why is that happening? And how can you do something about it?

Scott:
And then we’ll have like three or four articles that sort of are just touch points, milestones in it. Oh, multi gen family growth is, you know, high you know, more kids living at home, whatever I’m making these up, but, you know, these are all real facts. You know, we’ll talk about economic forces, you know, we’ll talk about trends, you know, Lumber’s up. So that’s something that, you know, we, we talk about every once in a while. So it’s going to be a several thing, combination of all those things. And I, I don’t want to make the answer really complicated, but what I think people do to finish the answer is don’t rely on one specific data source or person or company or broker. You really gotta be doing research continuously. I mean, if anything I learned from the 2008 recession was to really dig deep and, and, and like, you know, thoroughly into data sources and people that them, and what I mean by that, them as are they the, are they, how can I put this?

Scott:
You want to have people that are giving you economic, you know like guidance on the economy and trends that have no agenda. So if somebody is trying to sell a book, they’re going to say whatever they need to say about the economy to sell the book, right? The gold guys are famous for this, right? The world’s going to end tomorrow buy gold, right. And the world for those guys, always going to, that could be two years ago. It could be two years from now, and I’m not picking on gold guys. I think gold has a place in somebody’s investment portfolio. But it’s also, you know, if you’re trying to sell gold, you’re going to say what you say. So we’ve got to, we’ve got a, like a small group of people that we follow that we trust and have seen them call trends correctly, based on good empirical data and their own, you know assessment of the marketplace that they’re, you know, I mean, they got websites and blogs, blogs that they’re trying, you know, they got to advertise this.

Scott:
They got to make a living too, but they’re not, they have no agenda to steer you this way or that way, they’re just reading the market, sort of like agnostically, right. They don’t have a particular leaning. They just tell you what the data tells them. And then they make an assessment. Like one of them is called a it’s a blog called calculated risk blog.com, or just look up calculated risk blog. Bill McBride’s a writer that I’ve been following that guy since like 2010, 2009. And he was, he called the recession before 2008 in real estate. He’s a real estate center guy, housing centric guy. And then he called the bottom in 2011. And then he basically called not exactly what happened in 2020, but he said, look real. Estate’s not going to be in a recession in the way that it happened in 2008, but he said, there’s going to be what I think is some black Swan event.

Scott:
It’s going to take this economy out. Didn’t ever like, know anything about pandemic and coronavirus, right? We couldn’t, nobody could have known that. But that’s exactly what happened. You know, it was like the, the economy was booming. And we have this crazy, you know, out of left field, black Swan event. And that’s what ended up happening. But his, his assessments of the real estate market continue to be well-grounded. And then the last thing I love about him is he does great graphs of trends and real estate permit, issuance, housing, supply, months of supply go on there and he’s got tons and tons of grass, and he writes about other stuff besides housing don’t get me wrong. But he’s not a, he’s not an ivory tower economist, you know, he’s not a talking head on TV. He’s just like a retired fortune 500 executive that happens to be making, you know, grounded assessments about the economy. So those are the kinds of people in that, but even then you’ve got to get several of those kind of guys and that start to put them together for yourself and then apply that to your own situation for what you want to do for your business.

Charles:
Nice. Well, that’s a lot of great information. So what is your super long

Scott:
Answer? Sorry about that.

Charles:
It’s fine. What’s your current? You talked about these I dunno how you’ve worded it. Townhouse urban townhouse townhouse. Yeah. Is that your whole, is that your main development strategy now? And if you can go a little bit more into your development strategy and a little bit more into after they’re developed, you know, where, what your exit strategy is for them, are you renting them and then selling them? Are you selling right away? You’re selling two projects now I imagine it’s deal specific.

