Urban Investing Challenges Create Upside
I’m an urban guy at heart. I enjoy walking everywhere–to the cafe, grocery store, restaurants, gym, church, and parks. I don’t even mind public transportation so that I can continue walking somewhere else. This was easy to do when I lived and worked in San Francisco during the 2000s. Now, I enjoy annual visits to places like Boston, where I can act like an urbanite once again. But despite those moments of joy, I’m tired of owning apartment properties in urban areas. Misguided governments, certain property characteristics, and supply concentrations are three key concerns.
Urban investing has always been challenging. Usually, it involves investing in an up-and-coming city pocket. Developers work in tandem to create new neighborhoods. Restaurants, bars, and retail shops open as new amenities. Adventurous people move into apartments and condos to give the neighborhood a soul. Everything feeds off of one another to generate a palpable energy. This is what makes urban areas great.
But when any one piece of an urban neighborhood starts to crumble, the energy changes. Anyone who has lived in an urban setting has put up with some level of discomfort. In San Francisco, widespread homelessness, visible drug use, car break-ins, and unclean public transit was (still is) the norm. A baseline level of this activity was simply part of the experience. Unfortunately, a pandemic-induced spike in this activity hasn’t dissipated and drives people away.
How a city government functions is one way to assess downtowns. This is particularly true for investment. Is the city government more interested in re-naming schools than improving public safety? Is rent control a hot topic around City Hall rather than solutions for more apartment supply? Is a landlord persona non grata or can she operate under common sense policies? City and state government policies do impact a property’s bottom line.
Another factor–more prevalent in urban areas–is a property’s physical characteristics. Urban apartment properties are generally one building and not multiple buildings spread out. Depending on its age, it could have common mechanical systems. So, if the heat goes out, it goes out for everybody. Same with the hot water system. Instead of one angry tenant, you can have an entire building waiting for you with pitchforks in the lobby.
From a cost standpoint, central heating and hot water are expensive to replace when they fail. It’s much easier to plan and pay for one-off unit replacements of water heaters and HVAC units. Even with preventative maintenance, issues with central mechanical systems are expensive to replace. On the plus side, roof coverage is much smaller compared to garden style properties. Depending on the building’s height, it may be cheaper to replace. There are different considerations in urban mid- and high-rise buildings.
Then, supply always seems concentrated in urban areas. Those downtown parking lots make for great development pads. New supply is both good and bad. It’s positive when you and others commit big dollars to a particular part of town. That investment is what makes neighborhoods desirable. Though when the new supply comes all at once, rents suffer and concessions rise. There’s more rental volatility in the densest parts of town. This makes your investment timing critically important.
We began as urban investors at Calvera, and it remains in our DNA. My personal fatigue is due to the cities that seemingly disregard the efforts of good owners. I can deal with the idiosyncrasies of urban assets and pay close attention to new supply trends. I can’t quantify the wildcard of increasing regulations, landlord hostility, or crime. We own in markets like this currently, and it’s not for the faint of heart. The funny thing is, if you believe the state or city won’t hurt your investment, these markets have tremendous upside. If we had the stomach for more of it, we’d consider it.
Instead, I’d rather find suburban locations with urban-like amenities. There isn’t a long list of these markets, but we own in some of them and are targeting more for future investment. To me, this is the best of both worlds. As far as buying more properties in places like Oakland or Minneapolis–I’m out for now. I’m reminded of a saying from a long-time investor of ours, “is the juice worth the squeeze?” Not for me. Not right now.
SAN FRANCISCO OFFICE:
2 Embarcadero Center, 8th Floor
San Francisco, CA 94111
729 Washington Ave N, Suite 600
Minneapolis, MN 55401
Please subscribe me to the Calvera Insider.
GET INSIDER UPDATES
GET INSIDER UPDATES
Performance data listed in this website or is otherwise provided by Calvera Partners, LLC, or its affiliates (“Calvera”) with respect to a particular property or project represents past performance calculated for the relevant project and does not purport to reflect the overall performance of any private funds managed by Calvera, which may include other projects, as well as charge additional fees or carried interest, or have additional expenses, which would reduce the overall performance of the project from the perspective of a fund investor. Past performance does not guarantee future results; Current performance may be lower or higher than performance data presented. Calvera is not required by law to follow any standard methodology when calculating and representing performance data; the performance of any of Calvera’s projects may not be directly comparable to the performance of other investment vehicles or funds; and qualified potential investors can contact Calvera Partners for more current performance data of any private funds managed by Calvera.
This website is provided for informational purposes only. Nothing contained in this material is an offer or solicitation to buy or sell any security. In addition, (i) any securities offered to investors that respond to any general solicitation or general advertisement made by Calvera, may be sold only to accredited investors; (ii) such securities will be offered in reliance on an exemption from the registration requirements of the Securities Act and such securities offered are not subject to the protections of the Investment Company Act or required to comply with specific disclosure requirements that apply to registration under the Securities Act; (iii) Neither the SEC, nor any state securities regulator, has passed upon the merits of or given its approval to any securities offered by Calvera, the terms of the offering, or the accuracy or completeness of any offering materials or the accuracy or completeness of any of the information or material provided by or through this website; (iv) the securities will be subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and (v) investing in securities involves significant risks, and investors should be able to bear the loss of their investment. Please click here for additional important disclosures.