Scott:
Yeah. So urban townhouse, like, like I mentioned, is a rental townhouse product townhouse being three stories where the one family lives in a three story, townhouse, five bedrooms, four bathrooms, two car direct access garage in unit laundry. One of the bedroom bathrooms is on the ground floor helping it to make it multi-generational and our whole purpose for building this product type. And it’s really throughout Southern California is to serve middle-income multi-generational families, right? Like we identified our gap in, particularly in California is affordable housing, but even within the affordable housing domain, like that has a big spectrum of different, you know, types of people, the renters, the incomes, the demographics that they, that they, you know, that are, that they come from or that they are. And so, again, from this background, I knew that there was like this working class family that actually produces decent income and too much income to qualify for the true government subsidized housing, but not necessarily enough to, to afford to buy a house or to rent the really high end, you know, the, the nice, you know, sexy downtown unit plus those units and new construction apartment for the most part, don’t serve families, their, their studio in one better manage predominantly at least in, in California, in the urban areas.

Scott:
You know, if you’ve got a family of six, you know, th there’s nothing new for you. Well, you know, maybe a three bedroom out, you know, on the sort of peripheral areas, but if you’re living like, sort of in town, in Southern California, the LA basin, there’s really nothing new for you Lisa at scale, right? And so we identified this market. And so we’re like, we’re only doing that. That’s I appreciate that question. We, we believe so thoroughly in that marketplace and the depth of it, and the so lack of supply and high demand that we have gone basically fully a hundred percent into that business plan so much so that I’ll just, I’ll just, you know, offer like this is, this is forthcoming, but we’re actually raising a pretty significant equity fund to specifically and solely focused on these urban townhouse, you know, middle income rental housing projects.

Scott:
That’ll be you know, focusing on Southern California. But right now I will, I’ll share with you the, what people call the build to rent market. And workforce housing are like the, you know, the hottest area of multi-family development that you could find for several reasons. One is this ongoing affordability cycle that we’re in, which is, you know, you’ve got income sort of doing this they’re stagnant and housing prices doing this depending on what market you’re in California, it’s this, and, you know, Texas is this, but still you got stagnant incomes and rising housing prices, right? And there’s economic trends in a larger scale that make are producing that. But nonetheless, we have this gap, right. This space in here, that’s exactly where our product lives and that’s a national issue, at least in urbanized, metropolitan areas. So we were, you know, like I started about five years ago.

Scott:
We started in a small group of projects as an experiment because the reality is nobody’s doing five bedroom, four bathroom rental product, and certainly nothing at scale. And so we wanted to make sure that we prove the model, like who could really rent it and build it and value it at what we needed to be profitable, because our model is a private capital, right? Very standardized capital stack of equity, LP, equity, and debt like you would have in any market rate developments. There’s no government subsidy we don’t income restrict per se, but we really do try to meet the middle income, you know, 80 to one 20 income category, right? Like working class think blue collar families. Right. And these are, these are hardworking families, usually multiple earners in the household, right. You know, mom and dad and adult children, and in-laws they’ll work.

Scott:
They all pull their incomes and expenses in across the family group a, a term I call economic sharing, right. They’re bringing their economic resources together and sharing their economic costs across the family group. The rates of pottery for multi-generational families are exceptionally low compared to everybody else. And if you listen to the mainstream media, you’ve seen it, oh, the average apartment, you know, in California, somebody needs to make, you know, $50 an hour and I’m making these numbers up. These aren’t the real numbers. Right. And that’s true if you’re an individual earner right. Living in the average apartment unit. Right. But it’s, there’s, you know, it’s interesting. There’s no there’s no, how can I put this? Nobody’s thinking about like other like structures that could facilitate people to live more affordably. Like, Hey, maybe you get together with roommates. I mean, that’s roommates or a classic, like like I didn’t make that up.

Scott:
I mean, we, we’ve all done roommate situations and that was a version of economic sharing. Co-Living right. You’ve heard that term. That’s economic sharing our UTeach model of families, you know, and, and we’re not talking to families that are unrelated coming together. These are related families, grandparents, in-laws parents, dolt kids, younger kids. And, and most of the cultures that we find that are predominant, California, Hispanic families, Asian families, Indian families, they all live, you know, multi-generationally like naturally, in fact, if you look at the United States, we’re the anomaly. And we’re shifting away from that where the nuclear family, where mom and dad, and two and a half kids and, and, and, you know, and vows, or the dog live in a suburban environment, like that’s an, a Thema to the world. Right. And the far as cultures and also just economic reality, right. I mean, the idea of kids living at home longer is becoming more common.

Scott:
In fact, there’s a statistic that P research put out a couple of years ago, we’re at the highest rate of multi-generational living in something like 160 years. So they did a research and they went back and, you know, multi-generational living way back when it was high, right. Families lived together to share economically it dropped through the 50, 60 seventies to as low. And then we’re actually taking up really nicely. And I don’t necessarily say that I’m like the economic trends that are having people have to make these decisions to do that. Right. I would go like, if everybody can live in their own unit and afford it fine, but reality is that it is economic reality. You can try to fight it all you want. And so what we’re doing is we’re providing a housing unit housing type that, that serves that reality.

Scott:
Right. And in fact, it helps those families when they do live multi-generational and they do economic share their rates of proper poverty are exceptionally low and really it’s off the radar. Really the governments, you know, just sort of thinking about like, how can we solve poverty? Let’s, let’s push money at it that works sort of marginally diminishing returns. What we really need is a, is an innovation. And that’s what you teach is an innovation that we created to meet the, those needs and those demand characteristics in the market, meet that gap in a unique way where we can basically use private capital to fund this workforce housing model.

Charles:
Nice. Okay. So with, with, when you’re doing development, how do you mitigate risk as a developer? When you’re say there’s a pullback in the economy and a, so everything’s going well, and you find yourself a project’s half done, or it’s going to be completed. And and now you find yourself in a recession, like how does, how do you mitigate risk?

Scott:
Yeah, well, a couple co a few different things, and actual, I’ll use this to answer part of the question that you asked before, whether we were a long-term hold or short-term oriented, and we’re actually generally long-term hold oriented. And that’s actually one of the defense mechanisms about the you know, to, to resolve or help you know, like deal with a recession, right. If you’re long-term oriented and your hold on apartments and you’ve underwritten them, you know, decently and conservatively, and didn’t, you know, try to go into the market where everybody else is. And there’s a lot of other units and a lot of other developers. So, you know, we sell project strategically. Right. so when you have a long-term hold orientation, right? So I’ll give you an example. That’s specific to us. So about three years ago, it’s a five-year-old program about two to two and a half years into it.

Scott:
Like, because I had learned these lessons in the 2008 recession, and I was paying attention to these economic, you know, prognosticators and looking for the economic signals, what I teach people and, and internally, and what I share with people is like, look, the signals for recession will be there. They are there. It’s just that people miss them. Or they, there’s a lot of noise in the background, the media, and you know, just a CAC, whatever, you know, it’s just like a lot of background noise, but the signals are there. If you, if you know how to sort of filter it out. So I’ll give you an example. In 2005 or 2006 in Forbes magazine, Tom Barrack, who runs a company called colony capital. It’s like one of the most famous real estate, you know, hedge fund managers, fund managers across the United States on the cover of Forbes.

Scott:
He’s like, I’m getting out, like basically getting out of real estate, like you sell on everything. And that was one of the signals. And there was like a bunch of others. In fact, I keep a book on my desk where I clipped articles of all the signals that were there that I missed personally. Right. Maybe I saw the article sometimes there examples of like ridiculous things. So the wall street journal in 2005, 2006 had a graph of housing price since 1930. And it went straight up and got straight up. But you know, up at a 45 degree angle from 1930 through 2006, and housing never had a down year, you know, it’s the wall street journal. So it must be right. You know, you think to yourself, not true, not true at all. And we were in the map, like the bubble of bubbles and housing, right?

Scott:
So you have to pay attention to the signals, right? Because they’re there and you have to look at lots of signals. And yet the vet, those again, vetting the people and make sure that there’s like, it’s real research. It’s really grounded. It’s not Paul Krugman, you know, saying the world’s going to end or, you know, whatever, pick your person who has like their own agenda that they like to put forth. And then you have to underwrite your deals in a way and, and manage and structure your deals in a way that new lessons, the exposure you have as much as possible to the market. Now, of course, this is a risk oriented business, real estate, investment and development. So you can never reduce risk entirely. In fact, you know, arguably, if you were able to do that, then you know, the profit you would generate in a deal should be zero, right?

Scott:
If there’s no risk, there should be no profit. But the idea is to create the risk position while mitigating it in many ways as you can. So let me give you examples of that. You know, for us two and a half years ago, we converted everything to a long-term hold because two and a half years ago, we started to see early signals. Right. You know, guys like, you know bill McBride, who I spoke about sort of saying, yeah, it’s, everything’s looking okay. We don’t think the next recession will be real estate oriented, but we think a recession is coming. Right. Cause a recession will always come. A peak will always come a trough, always a common, then another peak, another trough, right. That’s fundamental. The economic cycle is always there. It’s just the timing between cycles and troughs and P w will differentiate. But if you’re in an orientation of like, not in a bad mood, but you know, like sophisticated, real estate investors are alert. Like, man, when a recession comes, I’m looking forward to that. Right. Because I can buy discounted properties. Yeah. Right. And you know, not to be like great dancer, you know, want.
Scott:
Between cycles and troughs and peaks, what will differentiate. But if you’re in an orientation of like, not in a bad mood, but you know, like sophisticated, real estate investors are alert. Like, man, when a recession comes, I’m looking forward to that. Right. Because I can buy discounted properties. Yeah. Right. And you know, not to be like grave dancer, you know, want people to be heard. I I’m, I’m not that kind of guy. And you already either probably. But to basically be vigilant is the terminology I use to go look, it’s coming. I know it’s out there. I don’t know what it will look like. And of course what I, in fact, what I say is it will be different this time than it was last time. That’s for sure. Right. It won’t be mortgage and it won’t be single family and CDOs and all that kind of craziness, but it’ll be something else.

Scott:
So that’s like when bill McBride wrote, he goes, look, the next recession won’t be led by real estate. In fact, his, his philosophy is that housing leads our economy in and out of recession normally. So if you’re in a normal cycle, right then housing would turn down and then the economy would go down and then housing would come back up and the economy would go back up. Like that was sort of the classic cycle. If you can call any cycle classic. And anybody said this time is going to be different because in 2008 real estate got hammered so badly. I mean, even in 20 13, 20 14, 20 15, I think we’re still in recovery. I mean, we might even argue we’re still in recovery now because you know, the mortgage market’s still relatively disciplined. Right. That’s a carry over from 2008 because people got burned. So badly book, borrowers, book owners of houses, but also the lenders, right.

Scott:
I’m seeing like in, you know, since 2016 through now, like I’ve seen equity and debt like that we work with on our multi-family projects actually be relatively disciplined. Right. In 2016, there was a period of time at the end of the year where the lenders and several equity investors that we knew and go, yeah, we think there’s a little bit too much supply in the LA market. We’re going to, we’re going to back off a little bit. And then that went on for a few months and then, you know, seeing sort of work their way out and units absorbed and you know, it was like a steady pipeline. So you can trust that again. Okay. So what else? So the other thing is to not underwrite your deal so aggressively that you can’t take like a downward, you know, change and rents as an example.

Scott:
So the classic one, I use again, back to this younger dealmaker, younger project manager, newbie in the business, you know, the, the, the logic is sort of like this. Well, the market for two bedroom is 900. I’m going to build the new building so I can get a little bit of a premium because the brokers told me that’s true. So I’m going to go, I think I can get 1100, right? Without necessarily research in the market. Maybe 1100 does exist. Maybe that is possible in the market, but then you go, but what if the market turns it downwards? Can I still get 1100? If the market turns down and I have units that are 1,115 other developers all have units, 1100, well, somebody going to lower their rent, they got, yeah, they got it because if they’re going to fill up their units, so maybe I’d better not be at 1100, maybe I’d better be at a thousand.

Scott:
Maybe I better be it 900. You go, well, what’s the logic. If the market’s 900, you’re at 900, well, if you can’t make your deal work, then that’s true. But if you can make your deal work, and if your model, your land price, your construction costs, your mix of units, has you, you know, still be at market or slightly above market and still make money. Then if the market turns against you, you’ve got a cushion, you got a defensible, right. A cushion. Let’s see. One of the ones that we use, one of the reasons we love this, this, this working family marketplace, is that in a recession, they’re very sticky. That’s the terminology I created, which basically means that they don’t like they don’t, they’re not mobile. They have roots in the community. What I call strong social networks. So their kids are in school.

Scott:
They’re churches down the road, their extended families around, maybe they’re from that location historically, that’s where they grew up. Their job is close by. So those are all logic for them to stick around and figure out how to manage through the recession, you know, get an extra job. Hey, you know, like you gotta go to work. The, again, this economic sharing model is really the key core, you know, defensive mechanism against that. And we’ve even seen that. I mean, we, we, in the pandemic our last two projects for our fuller tenant project on Montebello, those assays that they’re in Montebello is actually finished leasing. Now we’ve had the best leasing velocity that I’ve had in any project in my entire career. And, and at rents that are two to 500 a month over proforma. Right. Which, you know, I think just as a Testament to our conservative underwriting, but also just the viability of the product.

Scott:
Now, some of the acceleration just came from the pandemic and the work from home, which we couldn’t have known about, but we knew our unit was a space when people move out of the studio, cause they can’t afford any anymore. Where do they go? They move home with parents or family. They get roommates, they do some recombination to become defensively, economically defensive, right. To share the cost, share to economic share, right. Families do that roommates do that, you know, whoever like that happens in a recessionary environment. So that was a, that was like an antique, there’s a book called antifragile written by a guy named [inaudible]. And his, his theory is that like in business and in like offers like the, you know real estate projects, investments, and that kind of thing, you would like to design it in a way that’s antifragile.

Scott:
That means basically it benefits from harm. So it’s a, it’s a interesting concept. But the way to think of it is like, if anybody’s ever lifted weights, you know, you lift weights, right. And you basically actually damage the muscle. It hurts for a, and then it grows, right. That’s I can’t, you know, it’s hypertrophy or if I’m pronouncing it correctly, so you harm the muscle and then it benefits and grows from it. So that’s the physical biological example I use our product UTA is anti-fragile because when the economic recession came, people combined together and exactly the way that we already anticipated that they would. And they actually saw we’d already been seeing that. And then that basically accelerates, like we became a place of refuge, right. Somebody wants to move out of downtown LA or move out of San Francisco, whatever big city they’re in, they’re going to move into these urbanized suburbs. And then they’re going to want an economic share to try to like, you know, extend their incomes that they are producing as far as they can. Right. And they do that by sharing.

Charles:
Interesting. Yeah. I just as we’re finishing up here, I have a couple of questions are, will really main question is what are your main challenges you’re finding today as being a developer? I mean, I imagine material costs are a huge, huge portion of apple. What other issues are you finding?

Scott:
Yeah, actually material costs you’re you’re right on the money. I mean, lumber is like insane. It was, oh, pre pandemic, like 300 per thousand board feet. I looked at it yesterday it’s 1578 or something. I mean, it’s, the graph has gone straight up. You know, it’s got a return to the mean at some point, and I don’t think that’s normal inflation. This is supply chain, disruption, you know lumber, mill shut down trucking is restricted. You know, there’s various, you know, there’s anything, any of these economic trends, there’s usually several interrelated or like a web of, you know, things that influence that back. There was a guy I would recommend people, you know, if they’re interested in that on YouTube, there’s a guy called the uneducated economist. He’s interesting duty works in the lumber business. He’s like a lumber sales guy.

Scott:
And, but he’s got some machine just very, again, very pragmatic thinker, right? Not a trained economist, just observing his part of the world, talking to people that are in the lumber industry is starting to get some, some traction in the in the online domain. Right. so he’s interviewing with actually some fairly high level economists now. I mean, he’s great. And he’s just talking about like what he’s seen and what he’s hearing from people about why as lumber, like why is lumber so high? What’s the, what’s the issue with it? Why is this happening? Can it continue? So that’s definitely somebody who, you know, if they’re looking at he’s particular to lumber, but a lot of commodities, copper steel oil, right. Obviously well came off of it, you know, historical low at whatever negative 34 barrel. It was, you know back in the recent past.

Scott:
So we are having projects now that we’re having to re underwrite the hard costs underwriting. So for probably two or three years, we built that 135 bucks a foot that’s net leaseable hard costs. So just the cost of build the building and do the grading and get it ready, like, but that’s all in our costs. And we jumped up about a good 30 bucks a foot in the span of about a year from when we finished one project, we had a little gap, really. It was like the 20, 20 year when the pandemic hit, we basically, we had some projects that were finishing apps, so you don’t do anything. You know, you don’t change anything, you finish the project. Right. You’ve got to get it right. At least. And then we started to just let for about a three month period, just, you know, the world was going crazy.

Scott:
So we just started to reassess, like what, what will this new environment look like? How will affect our product? What do we do about it? Because I was definitely in the mood of vigilance. And then that turned out to be, you know, like a worthy valuable stance to, to be thinking about it. And then the, and then their massive disruption. Right? And so the way that we approach is we go look, you know, one, because we had gone to a long-term orientation, we weren’t like an immediate need. Oh my God. You know, the world’s imploding, I got to solve a project, right. The worst possible time, right. The world’s imploding and you got to sell a project. And we saw a lot of that in 2008. We weren’t going to be in that. So two and a half years earlier, right. We saw the signals and we went to long-term hold.

Scott:
So I had ownership of properties that were finishing that I was going to have several years beyond to finish and lease up and hold. I didn’t know how the pandemic was going to affect our product, but I speculated from our research that we would be, be benefited by people combining right. And bigger units that turned out to be that coronavirus people want a bigger units. They wanted to be like outside the city center and like urbanized suburbs. They wanted to combine together. And roommates that could work from home. I mean, I have units of people that are entirely professional working people that were friends and college roommates in college that came together on our unit. And they were from like Oregon and Seattle and San Diego. And they all came together in our unit and they all worked from home. In fact, we have one unit where it’s three people running the unit and they use the other two bedrooms is their office, their home offices.

Scott:
Right. So that was, we’re very, you know, very grateful that that happened. But the design of the product was sort of anticipating disruption and recession and this recombining idea, we were thinking it would be families, right. Kids moving home, but it happened to be also a work from home roommates. So yeah. So commodities are they in on the, on the, I think inflation generally is just like on the horizon and I know people have different opinions about it, and I listened to several different, you know, again, I have these, these data sources of people that I listened to and there’s varying opinions on inflation, but clearly the amount of stimulus money that’s gone into the economy is, you know, the most massive that it’s ever been in the history of the United States, that’s going to have some effect. We don’t know what the effect will be, but we look for what that effect is.

Scott:
Or like, we look for the signals of the effect, right. We could anticipate in inflation, you know, the U S dollar is still the world’s reserve currency, which is a deflationary, right. We’re shipping dollars off shore, even though we’re printing them. There, that’s a deflationary thing. But I think we’re starting to see it, you know food gasoline, you know, I don’t know about you were where you are a bit, you know, I mean, we’ve been seeing inflation of food. I have a family of five, I have three kids and my wife and I we’ve been noticing it gasoline, you know, has gone back up. So I think we’re in that world. Certainly wages are starting to inflate, which is like, like a little unusual, like we haven’t seen wage inflation. Like that’s more rare, but you know, so many people are out of the workforce that if you have a business, a restaurant or a retail establishment, you’re trying to hire people.

Scott:
I’m seeing all over the place that you probably are too. People can’t hire enough people. Right. I have a family office that we advise. So we have a real estate advisory team. That’s part of our company separate from the real estate development. And this is a restaurant corporation, you know, probably one of the biggest United States. And they cannot hire enough people to save their lives. I mean, they’re starting to look at increasing wages to compete, but even still, even with, you know, increases in, you know, their offers, a wage is still hard to get people to become. So we haven’t seen that show up. We got good construction, good, good sub base loyal. We give them, you know, we always working with them on new deals. So we get them to come back time and time again. So we built those networks over several years.

Scott:
But the, the construction labor market doesn’t seem to have disrupted at least that I noticed. So we’re fortunate there. But material’s going to be an interesting thing to watch over the next, you know, probably two to three years. What does that do? Although I got to say, Lumber’s got to come down, man. It’s 1500. It’s like, whatever, 5, 6, 7 X. It’s insane. I mean, it’s so far off the mean, like the mean of lumber went along this for forever and ever that whoop you right up here. So it’s got to, it’s got to come back at some point. Interesting.

Charles:
Well I want to thank you so much for coming on and how can our listeners learn more about you and your business?

Scott:
Yeah, so I would encourage people to go to our website, www urban pacific.com. Take a look at our investor education section. We have like numerous videos, podcasts, articles eBooks you know, people want to go in probably this will come out in the next few weeks. Our, my personal website, www.Scottchoppin.com will be available. And some of the you know, real estate development learning will be there, but I would encourage people to sign up on their civic site for the e-blast it’s the sign up button that’s on every page and get on that email list for Saturdays, because that’s a good source of info. I mean, this is guys, all the, that we’re reading. I just like put it together. You know, I, I, you know, I sorta edit out like, you know, a lot of the stuff that’s not relevant, but every, you know, every Saturday you’re going to get a, you know, a, a, you know, sort of good, you know, group of articles that are reflective of, you know, the information that we’re seeing in the last, you know, two or three weeks as, as we’re reading through everything that we’re reading through.

Charles:
Okay. Well, sounds great. I will put those links into the show notes, and I want to thank you so much for coming on today, Scott.

Scott:
Thanks, Charles. Great to be here.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

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The Urban Pacific Group of Companies

About Scott Choppin

Scott Choppin is the CEO and Founder of The Urban Pacific Group of Companies, a Long Beach, CA-based real estate development company, founded in 2000, that focuses exclusively on workforce rental housing communities throughout California and the western US. Urban Pacific has created a new housing innovation called Urban Town House (UTH), which pairs private capital with middle income multi-generational rental housing, while producing market superior yields on invested equity. Historically, Urban Pacific’s UTH projects have delivered 22.66% programmatic IRR yields on equity.

With over 35 years in the development business, Scott is a leader in the field, and is a regular contributor to major media outlets throughout the nation. Scott has been published in Forbes Magazine, GlobeSt.com, Los Angeles Times, Builder Magazine, Affordable Housing Finance, Affordable Housing News, and most recently, the cover and feature article about the UTH housing model in Multi-Family Executive magazine.

Scott and his wife Becky have been happily married and together for 27 years, and are raising their 3 kids in Long Beach, CA – Sean Patrick 19, Dylan 16, and Jenna 13. Scott and Becky’s three kids are the 4th generation of the Choppin family in Long Beach.

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